This is a petition under article 226 of the Constitution directed against the order of the Income-tax Officer dated the 27th of July, 1962, whereby the Income-tax Officer considered that he was competent to proceed to make an assessment on the company for the assessment year 1958-59 notwithstanding that some liquidation proceedings had intervened and had terminated in a scheme sanctioned by this court. A writ of prohibition is also prayed for directing the Income-tax Officer not to make the assessment against the petitioner for the assessment year 1958-59.
The material facts leading up to this petition are these : The petitioner, Tika Ram and Sons, is a private limited company (hereinafter referred to as the company). A notice under section 22 (2) of the Indian Income-tax Act, 1922 (hereinafter referred to as the Act), was served on the petitioner in respect of the year 1958-59 and the company in compliance therewith filed a return of its income on the 17th of July, 1958. While these assessment proceedings were pending an application was made under section 439 of the Companies Act, 1956, for the winding up of the company and this court on the 8th of January, 1960, ordered the winding up of the company on the ground that it was just and equitable to do so. By that order it was noticed that the shareholders of the company were all members of the family of Lala Tika Ram except for two outsiders; that disputes had arisen between various members of the family which had resulted in dissension and litigation which was continuing till then. The winding-up order was directed to be published pursuant to rules 112 and 113 of the Companies (Court) Rules, within fourteen days in one issue each of the Hindustan Times and the Bharat newspapers.
The official liquidator took charge of the property and a statement of the affairs of the company was made to him under section 454 of the Companies Act, 1956. In this statement the income-tax department was not shown as a creditor so far as the tax liability for the assessment year 1958-59 was concerned. During the continuance of the liquidation proceedings a compromise was proposed between the company and its creditors and the company judge was pleased to order the holding of a meeting of the contributories of the company and of the creditors for consideration of the compromise and arrangement proposed in respect of the company in liquidation. The learned company judge by his order dated 25th of March, 1960, ordered that separate meetings of the creditors and members be called for the same day to consider the proposed scheme and arrangement. The meeting of the members of the company was fixed for the 1st of May at 10 a.m. whereas that of the creditors at 2 p.m. on the same day. Notice of the meetings was to be sent to the creditors by registered post and also to be published in the leader and the Bharat. The meetings were duly held but the Income-tax Officer concerned did not put in any claim as no notice to him as such had been served. The scheme as proposed was sanctioned, subject to the modification that the sales tax dues assessee so far...... shall be a charge on the following property.... It was further provided that the creditors to the compromise were to be paid within two years from the date of the coming into operation of the scheme. The payment was to be made in two or more instalments; 'that neither the company shall have any claims whatsoever against the petitioners jointly or severally nor the petitioners shall be liable for the liabilities of the company as to creditors, depositors, income-tax and sales tax, etc., or any other contingent liabilities; nor the petitioners will have any claim whatsoever against the company.' Further, 'that there shall remain no further claim of any sort of the company against Dr. R. S. Gupta, Veda Prakash Gupta or Om Prakash Gupta (shareholders as well as creditors of the company) either jointly or severally.' Lastly 'that the official liquidator shall cease and the company shall come back to its shareholders and directors.'
The official liquidator of the company, vide his letter dated the 15th of January, 1960, informed the Income-tax Officer that the company was in liquidation. Thereafter, no proceedings were taken by the income-tax department till the 8th of May, 1962, which was more that two years of the passing of the winding up order by the High Court.
On the 8th of May, 1962, the Income-tax Officer issued a notice under section 23(2) calling upon the petitioner to appear on 22nd of May, 1962. The company protested against the continuance of the proceedings which had been commenced prior to the winding up order on the ground that the Income-tax Officer had no longer any jurisdiction to continue the same. The Income-tax Officer had no longer any jurisdiction to continue the same. The Income-tax Officer did not accept the contention of the petitioner and by his letter dated July 27, 1962, held that he had jurisdiction to proceed with the assessment and fixed August 6, 1962, for the production of account books, etc. Challenging this decision of the Income-tax Officer and praying that the Income-tax Officer be prohibited from proceeding further with the assessment for the year 1958-59, the present writ petition has been filed.
