TMI Blog2014 (12) TMI 266X X X X Extracts X X X X X X X X Extracts X X X X ..... preferential ranking or higher priority in favour of Government or the Department or tax dues, and it does not place tax dues or the dues of State / Department in a position higher or better than what is conferred by and what is available under Companies Act. There is an additional feature viz. the Department has not even passed any order u/s 178(2) - The Department's affidavit does not claim that the competent assessing officer has passed order under section 178(2) of the Income Tax Act. That is not the case or claim even of the Department - the obligation cast on the liquidator u/s 178(3) will arise after he is notified by the authorised assessing officer under sub-section (2) of section 178 - section 529A is a non obstante clause and the section 529A is introduced and brought in force subsequently (i.e. From 24.5.1985) it will have overriding effect, and it shall prevail, over other provisions. The costs, charges and expenses properly incurred in winding up may stand ahead in the order of priority prescribed u/s 530 of the Companies Act but the dues covered within purview of section 529A of the Companies Act will have priority and overriding effect - The priority and pref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TION NO. 245 of 2012, 525 of 2008, 208 of 2013, 286 of 2011, 209 of 2013, 399 of 2010, 210 of 2013, 295 of 2011. COMPANY PETITION NO. 253 of 2008, 253 of 2000. OFFICIAL LIQUDATOR REPORT NO. 35 of 2012 - - - Dated:- 30-6-2014 - MR.JUSTICE K.M.THAKER, JJ. For The Appellant : MR M.R. BHATT, SENIOR COUSNEL WITH MRS MAUNA M BHATT, For The Respondent : MR SHALIN MEHTA, SENIOR COUNSEL, MR HEMANG M SHAH, MR J.S. YADAV, ADVOCATE AND MR D.S. VASAVADA, ADVOCATE JUDGMENT 1. Heard Mr.Yadav, learned advocate appeared for the Official Liquidator, Mr.M.R. Bhatt, learned senior counsel for the applicant Income Tax Department (hereinafter referred to as 'the Department' for sake of convenience) and Mr.Vasavada, learned advocate has made submissions on behalf of the Textile Labour Association. 2. In Company Petition No.253/2000, the Official Liquidator of M/s. Gujarat Telephone Cables Ltd. has taken out the captioned report being OLR No.35/2012. 2.1 In the said Company Petition No.253 of 2000, the learned Company Court passed winding up order on 12.3.2008. 2.2 From the details mentioned by the Official Liquidator in the captioned OLR No.35/2012, it has emerged th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... property of the company as Capital Gain Tax, the same shall be paid by the Respondent No.1 i.e. ARCIL on intimation by the Official Liquidator. 3. On the other hand, the Department has taken out Judge's Summons which is registered as Company Application No.245/2012. In the said summons dated 2.7.2012, the Department has prayed, inter alia, that: (A) That this Hon'ble Court may be pleased to direct the Official Liquidator to file return of income tax under Section 139 of the Income Tax Act, 1961 and as a necessary corollary, to comply with the provisions of Section 140A and other provisions with regard to payment of taxes, interest, penalty, etc.; (B) That pending hearing and final disposal and compliance by the Official Liquidator with the above referred direction, this Hon'ble Court may be pleased to direct the Official Liquidator not to disburse any amount out of the sale proceeds either to the secured creditors and/or workers; 4. The learned senior counsel for the Department submitted that in backdrop of similar facts and for almost similar relief, the Department has taken out identical applications which also may be heard and decided together. Therefo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent and profit/gain, as the case may be, arising on such sale would be required to be disclosed in the income tax return. 5.1 The Department filed another affidavit dated 2.7.2012 and claimed that: 4. I humbly submit that on realization of the sale proceeds from the sale of the company's assets, capital gains under Chapter-IV-E are to be computed and taxed accordingly. I humbly submit that upon the sale realization being deposited by the Liquidator in any Fixed Deposit and interest being accrued or received thereon, tax is required to be computed as per provisions of Chapter-IV-F. I therefore humbly submit that in the first instance, the Official Liquidator may be directed to file a return of income tax and as a necessary corollary to comply other provisions of the Act, including payment of selfassessment taxes, etc. I humbly submit that until this exercise is completed, the Income Tax Department objects to any appropriation or disbursement of the amounts to the secured creditors and/or the workers. I humbly submit that taxes as aforesaid would be the costs in the winding up and are required to be paid prior to disbursement to secured creditors/workers. 5.2 The cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Act. 7. Another relevant aspect which also has emerged from the said affidavits, summons and submissions by the learned senior counsel is that the Department has raised the claim in respect of income received after the 'relevant date'. 