Prepared By:

Jeevesh Mehta |Partner| Maven Legal LLP-Advocates & Consultants

1. Whether tax assessment is a legal proceeding under section 446 of The

Companies Act 1956

2. Whether priority can be claimed beyond the time limit of section

530(1)(a) of the Act

3. Whether interest under section 220(2) of the Income Tax Act is a

preferential payment under section 530(1)(a) of The Companies Act

1956

4. Whether penalty is a preferential claim under section 530(1)(a) of The

Companies Act 1956

5. Whether rent for goods stored in the godown are costs and expenses of

winding up under Section 530 (6) of the Companies Act 1956

• Stay on suits after the order of winding up

• Suit or legal proceedings cannot be commenced or proceeded without leave

of the court

• Tribunal/Court has been given the jurisdiction to decide -

- suit/proceeding

- claim

- application under section 391

- question of priority

- question of law or fact

Tika Ram and Sons Private Limited

v.

Commissioner of Income Tax, U.P., and Another

1964(34)CC1151Allahbad High Court

• Assessment proceedings do not fall within the term „other legal

proceedings‟

• They do not automatically come to a stop when a company goes into

liquidation

• The proceedings have to be carried out according to the Income Tax Act

which is a complete code in itself.

Official Liquidator, High Court, Calcutta

v.

Commissioner of Income Tax

1971 (41) CC 477

Calcutta High Court

• A valid assessment is the only way of creating a debt in favor of the

department and does not affect the assets and liabilities of the company and

the scheme of winding up.

• Section 446 covers recovery proceedings but assessment proceedings are

beyond its scope

S. V. Kondaskar v. V. N Deshpande

1972 (83) ITR 685

Supreme Court Of India

• Assessment proceedings are not “other legal proceeding‟ that can be

started or continued with leave under S. 446

• Provision of appeal against tax assessment has been provided as a remedy

• Liquidation court is empowered to stop tax assessment of a company being

wound up

• After the assessment the liquidation court can determine the amount to be

accepted as the lawful liability on the funds of the company.

• Preferential Payments

• Priority subject to subject to provisions of 529A

• Revenues taxes cesses and rates

• Which have become due and payable

• Within 12 months next before the relevant date

Northern India Oil Industries Limited The Sales Tax Officer,

v.

Official Liquidator

1968 (38) CC 430

Allahbad High Court

• Taxes neither due nor payable within 12 months from the relevant date are

not entitled to priority

Official Liquidator, Palghat Metal industries Co. Ltd

v.

Assistant Commissioner of Sales Tax

1976 5 CTR Ker 225

Kerela High Court

• Preference to Central and State Government is subject to the time limit of

Section 530

• If not, the only remedy available to revenue department is to prove debt

and secure payment in the course of winding up as an unsecured creditor.

Income Tax Officer v. Official Liquidator

1986(158)ITR791

Kerela High Court

• Arrears of tax and interest claimed became due long after the relevant date

had passed and therefore were not given priority under section 530(1)(a)

• The Department is to be treated as an unsecured creditor whose debt will

be payable in liquidation proceedings only

• The department is subject to the jurisdiction of the liquidator and company

court

Rajratna Narainbhai Mills Company Limited

v.

Sales Tax Officer

1991 (71) CC 149

Supreme Court Of India

• Three conditions which should coexist for application of section 530(1)(a)

-

a) Debt of the kind mentioned in the clause must be outstanding on the

relevant date

b) The debt must have become due, in the sense that it must have been

incurred at any time within twelve months before the relevant date

c) The debt must have become payable at any time within twelve months

next before the relevant date

• The debt should be born within the time frame of the 12 months and due

and payable within those 12 months

• „due and payable within 12 months‟ limits the priority claimed to eliminate

the debts outstanding and payable at that time

• Liability of payment must be founded during the period of 12 months

S. V. Kondaskar v. V. N Deshpande

1972 (83) ITR 685

Supreme Court Of India

• Whether interest to be paid out of the funds of the company to be

scrutinized by the company court

• Income Tax Officer should obtain the sanction of the court to claim interest

under section 220(2)

• Demand for interest without fulfilling the requirements of section 446(2)

and (1) makes it unenforceable

Official Liquidator v. ITO

1978 (48) CC 59 (KER)

• Interest was demanded for tax assessed for periods subsequent to winding

up

• Interest is in nature of compensation for delayed payment of tax

• It pertains to realm of recovery and collection

• Such proceedings are not assessment or reassessment proceedings

Official Liquidator, High Court, Calcutta

v.

Income Tax Officer, ”K” Ward, Companies District –Iii, and others

1981(51)CC572

Calcutta High Court

• Claim of interest is disallowed if it amounts to hardship and injustice for

innocent creditors

• Court empowered to disallow such claims under section 446(2)(b) read

with r.9 of the Companies(Court)Rules,1959

Income Tax Officer, B–Ward, Companies Circle, Ernakulam v. Official Liquidator

1982 (52) CC 156\

Kerela High Court

• Liquidator does not have the freedom to deal with the funds like any other assessee

• Provisions of Companies Act and that of Income Tax Act should be reconciled.

• Section 220(2) does not apply when insolvency rules have to be applied under the

former.

• Company‟s funds in the hands of the liquidator are not available for meeting the

demands of Section 220(2)

Income Tax Officer v. Official Liquidator

1986(158) ITR 791

Kerela High Court

• Fundamental basis of section 220 of Income tax Act is in conflict with the

scheme and provision of Companies Act.

• Section 220 cannot apply to company in liquidation governed by the

Companies Act

• When the liquidator fails to make payment within 35 days of the service of

demand notice he cannot be held as the defaulter liable to pay interest

under section 220 or pay penalty under section 221.

Baroda Board and Paper Mills Ltd

v.

Income Tax Officer and ors

1976(102)ITR 0153(Guj)

Gujrat High Court

• There was a reasonable cause for liquidator to not pay taxes within the

prescribed time

• Therefore amount of penalty was not held to be an admissible claim

S.S. Chawla and Company

v.

Globe Motors Limited (In Liquidation) and Another

1987 (62) CC 815

Delhi High Court

• Godown was not retained by the official liquidator for the “convenience” or “purpose” of the winding up.

• Landlord not entitled to rent accruing due after the order of winding up as „cost and expenses of winding up‟

• Landlord will have to prove such debt in liquidation court and paid paripassu with other creditors

• That tax assessment is not a legal proceeding under section 446 and the remedy available to

the liquidator is to contest the same in appeal

• That the tax which is not founded within the the 12 months preceding the relevant date is not

a preferential payment. In such a case the department is deemed to be an unsecured creditor

who has to prove his debt in the liquidation court.

• That interest subsequent to winding up is not a preferential payment and the leave of the court

under section 446 is required for claiming interest

• That penalty cannot be an admissible claim if there existed a reasonable cause for the

liquidator to delay the payment of tax

• That after the order of winding up rent which accrues on a property leased by the company

will not be a prefrential payment if not used by the liquidator for the purpose of winding up

For clarifications anddoubts we may bereached atjeevesh@mavenlegal.netor at the belowmentioned address

E 149 FF Rishi Nagar,Delhi -110034