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TMI Blog1996 (3) TMI 397X X X X Extracts X X X X X X X X Extracts X X X X ..... catch the income at the earliest point of time and tax the same where it is found, instead of waiting for long. We, therefore, hold that the judgment under appeal does not merit interference by this Court. X X X X Extracts X X X X X X X X Extracts X X X X ..... . The Division Bench of the Kerala High Court before whom the matter came up, by order dated 27-6-1977 referred the matter to a Full Bench for decision and accordingly the matter was finally heard and decided by a Full Bench. The judgment of the Full Bench in Imperial Chit Funds Ltd. (In Liquidation) v. Income-tax Department [1979] 116 ITR 176 (Ker.). 3. We heard the counsel for the appellant Mr. K. John Mathew and the senior counsel for the respondent-revenue Mr. J. Ramamurthy. The sole question that arises for consideration in this case is, whether section 178 of the Income-tax Act affects or alters the existing law of priority or overrides the provisions of preferential payment provided in section 530 of the Companies Act. There are conflicting decisions on this point. A learned Single Judge of the Kerala High Court in ITO v. Indian Traders Bank Ltd. (In Liquidation) 1968 KLT 595, took the view that section 178 of the Income-tax Act does not affect the scheme of priority in section 530 of the Companies Act, but, the amount 'set aside' under section 178 of the Income-tax Act will not be available for distribution in accordance with the provisions of the Companies Act and should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the liquidator within three months from the date on which he receives notice of the appointment of the liquidator the amount which, in the opinion of the Assessing Officer, would be sufficient to provide for any tax which is then, or is likely thereafter to become, payable by the company. (3) The liquidator-- (a)shall not, without the leave of the Chief Commissioner or Commis-sioner, part with any of the assets of the company or the properties in his hand until he has been notified by the Assessing Officer under sub-section (2); and (b)on being so notified, shall set aside an amount, equal to the amount notified and, until he so sets aside such amount, shall not part with any of the assets of the company or the properties in his hands : Provided that nothing contained in this sub-section shall debar the liquidator from parting with such assets or properties for the purpose of the payment of the tax payable by the company or for making any payment to secured creditors whose debts are entitled under law to priority of payment over debts due to Government on the date of liquidation or for meeting such costs and expenses of the winding up of the company as are in the opinion of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which the winding-up of the company is proceeding may, notwithstanding anything contained in any other law for the time being in force, be transferred to and disposed of by that Court." "447. Effect of winding-up order.--An order for winding-up a company shall operate in favour of all the creditors and of all the contributories of the company as if it had been made on the joint petition of a creditor and of a contributory." "456. Custody of company's property.--(1) Where a winding-up order has been made or where a provisional liquidator has been appointed, the liquidator or the provisional liquidator, as the case may be, shall take into his custody or under his control, all the property, effects and actionable claims to which the company is or appears to be entitled." "511. Distribution of property of company.--Subject to the provisions of this Act as to preferential payments, the assets of a company shall, on its winding-up, be applied in satisfaction of its liabilities pari passu and, subject to such application, shall unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company." Inserted by the Companies (Am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Act referred to herein are distinct and provide for different contingencies. If it is not so understood, and section 178 of the Income-tax Act is interpreted as one providing for preferential payment also, it will lead to disastrous consequences and completely set at naught the scheme and the relevant provisions of the Companies Act with regard to the winding-up proceedings. Since the stage for deciding for preferential payment has not reached, the ITO had no right to call upon the liquidator to pay the amount and should wait for the stage when he can prove the claim in the winding-up proceedings. The interpretation placed by the High Court on section 178 of the Income-tax Act as if it provides for a preferential payment of income-tax dues, has failed to give effect to the relevant provisions of the Companies Act and the significance of the winding-up proceedings in its proper context. The High Courts of Mysore, Calcutta, Rajasthan, Gujarat and Delhi have understood section 178 as not in any way providing for priority of payments regarding income-tax dues and the view expressed by the Kerala and the Andhra Pradesh High Courts to the contrary does not lay down the correct law. On ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acted in the present form. After referring to the above materials in paragraph No. 4, the Full Bench of the High Court observed, thus: ". . . With respect, these decisions [Decisions of other High Courts] fail to take note of the object and purpose with which section 178 of the Income-tax Act was put into the statute book; and the significance and the implications of 'setting aside' of an approximate amount needed to meet the tax liability of the company. These have been noticed in the Kerala and the Andhra decisions to which we shall refer. Before we do so, we may briefly indicate that the effect of section 178(3)(b) is that the amount 'set aside' by the liquidator is marked off as outside the area of the winding- up proceedings and the jurisdiction of the winding-up Court. This is the view taken by the Kerala High Court and we are in agreement with it;. . ." (p. 102) We would only add that the scope of section 530(1)(a ) of the Companies Act is different from that of section 178 of the Income-tax Act. Under section 530(1)(a) all taxes which have 'become due and payable' alone are entitled to preferential payment. The amount should have been crystal- lized into a liability. Unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y available for distribution are the assets which come into the hands of the liquidator minus the trust monies, or the incumbrance of a secured creditor, or, in a case failling under section 178 of the Income-tax Act, the amount set aside or earmarked for the payment of the tax. For, reading sub-sections (2), (3) and (4) of that section together there can be no doubt that what the section does is to create a first charge on the amount set aside by sub-section (3) thereof for payment of the tax that might be admitted to proof. To say as the liquidator has done that the amount is set aside only for the purpose of paying the dividends that might be declared in respect of the tax liability and not the entire liability as proved in the winding-up, so that the section serves only the limited purpose of ensuring that the assets of the company are not distributed beyond recall without reserving sufficient funds for the payment of dividends in respect of the tax liability which might not yet have been determined, and therefore not provided, is hardly in keeping with the wording of the section defective though it be. Sub-section (2) of the section, it may be noted, speaks of the tax payable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus attached to the expression 'set aside' convey the idea of an appropriation or an allocation of the income-tax dues; with the result, that it stands outside the winding-up by the Company Court, an idea suggested in the judgment of Ag. Chief Justice Raman Nayar, confirmed by the Division Bench..." [Emphasis supplied] (p. 187) The Andhra Pradesh High Court in the decision reported in Official Liquidator's case (supra) has taken a similar view. We are of the opinion that the judgment of the learned Single Judge of the Kerala High Court in Indian Traders Bank Ltd. (In Liquidation)'s case (supra), affirmed in A.S. No. 225 of 1968 and approved by the Full Bench in the judgment under appeal as also the decision of the Andhra Pradesh High Court in Official Liquidator's case (supra) lay down the law correctly. On a total view of the relevant statutory provisions, it appears to us, that the income-tax depart-ment, is treated as a 'secured creditor'. The decisions of the Mysore, Calcutta, Rajasthan, Gujarat and Delhi High Courts have failed to give due importance to the legislative history and background that led to the enactment of the section and the crucial words occurring in sections ..... 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