The contention of Mr. Hari Swarup, the learned counsel for the petitioner, in the main is that on the filing of the winding up petition in the High Court all income-tax proceedings stood automatically stayed and could not be resuscitated after the winding up proceeding had resulted in the dissolution of the company or in the sanctioning of a scheme. The income-tax department, according to the learned counsel, was a creditor on the day when the winding up order under section 439 of the Companies Act was passed and even though the assessment had not been made, the department was obliged to prove its claim before the liquidator or suffer the penalty of losing its right to make an assessment or recover the amount found due thereon.
The questions, which fall for consideration are, firstly, whether even before an assessment is made, the department can be said to be a creditor, contingent or prospective, of the company within the meaning of section 391 of the Companies Act, 1956, and, secondly, whether income-tax assessment proceeding are 'other legal proceedings' which cannot thereafter be proceeded with within the meaning of section 446 of the Companies Act, 1956.
The relevant part of section 391 of the Companies Act which deals with the power to compromise or make arrangements with he creditors and members is as follows :
'(1) Where a compromise or arrangement is proposed -
(a) between a company and its creditors or any class of them;...
the court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members or class of members, as the case may be, to be called, held and conducted in such manner as the court directs.
(2) If a majority in number representing three-fourths in value of the creditors, or class of creditors..... as the case may be, present and voting.... at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors.... and also on the company.....'
If the income-tax department is a creditor within the meaning of section 391 and the scheme having been sanctioned without taking into consideration the liabilities to income-tax, the income-tax department would be bound by the scheme and after the winding up had terminated either in the dissolution or in the sanctioning of the scheme, the department could not thereafter make any claim against the company for the discharge of its income-tax dues. If, on the other hand, the income-tax department was not a creditor, contingent or prospective, and was not bound to prove its claim before the liquidator, then, manifestly, the department cannot be held bound by any scheme that may have been sanctioned.
The income-tax department can only become a creditor when an assessment is made and not before. In Doorga Prasad v. Secretary of State it was laid down by the Judicial Committee that income-tax becomes a debt due to the Crown only when the demand is made under section 29 and 45 of the Income-tax Act. Income-tax is calculated and assessed by reference to the income of the assessee for a given year, but it becomes due when the demand is made. In other words, until the stage of assessment is complete, there is no demand and the Crown or the department cannot be said to be a creditor, contingent or prospective, of the taxpayer.
The Supreme Court in the case of E. D. Sassoon & Co. Ltd. v. Commissioner of Income-tax observed, though in a different connection, that before an income can be said to have accrued, there must be a debt owed to him by somebody. No one can become a creditor unless such person has acquired a right to receive the amount from such person, or, in other words, that a debt must be owed to him by somebody. 'Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him.'
The relationship of creditor and debtor between the revenue department and the assessee cannot come into existence until an assessment has been made. Mere liability to pay tax, as contended by the learned counsel for the petitioner, is sufficient to establish the relationship of creditor and debtor. The learned counsel for the petitioner has not been able to cite any direct authority for the proposition that even before an assessment is made the income-tax department becomes a creditor and it is obliged to prove its claim against the company in liquidation before the liquidator. Certain observations made in some cases, however, are relied upon, but those observations must be read in the context of the facts of those cases.
The first case relied upon was Chitta Ranjan Guha v. M. Ameen for the proposition that a creditor in a proceeding under section 153 of the Companies Act can also be a prospective or a contingent creditor. Chakravartti J. in this connection observed :
'It is true that even contingent or prospective creditors are creditors within the meaning of the Companies Act, but a person holding specified chattels deposited with him by another person for safe custody is not a creditor of any kind, whether present or contingent or prospective. A contingent creditor is one to whom nothing is at present due but a right in whose favour will arise on the happening of a contingency which is already clearly provided for. A prospective creditor again is a person to whom money is not immediately payable but will be payable on a certain day still in future.'
These observations obviously relate to ordinary contractual relationships where there is a liability to pay in future or on the happening of a contingency and have no application to the case of the Crown or the revenue department in claiming income-tax dues. There can be no question of any contingency or prospectiveness in the matter of assessment.
