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TMI Blog1978 (5) TMI 33X X X X Extracts X X X X X X X X Extracts X X X X ..... n seeks to take certain coercive steps under the Income-tax Act, 1961, which leads to a supposition that the income-tax authorities want to act outside the Companies Act. To understand the legal background of the matter, it is enough to refer to the above-mentioned judgment delivered by myself which is based on some of the leading decisions of the Supreme Court and the Federal Court on the subject. The legal position is that in the matter of recoveries from a company in liquidation, the income-tax authorities stand in the same position as any other creditor. The payments to such creditors have to be made in accordance with sections 528 and 529 of the Cornpanies Act. These sections provide that the insolvency law will govern payments to creditors of insolvent companies and payments will be made on proof of debts. Thus if the Income-tax authorities want to recover anything from the assets of an insolvent company, they have to prove the debt before the court and will be paid Pari passu along with other creditors. The income-tax authority or income-tax dues have no special advantage or priority. The entire legal position has been fully explained by the Federal Court in Governor-General ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the Income-tax Act was amended in 1961 and now it is a complete code by which income-tax can be recovered and, being a complete code, means that the recovery of tax outstandings can be made outside the jurisdiction of the liquidation court. As the above judgment was given in 1972, 11 years after the Income-tax Act was passed, I am unable to accept that any change in the Income-tax Act has altered the legal position. I am in any case bound by the Supreme Court's declaration of the law. It is no doubt true that if there is a special procedure for dealing with particular types of claims such as income-tax assessments of claims under special laws, etc., then the assessment of that tax or computation of penalties, etc., payable under that Act or assessment or reassessment proceedings, etc., have to take place under that Act ; in other cases, special proeedings have to take place before the Tribunals denominated for this purpose by the law in question. The High Court as the company court, which is the alternative court under the Companies Act as per section 446, cannot possibly deal with subjects like assessment, reassessment or appeals against assessments or reassessments, etc. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w remains to be seen whether any such priority has been created in some other way. It is urged by the learned counsel for the applicant that such a priority has in fact been created by the enactment of section 178 of the Income-tax Act, 1961, which provides that when a company has gone into liquidation, the liquidator shall give notice of his appointment within thirty day to the Income-tax Officer and thereafter, within three months, the Income-tax Officer will inform the liquidator concerned of the income-tax liability then due or likely to be due thereafter. There is a further provision in the section that the liquidator has to keep such amount apart. The question for consideration is does this mean that the Income-tax Officer by passing an order under section 178 can create a priority in respect of income-tax dues which is not provided for in any other law. In my opinion, this section does not create any priority and I now proceed to set out my reasons for this view. The basic question involved in the enactment of section 178 is the protection of the assets of the company in winding up for the purpose of payment of income-tax. The section has been introduced to meet a particul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nacting section 178. An omission in the section cannot be provided by legal submission or argument. Now, I take another example, suppose the assets of the company are Rs. 50,000 and the Income-tax Officer's claim is Rs. 2,00,000. Obviously, the liquidator cannot keep apart Rs. 2 lakhs out of an amount of Rs. 50,000. He, therefore, cannot comply with the order. Section 178 does not deal with such circumstances, and merely states that if the liquidator does not keep Rs. 2 lakhs he is personally liable for the remaining balance. Obviously, this is not a reasonable way to read the section. The liquidator cannot retain anything he does not have. He cannot, therefore, keep more than Rs. 50,000. Even after retaining this amount, the actual amount to be paid is the dividend and not the amount retained. The court has no power to alter the section. It is obvious from this analysis that section 178 does not provide the answer as to how adjustments have to be made between creditors. Reference has to be made to sections 528 to 530 of the Companies Act for this purpose. The analysis need not be amplified any further. In the present case, the position is quite a simple one. The company went ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other assets he may know about. Though I have made an analysis of section 178 of the Income-tax Act above, I must also observe that the same was not really necessary in this case as there is no mention of any direction having been given under that section in the statement of facts contained in the application. In fact, it is common ground that the present income-tax claims which are around Rs. 28 lakhs did not exist at the time the company went into liquidation. It also appears that as soon as the company closed down due to losses, etc., the Income-tax Officer depending large on facts known only to him, started making heavy assessments, apparently on the basis that the company must be making heavy profits. It is pointless to make any comments on the wisdom of such a procedure ; ordinarily, logic and reas on would have indicated that a company which has closed down due to inability to pay debts, could not be making profits, but possibly such logic has no place in taxation proceedings. Unfortunately, due to the Supreme Court's declaration of law in Kondaskay's case [1972] 83 ITR 685 ; 42 Comp Cas 168 the winding-up court has no control on the assessment proceedings and has no powe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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