1. The applicant Income-tax Officer, Special Investigation Circle A, Bangalore, had made a claim for preferential payment to him of a sum of Rs. 14,503.80 nP. from the assets of the company in liquidation. The claim is wholly rejected by the liquidator by his order dated 18th January, 1962. In this application, the applicant appeals against the order of the liquidator rejecting his claim.
2. The facts and circumstances, on the strength of which the claim had been made, are briefly the following :
The company had entered into a contract with a firm of builders called 'South India Builders' for construction of certain buildings. The said firm of builders had defaulted in payment of income-tax due by them, for recovery of which the Income-tax Officer, Bellary, who was the appropriate assessing authority in respect of the said firm, issued to the company on 11th February, 1953, a notice under the provisions of section 46(5A) of the Indian Income-tax Act, 1922, requiring the company to pay to the officer the money due by it to the defaulting assessee. In reply to the notice, the company in its letter dated 20th February, 1953, after acknowledging receipt of the said notice, stated as follows : 'The above firm has done some contract work for us in the years 1947-48-49 and have obtained payment in respect of the works executed on interim bills by way of cash and material advances. Only a sum of Rs. 14,503-12-9 is due to them according to our books. But they have not signed and returned to us the final bills prepared by our engineer. This amount becomes payable to them only on their signing, accepting and delivering the bills to us. Till such time we are keeping this amount in suspense under restraint. We have asked the party to expedite sending of the bill.'
3. It also appears from the same reply that a similar notice had been received by the company from the II-Additional Income-tax Officer, Urban Circle, Bangalore. The company, however, did not make any payment to the income-tax department. In December, 1956, the company wrote to the Income-tax Officer, Special Circle at Bangalore (to whom the learned counsel for the applicant says the matter of collecting arrears of tax due by the firm of builders had been entrusted), stating that the question whether the company was legally liable to pay any amount to the South India Builders had been referred for legal opinion. After receipt of such legal opinion, the company wrote once again to the same officer on 28th December, 1956, as follows :
'With reference to your letter quoted above, we write to inform you that legal opinion has since been taken by our company on the question of liability of our company to the assessee and that our company are advised that they are not due any amount to Messrs. South India Builders, as the latter's claim, if any, had become time-barred long before the receipt of the notice of attachment from you by us. Hence we regret to say that we are unable to comply with your notice of attachment under section 46(5A) of the Indian Income-tax Act.'
4. Subsequently, some steps appears to have been taken by the department to recover the dues under the provisions of section 46 of the Indian Income-tax Act. But, before any money could be recovered, a petition to wind up the company - being Company Petition No. 435 of 1958 - was presented to this court on November 17, 1958. One other fact, which should noted before examining the contentions pressed before me, is that the firm of Builders having got dissolved, one Vijayan, said to be one of its partners, appears to have been authorised to take all steps for winding up the business of that firm. He demanded payment of moneys due to the Builders from the company through a lawyer, Mr. B. Neelakanta. The company sent a reply to Mr. Neelakanta on 21st June, 1952, in which it stated :
'In this connection we write to inform you that Mr. D. K. Vijayan has not signed the bills and measurement books for settlement of the claim and a copy of our letter addressed to Mr. Vijayan is herewith enclosed for your reference. We shall be glad if you will please arrange to let us know his present address so that we might write to him to sign the bills, etc., when we will be in order to settle up this outstanding account.'
5. In his order the liquidator has stated two principle reasons for declining to accept the claim. The first of them is that the company did not accept any liability in favour of the firm of Builders and that no mention of the continued existence of any such liability has been made in the statement of affairs filed by the company. The second ground is that the claim, if any, had become barred by limitation.
6. The learned counsel for the applicant-Income-tax Officer states that neither of these grounds is sustainable either on facts or in law.