Similarly, the observations of the Judicial Committee in the case of Wallace Brothers & Co. Ltd. v. Commissioner of Income-tax that 'the liability to tax arises by virtue of the charging section alone, and it arises not later than the close of the previous year, though quantification to the amount payable is postponed', can be of little or no assistance to the petitioner in this case. A person may have a liability to tax because he alone knows whether his income is above the minimum taxable limit or not in relation to the relevant Finance Act but such liability as may be within such persons knowledge will not make the revenue department his creditor in respect thereof. The observations made by the Supreme Court were clearly made in a different context altogether. The question there was whether the charge to tax depended on the passing of the Finance Act or it was determinable under the scheme of the Indian Income-tax Act and whether the moment any income was earned it attracted the quality of chargeability with reference to the standing provision of the Act and only the quantification of the tax depended on the passing of the Finance Act It was there held that income is chargeable to tax independent of the passing of the Finance Act but until the Finance Act is passed no tax will be actually levied. This only means that the liability to tax is there but it cannot mature into a debt or even a claim by the department until the department has proceeded to quantify it by making an assessment.
Reliance was next placed on the case of Ravi Paint Colour and Varnish Works Ltd. v. Federation of Pakistan. A Full Bench of the Lahore High Court laid down that where a company is under liquidation the income-tax authorities can prove their claim under section 228 of the Companies Act against the company by the production of the assessment order made by them that if the income-tax authorities fail to prove a claim for income-tax within the time fixed by the court in the winding up proceedings, they are excluded from the benefit of any distribution made before such claim is proved and are only entitled to share in the dividends to be declared after such proof; that a company in liquidation is still an assessee and subject to the income-tax law, and the liquidator can be called upon to submit the usual income-tax return under the provisions of the Income-tax Act and if the liquidator feels aggrieved by the assessment he must pursue the same remedies as are open to any other assessee.
This case again does not in any way go to show that the income-tax department, even before an assessment is made, can be considered to be a creditor within the meaning of section 391 of the Companies Act, 1956. On the other hand it lends support to the view that it is only after an assessment is made that a debt can be said to accrue to the department or Crown which can be proved before the liquidation court and the only proof required in such a case is the production of the assessment order before the liquidator or the liquidation court. It follows that the revenue department in the present case was not a creditor and it could not have proved its claim in the liquidation case proceedings pending before this court.
The second question which arises is whether the income-tax proceedings which were pending on the date of the winding up order could not be proceeded with except by leave of the court. The relevant portion of section 446 of the Companies Act, 1956, runs :
'446. Suits stayed on winding up order - (1) When a winding up order has been made or the official liquidator has been appointed as provisional liquidator, no suit or other legal proceeding shall be commenced, or if pending at the date of the winding up order, shall be proceeded with, against the company, except by leave of the court and subject of such terms as the court may impose.'
It is contended that income-tax proceedings fall within the ambit of the words 'other legal proceeding' and, therefore, the income-tax proceedings for the assessment year 1958-59 automatically came to a stop on the making of the winding up order and could not be resuscitated or proceeded with at any time thereafter without the permission of the liquidation court. Again, no direct authority has been cited except a decision of a learned single judge of the Punjab High Court in the case of Union of India v. Seth Spinning Mills Ltd. (In liquidation), where it was held that a penalty order which was passed on the 14th of April, 1956, after the company had gone into liquidation on the 13th January, 1956, without notice to the official liquidator, was 'other legal proceeding' within the meaning of section 171 of the Indian Companies Act, 1913 (corresponding to section 446 of the Act of 1956), and that the language of the section was wide enough to include proceedings under the Income-tax Act. Those observations, however, must be confined to the facts of that particular case where obviously penalties a stage posterior to the assessment. In any event, if that authority intended to lay down that not only penalty but all proceedings under the Income-tax Act fall within the scope of the words 'other legal proceeding' then I must, with the greatest respect, differ from the view taken.
The Federal Court, in the case of Governor-General-in-Council v. Shiromani Sugar Mills Limited (In liquidation), observed that the Crown is bound by the provisions of the Companies Act, and is bound, in regard to the provisions relating to the liquidation of companies, to a statutory scheme of administration wherein the prerogative right of the Crown to priority no longer exists. The Crown is only entitled to priority or preferential right of treatment in payment of its claim as provided by section 230 and sub-section (2) of section 232 of the Indian Companies Act, 1913. It was laid down that no narrow construction should be placed on the words 'or other legal proceedings' in section 171. The words can and should be held to cover distress and execution proceedings in the ordinary courts, and such proceedings are 'other legal proceedings' against the company, as contrasted with ordinary suits against the company.
