Balakrishna Menon, J.:— A Division Bench of this Court has doubted the correctness of the decision in Income-tax Officer. B-Ward Companies Circle, Ernakulam v. Official Liquidator, Swaraj Motors (P) Ltd., (134 ITR. 132) and that is why this case has come up before a Full Bench.

2. The Palai Central Bank Ltd., (in liquidation) (hereinafter referred to as the Company) was assessed to Income-tax for the years 1975-1976 and 1976-1977, allowing permissible deduction to the extent only of Rs. 7,500/- for each year as against the claim of the Official Liquidator for much larger deductions. In appeal by the Official Liquidator, the Appellate Assistant Commissioner allowed the deductions claimed and the taxable income of the Company in liquidation was reduced considerably. In further appeal at the instance of the Department, the Income-tax Appellate Tribunal set aside the orders of the Appellate Assistant Commissioner and allowed deduction to the extent of Rs. 10,000/- for each year. Fresh demands were made by the Income-tax Officer for payment of the tax assessed in pursuance to the orders of the Tribunal and the entire tax demanded was paid by the Official Liquidator on 27-4-1981. Thereafter fresh notices were issued under S. 154 of the Income-tax Act, for rectification of the orders of assessment to include also interest accrued under S. 220(2) of the Income-tax Act. Objections raised by the Official Liquidator were overruled and demand notices were issued for payment of Rs. 7,790.00 for the year 1975-1976 and Rs. 6,422.00 for the year 1976-1977 by way of interest accrued under S. 220(2) of the Act. The demand notices were accompanied by an order rectifying the order of assessment. The Official Liquidator thereafter filed application No. 839 of 1981 before the Winding-up Court for a declaration that the demand of interest under S. 220(2) of the Act is illegal and unenforceable for the reason that the assessment of interest under S. 220(2) of the Act was without the leave of the Court as required by S. 446(1) of the Companies Act, 1956. A learned Judge of this Court allowed the application holding that the levy of interest without the prior sanction of the Company Court is illegal and unenforceable as against the Official Liquidator. It is against this order of the Company Court that the Income-tax Officer has filed this appeal. S. 446(1) of the Compaines Act is extracted below:—

“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 to such terms as the Court may impose”.

3. Interest accrues under sub-section (2) of S. 220 of the Income-tax Act on failure of the assessse to pay the tax demanded within the time specified in the notice of demand.

4. In Union of India v. India Fisheries (P) Ltd. (57 I.T.R 331), the Supreme Court held that once the claim of the Income-tax Department has to be proved and is proved in liquidation proceedings it cannot by exercising its rights under S. 49-E of the Income-tax Act of 1922 get priority over other unsecured creditors. It was further held that S. 49-E of the Income-tax Act of 1922 is a general provision applicable to all assessees in all circumstances while Ss. 228 and 229 of the Companies Act of 1913 are special provisions dealing with proof of debts and their payments in liquidation proceedings. S. 49-E of the Income-tax Act authorising set off against refund, it was held would apply only when Insolvency Rules do not apply. Construing S. 171 of the Companies Act 1913 (corresponding to S. 446 of the 1956 Act), the Federal Court in Governor-General in Council v. Shiromani Sugar Mills Ltd., (1946 (14) I.T.R 248) held that the words ‘other legal proceedings’ in the section comprise any proceedings by the Revenue Authorities for recovery of the tax assessed and before forwarding the requisite certificate under S. 46(2) of the Indian Income-tax Act 1922 it is obligatory on the part of the Income-tax Officer to have applied under S. 171 of the Companies Act 1913 for leave of the Winding-up Court.

5. In M.K Ranganathan v. 1. Government Of Madras (1955 (2) S.C.R 374) the Supreme Court held that a sale effected by the Receiver of the Trustees of the debenture holders of a Company in liquidation without the intervention of Court is perfectly valid and is not hit by S. 171 of the Companies Act 1913 for the reason that a secured creditor is outside the winding-up and can realise his security without the leave of the Winding-up Court. If however he files a suit or takes other legal proceedings for the realisation of his security it was held that a secured creditor is also bound under S. 171 of the Companies Act 1913 to obtain leave of the Winding-up Court even though such leave would be automatically granted to him. Considering the decisions in Shiromani Sugar Mills Ltd's case (14 I.T.R 248) and M.K Ranganathan's case (1955 (2) S.C.R 374), the Supreme Court in S.V Kondaskar v. V.M Deshpande (83 I.T.R 685), stated thus at page 693:—

“These two decisions in our opinion do not lay down that assessment proceedings under the Income-tax Act should be held to be within the contemplation of S. 171 of the Indian Companies Act, 1913”.

