TMI Blog1978 (8) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. A notice to pay the amount was received from the TRO on December 8, 1976 ; whereupon, the official liquidator filed Report No. 53 seeking the direction of court that the tax claimed is not payable at this stage, as the ITO will have to wait and prove his claim when the list of creditors is settled ; and that the interest amount was not payable as it was against the provisions of the Companies Act and the Rules. A learned judge of this court referred to the judgment of this court in A.S. No. 224 of 1968 (Offl. Liq., Indian Traders Bank Ltd. v. ITO.) which had taken the view that the amount set aside under s. 178 of the I.T. Act will not be available for distribution in accordance with the provisions of the Companies Act, and that therefore there was no question of any priority in the distribution of assets. The learned judge felt that certain aspects of the company law were apparently not brought to the notice of the court and that the decision required reconsideration. The learned judge referred to the view taken in some of the other High Courts that s. 178 of the I.T. Act does not affect or alter the existing law of priority ; nor override the provisions for preferential ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be sufficient to provide for any tax which is then, or is likely thereafter to become, payable by the company. (3) The liquidator-- (a) shall not, without the leave of the Commissioner, part with any of the assets of the company or the properties in his hands until he has been notified by the Income-tax Officer under sub-section (2) ; and (b) on being so notified, shall set aside an amount equal to the amount notified and, until he so sets aside such amount, shall not part with any of the assets of the company or the properties in his hands : Provided that nothing contained in this sub-section shall debar the liquidator from parting with such assets or properties for the purpose of the payment of the tax payable by the company or for making any payment to secured creditors whose debts are entitled under law to priority of payment over debts due to Government on the date of liquidation or for meeting such costs and expenses of the winding up of the company as are in the opinion of the Commissioner reasonable. (4) If the liquidator fails to give the notice in accordance with sub-section (1) or fails to set aside the amount as required by sub-section (3) or parts with any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es ''due" and "payable" by the company. These expressions, it was held, meant that the amount must be presently payable. It was held that the income-tax for a particular assessment year becomes a debt due to the Crown only when the tax is calculated and assessed and thereafter a demand is made under the relevant provisions of the Act. It was only in this sense that the words in s. 530(1)(a) had to be interpreted. It was further ruled that s. 178 of the I.T. Act did not sanction any priority of payments, and that the same is provided only in the Companies Act. The provision in s. 178 of the I.T. Act only required the liquidator to intimate the ITO about his appointment, and the latter to give notice to the liquidator of the approximate amount that would suffice to meet the demand for any tax "then due, or likely to become due". It does require the liquidator not to part with any assets of the company, until he had been notified by the ITO under sub-s. (2), and on being so notified, he is to "set aside" the amount equal to what has been notified ; and until he thus sets aside, he is not to part with any of the assets of the company. The Gujarat High Court pointed out that the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned author observes that the section secures to the revenue, priority of payment over all unsecured creditors, of taxes payable in respect of all periods up to the date of commencement of liquidation or the date of appointment of receiver. In respect of taxes due for the years subsequent to the commencement of liquidation or the appointment of a receiver, according to the learned author, there was no provision made in the I.T. Act or the Companies Act. After noticing the above view of Shri Sampath Iyengar, the learned judges of the Gujarat High Court disagreed with the author's interpretation of s. 178(6) of the Act. The learned judges were of the view that s. 178 did not sanction any priority of payments which is provided in the Companies Act, and all that s. 178 requires is the giving of information by the liquidator about his appointment to the ITO and an intimation by the ITO within three months of the date of intimation, about the approximate amount needed to cover the tax liability. The learned judges were of the view that there is nothing in s. 178 which provides for a rule of priority for the said tax liability, and, therefore, the non-obstante clause in s. 178(6) did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of