7. In its reply dated February 20, 1953, to the notice under section 46(5A) of the Income-tax Act, the company has stated in unmistakable terms that a sum of Rs. 14,503-12-9 was due to the firm of Builders according to the books of the company. The further statement in that letter that the amount becomes payable to the Builders only upon the latter signing and accepting the bills relating to the works does not amount to a denial of the existence of liability. That is made further clear by the statement in the same letter to the effect that till such time (that is to say, until the Builders sign and accept the bills), the company would keep the amount 'in suspense under restraint'. The original papers produced on behalf of the Income-tax Officer also contain a statement of accounts between the company and the Builders signed on behalf of the company by its manager. The heading given to it by the company itself reads : 'A statement showing the ledger account of M/s. South India Builders'. It is found from that account that from time to time, the company was making cash payments to the Builders or supplying them with building materials. As on June 30, 1949, the debit balance against the Builders was Rs. 2,04,993-2-0. After striking that balance, the statement sent to the Income-tax Officer contains the following entries also signed on behalf of the company by its manager :
'Estimated amount of the buildings, constructionsworks done by M/s. South India Builders at MysoreSpun Silk Mills Ltd., Channapatna ... Rs. 2,19,496 14 9Less amount of advance paid up, the cost ofmaterials supplied, adjusted as above as on30-6-1949 ... Rs. 2,04,993 2 0------------------Balance ... Rs. 14,503 12 9------------------
8. Among the books of account maintained by the company is a book devoted exclusively to the particulars of account as between the company and the Builders. The amounts found entered in the statement of account sent to the Income-tax Officer appear to have been culled from this book. Neither the genuineness of the book nor the accuracy of the position as disclosed by the statement of account sent to the Income-tax Officer has been questioned. In another book of account called the Assets and Liabilities General Ledger, Volume 29, there is the top of page 233 under the ledger title 'building account' an entry of a sum of Rs. 14,503-12-9 (the identical amount shown as due to the South India Builders as above) with the narration which gives the reason for the entry to be a writing back to the building account (that is to say, a reversal of a debit to that extent against a credit in favour of the builders) as the same had been treated as an unclaimed liability.
9. The effect of the books of account therefore is that the company did recognize the existence of a liability of Rs. 14,503-12-9 in favour of the South India Builders as on 30th June, 1949. That liability of the company which would be a credit in favour of the South India Builders must have been balanced by a contra entry of the same amount to the debit of one of the asset accounts, viz., the 'building account'. Even when that entry was reversed as stated above, it is shown as an unclaimed liability. That means not that the liability never existed but that the person in whose favour that liability existed had not chosen to make a claim in respect of it.
10. In view of this clear effect of the books, the statement in the company's reply dated 20th February, 1953, to the Income-tax Officer to the effect that a sum of Rs. 14,503-12-9 was due to the Builders according to the books of the company accurately represents the true state of affairs.
11. It has been argued by the liquidator that the company's letter to the Income-tax Officer dated 28th December, 1956, the relevant portion of which I have already extracted, must be read as a disclaimer of liability by the company within the meaning of the last paragraph of section 46(5A) of the Income-tax Act, according to which where a person served with notice under that section objects to it on the ground that the sum demanded or any part of it was not due to the assessee, nothing contained in the said section should be deemed to require such person to pay any such sum or part thereof to the Income-tax Officer. But for the reasons already discussed by me, this letter read against the background furnished by the actual entries in the books of account amounts to not a disclaimer for purposes of the last paragraph of section 46(5A) but an acceptance of liability in the first instance followed by an attempt to disclaim the same on what is described as legal advice. Even the legal advice did not support the view that liability never existed. But it shows that on the date the advice was tendered, the liability, if any, had become time-barred.
12. The next question is whether this legal opinion is correct as against the claim of the department.
13. Admittedly, Rs. 14,503-12-9 were due as on 30th June, 1949. The claim by the Builders themselves for recovery of this money would have got barred on 30th June, 1952, under article 56 of the First Schedule of the Limitation Act. But, before the expiry of those three years, the company did write a letter to the Builders' lawyer, Mr. Neelakanta, on 19th June, 1952. That letter, the relevant portion of which I have already extracted, is a clear acknowledgment of the liability. Within less than three years thereafter the Income-tax Officer's notice under section 46(5A) of the Act had been served on the company.
