D.K. Kapur, J.
(1) M/S. National Conduits (P) Ltd., is a company which has gone into liquidation. Shri S. S. Arora one of its directors was drawing a salary from the company. For the period covered by the assessment years 1961-62 to 1965-66, assessments were made by the Income Tax Officer in respect of the income of Shri Arora, who consequently, became liable to pay, in the aggregate, a sum of Rs. 46,719.00 as tax. Shri Arora submitted certificates of deductions showing that a sum of Rs. 44,000.00 had been deducted by the company at source. It seems that this amount was never paid by the company. The Income Tax Officer, Special Circle Ix, served the Official Liquidator with a notice under Section 226(3) of the Income Tax Act, 1961, calling upon the Official Liquidator to pay a sum of Rs. 44,000.00. This was by notice dated 12th January. 1970 Later, the Income Tax Officer 11(2) (Collection). New Delhi, dealt with the case and corresponded with the Official Liquidator, who informed him that as the company was being wound up, leave of the Court under Section 446 of the Companies Act, 1956, was necessary.
(2) In these circumstances, the Income Tax Officer, District 11(2) Additional has moved this Court under Section 446 of the Companies Act, 1956 and has at the same time stated that the provisions of that section do not apply to the case. The petitioner has explained that the salary of the director in question, Shri Arora, was Rs. 36.000.00 annually and the deductions which should have been made under Section 192 of the Income Tax Act, 1961, amounted to Rs. 44,000.00, which should have been deposited in the Treasury. Having not made the deposit, the company was an assessed in default as provided by Section 201 of the Income Tax Act, 1961. A further sum was claimed as interest under Section 201(IA) of that Act. The petitioner also explained that after tax had been deducted at source, Shri Arora could not be called upon to pay tax. The prayer in the application is that the Liquidator should be directed to pay a sum of Rs. 44,000.00 with interest thereon to the Income Tax Officer and also, this Court should permit the petitioner to take proceedings under the Income Tax law for the recovery of the amount. The petition has been contested by the Official Liquidator who has Complained that the account books and the records of the company had not been handed over to the Official Liquidator and a statement of the affairs had also not been filed. It was further stated that the Official Liquidator was not in a position to know whether any tax was deducted at source from the salary of Shri Arora. Lastly, it was stated that the applicant should file a claim before the Official Liquidator as and when invited under Sections 529 and 530 of the Companies Act, 1956. It was submitted that the application should be dismissed.
(3) The principal question which arises for consideration in this case is, whether the Income Tax Officer can be permitted to take proceedings under the Income Tax Act for the realisation of the amount in question, or whether the arrears of tax due have to be treated in exactly the same way as any other debt due from the company In liquidation. I had passed a preliminary order in this case on 1st August, 1973, after referring to some of the case law. I had particularly referred to the judgment of the Supreme Court in S. V. Kondaskar, Official Liquidator and Liquidator of the Colaba Land and Mills Co. Ltd. (in liquidation) V. V. M. Deshpande, Income Tax Officer, Companies Circle 1(8) Bombay and another, : 83ITR685(SC) where it was observed that the provisions of the Section 446 of the Income Tax Act, 1961, did not debar the Income Tax Department from taking re-assessment proceedings, but the realisation of tax determined had to be made in the same manner as any other debt of the company. I had thought at that stage that the department was to be treated as a creditor of the company and had given the Official Liquidator time to disclose the state of assets of the company in his hands. I have since heard further arguments in which other cases have also been referred to. I now proceed to determine whether the Income Tax Officer was entitled to take steps under the Income Tax Act, or alternatively, if he cannot be permitted to do so, whether this Court can order the Official Liquidator to pay out the amount in question from any other assets that may be available to him.
(4) Section 446 of the Companies Act, 1956, is concerned with the effect of a winding up order on pending suits and other legal proceedings. Sub-section (1) of that Section provides :-
'(1) When a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator, no suit or other legal proceedings shall be commenced, or if pending as the date of the winding up order, shall be proceeded with, against the company, except by leave of the Court and subject to such terms as the Court may impose.'
