2. 1. Whether tax assessment is a legal proceeding under section 446 of The
Companies Act 1956
2. Whether priority can be claimed beyond the time limit of section
530(1)(a) of the Act
3. Whether interest under section 220(2) of the Income Tax Act is a
preferential payment under section 530(1)(a) of The Companies Act
1956
4. Whether penalty is a preferential claim under section 530(1)(a) of The
Companies Act 1956
5. Whether rent for goods stored in the godown are costs and expenses of
winding up under Section 530 (6) of the Companies Act 1956
3. • Stay on suits after the order of winding up
• Suit or legal proceedings cannot be commenced or proceeded without leave
of the court
• Tribunal/Court has been given the jurisdiction to decide -
- suit/proceeding
- claim
- application under section 391
- question of priority
- question of law or fact
4. Tika Ram and Sons Private Limited
v.
Commissioner of Income Tax, U.P., and Another
1964(34)CC1151
Allahbad High Court
• Assessment proceedings do not fall within the term „other legal
proceedings‟
• They do not automatically come to a stop when a company goes into
liquidation
• The proceedings have to be carried out according to the Income Tax Act
which is a complete code in itself.
5. Official Liquidator, High Court, Calcutta
v.
Commissioner of Income Tax
1971 (41) CC 477
Calcutta High Court
• A valid assessment is the only way of creating a debt in favor of the
department and does not affect the assets and liabilities of the company and
the scheme of winding up.
• Section 446 covers recovery proceedings but assessment proceedings are
beyond its scope
6. S. V. Kondaskar v. V. N Deshpande
1972 (83) ITR 685
Supreme Court Of India
• Assessment proceedings are not “other legal proceeding‟ that can be
started or continued with leave under S. 446
• Provision of appeal against tax assessment has been provided as a remedy
• Liquidation court is empowered to stop tax assessment of a company being
wound up
• After the assessment the liquidation court can determine the amount to be
accepted as the lawful liability on the funds of the company.
7. • Preferential Payments
• Priority subject to subject to provisions of 529A
• Revenues taxes cesses and rates
• Which have become due and payable
• Within 12 months next before the relevant date
8. Northern India Oil Industries Limited The Sales Tax Officer,
v.
Official Liquidator
1968 (38) CC 430
Allahbad High Court
• Taxes neither due nor payable within 12 months from the relevant date are
not entitled to priority
9. Official Liquidator, Palghat Metal industries Co. Ltd
v.
Assistant Commissioner of Sales Tax
1976 5 CTR Ker 225
Kerela High Court
• Preference to Central and State Government is subject to the time limit of
Section 530
• If not, the only remedy available to revenue department is to prove debt
and secure payment in the course of winding up as an unsecured creditor.
10. Income Tax Officer v. Official Liquidator
1986(158)ITR791
Kerela High Court
• Arrears of tax and interest claimed became due long after the relevant date
had passed and therefore were not given priority under section 530(1)(a)
• The Department is to be treated as an unsecured creditor whose debt will
be payable in liquidation proceedings only
• The department is subject to the jurisdiction of the liquidator and company
court
11. Rajratna Narainbhai Mills Company Limited
v.
Sales Tax Officer
1991 (71) CC 149
Supreme Court Of India
• Three conditions which should coexist for application of section 530(1)(a)
-
12. a) Debt of the kind mentioned in the clause must be outstanding on the
relevant date
b) The debt must have become due, in the sense that it must have been
incurred at any time within twelve months before the relevant date
c) The debt must have become payable at any time within twelve months
next before the relevant date
13. • The debt should be born within the time frame of the 12 months and due
and payable within those 12 months
• „due and payable within 12 months‟ limits the priority claimed to eliminate
the debts outstanding and payable at that time
• Liability of payment must be founded during the period of 12 months
14. S. V. Kondaskar v. V. N Deshpande
1972 (83) ITR 685
Supreme Court Of India
• Whether interest to be paid out of the funds of the company to be
scrutinized by the company court
• Income Tax Officer should obtain the sanction of the court to claim interest
under section 220(2)
• Demand for interest without fulfilling the requirements of section 446(2)
and (1) makes it unenforceable
15. Official Liquidator v. ITO
1978 (48) CC 59 (KER)
• Interest was demanded for tax assessed for periods subsequent to winding
up
• Interest is in nature of compensation for delayed payment of tax
• It pertains to realm of recovery and collection
• Such proceedings are not assessment or reassessment proceedings
16. Official Liquidator, High Court, Calcutta
v.
Income Tax Officer, ”K” Ward, Companies District –Iii, and others
1981(51)CC572
Calcutta High Court
• Claim of interest is disallowed if it amounts to hardship and injustice for
innocent creditors
• Court empowered to disallow such claims under section 446(2)(b) read
with r.9 of the Companies(Court)Rules,1959
17. Income Tax Officer, B–Ward, Companies Circle, Ernakulam v. Official Liquidator
1982 (52) CC 156
Kerela High Court
• Liquidator does not have the freedom to deal with the funds like any other assessee
• Provisions of Companies Act and that of Income Tax Act should be reconciled.
• Section 220(2) does not apply when insolvency rules have to be applied under the
former.
• Company‟s funds in the hands of the liquidator are not available for meeting the
demands of Section 220(2)
18. Income Tax Officer v. Official Liquidator
1986(158) ITR 791
Kerela High Court
• Fundamental basis of section 220 of Income tax Act is in conflict with the
scheme and provision of Companies Act.
• Section 220 cannot apply to company in liquidation governed by the
Companies Act
• When the liquidator fails to make payment within 35 days of the service of
demand notice he cannot be held as the defaulter liable to pay interest
under section 220 or pay penalty under section 221.
19. Baroda Board and Paper Mills Ltd
v.
Income Tax Officer and ors
1976(102)ITR 0153(Guj)
Gujrat High Court
• There was a reasonable cause for liquidator to not pay taxes within the
prescribed time
• Therefore amount of penalty was not held to be an admissible claim
20. S.S. Chawla and Company
v.
Globe Motors Limited (In Liquidation) and Another
1987 (62) CC 815
Delhi High Court
• Godown was not retained by the official liquidator for the “convenience”
or “purpose” of the winding up.
• Landlord not entitled to rent accruing due after the order of winding up as
„cost and expenses of winding up‟
• Landlord will have to prove such debt in liquidation court and paid pari
passu with other creditors
21. • That tax assessment is not a legal proceeding under section 446 and the remedy available to
the liquidator is to contest the same in appeal
• That the tax which is not founded within the the 12 months preceding the relevant date is not
a preferential payment. In such a case the department is deemed to be an unsecured creditor
who has to prove his debt in the liquidation court.
• That interest subsequent to winding up is not a preferential payment and the leave of the court
under section 446 is required for claiming interest
• That penalty cannot be an admissible claim if there existed a reasonable cause for the
liquidator to delay the payment of tax
• That after the order of winding up rent which accrues on a property leased by the company
will not be a prefrential payment if not used by the liquidator for the purpose of winding up
22. For clarifications and
doubts we may be
reached at
jeevesh@mavenlegal.net
or at the below
mentioned address
E 149 FF Rishi Nagar,
Delhi -110034
