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income-tax Officer Vs. Official Liquidator - Court Judgment

LegalCrystal Citation
SubjectCompany;Direct Taxation
CourtKerala High Court
Decided On
Case NumberApplication No. 239 of 1979 in B.C.P. No. 4 of 1961
Judge
Reported in(1980)17CTR(Ker)272; [1982]134ITR136(Ker)
ActsIncome Tax Act, 1961 - Sections 220, 220(1) and 220(2); Companies Act, 1956 - Sections 446, 528, 529, 530 and 530(1); Companies (Court) Rules, 1959 - Rules 147 to 179
Appellantincome-tax Officer
RespondentOfficial Liquidator
Appellant Advocate P.K. Ravindranatha Menon and; N.R.K. Nair, Advs.
Respondent Advocate T.V. Ramakrishnan, Adv.
DispositionApplication dismissed
Cases ReferredM.K. Ranganathan v. Govt. of Madras
Excerpt:
.....220 (2) - no sanction under section 446 (1) obtained by department for claiming interest - special provisions of companies act to prevail over general provisions of section 22 (2) of income tax act - department not entitled to claim interest from company in liquidation for period subsequent to winding-up. - - act like those contained in section 220(2), so that the department could not claim interest from a company in liquidation in respect of periods subsequent to the winding-up. , such proceedings would be 'other legal proceedings' within the meaning of section 446(1). 11. reverting to the case on hand, the liquidator's view that the department cannot prove the claim for interest under section 220(2) without the leave of the winding-up court under section 446, is clearly supported..........about rs. 5,000 to the department, towards the tax liability. for a subsequent assessment year the department claimed and obtained payment from the liquidator of an amount of over rs. 2,500 as advance tax. on regular assessment being made subsequently, the tax liability was found to be lower, and in consequence, about rs. 1,400 became refundable. but instead of refunding the amount, the ito set it off against the balance of tax due in respect of 1948-49. the question before the supreme court was whether the department was competent to set off the amount refundable under section 49e of the indian i.t. act, 1922. it was contended for the department that on the terms of section 49e, the power thereunder was not subject to any other provisions of law and that, therefore, it could enforce the.....
Judgment:

M.P. Menon, J.

1. This is an appeal against the order of the official liquidatar rejecting proof of a claim raised by the I.T. department in respect of interest payable under Section 220(2) of the I.T. Act, 1961.

2. The Catholic Bank of India Ltd. was ordered to be wound up on October 3, 1961. The official liquidator invited proof of claim and the list of creditors was settled and filed in court on July 5, 1962. It appears that income-tax assessment in respect of the company for the years 1955-56 to 1958-59 was completed only later. Demand notices were served on the liquidator on February 23, 1963. An additional demand for the year 1955-56 was made by notice served on February 5, 1967. The department was apparently under the wrong impression that the tax arrears would get priority under Section 530 of the Companies Act. Later, however, it moved Application Nos. 3/64 and 248/68 for varying the list of creditors, and these were allowed by the court. Affidavit of proof of the debt was thus filed before the liquidator in August, 1969, and the liquidator recognised the department's claim for tax arrears by an order passed on July 27, 1973. In the meanwhile, the department had requested the liquidator by letter dated January 29, 1971, to make provision for over Rs. 23,000 by way of interest on the tax due, under Section 220(2) of the I.T. Act. But the liquidator's order dated July 27, 1973, did not recognise this claim for interest; it recognised only the claim for the tax assessed. The department then filed Application No. 315/73 before the company court contending that interest also should have been allowed, but the application was dismissed, holding that no priority could be recognised under Section 530. The department thereupon appealed to the Division Bench ; and by judgment dated September 27, 1978, in A. S. No. 563/74 (see p. 143 infra), the Bench allowed the appeal to the extent of permitting the department to prove the claim (for interest) before the liquidator as an unsecured debt. The liquidator was directed ' to adjudicate upon the said claim in accordance with law, more particularly in accordance with the provisions contained in the Companies Act and the Companies (Court) Rules '.