The effect of this Section in relation to income tax proceedings has been considered by the Supreme Court in S. V. Kondaskar, Official Liquidator and Liquidator of the Colaba Land and Mills Co. Ltd. (in liquidation) V. V. M. Deshpande, Income Tax Officer, Companies Circle 1(8) Bombay and another, : 83ITR685(SC) referred to above. In that case, the question was whether re-assessment proceedings under Section 147 of the Income Tax Act, 1961, required the leave of the Liquidating Court. It was held that the Income Tax Officer was not performing a function of a court within the meaning of Section 446(2) and a winding up order would thereforee not result in the stay of such proceedings. It was further observed that the Court in which the liquidation proceedings were pending could not perform the functions of an Income Tax Officer and there would be an anomalous situation if the result of a winding up was to be a transfer of pending income tax proceedings to the liquidation Court. In the present case, there arc no pending proceedings before the Income Tax Authorities, and the question that I am concerned with, is what is the method to be used by the Income Tax authorities in collecting arrears of tax due from a company in liquidation. On this point, the judgment did make some observations at page 886 of the report, It said :-
'THE fact that after the amount of tax payable by an assessed has been determined or quantified its realisation from a company in liquidation is governed by the Act because the income-tax payable also being a debt has to rank pari passu with other debts due from the company docs not mean that the assessment proceedings for computing the amount of tax must be held to be such other legal proceedings as can only be started or continued with the leave of the liquidation court under Section 446 of the Act.'
Later on, in the same judgment it was stated :-
'THE liquidation Court would have full power to scrutinise the claim of the revenue after income-tax has been determined and its payment demanded from the liquidator. It would be open to the liquidation court then to decide how far under the law the amount of income-tax determined by the Department should be accepted as a lawful liability of the funds of the company in liquidation. At that stage the winding up Court can fully safeguard the interests of the company and its creditors under the Act.'
These two observations clearly indicate that the Supreme Court considered that the realisation of arrears of income-tax was to be effected in the same manner as the realisation of any other debt due from a company in liquidation. This would thus support the case of the Official Liquidator that the Income Tax Officer should proceed to prove his debt in the same manner as any other creditor of the company. The observations in question were made without reference to the provisions of Section 537(2) of the Companies Act, 1956, on the basis of which certain further submissions have been made by counsel for the applicant, with which I shall deal subsequently, in this judgment.
(5) The next question that has been contested before me is the question whether the demand for arrears of tax referred to above are a preferential debt as far as the Official Liquidator is concerned. In this respect, reference is first necessary to Governor-General in Council V. Shiramani Sugar Mills Limited (in liquidation) , wherein it was held that the debts owed to the Crown could not claim priority in the matter of payment on account of the administrative scheme provided by the Companies Act. On referring to Section 230 and Section 232(2) of the Companies Act, 1913, the Federal Court held that income-tax arrears could not be collected as arrears of land revenue under a certificate granted under Section 46(2) of the Income-Tax Act, 1922, That procedure being ultra virus of the Companies Act. In other words, it was held that as a result of the Companies Act. the claim of the Crown to get priority in the matter of payment of its dues was over-ruled by statute.
(6) A similar question was considered in Builders Supply Corporation V. Union of India and others : 56ITR91(SC) , which also related to the priority of debts due to the Government of India for arrears of income-tax over other debts due to unsecured creditors, It was held that the doctrine of priority of Crown debts was a law in force within the meaning of Article 372(1) of the Constitution of India and continued to be in force even thereafter. The case before the Court was not a case arising out of company law proceedings, but reference was made in the judgment to the aforementioned judgment of the Federal Court. There are no observations in this judgment of the Supreme Court, showing that the view of the Federal Court based on the provisions of the Companies Act, 1913, was overruled. Thus, I come to the view that the question of priority has to be decided on a consideration of the provisions of the Companies Act, 1956, and particularly to the provisions corresponding to Section 230 (1) (a) and 232(2) of the Companies Act, 1913. Turning now to the provisions of the Companies Act, 1956, I find that the question of priority is dealt with in Section 530 of the Act. As far as revenues, taxes, cesses and rates are concerned, priority has been granted in sub-clause (a) of sub-section (1), only to debts which became due and payable within 12 months before the winding up order. It is admitted that the present claim does not stand on this footing because it relates to a tax liability of an earlier period. It thus remains to be seen whether there is any other proceeding which makes the arrears of income-tax rank pari passu with any other unsecured debts. The provisions of Section 530(1)(a) are the same as those of Section 230(1) (a) of the Act of 1913
(7) Section 232(2) of the Companies Act, 1913, provided an exception to Section 232(1). The whole section ran as follows -
'232. Avoidance of certain attachments, executions, etc. (1) Where any Company is being wound up by or subject to the supervision of the Court, any attachment, distress or execution put in force without leave of the Court against the estate or effects or any sale held without leave of the Court of any of the properties of the Company after the commencement of the winding up shall be void. (2) Nothing in this section applies to proceedings by the Crown.'
