1986 (1) TMI 341 - HC - Companies Law

Summary

Issues Involved:
1. Recognition of tax arrears as debt.
2. Claim for interest under Section 220(2) of the Income-tax Act.
3. Applicability of Section 446(1) of the Companies Act.
4. Conflict between the Income-tax Act and the Companies Act regarding interest claims.
5. Priority of tax claims in liquidation proceedings.

Detailed Analysis:

1. Recognition of Tax Arrears as Debt:
The liquidator recognized the demand for arrears of tax for the assessment years 1955-56 to 1958-59, even though the assessments were completed after the winding-up order. Consequently, the Department was treated as an unsecured creditor and would be treated pari passu with other unsecured creditors.

2. Claim for Interest under Section 220(2) of the Income-tax Act:
The dispute in the appeal primarily related to the claim for interest under Section 220(2) of the Income-tax Act. Section 220(2) imposes a liability on the assessee to pay interest if the tax is not paid within the period specified in the notice of demand. The liquidator declined to recognize this interest claim, and this view was upheld by the learned single judge.

3. Applicability of Section 446(1) of the Companies Act:
The liquidator held that the claim for interest was not supported by sanction obtained from the company court under Section 446(1) of the Companies Act. This view was initially supported by previous decisions of the court but was overruled by a Full Bench decision, which aligned with the Supreme Court's decision in S.V. Kondaskar v. V.M. Deshpande.

4. Conflict Between the Income-tax Act and the Companies Act Regarding Interest Claims:
The learned single judge held that the claim for interest under Section 220(2) of the Income-tax Act could not be recognized because it conflicted with the provisions and the scheme of the Companies Act regarding companies in liquidation. The Companies Act requires all debts to be proved and paid pari passu, and the liquidator is not a free agent to make payments outside the framework of liquidation proceedings. Therefore, the statutory liability to pay interest under Section 220(2) does not apply to a company in liquidation.

5. Priority of Tax Claims in Liquidation Proceedings:
According to Section 530 of the Companies Act, the highest priority is given to taxes due within the 12 months preceding the relevant date (the date of the winding-up order). Since the arrears of tax and interest claimed became due long after the winding-up order, the Department could only be treated as an unsecured creditor. The Department's claim for interest was not recognized because it conflicted with the scheme of the Companies Act, which governs the liquidation process.

Conclusion:
The appeal was dismissed with costs, affirming that the provisions of Section 220 of the Income-tax Act do not apply to a company in liquidation governed by the Companies Act. The Department, as an unsecured creditor, must prove its debt in liquidation proceedings and cannot claim priority or interest outside the liquidation framework.