TMI Blog1986 (1) TMI 97X X X X Extracts X X X X X X X X Extracts X X X X ..... ter, the Income-tax Officer filed Applications Nos. 3 of 1964 and 248 of 1968 for varying the list of creditors and that was allowed. The Department by letter dated January 29, 1971, required the liquidator to pay up the arrears of tax together with interest levied under section 220(2) of the Income-tax Act. The Department sought to prove the debt before the liquidator by way of an affidavit filed in August, 1969. The liquidator by order dated July 27, 1973, recognised the tax arrears as debt but declined to recognise the interest claimed under section 220(2) as debt. Thereupon, the Department filed Application No. 315 of 1973 before the company court contending that interest also should have been recognised. This was dismissed on the ground that priority claimed under section 530 of the Companies Act, 1956, could not be recognised. The Department filed A.S. No. 563 of 1974 challenging this order. The appeal was allowed permitting the Department to prove the claim for interest before the liquidator as an unsecured creditor and the liquidator was directed to adjudicate upon the claim in accordance with law, particularly the provisions of the Companies Act and the Rules framed ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... succeeding sections relate to recovery. Recovery could be made by attachment and sale of the assessee's movable property or his immovable property, by arrest of the assessee and his detention in prison or by appointing a receiver for the management of his properties. Other modes of recovery are prescribed in section 226 of that Act. Section 229 states that any sum imposed by way of interest, fine, penalty or any other sum payable under the provisions of that Act shall be recoverable in the manner provided in the Chapter for recovery of arrears of income-tax. Admittedly, the liquidator did not and could not comply with the demands made in the demand notices issued under section 156 of the Income-tax Act. Payment was not made within 35 days or even thereafter. According to the Department, in these circumstances, sub-section (2) of section 220 came into operation and the assessee is liable to pay interest. The Department levied interest and moved the liquidator for recognising the claim. The liquidator held that the claim cannot be recognised for want of sanction under section 446 of the Companies Act, and this view has been upheld by the learned single judge. This view is eviden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5, the official liquidator has to make a preliminary report to the court indicating, inter alia, the estimated amount of assets and liabilities. Custody of the company's property is to be taken by the official liquidator and all the property shall be deemed to be in the custody of the court as indicated in section 456. Section 457 deals with powers of the liquidator. He has to realise the assets of the company and distribute the same. Section 467 states that the court shall settle a list of contributories and cause assets of the company to be collected and applied in discharge of its liabilities. Under section 474, the court may fix a time within which the creditors are to prove their debts or claims, or to be excluded from the benefit of any distribution before those debts or claims are proved. Section 528 states that in every winding up (subject in the case of insolvent companies to the application in accordance with the provisions of this Act or the law of insolvency), all debts payable on a contingency, and all claims against the company shall be admissible to proof against the company, a just estimate being made, so far as possible, of the value of such debts or claims. Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re considering, is only in the position of an unsecured creditor. An unsecured creditor cannot seek to recover the debt due to him outside the framework of the liquidation proceedings. He has to look to the liquidator and the company court for payment. He can expect to receive the payment only pari passu along with other unsecured creditors out of the funds available for such discharge from what is realised by the liquidator. The Department has no priority even in regard to the claim involved in this case. Its position is the same as that of any other unsecured creditor. The company in liquidation is not a free agent; nor is the liquidator a free agent who could pay the arrears of tax from the funds available with him, of his own volition. He can only make a pro rata payment out of the assets realised and after settling the list of creditors and determining the debts due to various creditors. Therefore, when the liquidator fails to make payment within 35 days of the service of demand notice on him, it cannot be said that he is a defaulter who is to be visited with the liability to pay interest under section 220 or even the penalty under section 221. Provisions of the Companies Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertainly, under the provisions of the Income-tax Act, the Department was entitled to set off the amount otherwise refundable. That would have meant that the Department could collect the debt due to it not pro rata as other unsecured creditors but could collect something more. That would be against the scheme of the provisions of the Companies Act regarding a company in liquidation, though the provision of the Income-tax Act is not subject to any other provision of law on the basis of which the Supreme Court held that the provision would not be applicable to companies in liquidation but are governed by the provisions of the Companies Act. The court observed (at pp. 334 and 335 of 57 ITR and pp. 672 and 673 of 35 Comp Cas): " The effect of these statutory provisions is, inter alia, that an unsecured creditor must prove his debts and all unsecured debts are to be paid pari passu. Therefore, once the claim of the Department has to be proved and is proved in the liquidation proceedings, the Department cannot by exercising the right under section 49E of the Income-tax Act get priority over the other unsecured creditors. If we were to read section 49E in the way suggested by the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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