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Income-Tax Officer, District Ii(2) v. Official Liquidator, National Conduits (P.) Ltd.
Structured Summary of the Opinion (Rajinder Sachar, J.)
Factual and Procedural Background
M/s National Conduits P. Ltd., a company, deducted income-tax from the salary of its employee S.S. Arora for the years 1961–62 to 1965–66, amounting to about Rs. 44,000, but did not deposit the deducted amount with income-tax authorities. The Income-tax Officer (ITO) demanded payment on October 6, 1966, without success. A winding-up petition was presented on January 16, 1969, and an order for winding up was passed on May 7, 1969. On February 24, 1971, the ITO requested the official liquidator to pay the Rs. 44,000. The official liquidator replied on March 1, 1971, instructing the ITO to obtain leave of the High Court under section 446 of the Companies Act before any payment could be made by him. The ITO then filed (on July 25, 1972) an application under section 446 seeking leave to proceed under the Income-tax Act provisions (section 222) to recover the amount. The learned single judge refused to grant leave, and the ITO appealed against that refusal. The learned single judge had also observed that the ITO could later move a separate application if any portion of the sum was shown to be entitled to priority under section 530(1).
Legal Issues Presented
- Whether the ITO can resort to the recovery provisions of section 222 of the Income-tax Act, 1961, to recover tax from a company after a winding-up order has been made without first obtaining leave of the court under section 446(1) of the Companies Act, 1956.
- Whether section 537(2) of the Companies Act (which excepts proceedings for recovery of taxes payable to Government from the voidness provision in section 537(1)) enables the ITO to proceed without leave under section 446(1).
- Whether section 178 of the Income-tax Act empowers the ITO (through directions to the liquidator and reservations of assets) to circumvent the Companies Act priorities (notably section 530(1)) or to obviate the requirement of leave under section 446.
- Whether the tax claimed by the ITO is a preferential debt under section 530(1) of the Companies Act and thus affects entitlement to leave under section 446.
Arguments of the Parties
Appellant's (ITO / Revenue) Arguments
- The ITO contended that section 537(2) of the Companies Act, which excepts tax recovery proceedings from the voidness provision of section 537(1), means that proceedings for recovery of tax are immune from the restriction imposed by section 446(1); therefore the ITO can exercise independent power to recover arrears of tax (i.e., resort to section 222 of the Income-tax Act) without obtaining leave of the court under section 446.
- The ITO (through Mr. Verma) also invoked section 178 of the Income-tax Act, arguing that this provision empowers the ITO, on being informed of the appointment of a liquidator, to inform the liquidator of tax liability and to direct the liquidator to keep sufficient funds to provide for tax — implying that section 178 supports the department's steps to secure and recover tax liabilities despite winding up.
Respondent's / Official Liquidator's Position and the Single Judge's Findings
- The official liquidator informed the ITO that the ITO should obtain leave of the High Court under section 446 before any payment could be made from the company's assets.
- The learned single judge refused to grant leave under section 446 because it was not established that the amounts claimed by the ITO fell within the preferential payments in section 530(1). The single judge allowed the ITO to make a separate application later if it could show any portion of the sum entitled to priority under section 530(1).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Governor-General in Council v. Shiromani Sugar Mills Ltd., [1946] 14 ITR 248 : 16 Comp Cas 71 (FC) | Held that section 171 (Companies Act, 1913) required leave of the winding-up court before revenue could forward the certificate under the Income-tax Act to initiate collection as arrears of land revenue; interpreted "other legal proceeding" to include proceedings by revenue authorities under the Income-tax Act. | The court relied on this Federal Court decision to support the proposition that leave of the winding-up court is necessary before recovery steps by the revenue — applying its reasoning to section 446 of the Companies Act, 1956. |
| S.V. Kondaskar v. V.M. Deshpande, ITO, [1972] 83 ITR 685 : 42 Comp Cas 168 (SC) | Recognised that proceedings under section 148 of the Income-tax Act (assessment) could be exercised without resort to section 171 of the Companies Act, 1913, because "legal proceeding" did not cover assessment proceedings; but held that recovery (realisation) from a company in liquidation is governed by the Companies Act and requires leave. | The court cited this Supreme Court decision to distinguish assessment proceedings from recovery proceedings and to reinforce that recovery from a company in liquidation requires leave of the court. |
| Union of India v. India Fisheries (P.) Ltd., [1965] 57 ITR 331 : 35 Comp Cas 669 (SC) | Held that the Income-tax Act (general provisions) could not be used to obtain priority over other unsecured creditors in contravention of provisions of the Companies Act (a special statute). | The court applied this principle to hold that the ITO, as an unsecured creditor, could not by exercising powers under the Income-tax Act obtain priority inconsistent with the Companies Act; supporting the view that the Companies Act prevails where it is the special law governing winding up and priorities. |
