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Polyolefins Industries Ltd. Versus Kosmek Plastics Mfg. Co. Ltd.

1997 (12) TMI 518 - HIGH COURT OF BOMBAY

Winding up - Overriding preferential payments, Costs of voluntary winding up - COMPANY PETITION NO. 44 OF 1986 - Dated:- 19-12-1997 - A.P. SHAH, J. K.B. Bhujle and Y.P. Trivedi for the Official Liquidator. P.S. Gajwani and B.B. Parekh for the Workers. T.U. Khatri for the Income-tax Department. JUDGMENT 1. The short question which falls for consideration is whether the capital gains tax arising out of the sale of the assets of the company in liquidation by the official liquidator can be satisfied .....

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on the assets of the company were sold by the liquidator and the liquidator is having a sum of Rs. 58,47,642 to its credit. The liquidator has received in all 233 claims from the workers amounting to Rs. 1,02,20,324 and unsecured claims to the extent of Rs. 76,449. The sale of the company s assets has resulted in capital gain within the meaning of that expression in the Income-tax Act. The liquidator has made a report dated 28-2-1996 submitting that in view of section 529, read with section 529A .....

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ction 476, read with section 520, of the Companies Act. 3. By Amending Act No. 35 of 1985, the Parliament had brought about important and significant changes in the provisions of the Companies Act. By virtue of sections 529,529A and 530 of the Companies Act, substantial rights and benefits are conferred on the workmen of the closed undertak-ing, the workmen getting rights pari passu with those of the secured creditors over the assets of the company in liquidation. A perusal of section 530 makes .....

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in any other provision of the Companies Act or any other law for the time being in force. The object of section 529A is to ensure that the workmen are not deprived of their legitimate claims in the event of the liquidation of a company. By this provision, the workmen s dues and the secured creditors dues which rank pari passu should be paid in priority to all other debts. The workmen are statutorily allowed to recover their dues from the securities. If the securities are insufficient, the claims .....

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im is more than a crore of rupees whereas the amount realised by auction of the assets of the company is around Rs. 53,00,000. Thus, the company is apparently insolvent. Now the question to be decided is whether the Income-tax Department will have precedence over the workers claim in respect of the capital gain tax arising upon the sale of the assets of the company in the liquidation proceedings. The preferential claim made by the Income-tax Department will not come under either section 178 of t .....

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hich he receives the notice of the appointment of the liquidator, the amount which, in the opinion of the ITO, would be sufficient to provide for any tax which is then or likely thereafter to become payable by the company. On being so notified the liquidator shall set apart an amount equal to the amount notified. The failure to give notice in accordance with the provisions of the section of the failure to set apart the amount as required by the ITO or parting with the assets of the company other .....

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ntioned in sub-section (2) of section 178 to set apart any amount for tax payment. Further, the tax payment referred to in that section is in respect of the income of a company accrued before its winding up. It has no application to the income accruing to the company after the order for its winding up. In view of this clear legal position, Mr. Khatri, the learned counsel appearing for the department has not pressed the claim under section 178(1) of the Income-tax Act. Equally, this claim will no .....

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reditors. Mr. Khatri urged that capital gain tax is an item of expenditure incurred for realising the assets of the company and, therefore, payable before other debts. According to Mr. Khatri, the expression costs, charges and expenses referred to in sections 520 and 476 of the Companies Act are extremely wide. In this will come the cost of repairs, payment of rent and tax, cost of preservation of any property, cost of realisation, etc. Mr. Khatri submitted that the income-tax which became payab .....

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any at a profit, the consequence being the assessment of the company to income-tax, can avoid the conclusion that this is one of the expenses in the winding up. It is curious that in the authorities to which I have referred the phrase does not seem to have been used by the Court. In my opinion, rates and taxes and for the purpose I can group them together, although there is for some purposes a distinction between them falling due subsequently to the winding up, are part of the expenses of the wi .....

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ich can be properly treated as expenses in the liquidation (p. 315) 6. Placing a strong reliance on the above observations, Mr. Khatri submit-ted that the capital gain tax falling due subsequently to the winding up is part of the expense of the winding up. Mr. Khatri also brought to my notice a decision of the Kerala High Court in ITO v. Official Liquidator, Swaraj Motors (P.) Ltd [1978] 111 ITR 77. In that case, the Division Bench of the Kerala High Court following the decision in Beni Felkai M .....

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the balance of income-tax demand to the ITO. 7. I am unable to accept the submission of Mr. Khatri based on sections 520 and 476 of the Companies Act. Mr. Bhujle, the learned counsel appearing for the official liquidator pointed out that from the facts of the case relied upon by Mr. Khatri, it is evident that the Court was not considering the claim for payment of income-tax in priority to the claim of any secured creditor. Mr. Bhujle rightly pointed out that by virtue of section 529A read with .....

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ecured creditor vis-a-vis expenses in liquidation. The Court also examined the difference between expenses incurred in the winding up and expenses incurred for realisation . Kemp, J., after observing that assets rally are whatever remains over after the claims of the secured creditors under their securities have been satisfied , held as follows: If, however, the District Judge s order is to be taken as expressing what he undoubtedly meant, viz,, that the first charge for the proposed loan was to .....

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r only to the fund available as assets, ie., after the claims of secured creditors have been satisfied. If the liquidators themselves realise property subject to a specific charge, the proceeds are distributable in priority of the following order, viz., firstly, to the costs of realisation; secondly, in payment of the costs of preservation, strictly so described, so far as the other assets of the company are not sufficient, and thirdly, in payment of the principal, interest and mortgagees cost, .....

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