1944 (11) TMI 16 - HC - Income Tax

Summary

Issues Involved:
1. Jurisdiction of the High Court under Section 226(1) of the Government of India Act, 1935.
2. Applicability of Section 171 of the Companies Act, 1913 to the Income Tax Department's recovery proceedings.
3. Interpretation of "suit or other legal proceeding" under Section 171 of the Companies Act, 1913.
4. The Crown's prerogative rights in the context of the Companies Act, 1913.
5. Whether proceedings under Section 46 of the Income Tax Act, 1922, constitute "legal proceedings."

Issue-wise Detailed Analysis:

1. Jurisdiction of the High Court under Section 226(1) of the Government of India Act, 1935:
The court addressed the argument that it had no jurisdiction to entertain the application due to Section 226(1) of the Government of India Act, 1935, which states that no High Court shall have any original jurisdiction in any matter concerning the revenue or any act done in the collection thereof. The court distinguished between "matters concerning the revenue" and "acts done in the collection thereof." It held that the section does not preclude the High Court from determining whether the act in question was done according to "the law for the time being in force." The court concluded that it retained jurisdiction to decide whether the Income Tax Department's actions were in accordance with the law.

2. Applicability of Section 171 of the Companies Act, 1913 to the Income Tax Department's recovery proceedings:
The court examined whether the proceedings initiated by the Income Tax Department under Section 46 of the Income Tax Act, 1922, required leave from the winding-up court under Section 171 of the Companies Act, 1913. Section 171 provides that no suit or other legal proceeding shall be commenced or proceeded with against the company without the leave of the court. The court held that the Crown's prerogative rights were not exempt from the statutory scheme of the Companies Act, which aims for a pari passu distribution of assets among creditors. It concluded that the Income Tax Department must seek leave from the winding-up court to proceed with its recovery actions.

3. Interpretation of "suit or other legal proceeding" under Section 171 of the Companies Act, 1913:
The court analyzed whether the steps taken by the Income Tax Officer under Section 46 of the Income Tax Act constituted "suit or other legal proceeding" within the meaning of Section 171. The court rejected the narrow interpretation that "legal proceeding" should be limited to original proceedings in a court of first instance. It held that "legal proceeding" includes any proceeding of a legal character, not necessarily analogous to a suit. The court concluded that the proceedings under Section 46, Income Tax Act, were indeed "legal proceedings" requiring leave under Section 171.

4. The Crown's prerogative rights in the context of the Companies Act, 1913:
The court discussed the Crown's prerogative to prefer its own debts over those of the subjects. It referred to the House of Lords' decision in Food Controller v. Cork, which clarified that the prerogative of the Crown to priority no longer exists in the statutory scheme of asset distribution under the Companies Act. The court held that the Crown's rights were subject to the statutory scheme of the Companies Act, which mandates pari passu distribution of assets.

5. Whether proceedings under Section 46 of the Income Tax Act, 1922, constitute "legal proceedings":
The court examined the nature of proceedings under Section 46(2) of the Income Tax Act, which allows the Income Tax Officer to forward a certificate to the Collector for recovery of arrears as if they were arrears of land revenue. The court concluded that these proceedings were "legal proceedings" as they involved formal legal steps prescribed by statute, including notice to the debtor, attachment, and sale of property, and were conducted with the powers of a civil court. Therefore, they required leave under Section 171 of the Companies Act.

Conclusion:
The court allowed the petition, restraining the Income Tax Department from proceeding with the recovery of the assessed amount without leave of the winding-up court. It emphasized that the statutory scheme of the Companies Act, 1913, which aims for a pari passu distribution of assets, applies to the Crown's prerogative rights and that proceedings under Section 46 of the Income Tax Act are "legal proceedings" requiring leave under Section 171. The respondents were ordered to pay the costs of the petitioners, and leave to appeal to the Federal Court was granted.