1999 (2) TMI 473 - HC - Companies Law

Summary

Issues Involved:
1. Preference of tax liabilities over the claims of secured creditors and workers.
2. Applicability of Section 178 of the Income-tax Act, 1961 versus Section 529A of the Companies Act, 1956.
3. Priority of workers' claims under Section 529A over tax dues.

Issue-wise Detailed Analysis:

1. Preference of tax liabilities over the claims of secured creditors and workers:
The core issue was whether tax liabilities like income-tax or sales-tax have preference over the rights of secured creditors and workers concerning the sale proceeds of the Bhandup property. The applicants contended that as secured creditors, their claims should take precedence over tax liabilities. The Official Liquidator argued that tax dues have a preferential right under Section 178 of the Income-tax Act.

The court referred to the Apex Court's judgment in the case of Collector of Aurangabad v. Central Bank of India, which established that the claims of the Crown (State) have priority over unsecured creditors but not over secured creditors. The court held that the Common Law doctrine recognized in India gives the State priority over unsecured creditors, not secured creditors. Therefore, the applicants' contention was accepted, and the claims of secured creditors were deemed to prevail over tax liabilities.

2. Applicability of Section 178 of the Income-tax Act, 1961 versus Section 529A of the Companies Act, 1956:
The court examined whether Section 178 of the Income-tax Act, which provides for the preferential right of income-tax dues, overrides Section 529A of the Companies Act, which gives priority to workers' dues and secured creditors. The court noted that the judgment in Imperial Chit Funds (P.) Ltd. v. ITO dealt with the priority of tax dues over unsecured creditors, not secured creditors.

Section 529A of the Companies Act was introduced to provide that workers' dues and secured creditors' debts rank pari passu and have priority over all other debts. The court concluded that Section 529A has an overriding effect and prevails over Section 178 of the Income-tax Act. Thus, the rights of secured creditors and workers under Section 529A override the claims of tax authorities.

3. Priority of workers' claims under Section 529A over tax dues:
Although not directly arising in the matter, the court addressed the priority of workers' claims under Section 529A over tax dues. The court reiterated that Section 529A gives workers' dues priority over all other debts, including tax dues. This interpretation was consistent with previous judgments, such as Polyolefins Industries Ltd. v. Kosmek Plastics Mfg. Co. Ltd., where workers' claims were given preference over tax authorities' claims.

Relief Granted:
The court noted that the claims by the applicants in Company Application No. 116 of 1998 and Company Application No. 117 of 1998 were beyond time, and no application for condonation of delay had been filed. Consequently, the court did not consider prayer (b) in Company Application No. 116 of 1998 and prayer (a) in Company Application No. 117 of 1998. However, the court granted liberty to the applicants to apply for condonation of delay and re-apply for the reliefs.

Regarding prayer (a) in Company Application No. 116 of 1998, the court found no objection as it pertained to expenses incurred for the sale of securities. The court ordered that the costs be proportionately apportioned based on the sale proceeds realized from the two properties. The court also allowed the applicants to propose a higher interest rate for the deposited money if they wished to make an application for part proceeds payment.

Final Order:
In Company Application No. 116 of 1998, the court made the rule absolute in terms of prayer clause (a) with interest at the rate of 11 percent per annum. All parties were directed to bear their own costs.