1962 (10) TMI 31 - HC - Companies Law

Summary

Issues Involved:
1. Whether the income-tax department is a creditor, contingent or prospective, of the company within the meaning of section 391 of the Companies Act, 1956.
2. Whether income-tax assessment proceedings are "other legal proceedings" which cannot be proceeded with within the meaning of section 446 of the Companies Act, 1956.

Issue-wise Detailed Analysis:

1. Creditor Status of the Income-tax Department under Section 391 of the Companies Act, 1956:

The primary contention was whether the income-tax department could be considered a creditor of the company before an assessment was made. The petitioner argued that the income-tax department was a creditor on the day the winding-up order was passed and should have proved its claim before the liquidator. The court examined the relevant part of section 391, which deals with the power to compromise or make arrangements with creditors and members. The court noted that if the income-tax department is a creditor within the meaning of section 391, it would be bound by the scheme sanctioned without considering the liabilities to income-tax.

The court referred to the case of Doorga Prasad v. Secretary of State, which established that income-tax becomes a debt due only when a demand is made under sections 29 and 45 of the Income-tax Act. The Supreme Court in E.D. Sassoon & Co. Ltd. v. Commissioner of Income-tax further clarified that a creditor-debtor relationship only arises when a debt is owed. Until an assessment is made, the income-tax department cannot be considered a creditor, contingent or prospective. The court concluded that the income-tax department could only become a creditor after an assessment is made and not before. Therefore, the department was not a creditor and could not have proved its claim in the liquidation proceedings.

2. Income-tax Assessment Proceedings as "Other Legal Proceedings" under Section 446 of the Companies Act, 1956:

The second issue was whether income-tax proceedings pending on the date of the winding-up order could not be proceeded with except by leave of the court. Section 446(1) states that no suit or other legal proceeding shall be commenced or proceeded with against the company except by leave of the court. The petitioner argued that income-tax proceedings fall within the ambit of "other legal proceeding," and thus, the assessment proceedings automatically stopped on the winding-up order.

The court referred to the Federal Court decision in Governor-General-in-Council v. Shiromani Sugar Mills Limited, which indicated that "other legal proceedings" should cover distress and execution proceedings but not necessarily assessment proceedings. The court also considered the provisions of sub-sections (2) and (3) of section 446, which give the court jurisdiction over certain proceedings but not income-tax assessments. The court concluded that income-tax proceedings are not "other legal proceedings" within the meaning of section 446 and do not automatically stop upon a winding-up order. The proceedings must continue as per the Income-tax Act, which is a complete code in itself.

Conclusion:

The court held that the income-tax department is not a creditor within the meaning of section 391 of the Companies Act, 1956, until an assessment is made. Additionally, income-tax assessment proceedings do not fall within the scope of "other legal proceedings" under section 446 of the Companies Act, 1956, and do not automatically stop upon the company's liquidation. The petition was dismissed, and the parties were left to bear their own costs.