8. During the hearing of the captioned applications, learned senior counsel for the Department submitted, inter alia, that the claim of the Department for tax dues is preferential claim and it ranks higher than any other claim and in view of section 178 of the Income Tax Act, 1961 the Official Liquidator should, before disposing the properties and assets of the company in liquidation and/or before disbursing the sale proceeds amongst the creditors including the workmen of the company in liquidation, set aside the dues of the Department and that the claim of the Department should be paid first before making payment to the creditors including the workmen of the company in liquidation. Learned senior counsel for the Department relied on the decision by Hon'ble Apex Court in the case of Imperial Chit Funds (P) Ltd. [(1996) 86 Company Cases 555]. He also submitted that since the official liquidator / the company has not filed returns ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Department which is put forward by way of affidavit in OLR No.35 of 2012 and also by filing separate applications, is not justified and does not deserve to be granted. The learned counsel for the workmen claimed that any claim in preference over the claim of workmen should not be entertained. 10. In light of the rival claims and submissions, the issue which arises for consideration is: whether the Department has a preferential right in matter of payment of dues over the right of the secured creditors (including the workmen) from the proceeds received upon sale of assets. 11. At the outset, it is relevant and necessary to note that the Department has taken out the summons to counter the liquidator's request for permission to disburse the sale proceeds amongst the creditors covered under section 529A of the Companies Act. Under the report, the liquidator has proposed to disburse the proceeds received from sale of assets which were loaded with charge created by the company in favour of the Banks / Financial Institutions. So as to support its claim the Department has invoked provision under section 178 of Income Tax Act and claimed that its dues should be paid in priority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome Tax Officer who is entitled and authorized to assess the income of the company (hereinafter referred to as 'the authorized assessing officer') under the Income Tax Act, that he (i.e. the liquidator) has been appointed as such. In turn, the concerned officer the Department shall, as contemplated under sub-section (2) of section 178, after calling for necessary information and necessary inquiries, notify to the liquidator, within 3 months, the amount which, in his opinion, would be sufficient to provide for tax which is payable then or likely to become payable thereafter. Sub-section (3) by its Clause (a) provides that without leave of the Chief Commissioner or Commissioner the liquidator shall not part with any assets of the company or the properties in his hands until he has been notified by the Assessing Officer under Sub-section (2) and clause (b) thereof provides that on being so notified the liquidator shall set aside an amount equal to the amount notified and until he so sets aside such amount, he shall not part with any of the assets of the company or the properties in his hands. Differently put, until the liquidator makes provision for tax liability as assessed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax on the strength of section 178 of the Income Tax Act, however, there is a fundamental flow in the Department's perception about the said section since the Department perceives the said provision as if it has a deeper as well as wider ambit, which, actually it does not have and it does not embrace or affect, muchless takes away or even dilutes the right and claims by unsecured creditors. 15.1 Besides this aspect related to the said section 178 of Income Tax Act, there is another feature as well. It is pertinent that the proviso of sub-section (3) also clarifies that the obligation and restriction imposed on the liquidator is in respect of those dues of Government which are due to the Government on the date of liquidation and not qua the dues which would be due from and after relevant date. 15.2 There is yet another aspect of section 178 of Income Tax Act. 15.3 The claim of the Department and submissions by the learned senior counsel overlook the object, scope and effect of said section 178. The said section aims at reserving sufficient assets for recovering tax dues and it is enacted for the purpose of ensuring that the Government's existing rights and the ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 529A of the Act (viz. the secured creditors and the workmen). That is so also for the reason that the operation and effect of said section 530 itself is subject to the superiority of section 529A of the Companies Act. 17. Moreover, in facts of present case there is an additional feature viz. In the cases on hand the Department has not even passed any order under section 178(2). The Department's affidavit does not claim that the competent assessing officer has passed order under section 178(2) of the Income Tax Act. That is not the case or claim even of the Department. 17.1 According to the said provision, the obligation cast on the liquidator under section 178(3) will arise after he is notified by the authorised assessing officer under sub-section (2) of section 178. 17.2 The right to claim payment under the said provision will spring from assessing officer's order under sub-section (2) of section 178 of the Income Tax Act. 17.3 Thus, unless and until the liquidator is notified by order under section 178(2) any occasion to claim and enforce payment/recovery does not arise. 17.4 Hence, at this stage, the claim and demand by the Department is, even otherw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether order passed under section 178 of the Income Tax Act would have preference over rights of unsecured creditors. The Apex Court held that Income Tax Department is to be treated as secured creditor and would get priority in the matter of payment. Imperial Chit Funds (P) Ltd.'s case (supra), is an authority for the proposition that between unsecured creditors the claim of tax due under section 178 of the Income Tax Act would have preference over all other claims of unsecured creditors. We are of the view, Apex Court in Imperial Chit Funds (P) Ltd.'s case (supra) as well as the decision of the Division Bench is Swaraj Motors (P) Ltd.'s case (supra) had no occasion to deal with the scope of section 529A of the Companies Act, as amended. 