6. In the aforesaid decision of the Supreme Court in 83 I.T.R 685, it is held that the expressions ‘other legal proceeding’ in sub-section (1) and ‘legal proceeding’ in sub-section (2) of S. 446 of the Companies Act convey the same meaning and proceedings under both the sub-sections must be such as can appropriately be dealt with by the Winding-up Court. Proceedings by way of assessment or re-assessment of income-tax do not fall under S. 446 of the Companies Act. The Supreme Court stated at page 698:

“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 S. 446 of the Act. The liquidation Court, in our opinion, cannot perform the functions of Income-tax Officers while assessing the amount of tax payable by the assessee even if the assessee be the company which is being wound up by the Court. The orders made by the Income-tax Officer in the course of assessment or reassessment proceedings are subject to appeal to the higher hierarchy under the Income-tax Act. There are also provisions for reference to the High Court and for appeals from the decisions of the High Court to the Supreme Court and then there are provisions for revision by the Commissioner of Income-tax. It would leave to anomalous consequances if the Winding-up court were to be held empowered to transfer the assessment proceedings to itself and assess the company to income-tax. The argument on behalf of the appellant by Shri Desai is that the winding-up court is empowered in its discretion to decline to transfer the assessment proceedings in a given case but the power on the plain language of S. 446 of the Act must be held to vest in that Court to be exercised only if considered expedient. We are not impressed by this argument. The language of S. 446 must be so construed as to eliminate such startling consequences as investing the winding-up court with the powers of an Income-tax Officer conferred on him by the Income-tax Act, because, in our view, the legislature could not have intended such a result”.

7. The decision of the Punjab High Court in Union Of India v. Seth Spinning Mills Ltd. (In Liquidation) (in liquidation) (46 ITR. 193), wherein it is held that the bar under S. 171 of the Companies Act 1913 applies also to proceedings of the Income-tax Officer for assessment of penalty and the decision of the Mysore High Court in Mysore Spun Silk Mills Ltd. (In liquidation)'s case (68 I.T.R 295 holding that the Income-tax Officer should also obtain leave of the Winding) up Court before quantification or collection of income-tax are overruled in the decision in Kondaskar v. Deshpande (83 I.T.R 685). It is stated at page 699:—

“We have not been shown any principle on which the liquidation court should be vested with the power to stop assessment proceedings for determining the amount of tax payable by the Company which is being wound up. The liquidation court would have full power to scrutinies 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 on 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, Incidentally, it may be pointed out that at the bar no English decision was brought to our notice under which the assessment proceedings were held to be controlled by the winding-up court. On the view that we have taken, the decisions in the case of Set Spinning Mills Ltd. (In liquidation) (46 I.T.R 193) and the Mysore Spun Silk Mills Ltd. (In liquidation) (68 ITR 295), do not seem to lay down the correct rule of law that the Income-tax Officers must obtain leave of the winding-up court for commencing or continuing assessment or re-assessment proceedings”.

8. In Income-tax Officer v. Official Liquidator, Swaraj Motors (P) Ltd. (in liquidation) (134 I.T.R 132) a Division Bench of this Court affirming the decision of a learned single Judge held that assessment of interest under S. 220(2) of the Income-tax Act is a legal proceeding within the meaning of S. 446 of the Compaines Act and the sanction of the Winding-up Court is necessary before the interest payable is assessed. The Division Bench referring to the decision in Kondaskar's case (83 I.T.R 685) stated that the Supreme Court had in the said decision approved the decision of the Punjab High Court in Seth Spinning Mills's case (46 I.T.R 193) and that of the Mysore High Court in Mysore Spun Silk Mills case (68 I.T.R 295). The Division Bench was wrong in its view that the decisions of the Punjab and the Mysore High Courts referred to above were approved by the Supreme Court in Kondaskar's case. Those decisions were held as not laying down the correct rule of law in holding that the Income-tax Officers must obtain the leave of the Winding-up Court for commencement of assessment or re-assessment proceedings. To the extent therefore it holds that the Income-tax Officer has to obtain leave of the Winding-up Court for assessment or re-assessment proceedings, the decision in Income-tax Officer v. Official Liquidator (134 I.T.R 132) cannot be accepted as laying down the correct law. It should also be borne in mind that the decision of the Punjab High Court in Seth Spinning Mills case related to penalty proceedings, and when the Supreme Court overruled the said decision, it is clear that proceedings for assessment of penalty are also outside the scope of S. 446(1) of the Companies Act. We therefore hold there is no need of a prior sanction of the Winding-up Court for assessment of interest under S. 220(2) of the Income-tax Act.

9. The question as to whether interest for delayed payment of tax should also be paid out of the funds of the Company in liquidation and if so to what extent such payments can be made are all matters for the Winding-up Court to decide when a claim is made by the Income-tax Department under Ss. 528 and 529 of the Compaines Act.

10. The proceedings for recovery will however be hit by the provisions of S. 446(1) of the Companies Act, unless leave of the Winding-up Court is sought for and obtained prior to commencement of the recovery proceedings. It is brought to our notice that subsequent to the decision of the learned single Judge, the refund due to the Company by way of excess tax paid for the years 1981-1982 and 1982-1983 was adjusted towards the interest assessed under S. 220(2) of the Act for the period 1975-1976 and 1976-1977. The recovery effected by way of adjustment of interest, without seeking to obtain prior leave of Court under S. 446(1) of the Companies Act is invalid and cannot be sustained. The Income-tax Officer is therefore directed to refund the interest recovered to the Official Liquidator of the Company in liquidation.

11. The appeal is disposed of as above. There will be no order as to costs.