clerks, servants and labourers, who are workmen (vide cls. (b) and (c) of sub-s. (1) of s. 230) are brought in line ; (ii) the maximum amount of wages or salaries in respect of which preferential claim should be admissible is increased from three to four months' emoluments, subject to a maximum of Rs. 1,000. We recommend that holiday wages should be included within the definition of wages or salary, subject to this maximum ; (iii) expenses of any investigation, carried out under any of the provisions of the Act, should rank for the preferential payment. In this connection we should like to refer to a memorandum that we received from the CBR, on the question of a priority to be given to Crown demands generally and, in particular, to arrears of income-tax, super-tax and corporation tax. It was suggested that there should be no time limit for the preferential payment of these Crown debts and that s. 230 of the Indian Companies Act should be amended accordingly. The practical difficulty of giving effect to this suggestion is that it would place a great majority of the unsecured creditors of the company at the mercy of the I.T. authorities, inasmuch as, whatever may be the n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany might have been distributed with the result that taxes become irrecoverable. It was pointed out that in certain instances the assets of a company have been hastily distributed and the name of the company got struck off from the register by the Registrar of Companies. To get such a company restored to the register requires costly and prolonged litigation. Under such circumstances, placing specific obligations on the liquidator to intimate the fact of his appointment and also insisting on his securing a tax clearance certificate before the assets of a company are distributed or compel him to set apart assets of the value equal to the tax that may be due or may become due, as may be intimated by the ITO appear to be necessary." The historical evolution of this branch of the law thus shows that s. 230 of the Indian Companies Act, 1913, and the decision of the Federal Court in Shiromani Sugar Mills' case [1946] 14 ITR 248 ; [1946] 16 Comp Cas 71 (FC) are to the effect that the State is not entitled to priority in respect of tax dues. Then we have the Company Law Committee Report and s. 530(1)(a) of the Companies Act, 1956. Next, we get the recommendation of the Direct Taxes Admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion does is to create a first charge on the amount set aside by sub-s. (3) thereof for payment of the tax that might be admitted to proof. "We see a blending of two strands of reasoning in the passage quoted above : (1) that the amount "set aside" is outside the scheme of winding up ; and (2) that the I.T. department is put practically in the same position as a secured creditor, and gets, so to say, a first charge on the amount due. Regarding the non-obstante clause, the learned judge observed : " And, if this brings the section into conflict with s. 530 of the Companies Act, the section must prevail by reason of sub-s. (6) thereof the question why income-tax alone of all Government dues should ride this high horse is not for me to answer. But, for the purposes of s. 530 of the Companies Act, the tax liability is an ordinary and not a preferential claim and it is only out of the amount set aside under sub-s. (3) of s. 178 of the I.T. Act, that the revenue can claim payment of its debt to the exclusion of other creditors." The decision was carried up in appeal and confirmed by a Division Bench of this court in A.S. No. 224 of 1968 (Offi. Liq., Indian Traders Bank Ltd. v. ITO). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a question as to whether this amount is available for distribution under the scheme of the Companies Act, 1956. If the matter is one of priority, of course the non-obstante clause in s. 178(6) of the Act will be attracted. But, we prefer to rest the decision on the ground that the amount set aside under s. 178 of the Act will not be available for distribution in accordance with the provisions of the Companies Act, 1956." We wish to emphasise the meaning of the expression "set aside" which has been noticed in the Andhra decision in ITO v. Official Liquidator [1975] 101 ITR 470. According to the Corpus Juris Secundum, Vol. 80, p. 1, "to set aside" or "to set apart" means no more than "to designate" and means "to separate to a particular use". In common terminology "set aside" or "set apart" has been held to be synonymous with "appropriate". According to Corpus Juris Secundum, Vol. 6, p. 121, "set aside" means "to set apart or apply to a particular purpose". The shades of meaning thus attached to the expression "set aside" convey the idea of an appropriation or an allocation of the income-tax dues ; with the result, that it stands outside the winding up by the company court, an id ..... X X X X Extracts X X X X X X X X Extracts X X X X
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