Under the first part of this section, an attachment, distress or execution against a company in liquidation or a sale of its property would be void unless with the leave of the Court. The second sub-section provided that this would not apply to proceedings by the Crown. The corresponding section in the present Act is Section 537. The second sub-section, as it now stands after the amendment in 1960, states:-
'NOTHING in this section applies to any proceedings for the recovery of any tax or impost or any dues payable to the Government.'
Thus, section 537, as it now stands, is for all practical purposes the same as Section 232 of the Act of 1913. On this analysis it would appear that the provisions of the Companies Act of 1913 have been reproduced in the Companies Act of 1956. Reverting now again to the Federal Court's judgment in Shiromani Sugar Mill's case) it is necessary to examine the reasoning which led the Federal Court to hold that in spite of Section 232(2) of the Act, arrears of income tax could not be recovered by the Collector as arrears of land revenue. The scheme of Section 230(l)(a) of the Act of 1913 and the other portions of that provisions showed that certain creditors of the company in liquidation were to be treated as prior claimants. The same provision is now to be found in Section 530(1). The Court concluded that the prerogative of the Crown to claim priority of Crown debts had been over-ruled by a special priority contained in Section 230. The Court relied on the decision of the House of Lords in Food Controller V. Cork, 1923, A.C. 647. A further reason was given by the Federal Court at a later stage in the judgment. It was stated thus:-
'WE agree with the learned Judges of the Allahabad High Court in holding that the words 'other legal proceeding' in Section 171, Companies Act, 1913, comprise any proceeding by the revenue authorities under Section 46 (2), Income-tax Act, and that accordingly before forwarding the requisite certificate under Section 46 (2) to the Collector, which would put the machinery for the collection of the arrears of income-tax as arrears of land revenue into motion, the appellant should have applied in the liquidation under Section 171, Companies Act, for leave of the winding up Court.'
(8) The provisions of Section 171 have now been reproduced in Section 446(1) of the Companies Act, 1956. It, thereforee, follows that before proceedings can be taken by the Income-tax authorities to realise the taxes which have not been deposited by the company in the manner stated above, leave of the Court has to be sought. This is an application for leave and I am treating it as such.
(9) The legal position that thus emerges is that the Income-tax authorities cannot proceed to realise arrears of tax without the leave of the Court. Moreover, by virtue of Section 530(1)(a) as interpreted in the aforementioned judgment of the Federal Court, which was interpreting the corresponding Section in the Companies Act of 1913, it would appear that the Income-tax authorities cannot claim any priority for the realisation of the aforementioned debt. This priority is only given in respect of debts which are due in the immediate 12 months before the date of the winding up. This has a great bearing on the question whether leave should be granted to the Income-tax authorities to proceed in this case.
(10) I now proceed to refer again to the Judgment of the Supreme Court in S. V. Kondaskar's case, : 83ITR685(SC) . in that case, the Supreme Court made a distinction between the procedure in assessing tax and the procedure for Realizing the tax as determined. As far as the assessment proceeding were concerned, the Court held that the proceedings were not to be stayed by operation of Section 446(1) of the Act. On the other hand, as far as the realisation of tax dues were concerned, the Court observed that the same procedure had to be followed as the realisation of any other dues by any other creditor. It would, thereforee, appear that the procedure to be followed by the Income-tax authorities will depend on whether leave is granted under Section 446 (1) of the Companies Act, 1950, or not. In case the authorities are granted leave, they may proceed to realise the tax by reference to the procedure prescribed by the Income-tax Act, 1961, or as arrears of land revenue, or by other means available to the authorities. On the other hand, if leave is refused, then, the Income-tax authorities will be placed in the same position as any other creditor of the company. As in the present case, the dues to be realised arc arrears of tax which were not deposited by the company in liquidation for the period covered by the assessment years 1961-62 to 1965-66, I would hold that no priority was involved in these realisations. If any part of the sum of Rs. 44.000.00 is entitled to priority under Section 530(1)(a) of the Act, the Income-tax Officer is entitled to get leave. No indication has been made in the application as to whether any part of the sum claimed is entitled to priority and hence I am unable to determine this question on the present record. I permit the Income-tax Officer to apply for leave under Section 446(1) to proceed under the Income-tax Act, 1961, in relation to any debts due from the company which are entitled to priority under the provisions of Section 530(l)(a) of the Companies Act, 1956. This will have to be by a subsequent application. If the Income-tax Officer is able to show that the said priority has to be granted, I would grant leave to the authorities to proceed under the Income-tax Act, 1961. For the moment, I am refusing leave under Section 446(1) of the Companies Act, 1956, on account of the fact that either the whole of the sum of Rs. 44,000.00 or a substantial part of it is not entitled to priority under Section 530(1)(a) of the Companies Act, 1956.
