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TMI Blog1976 (7) TMI 125X X X X Extracts X X X X X X X X Extracts X X X X ..... his was treated as income and assessed to tax. The assessment order was passed on February 3, 1975, and the notice of demand to pay a tax of Rs. 97,037 was served on the liquidator on February 17, 1975. Though the liquidator took up the matter in appeal to the Appellate Assistant Commissioner, he did not succeed in that attempt. The liquidator was not in a position to pay the tax within the time allowed in the notice. He applied for extension of time and the Income-tax Officer extended the time for payment up to June 30, 1975. The liquidator paid a sum of Rs. 40,000 and the balance of Rs. 57,037 and interest still remained due. By the present application the Income-tax Officer has sought permission of the court under section 446(1) of the Act to take proceedings against the company for the recovery of the balance tax due. On receipt of notice of this application, the official liquidator contended that the tax demand of Rs. 97,037 can only be considered as a "debt" payable as contemplated in section 528 of the Companies Act, 1956, that, in any event, the present demand is one coming under the category of "future and contingent claims" mentioned in section 528, and that it could be p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... views expressed by some of the other High Courts on the scope of section 178 on the right of the Income-tax Officer to claim preferential payment of tax even if that tax demand is not covered by section 530(1)( a ) of the Companies Act. The view of the Mysore, Rajasthan and Gujarat High Courts is that the section is enacted for the limited purpose of ensuring that the Government's existing rights and priorities under the law are not defeated by sale of the company's assets, or distribution among the shareholders or creditors who under the Companies Act are not entitled to be paid before the Government. It does not confer on the Government any higher rights or wider priorities than those enjoyed by the Government under the company law. (See Income-tax Officer v. Official Liquidator [1967] 63 ITR 810; 37 Comp. Cas. 114 (Mys.), Commissioner of Income-tax v. Official Liquidator, Golcha Properties (Pvt.) Ltd. [1974] 95 ITR 488 ; 44 Comp. Cas. 445 (Raj.) and Baroda Board Paper Mills Ltd. v. Income-tax Officer [1976] 102 ITR 153 ; 46 Comp. Cas. 25 (Guj.). The Andhra Pradesh High Court has, however, taken a contrary view on the scope of the section, namely, that this provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He died on 29th March, 1953. For the purpose of estate duty the shares had to be valued with reference to the net value of the assets of the company instead of by reference to the open market value of the shares. The assets of the company at the date of the deceased's death included five ships. The cost of these ships for income-tax purposes had been agreed to be 847, 907, and at the date of the deceased's death the company had received capital allowances under the provisions of Part X of the Income-tax Act, 1952, leaving 290,749 of expenditure "unallowed". In the event of a sale of the ships for a sum in excess of the amount of such expenditure unallowed, a balancing charge would be imposed of an amount equal to such excess, resulting in an assessment to income-tax and profits tax at the rate appropriate to the year in respect of which such assessment was made. The ships were sold between November, 1953, and February, 1954, for sums amounting in the aggregate to 1,070,505. This gave rise to balancing charges of 548,318, resulting in an anditional income-tax assessment on the company for the year 1953-54 at 9s. in the pound, totalling 246,743 2s., and an additional profits t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e commissioners as the statute directs." Under the Indian Income-tax Act also development rebates are allowed in arriving at the total income of an assessee for purpose of income-tax assessment. A development rebate for a plant, machinery or a ship is allowed on the basis that this plant, machinery or ship is not sold for a certain number of years after the assessment year in question. But if a sale takes place within the period allowed by the statute the development rebate will stand cancelled and the amount of rebate allowed in any particular year will be taxed for that year. That is a case of a contingent liability. When the rebate was allowed that gave rise to an obligation and a liability on the happening of an uncertain event, namely, sale of the ship in future. Such a liability is a contingent liability. Similar questions have arisen under the Wealth-tax Act. To find out the net value of the wealth the contingent liabilities are also taken into account. Thus, the principle is that there must be an obligation at the relevant date. That obligation may or may not give rise to a liability on a future date depending on the happening of the contingency. Such a liability is alone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company at a profit, the consequence being the assessment of the company to income-tax, can avoid the conclusion that this is one of the expenses in the winding-up. It is curious that in the authorities to which I have referred the phrase does not seem to have been used by the court. In my opinion, rates and taxes and for this purpose I can group them together, although, there is for some purposes a distinction between them falling due subsequently to the winding-up are part of the expenses of the winding-up." Again, at page 315, his Lordship further observed as follows : "I do not. see any particular reason for limiting the meaning of the phrase 'expenses of the liquidation', or 'expenses incurred in the winding-up'. The term is not one of art, and I see no reason why it should not include any expenses which the liquidator might be compelled to pay in respect of his acts in the course of a proper liquidation of the company's assets. In my opinion, then, the sums in question are suras which can be properly treated, as expenses in the liquidation." With respect, we agree with this principle. Therefore, before the assets are distributed among the creditors, this is payable a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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