18.1 In the facts of the present case, the said decision in case of Imperial Chit Funds (supra) would otherwise also not be applicable and will not help the case of the Department inasmuch as the assessing officer, in present case, has not passed any order under section 178(2). 19. Now I may turn to the other contention of the Department, which is raised on the strength of section 520 and section 476 of the Companies Act. 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sections 528 to 560 which are applicable to every mode of winding-up . 19.7 Thus, said section 529A has universal application in cases of winding up and it is relevant and applicable in all types and modes of winding-up. 19.8 This aspect, in addition to the fact that it is a nonobstante provision and is introduced subsequently (i.e. w.e.f. 24.5.1985) establishes its superiority over other provisions. 19.9 The said section 476 is an enabling provision which enables the Court, or rather lifts all barriers in the way and in the matter of payments to pay the cost and expenses which the liquidator has to incur to take the winding up process to its conclusion and final destination in accordance with the procedure prescribed under the Act. Like section 520 this section 476 does not contain the expression in priority to all other claims . 19.10 So far as section 520 is concerned, as mentioned earlier, it provides for payment of cost and expenses in the process of winding up and before payment of other dues, but subject to rights of secured creditors. 19.11 The rights of secured creditors referred to in section 520 of Companies Act (and also in section 178 of Income Tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebentures under any floating charge created by the company, and be paid accordingly out of any property comprised in or subject to that charge. (6) (9) 20.1 On conjoint reading of sections 476, 520, 529, 529A and 530 of the Companies Act, it emerges that (a) it is section 530 whereby order of priority in the matter of payment is created which are in substitution of the creditors' remedy under ordinary law against an insolvent; (b) the priority under the said sections 520 and 476 of the Companies Act are subject to section 529A of the Companies Act; (c) by virtue of the very same provision and also by virtue of the provision under section 529A of the Companies Act, the said latter provision has overriding effect; (d) consequently the special right, priority and preference created by section 529A has overriding effect against all other claims and dues; (e) the order of priority prescribed under section 530 is itself subject to the preference and priority conferred by section 529A in favour of the dues specified under the said section i.e. section 529A of the Companies Act. 20.2 Therefore, any claim on the strength of section 476 and/or section 520 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iously, not include any property or asset of the banks / financial institutions (i.e. of the secured creditors). 21.5 Meaning thereby, it will not include the mortgage rights of the mortgagee bank / financial institutions inasmuch as 'mortgage right' is property and asset of secured creditors and not of the company in liquidation. 21.6 The assets and properties which were put up for auction sale were the assets which were put under 'charge' of the mortgagee banks / financial institutions who held first charge over the said assets and that, therefore, when the liquidator offered for sale such property/assets, the said properties were not only loaded with the charge created in favour of banks but they also carried with them the asset of the banks / financial institutions viz. the mortgage rights of said banks / financial institutions. 21.7 Since the banks / financial institutions held charge over the said properties and assets and they also hold charge over various properties, they are secured creditors contemplated under sections 520, 529A and 530 of Companies Act as well as under the proviso of sub-section (3) of section 178 of the Income Tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reditors are fully paid and the said claim by the Department cannot be allowed to steal march over the preferential right of secured creditors. 23. From the claim raised by the Department, it appears that the Department conveniently overlooks that against the mortgaged assets and against the mortgage right, no one except the secured creditor / mortgagee, i.e. neither the company, nor its shareholders nor the liquidator nor the State can claim priority or preference over the 'mortgage right' of the secured creditors until the dues of the mortgagee / secured creditors are paid. Moreover, the secured creditors, who are covered under section 529A of the Act are, even otherwise, statutorily, entitled for priority and preference in matter of payment of dues. Therefore, the Department's claim for priority in payment from out of the assets loaded with the charge created by the company in favour of the secured creditors cannot be entertained until the dues of secured creditors are fully paid and the said claim by the Department cannot be allowed to steal march over the preferential right of secured creditors. Furthermore, the dues of workmen, which rank pari passu with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creditors as contemplated under sections 124, 126 and 127 of the Companies Act, cannot be categorized as secured debt / dues. Consequently by virtue of very same provision and so also by virtue of provision under section 529A of the Companies Act, the Department s claim