V.S. Desai, J.
1. The short question that arises for consideration in this petition under article 226 of the constitution is whether the income-tax authorities were entitled to set off the refund of Rs. 1,460-1-0 against the tax dues of Rs. 3,549-12-0, which had remained payable under the provisions of section 49E of the Income-tax Act. The petitioner is a private limited company was directed to the wound up by an order passed by this court on October 11, 1950, and a court liquidator was appointed as the official liquidator thereof with all powers under section 179 of the Indian Companies Act, 1913, to be exercised by him under section 180 without sanction or intervention of the court save and except in case of sales of immovable property belonging to the petitioner. The petitioner's assessment for the year 1948-49 was completed on December 8, 1950, and the petitioner was assessed to pay a tax of Rs. 8,737-15-0. Since, before this date the petitioner had gone into liquidation, the Income-tax Officer lodged a claim with the official liquidator on or about March 15, 1951. That claim was adjudged and allowed as an ordinary claim and certified as such on April 2, 1952. In August, 1954, the official liquidator declared a dividend of 9 1/2 annas in the rupee and paid to the Income-tax Department a sum of Rs. 5,188-3-0 against the claim made by it as an ordinary creditor. Thus, out of the amount of Rs. 8,737-15-0, which was proved by the Income-tax Department as a claim of an ordinary creditor, a balance of Rs. 3,549-12-0 remained payable to the Income-tax Department from the assets of the petitioner. For the advance tax for the year 1955-56, a demand of Rs. 2,565-6-0 was made by the Department from the petitioner on June 22, 1954, and the said amount was paid by the official liquidator. When the regular assessment for the said year was made by the Income-tax Officer, Rs. 1,126-12-0 was determined as payable by the petitioner. After the said amount was adjusted against the advance payment, a balance of Rs. 1,460-1-0 became refundable to the petitioner inclusive of interest. Instead of refunding the said balance to the petitioner, the Income-tax Officer set off the said amount against the balance which had remained payable in respect of the income-tax demands for the year 1948-49. In the demand notice, which was issued by the Income-tax officer for the assessment year 1955-56, endorsements to the said effect were made, and the Income-tax Officer did not pay the amount of the said refund to the official liquidator. Against the said decision of the Income-tax Officer, the petitioner filed an application in revision to the Commissioner of Income-tax. On September 21, 1959, the said application was rejected by the Commissioner, holding that the action of the third respondent was perfectly justified under the provisions of section 49E of the Income-tax Act. Thereafter, on November 25, 1959, the petitioner has filed the present application under article 226 of the Constitution, and has prayed for a writ, direction or order for setting aside the order of the second respondent confirming the action of the third respondent, and also for a further writ, direction or order restraining the Department from setting off the refund against the tax dues, and directing them to hand over the refund to the official liquidator.
2. The petitioner's case is that the Income-tax Department had no priority in respect of the demand of Rs. 8,737-15-0, and was only an ordinary creditor, having no higher rights than other ordinary creditors in respect of the said claim. In setting off the amount of Rs. 1,460-1-0 towards its balance from the said claim, which was the claim of an ordinary creditor, the Department was obtaining a preferential payment in respect of its claim contrary to and in breach of the provisions of the company law. Provisions of section 49E of the Income-tax Act had no application to the present case, since by reason of the provisions of the company law the Income-tax Department was not entitled to the full amount of the refund of Rs. 1,460-1-0 but was statutorily bound to share it with the other creditors of the petitioner. The Department was also not entitled to the full amount of the balance of tax payable for the year 1948-49, and could get it proportionately along with the other ordinary creditors of the petitioner. The contention of the Department is that in setting off the amount of the refund towards the tax payable, it was only exercising its statutory right to set off and not obtaining a preferential payment. It was contended by the Department that an assessee's right to refund was subject to the provisions of the Income-tax Act, and one of such provisions was the provision of section 49E of the said Act. The provisions of this section applied to every person which included even a company in liquidation like the petitioner. According to the Department, therefore, the action taken by the Department was perfectly legal and proper and was not either in breach of or contrary to the provisions of the company law.