The above observation of their Lordships of the Federal Court makes it clear that the 'other legal proceedings' so execution or distress proceedings, that is, action under section 46, which is a stage arising after the assessment has been completed. Their Lordships went on to observe :
'That still leaves open the question whether action under section 46 of the Indian Income-tax Act is covered by the phrase other legal proceeding. Clearly it is not a proceeding in an ordinary court of law. But we see no reason why in British India no legal proceeding can be taken otherwise than in an ordinary court of law, or why a proceeding taken elsewhere than in an ordinary court of law, provided it be taken in a manner prescribed by law and in pursuance of a law or legal enactment, cannot properly be described as a legal proceeding. If it be considered that the effect of the income-tax authorities putting the machinery of section 46 of the Income-tax Act in motion for the collection of arrears of income-tax is to bring into operation all the appropriate legal enactments relating to the collection of land revenue in the province concerned, it is, in our judgment, very difficult to say that they are not taking a legal proceedings.'
The ratio of the decision is that because other Acts - the U. P. Land Revenue Act and the Civil Procedure Code - in proceedings under section 46 of the Income-tax Act come to the assistance of the Collector, those proceedings can be termed as legal proceedings. It was, however, nowhere held that even assessment proceedings which fall under a special Act which is a complete code in itself could be considered to be 'other legal proceeding'.
The provisions of sub-section (2) and sub-section (3) of section 446 of the Companies Act, 1956, would also go to indicate the scope of the words 'other legal proceeding' as used in sub-clause (1) of that section. Sub-section (2) gives the court concerned with the winding up of the company the jurisdiction to entertain or dispose of any suit or proceeding by or against the company itself. Sub-section (3) gives such court the right to transfer proceedings pending before another court and to dispose it of itself. Income-tax proceedings are certainly not such proceedings which the High Court under section 446 could possibly entertain and make the assessment itself nor could it transfer any such assessment pending before the Income-tax Officer to its own record. Thus these two sub-sections go to indicate that the words 'other legal proceedings' must be such proceedings over which the High Court in its ordinary jurisdiction can exercise some original or appellate jurisdiction and control. The High Court, under section 66 of the Income-tax Act, has merely an advisory jurisdiction and no more. It has no original or appellate jurisdiction whatsoever in income-tax matters and much less has it the power to transfer any assessment proceedings to its own record. Income-tax proceedings are also not proceedings for the enforcement of any personal rights against the assets of the company but are proceedings in the interest of public revenues and in the vindication of public interests.
Section 446 of the Companies Act, 1956, cannot in my judgment have any application to income-tax proceedings prior to the stage of assessment. It is, however, unnecessary for me to decide in these proceedings as to whether, after the assessment is made, the department can or cannot proceed to recover the amount found due without the leave of the court which sanctioned the scheme or dissolved the company.
Some support for the view I have taken is available from three cases. In B. V. John v. Coir Yarn and Textiles Limited it was held that the Industrial Disputes Act, 1947, is not 'other legal proceeding' within the meaning of section 446 of the Companies Act, 1956. Similarly, proceedings under the Income-tax Act are proceedings under a special and complete code and they cannot be hit by the provisions of section 446 of the Companies Act, 1956.
In the case of Suburban Bank Ltd. the question which arose was whether a tax becomes due and can be proved or recovered the moment a return is made under section 18A of the Act It was held that the amount would only become due after the assessment and after such assessment would such a debt in favour of the department have a priority in liquidation. There is also an unreported decision in the matter of Recols (India) Ltd., which was a case under the Bengal Sales Tax Act. It was held by a Full Bench of the Calcutta High Court that the amount of sales tax, following the principle enunciated in respect of income-tax, would only become due when the notice of demand was served and not any date anterior thereto, and the principle that where a tax is to be assessed it does not become either due or payable till at least an assessment is made, was one of general application.
For these reasons I would hold that assessment proceedings do not fall within the scope of 'other legal proceedings' and do not automatically come to a stop the moment the company goes into liquidation. Such proceedings have to be carried out in accordance with the provisions of the Income-tax Act which is a complete code in itself. The company in liquidation is still an assessee, and income-tax proceedings up to the stage of assessment do not fall within the scope of the words 'other legal proceedings' as used in section 446 of the Companies Act, 1956.
Accordingly, the petition is dismissed, but, in the circumstances of the case, the parties are left to bear their own costs.