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1997 (12) TMI 518

ial 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 from out of the proceeds of the sale of the company s assets either as costs, charges and expenses incurred in the winding up under sections 476 and 520 of the Companies Act, 1956 ( the Act ) or as an amount set aside under section 178 of the Income-tax Act, 1961 in priority to the workmen s claim under sections 529 and 529A of the Companies Act. 2. The company, Kosmek Plastic Mfg. Co. Ltd. (in liquidation) was ordered to be wound up b .....

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the company in liquidation. A perusal of section 530 makes it clear that (i) this provision is subject to the provisions of section 529A and (ii) revenues, taxes, cess and rates must have become due and payable within the 12 months next before the relevant date which is the date of appointment of the provisional liquidator or the date of winding up, as the case may be, in order that they may be paid in priority to other debts. Section 529A is a subsequent provision which confers rights on secured creditors and workmen notwithstanding anything contained 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 .....

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the ITO who is entitled to assess the income of the company. The notice has to be served within 30 days of the appointment. On receipt of such a notice the ITO shall, after making such enquiries or calling for such information as he may deem fit, notify to the liquidator within three months from the date on which 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 require .....

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payable before the assets are distributed to the unsecured creditors. 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 payable at the winding up also is an expense in the winding up. Income-tax is a necessary consequence of the acts performed by the liquidator in the course of the liquidation for the purpose of r .....

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uently 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 Mining Cos case (supra) , held that rates and taxes falling due subsequently to the winding up are part of the expenses of the winding up and income-tax is a necessary consequence of the acts performed by the liquidator in the course of the liquidation for the purpose of realising the assets of the company. Under sections 520 and 476, the Court can direct the liquidator to pay the demand of the ITO before distributing the dividend. Accor .....

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nt, viz,, that the first charge for the proposed loan was to have priority over the mortgages of the plaintiff and second defendant, then, I am of the opinion that order was not only wrong but passed entirely without jurisdiction. The District Judge could not, by any order passed on that petition, take away the rights of secured creditors without their consent. The sections of the Indian Companies Act cited by Mr. Mulla regarding preferential payments and the priority of payments out of the assets of a company of the costs and expenses of winding up refer 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 proce .....

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