| Baroda Board & Paper Mills Ltd. v. ITO, [1976] 102 ITR 153 : 46 Comp Cas 25 (Guj) | Held that the non obstante clause of section 178(1)(b) of the Income-tax Act does not interfere with the order of priorities laid down in section 530(1)(a) of the Companies Act. | The court relied on this decision to conclude that section 178 does not undermine the priority scheme in section 530(1) and does not abrogate the requirement of leave under section 446. |
| ITO v. Official Liquidator, Mysore High Court, 63 ITR 810 : 37 Comp Cas 114 | Adopted a view similar to that in this judgment (i.e., supportive of the requirement of leave and the Companies Act priority regime). | The judgment was noted as taking a similar view to the present court's conclusion; the present court cited it as supportive authority. |
| ITO v. Official Liquidator, [1975] 101 ITR 470 : [1976] 46 Comp Cas 46 (Andhra Pradesh High Court) | Represented a contrary view (i.e., differing approaches as to interplay between Income-tax Act provisions and Companies Act priorities/leave requirement). | The present court noted this contrary decision to acknowledge conflicting High Court views but observed that these decisions had not decided whether tax could be recovered without obtaining leave under section 446. |
| Steel Sons Pvt. Ltd. v. Registrar of Companies (C.P. No. 14/1969) (Kerala High Court) | Represented a contrary view (i.e., differing approach to the interplay of Income-tax Act provisions and Companies Act). | The court recorded this decision as another instance of conflicting High Court views and noted that those courts had not resolved the precise question concerning necessity of leave under section 446. |
Court's Reasoning and Analysis
The court began with the statutory text and scheme: section 446(1) of the Companies Act provides that, after a winding-up order and appointment of an official liquidator, no suit or other legal proceedings shall be commenced or proceeded with except by leave of the court; section 530(1) sets out certain preferential payments (including wages, taxes, etc.). It was not established before the single judge that any part of the Rs. 44,000 claimed by the ITO fell within the preferential categories of section 530(1). The single judge therefore refused leave but permitted the ITO to apply later if it could show entitlement to priority.
The court addressed the ITO's reliance on section 537(2) (which excepts tax recovery proceedings from the voidness provision of section 537(1)). It rejected the argument that section 537(2) negated the leave requirement under section 446(1). The court analysed the temporal and functional differences between sections 537 and 446: section 537(1) deals with attachments, distress or execution after the commencement of winding-up (i.e., the period between presentation of the petition and the winding-up order) and renders certain acts void if done without leave, whereas section 446 operates from the date of the winding-up order and bars commencement or continuation of "legal proceedings" except by leave. Thus section 537 covers transactions prior to the winding-up order, and section 446 covers proceedings after the winding-up order.
The court held that section 537(2) (the exception for Government tax recovery) is concerned with the period prior to the winding-up order and does not address the separate question whether, after the winding-up order, recovery may be pursued without leave. In addition, the court emphasised the statutory principle that a special provision (section 446, dealing specifically with companies in liquidation) prevails over a general provision (the Income-tax Act's recovery provisions, such as section 222). It relied on Federal Court and Supreme Court authority (Shiromani Sugar Mills and Union of India v. India Fisheries) for the proposition that revenue authorities must obtain leave in liquidation contexts, and that the Income-tax Act cannot override the Companies Act's priority and procedural regime.
The court also examined the ITO's reliance on section 178 of the Income-tax Act and declined to consider the point in the appeal because it was not raised before the single judge and was not included in the grounds of appeal. On the merits, the court observed that section 178 serves as a mechanism to require a liquidator to reserve funds for potential tax liabilities but does not interfere with or abrogate the priority scheme under section 530(1). The court cited Baroda Board & Paper Mills Ltd. v. ITO to the effect that section 178's non obstante clause does not affect section 530(1)(a).
The court noted conflicting High Court decisions on related issues but observed that they had not answered the core question whether tax can be recovered without leave under section 446. The court also referenced a government committee recommendation (para. 15.30) proposing an amendment to section 530 to clarify the temporal limit for tax priority; however, the court did not treat this as altering the immediate legal requirement that leave be obtained under section 446 where applicable.
In light of the precedents, the statutory scheme, and the absence of an established preferential claim under section 530(1), the court agreed with the single judge that leave under section 446 was necessary and that the refusal of leave (subject to the single judge's invitation to revisit priority if supported) was not objectionable.
