TMI Blog1975 (10) TMI 22X X X X Extracts X X X X X X X X Extracts X X X X ..... liquidation on behalf of the State Government and in the company application the main question is whether, and if so, to what extent, priority can be recognised for the liabilities for income-tax and sales tax dues. When the matter came up for hearing before B. K. Mehta J. his attention was drawn to the decision of D. A. Desai J. in Company Application No. 94 of 1973 in Company Petition No. 21 of 1966, being the matter of Sales Tax Officer, Petlad v. Rajratna Naranbhai Mills Co. Ltd. B. K. Mehta J. was unable to agree with the conclusions reached by D. A. Desai J. in Rajratna Naranbhai Mills Co.'s case and hence he referred the matter to a larger Bench so that the entire question may be decided. Before this Company Application No. 26 of 1973 could be taken up for final hearing, appeal filed by the Sales Tax Officer, Petlad, in Rajratna Naranbhai Mills Company's case, being O. J. Appeal No. 2 of 1975, became ripe for hearing and since the question in both the matters is the same, we have heard both these matters together and we are disposing of both these matters by this common judgment. Before we proceed with the specific facts of each case, it will be necessary to set out s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) must have become "due and payable" within the twelve months next before the relevant date. It also says that not only they must become due and payable within the twelve months immediately preceding the relevant date but they must be due from the company either to the Central Government or to the State Government or to a local authority at the relevant date. Thus, section 530(1)(a) lays down two conditions-firstly, that the taxes, cesses, etc., must be due from the company at the relevent date and, secondly, the taxes, cesses, etc., must have become due and payable within the twelve months immediately preceding the relevant date. The decision of D. A. Desai J. in Sales Tax Officer v. Rajratna Naranbhai Mills. Co. is now reported in [1974] 44 Comp Cas 65 and the view that he took was that the word "due" implies or conveys different meanings in juxtaposition in which it is used in the two parts of the same clause. The word "due" in the first part of the clause must mean "outstanding at the relevant date". When it occurs in the expression "having become due" in the later part of the clause, it means that the event which brought the debt into existence occurred and also it became ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome-tax due to it from assessees over the private debts due from them to their creditors, and this claim has been consistently upheld." At the same time it has been pointed out with reference to the decision of the Federal Court in Governor-General in Council v. Shiromani Sugar Mills Ltd.: "It would be noticed that this conclusion postulates the applicability of the doctrine of priority of the debts due to the Crown and holds that as a result of the specific provision contained in section 230(1)(a), the said doctrine must be worked in the manner prescribed by the said section and not outside it." Coming now to the meaning of the words "due" and "due and payable", we find that these words have been interpreted by the courts in India and abroad in the context, both of the Companies Act and similar provisions of the Insolvency Acts and Bankruptcy Acts. The provisions of the Companies Act, 1929, in England relating to priority of some debts in winding-up proceedings of a company were in identical terms with the provisions of section 530(1)(a) of the Companies Act, 1956. In In re Airedale Garage Company Ltd.: Anglo-South American Bank v. The Company, Lord Hanworth M. R. obser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o makes it clear that it is only when a sum of money is presently due and payable that it can be said to be a "debt due", otherwise it will not be described as a "debt due". Thus, according to this passage which was approved by the Supreme Court in Kesoram Industries case the word "due" in the context of a "debt" or financial liability is equal to "due and payable" which in its turn is equivalent to presently payable. That this is the ony way to interpret the words "due" and "due and payable" is borne out by the decision of the Supreme Court in Union of India v. Raman Iron Foundry. In that case Bhagwati J., delivering the judgment of the Supreme Court, observed in the context of the phrase "recovery of sum due" and said: " Now a sum would be due to the purchaser when there is an existing obligation to pay it in praesenti. It would be profitable in this connection to refer to the concept of a 'debt', for a sum due is the same thing as a debt due. The classical definition of 'debt' is to be found in Webb v. Stenton, where Lindley L. J. said: '...a debt is a sum of money which is now payable or will become payable in the future by reason of a present obligation.' There must be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come presently payable". In Doorga Prosad v. Secretary of State, Sir John Beaumont, delivering the opinion of the Privy Council, has observed at page 289 of the report: " In their Lordships' opinion, although income-tax may be popularly described as due for a certain year, it is not in law so due. It is calculated and assessed by reference to the income of the