3. Mr. Sorabjee, learned counsel appearing for the petitioner, has argued that the Crown does not have any priority in respect of its claims in the liquidation of a company except as is provided in section 230 of the Indian Companies Act, 1913, which was applicable at the material time. Now, the present claim of the Income-tax Department has been already adjudged and certified to be an ordinary claim of an unsecured creditor. The said claim, therefore, has got to be dealt with and satisfied only under the provisions relating to the payment of such claims in the liquidation proceedings under the provisions of the company law. Under section 229 of the Indian Companies Act, 1913, in the winding up of an insolvent company the same rules shall prevail and be observed with regard to the respective rights of the secured and unsecured creditors and to debts provable and to the valuation of annuities and future and contingent liabilities as are in force for the time being under the law of insolvency. Under the law of insolvency, when a person is adjudged insolvent, his property is transferred to the official assignee or receiver, and the remedies which the creditors have against this property before he was adjudged insolvent are taken away. In substitution of this remedy, the creditors acquire a right to share equally and proportionately in the distribution of the insolvent's assets. In the present case, therefore, a winding up order having been passed, and an official liquidator having been appointed, the unsecured creditors, for the satisfaction or realisation of their dies from the insolvent company, have to proceed under the provisions of the company law, and all other remedies which were available to them for the realisation or satisfaction of their debts would not be available to them. Thus, where the claim of the Income-tax Department is ranked as the claim of an unsecured creditor, the machinery provided under the Income-tax Act for the recovery of the income-tax dues is not available to the Department. This is the vies which has been taken by the Federal Court in the case of Governor General in Council v. C. Shiromani Sugar Mills Ltd. It was held in that case that 'in the winding up of a company the Crown is not entitled to any priority, prerogative or preferential treatment except to the extent provided for in the Indian Companies Act, in particular, by section 230 and 232.' In that case, after the winding up order against the company had been made by the High court in April, 1942, a notice of demand was served on the official liquidator by the Income-tax Department under section 29 of the Indian Income-tax Act, 1922, and therefore, without following the procedure of lodging the claim in the winding up, and having the claim provided, and arrear demand was issued with a view to set in motion the machinery available to the Department under section 46 of the Income-tax Act. The official liquidator filed an application to the High Court under sections 171, 228 and 232 of the Indian Companies Act, 1913, asking for an order directing the Department to put in a formal claim and restraining the Collector from effecting recovery of the said sum as arrears of land revenue pending the disposal of the application. It was contended that the Crown was not affected by the provisions of the Indian Companies Act. That contention was negatived, and it was held that the Crown was bound by the provisions of the Indian Companies Act, and is bound in regards to the provisions relating to the liquidation of the company to a statutory scheme of administration wherein the prerogative right of the Crown to priority no longer exists, and it was further held that the Crown was not entitled to any prerogative, priority or preferential rights of treatment save those expressly conferred and limited by the Act itself, in particular, by section 230 and sub-section (2) of section 232. Dealing with the question of the Department's right to proceed under section 46 of the Income-tax Act, in respect of the claim which ranked with that of an ordinary creditor, their Lordships observed that if the machinery of section 46 were made available in respect of such claim, it would, in effect, enable the Crown to secure for the arrears, the very priority to which both in England and in India the Crown has been held not entitled. Mr. Sorabjee has argued that although this decision refers to the case of a recovery, the ratio of this case is equally applicable to the case of a set-off under section 49E of the Indian Income-tax Act. The provisions of section 49E which empower the Department to set off is a provision enabling them to have their dues satisfied, and would thus have the effect of permitting the Department to have its claim as an unsecured creditor satisfied to the full extent in preference to the other unsecured creditors and without having to share the amount with them. In our opinion, this contention of Mr. Sorabjee appears to be well founded and supported by the decision of the Federal Court which has been referred to above.
4. Mr. Joshi, learned counsel for the Department, has, however, contended that there is an essential difference between a case where the Income-tax Department wants to recover its dues by enforcing its claim, and the case where it is only exercising its statutory right to make a set-off. The advance payment which was made by the petitioner company was a payment of tax under section 18A of the Income-tax Act. After the regular assessment was made, the excess of the advance payment over the tax that was properly due from the assessee would undoubtedly be refundable. But before it can be so refunded to the assessee, the provisions of section 49E intervene, and enable the Department not to refund the said amount, but made it available fort the purpose of payment towards the tax which had remained payable and has not been paid. The payment which was made as tax only becomes refundable as an excess provided there is no other amount of tax still payable to the Department from the assessee. Where such other payment of tax is payable to the Department this advance payment of tax made by the assessee goes towards the satisfaction of that balance of tax and does not become an excess refundable to the assessee. According to Mr. Joshi, therefore, the provision of section 49E was available to the Department in the present case to set off the payment of the advance tax to the tax which has remained payable.
5. In our opinion, the argument advanced by Mr. Joshi is not tenable. It is true that a demand of Rs. 8,737-15-0 which was made in respect of the tax fort the year 1948-49 was a tax demanded. In view of the supervening insolvency, however, this demand ranked as the claim of an unsecured creditor, and on its being is adjudged and certified, came to have all the incidents and character of an unsecured debt payable by the official liquidator to the Department. This claim thereafter was governed by the provisions of the company law and could be paid to the creditor only in accordance with the provisions of the company law. No other remedy nor any other methods of obtaining satisfaction of his claim was available to the creditor thereafter. It was no longer the amount of tax remaining payable by a person to whom the refund was due within of tax remaining payable by a person to whom the refund was due within the meaning of section 49E of the Income-tax Act. In our opinion, therefore, the provision of section 49E was not available to the Department for setting off the amount of the excess towards the balance of its claim of Rs. 8,737-15-0 which the Department had proved in the insolvency of the company and was being dealt with in the Department had proved in the insolvency of the company and was being dealt with in the insolvency. The decision of the Income-tax authorities, therefore, that the amount of Rs. 1,460-1-0 was available for being set off under the provisions of section 49E of the Income-tax Act is clearly erroneous and unsustainable. Since, in our opinion, the view that the income-tax authorities have taken is not possible on the material and relevant provisions of law, there is an error apparent on the face of the record in the decision of the income-tax authorities, and the petitioner, therefore, is entitled to a writ under article 226 of the Constitution.
6. We will accordingly set aside the orders passed by the Department in so far as they set off the amount of the refund towards the tax remaining payable, and direct the third respondent to deal with and dispose of the claim of the petitioner for the refund and pass appropriate orders in respect of the said amount of refund under the provisions of section 48 of the Income-tax Act. The rule is accordingly made absolute with costs.
7. Petition allowed.