would be subject to section 529A of the Act. Therefore, the costs, charges and expenses properly incurred in winding up may stand ahead in the order of priority prescribed under section 530 of the Companies Act but the dues covered within purview of section 529A of the Companies Act will have priority and overriding effect. The priority and preference conferred in favour of secured creditors (and the workmen whose dues rank pari passsu with that of secured creditors) under section 529A of the Companies Act is a superior right and ranks higher compared to all other priorities and they cannot be made subject to the payment of 'costs and charges' covered within purview of section 520 of the Companies Act. 23.3 From conjoint reading of section 520, section 476, section 529A and section 530 of the Companies Act, it also becomes clear that the priority of the State is qua the creditors within the purview of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 530(1)(a) of Companies Act. 25. It is trite that if there is no provision which would expressly create and confer priority in matter of payment or if there is no provision in the Act wherefrom such priority can be inferred, then neither any priority or preference can be claimed nor it can be granted and the principles which are ordinarily applicable in matter of insolvency would apply. 25.1 In this context, it is pertinent that so far as the Companies Act is concerned, section 529 provides that in the event of winding up of insolvent company rules of insolvency will apply. The said section 529 reads thus: 529. Application of insolvency rules in winding up of insolvent companies. (1) In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to- (a) debts provable; (b) the valuation of annuities and future and contingent liabilities; and (c) the respective rights of secured and unsecured creditors; as are in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent: 1 Provided that the security of every secured creditor shall be deemed to be subject to a pari passu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ention that similar contentions and claim came up for consideration before Kerala High Court in the case of Re KTC Tyres (India) Ltd. The view in present case is fortified by the decision in case between Re Ktc Tyres (India) Ltd. vs. Unknown [(2002) 125 Taxman 899], wherein the High Court observed and held, as regards the issue under consideration: The question posed before the Division Bench in Swaraj Motor (P) Ltd.'s case (supra) is whether Income Tax Department has got any preference or they could be treated just like any other creditor. Liquidator took up the stand that Income Tax Department must prove the claim and get dividend pari passu just like any other simple creditor of the company. Division Bench took the view that before assets are distributed among the creditors amount due to Income Tax Department is payable as provided in sections 520 and 476 of the Companies Act. The court held that the liquidator would pay tax demanded for distributing the dividend. We may now examine whether the point raised by the Official Liquidator, is covered by the decision of the Apex Court in Imperial Chit Funds (P) Ltd.'s case (supra). What was raised before the Apex Court was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uments upto the date of closure of the company will rank in priority over the secured creditors. Having regard to the submissions by the Department in light of provisions under Section 520 of Companies Act, the Court, after taking into account the provision under Section 520 of the Act, observed, inter alia, that: Claim of secured creditors has not been overridden by section 520 which is subject to rights of secured creditors. The right of secured creditors are safeguarded by section 529A by employing a non obstante clause. Therefore, the argument advanced by the standing counsel on behalf of the Income Tax Department on the basis of sections 520 and 476 cannot be sustained. The above view is fortified by the decision of the Bombay High Court in Polyolefins Industries Lid. v. Kosmek Plastics Mfg. Co. Ltd. (1999) 98 Comp Cas 481 (Bom) as well as Syndicate Bank's case (supra) with which we concur. Finally, counsel for the Income Tax Department contended that the amount due to the department by way of capital gain tax is not a debt within the expression debt used in section 529A. Section 529A has used the expression workmen's dues . Further, the expression debt is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t about liquidator's appointment in each case, cannot be sustained and the claim and submissions of the Department deserve to be rejected and are, accordingly, rejected. 30. Now, so far as the Department's request that the liquidator be directed to inform the Department about the order appointing liquidator in each case and to file returns are concerned, it is relevant to mention that the liquidator, in his report being OLR No.35/2012, has averred in paragraph No.13 that before passing any orders of disbursement, this Hon'ble Court may be pleased to hear the respondent No.2 i.e. Commissioner of Income Tax, Range 4, Ahmedabad in this matter . The request made by the Department and the submission made by the Official Liquidator are in consonance with the obligation imposed by virtue of section 178 of Income Tax Act and that, therefore, appropriate intimation to the Department in each case when order appointing liquidator is passed and when the process for disposal of assets and/or disbursement of sale consideration received by liquidator begins, ought to be given to the concerned authority / officer of the Department. 31. On this count it is relevant to mention tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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