1. As almost all the details of work in connection with the winding-up of the affairs of this company had been concluded and there appeared to be available with the liquidator more than a lakh of rupees and requests were made on behalf of the petitioning-creditor and others that steps may be taken to declare a final dividend, I directed the liquidator to file a report giving particulars so that I may give further directions for the above purpose.
2. The liquidator filed a report stating that though there was with him a sum of Rs. 1,47,483 in the account of this winding-up, it may not be possible to declare a dividend for the reason that large amounts would be required to pay the fees due to Central Government and also that the auditors had suggested that there was also a tax liability in respect of income arising out of the investments made in the course of winding up. As the liquidator appeared to entertain the opinion that it was a matter for doubt whether the company in liquidation could be held to be liable to tax in the light of the recent amendments of the Income-tax Act and the Companies Act, I asked him to take out a formal application for directions. The above Application No. 16 of 1967 is such an application. So that I may have the benefit of the arguments from both the opposing points of view, I issued notice of the application to the Commissioner of Income-tax in Mysore and also permitted the official liquidator to engage the services of Mr. K. Srinivasan, Advocate. The Commissioner having entered appearance through counsel, his case was presented to me by Mr. Rajasekhara Murthy.
3. In the course of this winding-up, large sums of money came into the hands of the liquidator which could not be immediately applied for distribution of dividends to the creditors. The result was that he had to invest the same pursuant to the relevant provisions of the Companies (Court) Rules. They were mostly by way of bank deposits. The following table gives the amounts of interest received from time to time:
Financial Year
Amount of interest
1960–1961
52,510-02
1961–1962
52,589-04
1962–1963
38,142-50
1963–1964
33,105-67
1964–1965
12,587-72
1965–1966
6,429-10
Total
Rs. 1,95,364-05
4. In the course of the audit of accounts of the company for the half year ended 30th September, 1965, the auditors B.K Ramadhyani and Company, in their report dated 3rd March, 1966, observed that the above amounts of interest received by the liquidator would attract liability for income-tax and that therefore appropriate steps should be taken to settle the question of such liability in order to avoid the possibility of excess distribution of dividends. In my order dated 18th March, 1966, while accepting the report of the auditors, I had also made a direction that the liquidator should take out a separate application for necessary directions in regard to the question of liability to income-tax of the above amounts of interest.
5. According to the tentative calculation made by the auditors, the tax liability is estimated at Rs. 93,745.
6. In the course of the arguments on the application, two questions were formulated:—
(1) whether the company in liquidation is at all liable to be assessed to income-tax in respect of any receipts by it or by the liquidator on its behalf in the course of winding up, which in ordinary course would be regarded as items of income liable to income-tax,
(2) whether the amounts received by the liquidator by way of interest on bank deposits are liable to tax.
7. I do not think that I need go into the second question because, if my answer to the first question is in the negative, the second question will not arise, and if my answer to the first question is in the affirmative, the more appropriate course would be to leave it to the income-tax authorities to examine the liability in exercise of their statutory functions.
8. I shall therefore decide only the first question.
9. Upon certain points there could be no doubt whatever. According to section 4 of the Income-tax Act, 1961, the charge for income-tax rests upon every person who receives income attracting liability. Clause (31) of section 2 of the Act defines a person as including a company. It is also undoubted that an order to wind up a company compulsorily does not put an end to the continued corporate existence of the company. Such existence is terminated only when at the close of the winding-up proceedings an order is made for the dissolution of the company.
10. Hence, prima facie, there should be no difficulty in taking the view that the company is or continues to be liable to income-tax as a person even after an order to wind up its affairs compulsorily by court is made and until it is finally dissolved. That the company in liquidation is a company for the purposes of the Income-tax Act and therefore assessable to tax, was also the view taken by the Allahabad High Court in the case reported in Commissioner of Income-tax v. Agra Spinning Mills Co. [1934] 2 I.T.R 79.
11. The argument addressed in that case in support of the view that a company in liquidation is not assessable to income-tax is more or less the same as the argument addressed before me in this case. That argument is that, according to the Income-tax Act, the person or the individual, on whom the responsibility of preparing, verifying and presenting the return of income and attending to the details of assessment rests, is an officer of the company called the principal officer. The definition of the principal officer both in clause (12) of section 2 of the Income-tax Act, 1922, and in clause (35) of section 2 of the Income-tax Act, 1961, is to the same effect so far as our present enquiry is concerned. According to the relevant portion of the definition, the principal officer means the secretary, treasurer, manager or agent of the company. It was argued both in the above case before Allahabad High Court and before me that a liquidator appointed in winding up of a company does not come within the purview of the said definition.
12. The Allahabad High Court in the said case rejected the argument and held that he would be a person who could reasonably be held to answer the description of the term “manager”. The said High Court also took the view that in any event, he might be regarded as the principal officer for the purposes of the Income-tax Act if a notice is served upon him by the Income-tax Officer of his intention to treat him as a principal officer of the company, as service of a notice of such intention would bring him within the definition.