Holding and Implications
Holding: The appeal is dismissed. The court held that, without obtaining leave under section 446(1) of the Companies Act, the ITO cannot resort to section 222 of the Income-tax Act to recover tax due from a company after a winding-up order. The appeal was dismissed without costs.
Implications and consequences:
- The ITO must obtain leave of the winding-up court under section 446(1) to commence or proceed with recovery proceedings against a company after a winding-up order has been made; recovery under the Income-tax Act cannot be pursued independently in contravention of the Companies Act procedure.
- Where the ITO's claim is not shown to be a preferential debt under section 530(1), the claim must take its rank with other debts due from the company; the single judge permissibly refused leave subject to the ITO's ability to later establish any entitlement to priority.
- The court found no inconsistency between sections 537 and 446 once their temporal operation is understood: section 537 deals with the period between presentation of the winding-up petition and the winding-up order, and section 446 operates from the date of the winding-up order; section 537(2)'s exception for tax recovery does not permit bypassing the leave requirement under section 446 after the winding-up order.
- The decision aligns with earlier Federal Court and Supreme Court authorities and with the view that special company-winding-up provisions govern recovery and priorities over general tax recovery provisions; the court did not purport to create new law beyond applying existing precedents and statutory interpretation to the facts of this case.
Rajinder Sachar, J.:— Can the provisions of s. 222 of the I.T Act, 1961, for recovery of the tax be resorted to by the ITO without seeking leave of the company judge under s. 446 of the Companies Act, 1956, in the case of a company after a winding-up order has been made is the question arising in this appeal against the judgment of the learned single judge, who has held that obtaining leave under s. 446(1) of the Companies Act was a condition precedent for seeking to recover tax by the ITO.
2. M/s. National Conduits P. Ltd. is a company registered under the Companies Act. In respect of its employee, one S.S Arora, the company made deduction on account of income-tax from his salary, the total amount of which came to about Rs. 44,000 for the years 1961–62 to 1965–66. The company, however, did not deposit the said amount with the I.T authorities. As a result on October 6, 1966, the ITO demanded from the company the payment of this amount, but to no effect. On January 16, 1969, an application was moved for winding up the company. An order of winding up was passed on May 7, 1969. On February 24, 1971, the ITO requested the official liquidator for payment of Rs. 44,000 due on account of deductions made from the salary of Arora. The official liquidator by his letter of March 1, 1971, asked the ITO to obtain leave of the High Court under s. 446 of the Companies Act, before any payment could be made by him. It was apparently this which made the ITO on July 25, 1972, to move an application under s. 446 of the Companis Act, seeking leave to take proceedings under the provisions of the I.T Act for the recovery of the aforesaid amount. It was at this stage that the issue was joined as to whether leave should be granted. The learned judge has refused to grant leave and hence the appeal by the ITO. Section 446(1) of the Companies Act provides that when a winding-up order has been made and an official liquidator appointed no suit or other legal proceedings shall be commenced or shall be proceeded with except by leave of the court and subject to such terms as the court may enforce. Section 530(1) provides that in a winding up there shall be paid in priority to all other debts certain mentioned claims like wages, taxes, etc. Before the learned single judge it was not disputed or at least it was not established that any of the amounts claimed by the ITO were covered under the preferential payments within any of the clauses of s. 530(1) of the Act. As a matter of fact the learned judge has specifically safeguarded the interest of the appellant by permitting it to move any time a separate application if it is able to show that any portion of a sum of Rs. 44,000 is entitled to priority under s. 530(1). As the debt was not found to be preferential payment, the order refusing leave is not open to objection because there is no reason why this debt should not take its place along with other debts due from the company, especially when the right of the appellant to move later on if the circumstances show that any part of the debt covered by s. 530(1)(a) has been protected by the learned single judge.
3. Mr. Verma, however, invokes s. 537, which though by sub-s. (1) provides that any attachment execution against a company which is being wound up, without leave of court, will be void, yet by sub-s. (2) excepts the applicability in proceedings for recovery of any tax payable to Government. The argument is that notwithstanding s. 446 of the Companies Act there is an independent indefeasible power with the ITO to recover the arrears of tax, under s. 537(2) of the Act; we cannot agree. Now, s. 446(1) is specific that after a winding-up order has been made no legal proceedings can be commenced or proceeded with, except by leave of the court. What was, however, urged was that as s. 537(2) excepts proceedings for the recovery of any tax or dues payable to the Government, it means that the proceedings for recovery of such dues are immune from the restriction of s. 446(1) of the Act. The argument is unacceptable. That s. 171 of the Companies Act, 1913, corresponding to s. 446 of the Companies Act, 1956, requires leave to be obtained from the court by the ITO for seeking to recover the tax as arrears of land revenue by virtue of power under the I.T Act, was decided as far back as over 30 years and is reported in Governor-General in Council v. Shiromani Sugar Mills Ltd., [1946] 14 ITR 248, 258 : 16 Comp Cas 71, 80 (FC), wherein it was observed;
“Accordingly, we agree with the learned judges of the Allahabad High Court in holding that the words ‘other legal proceeding’ in section 171 of the Indian Companies Act, 1913, comprise any proceeding by the revenue authorities under section 46(2) of the Indian 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 of the Companies Act for leave of the winding-up court.”