(11) I now deal with the last contention raised on behalf of the applicant, which is based on an interpretation of Section 537(2) of the Companies Act, 1956. This section, i.e., Section 537 read as a whole shows that any attachment, distress or execution effected without leave of the Court against the estate or assets of a company is void. So too is any sale made without the leave of the Court. The exception made by Section 537(2) is that it wilt not apply to any recoveries or impost or other dues payable to the Government. This means that if any attachment, distress or execution is levied by the Income-tax Officer without leave of the Court, or if a sale is effected without leave of the Court, then the sale will not be void by reason of Section 537 of the Companies Act. 1956. Learned counsel for the Department strongly relies on this provision to submit that this means that (he Income-tax authorities can realise arrears of tax without recourse to the Court and, thereforee, it is unnecessary to even ask for the leave of the Court either under Section 446 or under Section 537 of the Act. I cannot help feeling that there is an inconsistency between the provisions of Section 537 and Section 446 of the Companies Act, for if proceedings are stayed under Section 446(1) it will not be possible for proceedings for Realizing tax arrears to end in execution or sale to which Section 537(1) or (2) could apply. These two provisions have to be read with the provisions of Section 530(1)(a), which entitles preferential payments to be made only in respect of certain taxes cesses and rates. If the contention of the Department were to prevail, the Department could proceed to realise all taxes without recourse to the liquidator and without seeking priority. In other words, the Income-tax Department could get priority merely by exercising its statutory powers under the Income Tax Act, 1961. In my view, this inconsistency existed even when the Federal Court delivered its aforementioned judgment. The Federal Court resolved the incojnsistency by holding that the Government was not entitled to a preferential payment for arrears of tax except in so far Section 230(1) (a) of the Companies Act. 1913. permitted. Correspondingly, it would follow that the Income-lax Department cannot claim priority except to the extent permitted by the law now in force, i.e., by Section 530(1)(a) of the Companies Act, 1956. As regards the realisation of taxes in general, the Federal Court held that the provisions of Section . 171 of the Act of 1913, corresponding to the provisions of Section 446(1) of the present Act, operated to stay the realisation of lax except with the leave of the Court, It would, thereforee, follow that unless the leave of the Court was granted under Section 446(1) of the present Act, the Income-tax authorities could not proceed to follow the proccedure laid down in the Income-tax Act, 1961. This being the position, Section 536(2) of the present Act does not entitle the Income-tax authorities to effect a sale or attachment unless leave is granted under Section 446(1) of the Act. The view of the Federal Court is confirmed by the observations of the Supreme Court in the case already referred to (S. V. Kondaskar's case) which have been reproduced already. It would, thereforee, follow that in spite of the provisions of Section 537(2), the Income-tax authorities cannot proceed against the assets of the company in the hands of the liquidator without the leave of this Court being granted under Section 446(1) of the Companies Act, 1956. I have already indicated that such leave cannot be granted in the present case, because the debt in question, i.e., the arrears of income Tax unpaid are not entitled to priority. I have also indicated that it is possible that a portion of the amount of Rs. 44,000.00 may be entitled to priority by reason of Section 530(1)(a) of the Companies Act, 1956, and if this is so, leave will be granted to that extent. If the applicant moves a petition showing that any portion of the sum of Rs. 44,000.00 is entitled to priority, I shall make an order granting leave under Section 446(1) of the Act. I cannot help observing that the matter has been very fully and fairly placed before me by the learned counsel, Miss Deshpande and Miss Goel. I make no order as to costs,