3. The matter was, therefore, again considered by the liquidator, but he rejected it on two grounds :

(i) no sanction under Section 446(1) of the Companies Act had been obtained by the department for claiming interest; and (ii) the special provisions of the Companies Act would prevail over the general provisions of the I.T. Act like those contained in Section 220(2), so that the department could not claim interest from a company in liquidation in respect of periods subsequent to the winding-up.

4. It is this order of the liquidator that is now being challenged.

5. In order to appreciate the rival contentions, it is necessary to refer to some of the decisions cited by counsel. In Union of India v. India Fisheries (P.) Ltd. : [1965]57ITR331(SC) , the facts were these. The company in question was ordered to be wound up in October, 1950. In December, 1950, the ITO assessed the company for 1948-49 for an amount exceeding Rs. 8,000. The ITO lodged a claim for this amount and the liquidator accepted proof of the same as an ordinary debt in 1952. And in 1954, when a dividend of 9 1/2 annas in the rupee was declared, the liquidator paid about Rs. 5,000 to the department, towards the tax liability. For a subsequent assessment year the department claimed and obtained payment from the liquidator of an amount of over Rs. 2,500 as advance tax. On regular assessment being made subsequently, the tax liability was found to be lower, and in consequence, about Rs. 1,400 became refundable. But instead of refunding the amount, the ITO set it off against the balance of tax due in respect of 1948-49. The question before the Supreme Court was whether the department was competent to set off the amount refundable under Section 49E of the Indian I.T. Act, 1922. It was contended for the department that on the terms of Section 49E, the power thereunder was not subject to any other provisions of law and that, therefore, it could enforce the set-off irrespective of the provisions of the Companies Act. The statutory power of the ITO under Section 49E, it was urged, remained uncontrolled by the provisions of the Companies Act. But the court rejected this argument, observing that the power could not be exercised 'in such a way as to defeat the provisions' of the Companies Act. Their Lordships referred to Sections 228 and 229 of the Indian Companies Act, 1913 (corresponding to Sections 528 and 529 of the 1956 Act) and observed (page 334) (also see p. 672 of 35 Comp Cas):

' The effect of these statutory provisions is, inter alia, that an unsecured creditor must prove his debt and all unsecured debts are to be paid pari passu. Therefore, once the claim of the department has to be proved and is proved in the liquidation proceedings, the department cannot by exercising the right under Section 49E of the Income-tax Act get priority over the other unsecured creditors. If we were to read Section 49E in the way suggested by the learned Additional Solicitor-General, it would be defeating the very object underlying Sections 228 and 229 of the Companies Act, 1913. If there is an apparent conflict between two independent provisions of law, the special provision must prevail. Section 49E is a general provision applicable to all assessees and in all circumstances ; sections 228 and 229 deal with the proof of debts and their payment in liquidation. In our opinion, Section 49E can be reconciled with Sections 228 and 229 by holding that Section 49E applies when insolvency rules do not apply. '

6. In other words, the rules in insolvency had to be applied to the distribution of the assets of an insolvent company governed by Section 229, and the application of this rule could not be got over by the department by resort to Section 49E of the I.T. Act. The apparent conflict between the two statutory provisions had to be reconciled by holding that Section 49E would not apply to a company governed by Section 229.

7. In Kondaskar v. Deshpande : [1972]83ITR685(SC) , the question was whether the ITO was entitled to commence or continue assessment or reassessment proceedings in respect of a company in liquidation, without obtaining the leave of the company court under Section 446(1) of the Companies Act, 1956. The liquidator contended that the words 'other legal proceedings ' were wide enough to include assessment or reassessment proceedings by the I.T. department also, and relied on a decision of the Federal Court in Governor-General in Council v. Shiromani Sugar Mills Ltd. [1946] 14 ITR 248 : 16 Comp Cas 71 (FC) and one of the Supreme Court itself in M.K. Ranganathan v. Govt. of Madras : [1955]2SCR374 for this proposition. Regarding the first case, the court observed that the proceeding involved therein was one for recovery of tax, and not for assessment; and regarding the second, it was observed that it had not laid down any proposition different from the first. The court drew a distinction between assessment and reassessment proceedings for quantifying the tax, and proceedings for recovery of the tax after quantification. The former was not a matter the company court itself could do under Section 446 because the exclusive power in that regard was vested in the quasi-judicial tribunals constituted under the I.T. Act ; but the latter was linked to the distribution of the assets of the company in liquidation, and in relation to that, the provisions of the Companies Act and the power of the company court would be attracted. The position was clarified on the following terms (p. 699) (see also p. 181 of 42 Comp Cas):