4. It may be noted that s. 46(2) of the Indian I.T Act, 1922, corresponded to s. 222 of the present I.T Act. The attempt to avoid the applicability of s. 446 of the Companies Act by the counsel for the revenue by importing s. 537(2) to his aid is of no avail in view of the Federal Court decision wherein, though reference was made to s. 232(1) and (2) of the Indian Companies Act, 1913 (corresponding to s. 537 of the Companies Act, 1956), it was nevertheless held that leave of the court has to be obtained. Reference in this connection may be made to S.V Kondaskar v. V.M Desh-pande, ITO, [1972] 83 ITR 685, 698 : 42 Comp Cas 168, 181 (SC), which, while recognising that the power under s. 148 of the I.T Act, 1961, could be exercised without resort to s. 171 of the Indian Companies Act, 1913 (corresponding to s. 446 of the Companies Act, 1956), because the words “legal proceeding” in s. 446 did not cover the proceedings under s. 148, went on to observe:
“The fact that after the amount of tax payable by an assessee 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 does 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.”
5. Thus, the Supreme Court has clearly held that notwithstanding the assessment the recovery of the tax can only be proceeded with after leave of the court has been obtained. We are, therefore, in agreement with the view taken by the learned single judge that leave under s. 446 of the Companies Act was necessary and also with his further finding that in the absence of any claim for priority for this amount the ITO was not entitled to the grant of leave.
6. The learned judge has observed that there seemed to be an inconsistency between the provisions of s. 537 and s. 446 of the Companies Act, for, if the proceedings are stayed under s. 446(1) it will not be possible for proceedings for realising tax arrears to end in execution or sale to which s. 537(1) or (2) could apply. But the controversy had been resolved by the Federal Court by holding that Government was not entitled to preferential payment for tax arrears except as it is permitted by s. 530(1)(a) of the Companies Act. In our opinion, there is no inconsistency as they deal with different stages. Section 444(1) contemplates a situation where a winding-up order has been passed and then certain consequences will follow with regard to proceedings on the date of the winding-up order. The winding-up of a company by the court is deemed to commence at the time of the presentation of a petition for the winding-up (s. 441(2)). There is thus obviously a time gap between the commencement of the winding-up and the passing of the winding up order. Section 537 is covering a period in between this interval, because it clearly says that where any company is being wound up by court any attachment, distress or execution put in force, without leave of the court, after the commencement of the winding-up, or any sale held, without leave of court after such commencement shall be void. Section 537(1), therefore, only makes all such transactions void between the date of presentation of petition for the winding-up and the date of winding-up order. The reason why nothing more need to be said under s. 537(1) is that by virtue of s. 446 of the Companies Act the moment the winding-up order is passed no legal proceedings shall be commenced or if pending on the date of the winding-up order shall be proceeded with against the company except by leave of the court. That, however, left out the transactions earlier to the passing of the winding-up order. This is covered by s. 537(1) of the Companies Act. Thus, right from the date of presentation of a petition for winding up, the courts' protective arm is thrown on all transactions so that private individuals may not take undue advantage of the situation and thus leave only the husk Of the company at the time when the order of winding-up comes to be passed. But no public interest is involved when taxes are being realised during this period and that is why sub-s. (2) of s. 537 excepts the proceedings for the recovery of any tax by impost or any dues payable to the Government, from the provisions of s. 537(1). Thus, even if any proceedings have been started for the recovery of such tax even after the date of presentation of the petition for winding up they would not be deemed to be void automatically. It appears to us that s. 537(2) of the Companies Act has really no relevance to the question whether the ITO can resort to s. 222 without obtaining the leave of the court under s. 446(1) of the Act. Section 537(1) affects certain proceedings prior to the date of the winding-up order. Section 446, however, is a special provision dealing with a company which is being wound up from the date of winding-up order. The power of recovery proceedings under s. 222 of i.t act are general provisions applicable to all companies whether being wound up or not, Section 446(1), however, deals with a company which is being wound up and is thus a special provision and will prevail over the general provision of recovery of tax under the I.T Act. That I.T Act is a general provision applicable to all assessees and cannot override the provisions of a special law like the Companies Act was recognised in Union of India v. India Fisheries (P.) Ltd., [1965] 57 ITR 331 : 35 Comp Cas 669 (SC), wherein it was held that the department cannot by exercising the right under s. 49e of the i.t act get priority over the other unsecured creditors as laid down under ss. 228 and 229 of the Indian Companies Act, 1913. Similar consequences must follow in the present case. To accept the argument of Mr. Verma would mean that though the I.T Dept. is an unsecured creditor for the amount in dispute and would have to stand along with other unsecured creditors for the realisation of this amount it could still exercise its powers under s. 222 of the i.t act. This would be contrary to the Companies Act. It must, therefore, be held that without obtaining leave under s. 446(1) of the Companies Act, the ITO cannot resort to s. 222 of the i.t act for recovery of tax due from the company. It must obey the mandate of the Companies Act and proceed within its requirements.
