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TMI Blog1989 (11) TMI 36X X X X Extracts X X X X X X X X Extracts X X X X ..... mpanies Act. Notice of these applications was given to the Income-tax Department. This court passed order dated March 30, 1989, permitting the bank to appropriate a sum of Rs. 75,00,000 from out of the sale proceeds towards the amounts due to the bank under the loan transactions of Messrs. Giovanola Binny Ltd. (in liquidation). However, this court made it clear that if it was found later that the balance amount is not sufficient to meet the claims of the Income-tax Department as well as other claims, it will be open to this court to reopen this order and to direct the bank to bring to the common pool the whole or any portion of the amount allowed to be appropriated. Subsequently, by order dated July 3, 1989, in M. C. A. No. 37 of 1989, this court granted sanction to the liquidator to declare a first dividend of 27 paise in a rupee as shown in annexure A to the said application to the creditors of the company under sections 529 and 529A of the Companies Act. In the very same order, this court directed the Canara Bank to provisionally set apart Rs. 27,00,000 for capital gains tax on the basis of the representation of learned standing counsel for the Department. It was also made clear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e companies, the properties sold having been mortgaged to the bank. The instructive analysis of Rashbehary Ghose in his Tagore Law Lectures, Law of Mortgage (6th Edition, page 61),is very much helpful to understand the word "mortgage". "A mortgage may be viewed in two aspects. In the first place, it is a promise by the debtor to repay the loan and as such it is a contract which creates a personal obligation. Secondly, it is also a conveyance, since it passes to the creditor a real right in the property pledged to him. However, the right created in the land is only an accessory right, intended merely to secure the due payment of the debt." Section 58 (a) of the Transfer of Property Act provides that a mortgage is the transfer of an interest in any immovable property for the purpose of securing the payment of money. Then, the question whether the mortgage right of the bank will be subject to the claim of the State for income-tax dues as costs of winding up has to be answered. Sri P. K. Ravindranatha Menon, learned standing counsel for the Income-tax Department, placed strong reliance on ITO v. Official Liquidator, Swaraj Motors Ltd. [1978] 111 ITR 77 ; 48 Comp Cas 11, where Div ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rerogative remedy to enforce the right. I can understand, that the Crown might surrender the latter, while retaining the former, but not that it could surrender the former while retaining the latter. If the right to come first is surrendered, the prerogative remedy to enforce that right by writ of extent must have been, surrendered also. The question for decision, therefore, I think is, and is only, whether the Crown has surrendered the prerogative right to come first. The effect of section 209 is as follows : By section 209, sub-section (1)(a), certain Crown debts, which I will call the specified Crown debts, are brought into the class of debts identified by section 209(1)(a), (b), (c), (d). Debts of this class are to be paid 'in priority to all other debts', in priority, therefore, to (amongst others) the unspecified Crown debts. Subject to the priority right of this class, all liabilities are by section 186 to be satisfied pari passu. The specified Crown debts, therefore, are to be paid pari passu with the other debts in the class created by section 209(1), and in priority to all other debts, whether Crown debts or not, which are not in that class. Further, all debts, whether ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant date as defined in clause (c) of sub-section (8), and having become due and payable within the twelve months next before that date;" (rest of the section omitted). Thus, it is clear that (i) this provision is subject to the provisions of section 529A of the Companies Act, and (ii) revenues, taxes, cesses and rates must have become due and payable within the 12 months next before the relevant date, which is the date of appointment of the provisional liquidator or the date of winding-up, as the case may be, in order that they may be paid in priority to other debts. Therefore, the income-tax now claimed, will not come within the purview of section 530(1)(a) of the Companies Act, since the sale of the properties of the companies took place after the passing of the winding-up orders. Moreover, it has to be observed that the companies in liquidation had only a limited right over the properties which were sold, namely, full title over the properties minus the mortgage right in favour of the Canara Bank. The bank agreed for sale of the properties free of encumbrance subject to a first charge on the proceeds. In other words, what was sold was the right of the company as well ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the appellate judgment of Scott C. J. (at page 221 of [1917] ILR 42 Bom). Rashbehary Ghose in Tagore Law Lectures, Law of Mortgage 6th edition, page 388), relying on various authorities, has observed that "It seems a Government debt in India is not entitled to precedence over prior secured debt". Section 476 of the Companies Act provides that the court may make an order for payment out of the assets of the costs, charges and expenses incurred in the winding up, in such order of priority inter se as the court thinks just. The meaning of the word "assets" can only mean the assets of the company in liquidation. It will not include the mortgage right which is an asset of the bank. However, section 529A has created a new priority in respect of workmen and secured creditors. Even if income-tax is treated as winding up cost, it can be paid only from out of the assets of the company. It cannot be paid from out of the mortgage right which does not belong to the company in liquidation. In re, Mesco Properties Ltd. [1980] 1 All ER 117, 120 (CA), Buckley L. J. observed as follows : "The company is liable for the tax which is due. The tax ought to be paid. The liquidator is the proper off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany only if they have been assessed on the company up to a particular date, namely, 5th April, or prior to the appointment of the liquidator or resolution for the winding-up of the company and do not exceed in amount the whole of one year's assessment. It will be noticed that by comparison the provision of clause (a) of sub-section (1) of section 230 of the Indian Companies Act is much wider and gives much, more latitude to the income-tax authorities for under these provisions, arrears of taxes would rank in priority if they have become due and payable within twelve months next before the date on which they are payable irrespective of whether such taxes have been assessed on the company or not. We are aware of the large arrears of income and other taxes which are due by many companies, which are in liquidation, but we would venture to think that the remedy for this unsatisfactory situation is not the conferment of preferential rights without limit to the income-tax authorities under section 230 of the Indian Companies Act, but the energetic completion of assessment proceedings and vigorous measures for the collection of the assessed taxes." The purpose of section 529A is to ensu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mount due", even though Raman Nayar J., as he then was, had in his judgment in Indian Traders Bank's case [1968] KLT 595 (Ker), observed that the payments to the secured creditor (at p. 185) "are really not so much cases of priority as of the particular asset not being available for distribution among the creditors in the winding up" and it "stands on the same footing as, for example, trust funds". It may be mentioned that Civil Appeal No.. 1199 (NT) of 1979 against the Full Bench judgment in Imperial Chit Funds' case [1979] 116 ITR 176 (Ker); 47 Comp Cas 58 (Ker), pursuant to the certificate granted by that Bench, is pending before the Supreme Court. It is clear that neither section 178 of the Income-tax Act nor any provision in the Companies Act confers priority to income-tax in winding-up proceedings. The preferential payment provided under section 530(1)(a) is limited and is subject to the provisions of section 529A. The report of the Company Law Committee referred to earlier shows that the request for priority was specifically raised and it was not recommended by the Committee. Section 178 is a procedural one and cannot be taken as a provision conferring priority for income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X
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