' The argument that the proceedings for assessment or reassessment ofa company which is being wound up can only be started or continued with the leave of the liquidation court is also, on the scheme both of theAct and of the Income-tax Act, unacceptable. We have not been shownany principle on which the liquidation court should be vested with thepower to stop assessment proceedings for determining the amount of taxpayable by the company which is being wound up. The liquidation courtwould 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 thelaw the amount of income-tax determined by the department should beaccepted as a lawful liability on the funds of the company in liquidation.

8. At that stage the winding-up court can fully safeguard the interests of the company and its creditors under the Act.

9. The question of interest under Section 220(2) directly arose for decision in Official Liquidator v. ITO : [1978]111ITR398(Ker) . Interest was there demanded in respect of tax assessed for periods subsequent to the winding up. Viswanatha Iyer J. held that the provision for interest was in the nature of compensation for delayed payment of tax, pertaining to the realm of recovery and collection, and that such post-assessment proceedings were not the same as assessment or reassessment proceedings covered by Kondaskar's case : [1972]83ITR685(SC) . When once the tax payable was determined by the I.T. authorities, the question as to whether interest for delayed payment should also go out of the funds of the company was a matter the company court alone could scrutinise, because that was the stage at which the winding up court had to ' safeguard the interests of the company and its creditors ' under the Companies Act. His Lordship added (p. 402):

' On the one hand, Section 220(2) makes the assessee liable. On the other hand, the assessee is not free to pay the amount without the sanction of the court. If any delay in getting the sanction of the court will cause loss to the company in liquidation, it will be interfering with the power of the court to issue directions regarding the distribution of the assets of the company. So, the Income-tax Officer should obtain the sanction of the court or move that court that the claim for interest under Section 220(2) of the Income-tax Act may be considered and orders passed in respect of it. Demand to pay the amount without observing this requirement of Section 446(2) and (1) makes the demand unenforceable against the company in liquidation.'

10. This view was confirmed in MFA No. 92/77 [ITO v. Offi. Liq., Swaraj Motors (P.) Ltd. (see p. 152 supra)]; and, in doing so, the Bench examined both the Supreme Court decisions in India Fisheries : [1965]57ITR331(SC) and Kondaskar : [1972]83ITR685(SC) and explained that the rule in the former would apply in respect of proceedings for recovery and collection of tax, i.e., such proceedings would be 'other legal proceedings' within the meaning of Section 446(1).

11. Reverting to the case on hand, the liquidator's view that the department cannot prove the claim for interest under Section 220(2) without the leave of the winding-up court under Section 446, is clearly supported by the decision of Viswanatha Iyer J. [Official Liquidator v. ITO [1918] 48 Comp Cas 59 (Ker) and that of the Division Bench (MFA No. 92/77) [ITO v. Offi. Liq., Swaraj Motors (P.) Ltd. (see p. 152 supra)]. The Bench decision is as much binding on me as on the liquidator. But counsel for the department wouldargue that if sanction were required at all, the direction in A.S. No. 563/74 could be treated as a grant of sanction, I am unable to agree with this approach. What was done by the Bench in A.S. No. 563/74 [ITO v. Offl. Liq., Catholic Bank of India Ltd. (see p. 164 infra)] was to permit the department to prove its claim for interest under Sections 528 and 529, relaxing the rigour of Rule 168 ; no leave or sanction under Section 446 was granted. The very observation in the judgment that the liquidator should adjudicate the claim in accordance with the provisions of the Companies Act and the Rules indicates that it was for him, in the first instance at any rate, to decide whether the claim was sustainable under Section 446. Nor is it possible to accept the larger contention of Sri. N.R.K. Nair for the department that Kondaskar : [1972]83ITR685(SC) has overruled India Fisheries : [1965]57ITR331(SC) ; the Bench in MFA No. 92/77 [ITO v. Offl. Liq., Swaraj Motors (P.) Ltd. (see p. 152 supra)] has held otherwise, by clarifying that assessment proceedings dealt with by the former could not be equated to post-assessment proceedings considered by the latter. The liquidator's decision on this point has, therefore, to be upheld.