assessee for a given year, but it is due when demand is made under section 29 and section 45. It then becomes a debt due to the Crown, but not for any particular period." The scheme of the Income-tax Act, 1961, does not differ in this connection from the scheme of the Indian Income-tax Act, 1922, with reference to which the Privy Council made this observation and, hence, so far as income-tax is concerned, the tax for a particular assessment year becomes a debt due to the Crown only when the income-tax is calculated and assessed by reference to the income of the assessee for that particular year under consideration and thereafter the demand is made under the relevant provisions of the Income-tax Act. It is only then that it becomes a debt due to the Crown and a debt due means, as pointed out above, a debt which is pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of three learned judges, Chakravartti C.J., Lahiri J. and Sinha J. Chakravartti C.J. and Lahiri J. agreed and Sinha J. delivered a separate but concurring judgment. The interpretation which Mr. Shah wants us to put on the words "due and payable" occurring in section 530(1)(a) is to be found in the judgment of Sinha J. only. Chakravartti C.J. in his judgment has referred to the decision of the Privy Council in Doorga Prosad v. Secretary of State, and applied the principle of the decision to the Sales Tax Act. After referring to the decision in Doorga Prosad's case, Chakravartti C.J. proceeded to consider the question whether the principle enunciated as to income-tax could be applied to the Bengal Sales Tax Act and observed : " There seems to be no reason why the principle should not apply to sales tax due under an assessment, because the position as to assessed tax under the two Acts is precisely the same. Under both the Acts, the liability to pay the relevant tax accrues before an assessment is made-under the Bengal Act and in the case of a registered dealer, as soon as a taxable sale is made and under the Indian Act, as soon as a person's income reaches the taxable limit. Retur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r payment and thereby a default is committed...... Lastly, the principle that where a tax has to be assessed, it does not become either due or payable till at least an assessment is made, is one of general application... I am accordingly of opinion that there is nothing in the Bengal Finance (Sales Tax) Act to exclude the operation of the principle laid down by the Judicial Committee on tax assessed under it." Sinha J., on the other hand, held: "(1) Sales tax from a dealer chargeable under the Bengal Finance (Sales Tax) Act, 1941, is 'due' immediately upon his gross turnover exceeding the taxable quantum during the period prescribed by the Act. For determining the taxable turnover all due allowances must be made under sections 5 and 6 of the Act. But as soon as there is a taxable turnover the tax is due. (2) But the sales tax payable under the Act becomes 'payable' as follows: (a) where the dealer has filed his return under section 10(2) and as a condition precedent paid in the amount admitted in the return, when the return was filed, and to the extent admitted therein. This, however, will not apply to any excess paid because to that extent it is not a tax payable under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th any of the assets of the company or the properties in his hands. Sub-section (6) provides that the provisions of section 178 shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force. Mr. Kaji in this connection has drawn our attention to the commentaries at page 942 of the sixth edition of Kanga and Palkhivala on Income-tax, where the relevant passage reads: " The provisions of section 178 do not have any bearing on the question of priority for the company's tax dues. They do not confer on the Government any higher rights or wider priorities than those enjoyed by the Government under the company law. Section 178 is enacted for the very limited purpose of ensuring that the Government's existing rights and priorities under the law are not defeated by sale of the company's assets or distribution among the shareholders or creditors who under the Companies Act are not entitled to be paid before the Government. If the assets of the company in liquidation are insufficient to pay the unsecured creditors in full, the administration must be in accordance with the aforesaid provisions of section 530 of the Companies Act, 1956, und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xes payable in respect of all periods up to the date of the commencement of the liquidation or the date of the appointment of a receiver. In respect of the taxes due, if any, for years subsequent to the commencement of the liquidation, or subsequent to the appointment of a receiver, there is no provision made in this Act or in the Companies Act." With respect to the learned author of Iyengar on Income Tax, it must be said that his interpretation of the provisions of section 178(6) is not correct. There is nothing in section 178 about the priority of payments. Priority of payment is provided for in the Companies Act and not in the Income-tax Act. All that section 178 requires is that the liquidator should inform the Income-tax Officer concerned that he has been appointed as such from a particular date. The Income-tax Officer has to intimate under sub-section (2) within three months from the date on which he receives notice of the appointment of the liquidator the amount which, in the opinion of the Income-tax Officer, would be sufficient to provide for any tax which is then, or is likely, thereafter, to become payable by the company. The liquidator has not to part with any of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment proceedings for determining the amount of tax payable by company which is being wound up. The liquidation court would have full power to scrutinise the claim of the revenue after income-tax has been determined and its payment demanded from the liquidator. It would be open to the liquidation court then to decide how far under the law the amount of income-tax determined by the department should be accepted as a lawful liability on the funds of the company in liquidation. At that stage the winding-up court can fully safeguard the interests of the company and its creditors under the Act. Incidentally, it may be pointed out that at the Bar no English decision was brought to our notice under which the assessment proceedings were held to be controlled by the winding-up court. On the view that we have taken, the decisions in the case of Seth Spinning Mills Ltd (In liquidation) and the Mysore Spun Silk Mills Ltd. (In liquidation) do not seem to lay down the correct rule of law that the Income-tax Officers must obtain leave of the winding-up court for commencing or continuing assessment or reassessment proceedings." Thus, according to this decision in Kondaskar's case, it is obvious ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue" and "due and payable" occurring in section 530(1)(a) that we have to deal in this particular case. Mr. Shah has also relied upon the decision of the Mysore High Court in Income-tax Officer v. Official Liquidator, and he has relied upon the following passage of the decision of the single judge of the Mysore High Court at page 812 of the report : " Reliance was sought to be placed on a ruling of the Patna High Court in In the matter of Bihar Bolts and Rivets and Engineering Works (In liquidation). The tax dealt with there was sales tax and the question was whether the tax claimed was within the ambit of section 530(1)(a) of the Companies Act. It appears to have been argued that the tax had not become due within the twelve months next before the winding-up, though it might be said to have become payable within that period. The argument was rejected with the following observations : Mr. Shreenath Singh has contended that the amount of Rs. 7,934-1-0 due to the sales tax department is not entitled to priority, because it did not become due during the period of 12 months next before the relevant date. I am of opinion that this contention is without substance. Section 530(1)(a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment authority quantifies it. That amount becomes legally recoverable only when a notice is issued by the Commissioner as provided for in sub-section (4) of section 14." While dealing with the decision of the Calcutta High Court in Recols (India) Ltd.'s case we have already indicated that we prefer to accept the reasoning of Chakravartti C.J. in preference to the reasoning of Sinha J. for the reasons already stated, and, therefore, with great respect to the learned judges of the Patna and the Mysore High Courts, we are unable to follow their conclusions. In Sales Tax Officer v. Official Liquidator a single judge of the Allahabad High Court has held that under section 530(1)(a) the tax, etc., should have become due within the period of 12 months immediately preceding the date of the winding up, and that they should also have become payable within that period. Both these conditions must co-exist before the priority mentioned therein can be claimed. The section envisages revenue, sales tax, etc., currently due and payable at the time of the winding-up order and does not include within its ambit arrears of the same. The word "revenues" used in the provision means those which have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tax for each month for the first three months, after the last date by which the dealer should have paid that tax, and one and one-half per cent. of the amount of tax for each month thereafter. These amounts of penalty are sought to be imposed upon the company for the reason that after the order of winding up was passed and when sales tax dues were demanded from the liquidator as representing the company, he did not pay any amount. Mr. Shah, for the sales tax authorities, has clearly stated that these are the types of penalties which are sought to be levied from the company in this particular case. It is obvious that under the scheme of the Indian Companies Act, 1956, it is not open to the liquidator to pay any liabilities, whether it is a priority claim or otherwise, unless the claims are scrutinised and ascertained and the dues are paid on the orders of the liquidation court. Just because the liquidator does not pay promptly within the time mentioned in the notice of demand issued by the sales tax authorities, it cannot be said that he has not paid the tax without reasonable cause. The priority claims have to be ascertained, the assets have to be collected and it is only in the co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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