14. On this footing the contention on behalf of the Income-tax Officer is that at the time the notice under section 46(5A) was served on the company, a certain sum of money was due by the company to the South India Builders. On the serving of that notice the company became bound by force of statute to pay to the Income-tax Officer the sum of Rs. 14,503-12-9 then due by it to the Builders, because admittedly the arrears of tax due by the Builders were much higher. Because the company was so statutorily bound to pay, the Income-tax Officer can lawfully make a claim against the company for payment of that amount. When the company goes into liquidation, it is open to the Income-tax Officer to prove the same under section 528 of the Companies Act, because according to that section, in every winding up all debts payable on a contingency and all claims against the company, present or future, certain or contingent, etc., shall be admissible to proof against the company.
15. Because the money is claimed on behalf of the Central Government, the article of limitation governing that claim would be not article 56, but article 149 of the First Schedule of the Limitation Act. According to the latter article, a suit by or on behalf of the Central Government is governed by a period of 60 years counted from the point of time from which limitation would have had to be computed in respect of a like suit by a private person.
16. I think all these contentions on behalf of the officer are sound and should be accepted.
17. Apart from the principles stated in Sesha Ayyar v. Tinnavelly Sarangapani Sugar Mills Company Limited, viz., that a person who has attached a decree against a company must be allowed to prove in the name of the holder of that decree the debt due under that decree in liquidation as a creditor of the company, the effect of section 46(5A) of the Income-tax Act itself is sufficient to support the contention of the Income-tax Officer that by virtue of the notice under that section he has an enforceable claim against the company.
18. I also agree that that claim being one by or on behalf of the Central Government, the department can claim the benefit of longer period of limitation prescribed under article 149 of the Limitation Act. The claim therefore cannot be said to have been barred by limitation on November 17, 1958, the date of presentation of the petition for winding up.
19. The order of the liquidator totally rejecting the claim cannot therefore be upheld.
20. The further claim by the Income-tax Officer that he is entitled to preferential payment is, however, unsustainable. The only support for that claim is said to be section 530(1)(a) of the Companies Act. But taxes which are to be paid in preference to ordinary debts according to that clause are those due from the company to the Central Government. It is impossible to support the claim that because the officer is statutorily entitled to make a claim against a company to pay over to him amounts due by the company to another assessee, the liability of the company corresponding to that statutory claim of the officer can be described as tax liability owing by the company itself. At the highest on the principles stated in Sesha Ayyar v. Tinnavelly Sarangapani Sugar Mills Co. Ltd., the income-tax department making such a claim may be placed on a par with an ordinary creditor of the company and nothing more.
21. Some argument has been addressed before me as to whether this sum of money may be taken to be a sum certain payable to the company or merely an estimate of a contingent liability, a fresh calculation of which may now be made before the officer can claim payment. There would have been some force in this view but for the fact that from the manner in which the payments were made by the company to the builders it appears that at all times measurements of the works done and the calculation of the amounts due according to the agreed rates were made by the engineers of the company. Hence the estimate, if it could be said to be an estimate, was an estimate made by the company itself amounting to an admission that the company was liable to pay at least that amount as calculated by the engineers. That apparently was the reason why the company insisted upon somebody on behalf of the firm of builders signing and accepting those bills - just to obviate the possibility of the builders making a claim for a larger amount than that calculated by the engineers of the company and admitted by the company as due.
22. In partial reversal of the order of the liquidator under appeal, I admit the claim of the applicant as an ordinary creditor to the extent of a sum of Rs. 14,503-12-9 and reject the claim for preferential payment.
23. The parties to this application will bear their own costs.