12. The only other question is whether the department could claim interest under Section 220(2) from a company in liquidation for periods subsequent to the winding-up. Section 156 of the I.T. Act provides that when any amount is payable in consequence of any order passed under the Act, the ITO should serve a notice of demand on the assessee ' specifying the sum so payable '. Under Section 220(1), the assessee should pay that amount within 35 days of such service ; and if he fails to do so, Sub-section (2) makes him liable for interest at 12% from the 36th day onwards. The scheme is that the department should get the amount demanded at least on the 35th day ; for any delay thereafter, the assessee is damnified with interest. It appears to me that while enacting Sub-section (1) of Section 220, Parliament had in contemplation only an assessee who could obey its mandate, and not one who, by virtue of other laws made by Parliament itself, was not in a position to do so. The interest claimed in this case is in respect of tax due prior to the date of winding-up, but not entitled to priority under Section 530(1). It is settled law that in estimating the value of a debt or other claim under Sections 528 and 529 of the Companies Act, the position as at the commencement of the winding-up has to be taken; and if there is any doubt, Rule 154 removes it. Rules 147 to 179 of the Companies (Court) Rules lay down an elaborate procedure for estimating and finally assessing the company's liabilities as on the relevant date. The liquidator should first fix a date for the filing of claims by creditors; and after they are all received, he should examine and adjudicate upon them within three months (or such extended time as the court may allow) and pass orders in writing.

13. The creditor dissatisfied with a decision can appeal to the winding-Up court.

14. After the list of creditors, prepared by the liquidator is filed in court, the court settles it. It is only thereafter that dividends can be declared and payment effected, with the sanction of the court. Any collection of a sizeable part of the company's assets should necessarily precede payment. Thus, the Companies Act and the Rules framed thereunder place legal impediments against the liquidator complying with a demand for tax within 35 days, as required under Section 220 of the I.T. Act; the liquidator functioning under the Companies Act is not like any other assessee, with freedom to deal with his or its funds. Parliament could not have intended that a person, in his capacity as assessee, should comply with Section 220(1) of the I.T. Act, and at the same time, refuse to comply with it in his capacity as liquidator, in view of the curbs placed on him by the Companies Act. The application of Sub-section (2) of Section 220 should, therefore, be confined to an assessee who is at least free to comply with the requirement of Sub-section (1). As pointed out by the Supreme Court in India Fisheries' case : [1965]57ITR331(SC) with reference to Section 49E of the Indian I.T. Act, 1922, if Section 220(2) is to be read in the manner suggested on behalf of the department, it would defeat the object underlying Sections 528 and 529 of the Companies Act and the Rules noticed, at least in their application to an insolvent company like the one in hand ; and the solution, therefore, is to reconcile the provisions of the Companies Act with those of the I.T. Act by holding that Section 220(2) of the latter does not apply when insolvency rules have to be applied under the former.

15. That means that the second ground mentioned by the liquidator in the order appealed against has also to be sustained.

16. Counsel suggested that the exclusive jurisdiction to enforce Section 220(2) is on the department and that the liquidator cannot be permitted to usurp it. The plain answer is that if the section cannot apply at all to a case like the present, there is no question of any one exercising or usurping the power thereunder. That apart, by virtue of the judgment in A.S. No. 563/74 [ITO v. Offl. Liq., Catholic Bank of India Ltd. (see 164 infra)] and what followed, the department had obviously submitted to the liquidator's jurisdiction to decide its claim in accordance with the provisions of the Companies Act, and that alone has been done. The liquidator has only exercised the power conferred upon him by the Companies Act and the Rules, and specifically referred to in A.S. No. 563/74; and all that he has done is to indicate that the company's funds in his hands are not available for meeting the department's demand under Section 220(2).

17. The application, therefore, fails and is dismissed, but without anyorder as to costs.


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