13. It is, however, pressed before me that the line of reasoning accepted by the Allahabad High Court may not be now available, because the Income-tax Act does not define the term “manager” but only states in clause (20) of section 2 thereof that it will have the same meaning as is assigned to it in the Companies Act, 1956, and because whereas clause (12) of section 2 of the Companies Act, 1913, which was in force when the Allahabad High Court decided the case, gave an inclusive definition of manager, clause (24) of section 2 of the Companies Act, 1956, expressly defines the term “manager” to mean an individual (not being the managing agent) who has the management of the whole or substantially the whole of the affairs of a company subject to the superintendence, control and direction of the board of directors. It is stated that the liquidator cannot at all come within the said definition.
14. This refinement of the argument, though prima facie attractive, does not appear to me to be one of substance or one which affects the substance of the matter or the real question for consideration.
15. It is first necessary to have regard for the change in the legal position in regard to the management of affairs of a company brought about by an order for compulsory winding up of its affairs made by the company court. As already stated, the corporate existence of a company does not come to an end by the passing of such an order. The actual consequence is that the control over its affairs, which till then was being exercised by its directors, is put an end to, all its officers and employees cease to be officers and employees thereof, and all further control and direction are taken over by the court. The purpose of the law in the matter of winding up of affairs of a company is in principle the same as the purpose of the law of insolvency in the case of individuals, viz., that all the assets of the insolvent company are sequestered and brought under the control of the court with a view to see that they are realised and equitably distributed among its creditors subject to the rules as to priorities or preferential payments which the law stipulates. The liquidator is only an officer of the court. Unlike a receiver in the case of insolvency, properties of the insolvent do not vest in him but come within the control of the court. All his actions are subject to the control of the court for which purpose the court issues to him appropriate directions from time to time in the course of winding up. No court or other authority (subject to the exception contained in sub-section (4) of section 446 of the Companies Act) can take any proceedings or attach or otherwise reach any of the assets of the company without the leave of the winding-up court. In all matters, the winding-up court treats the liquidator as its special officer specially charged with the duty of representing the company and protecting its interests in winding up.
16. In the light of the above principles, it is the duty of the court to see that all liabilities of a company are properly met in accordance with the provisions of the law and the special provisions in that behalf contained in the Companies Act. Liability to income-tax is also one of the liabilities which the court is expected to provide for in the course of winding up.
17. Such being the position, the question is whether, because the liquidator does not answer the description of the principal officer as defined in the Income-tax Act, the liability, if any, of the company for payment of income-tax itself comes to an end and therefore the winding-up court may ignore that liability.
18. If, as I have already stated, the corporate existence of the company continues even after the winding-up order and, therefore, it answers the description of a person who could be charged to income-tax under section 4 of the Income-tax Act, the question of the manner in which the same should be enforced will cease to be a question which can be answered only by an application of the terms of provisions of the Income-tax Act. After the winding up order, it will be a question which has to be dealt with or answered on a joint application of the terms or provisions of not only the Income-tax Act but also the Companies Act.
19. It will be seen that until an order of winding up is passed, there will be some person in charge of the affairs of the company who answers the description of the principal officer. He ceases to hold office when an order of winding up is made, but the duties he was required to perform do not disappear into thin air. Those duties after the winding-up are got performed by the court through the liquidator in the light of the special provisions of the Companies Act that the Income-tax Act also substitutes him for the principal officer is apparent from section 178 of the Income-tax Act, under the first sub-section whereof the liquidator is charged with the duty of giving notice to the appropriate Income-tax Officer of his appointment.
20. Thereupon the Income-tax Officer is charged with the duty of notifying the liquidator the amount which, in the opinion of the Income-tax Officer, would be sufficient to provide for any tax which is then, or is likely thereafter to become, payable by the company. Taxes then due are also entitled to preference in the matter of payment under section 530 of the Companies Act, if they satisfy the conditions of the said section.
21. At the same time, as the issue of any notice, whether under section 178 of the Income-tax Act or under any other provision thereof, is in the eye of law the commencement of, or the necessary condition for commencing, proceedings for the purpose of quantification and collection of the tax, the Income-tax Officer is bound to obtain the leave of the company court under section 446 of the Companies Act. Any failure to do so would amount to contempt of court (vide State v. Topno, Income-tax Officer, Titlagarh).
22. In the light of the above principles, my answer to the first question is that even after a winding-up order is passed, the company continues to be a person within the meaning of section 4 of the Income-tax Act, that therefore any receipt in the course of winding up which would attract liability to income-tax under appropriate provisions of the Income-tax Act would be liable to income-tax or for payment of tax under the Income-tax Act, but that before any action can be taken by the appropriate Income-tax Officer under the Income-tax Act for the purpose of quantification or collection of the income-tax, he should obtain the leave of the winding-up court under section 446 of the Companies Act, and further that the collection of tax can only be by securing the orders of the winding-up court for payment of tax in the light of the appropriate provisions of the Companies Act.
23. I therefore make the following direction: The liquidator will prepare and file returns before the Income-tax Officer having jurisdiction together with a statement of his case as to the liability or otherwise of any of the items of receipt to income-tax. I grant leave to the appropriate Income-tax Officer to examine the nature and extent of the liability and make orders of assessment. He shall not, however, himself take any steps to collect the tax, if any, found to be due by the company; for the said purpose, he should make an application to this court.
24. In preparing the return and placing his case before the Income-tax Officer, the Liquidator may take the assistance of the auditors, Messrs B.K Ramadhyani and Company and also of Mr. K. Srinivasan, Advocate. Their fees for the said purpose will be fixed later.