7. We may also note that Mr. Verma tried to invoke s. 178 of the I.T Act. The first objection to permitting this contention being raised is that this point was never raised before the learned single judge who, therefore, had no occasion to deal with it. Not only that, even in the grounds of appeal no such ground has been raised on the basis of this provision. That apart, even on merits, in our view, the argument is also of no assistance to Mr. Verma. Section 178 empowers the ITO on receipt of information from the liquidator about his having been appointed as a liquidator of a company to inform the liquidator of the tax liability and also to direct him to keep sufficient funds to provide for any tax which is likely to be payable by the company and the liquidator shall not, without leave of the Commissioner, part with any of the assets, equal to the amount notified. This provision in no way interferes with or abrogates the provision of priority of the debts laid down in s. 530(1)(a) of the Companies Act [See Baroda Board & Paper Mills Ltd. v. ITO, [1976] 102 ITR 153 : 46 Comp Cas 25 (Guj)], where it was held that the non obstante clause of s. 178(1)(b) of the I.T Act does not interfere in any manner with the order of priorities laid down in s. 530(1)(a) of the Act.
8. A similar view has been taken by the Mysore High Court in ITO v. Official Liquidator, Mysore High Court, 63 ITR 810 : 37 Comp Cas 114. We, however, also must notice that a contrary view has been taken by the Andhra Pradesh High Court and by the Kerala High Court (See ITO v. Official Liquidator, [1975] 101 ITR 470 : [1976] 46 Comp Cas 46 and Steel Sons Pvt. Ltd. v. Registrar of Companies (C.P No. 14/1969). It may, however, be noted that when the Companies Act, 1956, was enacted, it was urged before the Company Law Committee that the power for review of the I.T Act should not be limited to a particular period. This plea was rejected by the Committee. The conflicting views taken by the courts have an area of plausibility. We may, however, note that the high-powered expert committee appointed by the Govt. of India took note of this conflict and has recommended (in para. 15.30) that s. 530 of the Companies Act should be amended by way of clarification that notwithstanding anything contained in s. 178 of the I.T Act, 1961, the priority for payment of taxes will be limited to taxes having become due and payable within 12 months next before the relevant date. Though, therefore, there may be a view that by the enactment of s. 178(6), the tax due, which is in the present case even prior to 12 months, can claim priority, it will still not help the appellants. The reason is as mentioned above that this point not having been raised before the single judge cannot be allowed to be raised in the appeal. That apart, even if this view was to be accepted that priority for tax of any period is to be given under s. 530 of the Companies Act, 1956, it does not take away the requirement of obtaining leave under s. 446 of the Act. No doubt, in granting or refusing leave, it may be one of the considerations, whether the debt has priority under s. 530 of the Companies Act but the main question which calls for decision in the present case, whether the tax can be recovered without obtaining leave under s. 446 of the Companies Act, has not been answered by the Kerala and Andhra Pradesh High Courts. The requirement of obtaining leave under s. 446 of the Act still has to be decided in the light of the decision given in the Federal Court decision in Shiromani Sugar Mills' case, 14 ITR 248 : 16 Comp Cas 71. Section 178 of the I.T Act, 1961, is only a mode of keeping intact certain assets of the company to be able to adjust them for the purpose of the tax liability which the ITO may determine in future.
9. The question of how to recover that tax will necessarily have to be decided by the special provisions of the companies act and, in the case of a company which is being wound up, the requirements of obtaining leave laid down in s. 446 of the Act would have to be observed. The question of any conflict between s. 446 and s. 530 of the Companies Act does not at all arise.
10. As a result, we find no merit in the appeal which is dismissed, but without costs.
11. Appeal dismissed.
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