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TMI Blog1943 (3) TMI 20X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 (4), Indian Income Tax Act, calling upon the company to produce their accounts on July 7, 1938. On this date the Manager of the Company appeared before the Income Tax Officer and applied for an adjournment and July 14, 1938 was fixed for production of the accounts. On July 12, 1938 an order was made to wind-up the company and a provisional Liquidator was appointed. On the of July 14, 1938 the Manager filed a return showing that the company had incurred a loss of ₹ 22,052 for 1937-38 which was the accounting year for the assessment year 1938-39. This return was not accompanied by a balance-sheet or a copy of the profits and loss account and it is conceded that this was not a return of income contemplated by law. The Manager of the Company was called upon to file copies of the profit and loss account and the balance sheet by July 28, 1938 and he was warned that if such were not filed, an assessment by the tax authorities would be made under Section 23(4), Indian Income Tax Act. On July 28, 1938 no one appeared on behalf of the Company and on July 29, 1938 the Income Tax authorities made an assessment under Section 23(4) of the Act. The Income Tax payable as a result of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come Tax said that he was not prepared to prove his claim except by production of the assessment. The learned Judge, following a Division Bench decision of this Court, held that the mere production of the assessment was not sufficient and as the Commissioner of Income Tax was not prepared to prove his claim, the claim was rejected. From this decision the present appeal has been preferred. The only question which has to be decided in this appeal is whether the Liquidator can call upon the Income Tax authorities to prove their debt. According to the Income Tax authorities, production of the assessment is sufficient whereas the Liquidator contends that the Court is entitled to go behind the assessment and to call for proof that the amount of tax to which the Company was assessed was actually due. It is clear in this case that the Crown has no priority for the amount of the tax in question. The tax did not become due and payable until after the winding-up order had been made and therefore it is not a debt for which priority can be claimed : see Section 230, sub-sections (1) and (2), Indian Companies Act, and The Bank of Bihar, Ltd. v. Secretary of State [1932] A.I.R. 1932 Pat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n Messrs. Dinshaw Co. v. The Income Tax Officer, Lucknow [1941] 9 I.T.R. 215 ; I.L.R. 16 Luck 599. In the case of In re Calvert referred to above, Wright, J., held that the rule that on proof for a judgment debt the Court will go behind the judgment and ascertain whether there is a provable debt, does not apply to a proof for assessed taxes. Where therefore a debtor, who had carried in a scheme of arrangement, applied to expunge a proof for an assessment to Income Tax under Schedule D (which had not been appealed against), on the ground that he had made no profits assessable to duty, the application was dismissed but without prejudice to any application he might be advised to make to the Inland Revenue under the Board of Trade Regulation of May 1888. Wright. J., in his judgment states that in the case of judgments or decrees there is always a danger that the insolvent has colluded with the decree-holders. A person about to be come insolvent might submit to number of fictions claims and permit his friends and relations to obtain collusive decrees against him and latter the insolvent by means of these decrees might obtain a share of the assets which he would not otherw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld go behind as assessment. Even if the case of In re Calvert [1899] 2 Q.B.D. 145 correctly states the law in England, I would hesitates to apply the same rule in Indian. In this province in particular a very large number of companies have been formed in recent years and experience has shown that directors and responsible officers of these companies have not fully realised their duties and obligations. At present there is a real danger, when a company is in financial difficulties, that demands for returns of income may be completely ignored with the result that assessments under Section 23(4), Indian Income Tax Act, might well be made when no income had been earned. Balance-sheets are often negligently and sometimes fraudulently prepared and cases have occurred in this Court when for fraudulently prepared and cases have occurred in this Court when for fraudulent purposes purely imaginary profits have been shown as having been earned and Income Tax paid upon such profits. Such cases are referred to in the judgment in the case of In re Diamond General Insurance Company C.O. 222 of 1937 to which reference will be made later in this judgment. To apply the rule as laid down i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ., observed :- It is quite clear that in the Court of Bankruptcy the consideration for a judgment may be investigated, particularly when the judgment has gone by default. I do not mean to say that this rule applies to such an extent that in every case in which a defendant has a good defence to an action and does not plead it, as, for instance, where he had no notice of dishonour of a bill of exchange, the Court of Bankruptcy would allow the creditors to go behind the judgment. The real question must always be whether there was a good consideration for the debt, and we have therefore to consider whether there was a good consideration in this case . The case of Ex parte Kibble was followed by the Court of Appeals in England in the case of In re Tollemache [1884] 13 Q.B.D. 720. That was a cases where collusion was suspected and the Insolvency Court felt bound to envisage whether the decree was passed upon a good and valid debt. At page 725, Cotton, L.J., observed : The proof is founded simply on the judgment, for there is no evidence of any indebtedness by the bankrupt independently of the judgment. What is the law on the point ? In bankruptcy a judgment certainly st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the bankruptcy only amongst the honest bono fide creditors of the bankrupt, . At page 329 Lindley, L.J., referring to an observation of Mellish , L.J., in Ex parte Kibble [1875] 10 Ch. A. 373, remarked :- What does that mean ? It means, I think, that although the judgment debtor could not go behind the judgment, the Court of Bankruptcy will not allow itself to be put in motion at the instance of a person who is not a real creditor. The Court will not allow bankruptcy proceedings to be had recourse to for the purpose of enforcing debts which are fictitious and not real, even although they are in the form of judgment debts. The effect of these cases appears to be that the Insolvency Court will always go behind a judgment or decoders if there exist reasons to believe that the debt is fictitious and not a real legal debt. The Court of Bankruptcy has to safeguard the interests of the debtors and of all the creditors and no act of the debtor ought to prejudice the rights of the other creditors. If the insolvent has colluded with a creditor, such (sic) will not prejudice the other creditors. And similarly if the insolvent by his inability or carelessness has failed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ason why the Income Tax authorities should be entitled in the liquidation of this company to obtain payment of their demand if it can be shown that there was no debt really due to them, in other words, if it can be shown that no income was earned, upon which tax is payable. In my judgment the true rule is that laid down in Ex parte Lennox [1885] 16 Q.B.D. 316 , in which it was laid down that a judgments is prima facie evidence of the debt but not conclusive. In cases where the facts givw rise to a suspicion that there is no real debt, the Court can go behind the judgment or decree but the onus of showing that the judgment or decrees does not represent a real and valid debt, rests on those who seek to challenges it. That rule to my mind applied with equal force to assessments and a Liquidation Court can in proper cases go behind assessments though the latter are prima facie evidence that certain income was earned and that the amount of tax is due. The precise point which arises in this case was considered by a Bench of this Court in the case of In re Diamond General Insurance Co. C.O. No. 222 of 1927 (unreported) decided on the of May 25, 1939, in which it was held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... represents a real debt due to the Crown in respect of Income Tax. In my judgment, circumstances do exists in this case which would entitle the Court to go behind the assessment and to disregard it if the materials placed before the Court by the liquidator establish that no income was earned or profits made during the year in question. The onus will rest upon the liquidator and if the latter fails to discharge the onus the assessment must be course, stand. In my view the learned Liquidation Judge was not right in rejecting the claim of the Commissioner of Income Tax without investigation . He should have treated the assessment as prima facie evidence and permitted the liquidator to rebut it, if he could, by producing documents or such other evidence as might be in his possession. In the result therefore I would allow this appeal, set aside the order of the learned Liquidation Judge and send the case back to the Liquidation Court to be heard and decided in accordance with the observations which I have made . The costs of this appeal will abide the decision of the Liquidation Judge. ABDUL RASHID, J. - I agree. BECKETT, J. - I agree Appeal allowed. - - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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