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Issues:
1. Priority of the Income Tax Department in a liquidation case regarding arrears of tax and interest. 2. Interpretation of Section 220(2) of the Income Tax Act, 1961 in relation to interest on arrears of tax in a liquidation scenario. Analysis: The case involved the Income Tax Officer appealing against the dismissal of an application by the company court regarding the admission of a claim for interest on arrears of tax in a liquidation matter. The Catholic Bank of India Ltd. owed considerable amounts as arrears of income tax to the Income Tax department for the years 1955-56 to 1959-60. The company was ordered to be wound up, and the department filed applications to file proof before the liquidator for the tax arrears. Initially, the claim for interest on the arrears was not included by the liquidator. The department then filed another application contending that the claim for interest should also be admitted. The company judge dismissed the application, stating that the tax claimed did not fall within the priority category under section 530(1)(a). The main contention was that the liquidator had erred in ignoring the claim for interest under section 220(2) of the Income Tax Act, 1961. The High Court held that while the department was not entitled to priority for the tax or interest, it was just and proper to allow the department to file a fresh claim for the interest amount alleged to be payable under section 220(2) of the Income Tax Act, 1961. The court directed the department to file the claim before the liquidator within one month, and the liquidator was to adjudicate on the claim in accordance with the law, particularly the Companies Act and the Companies (Court) Rules. The appeal was allowed to this limited extent, and each party was to bear their respective costs. The judgment highlighted the importance of correctly interpreting the law and ensuring that all claims, including interest on arrears of tax, are duly considered in a liquidation scenario.
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