1. This is appeal of the assessee-company, viz., The United Provinces Electric Supply Co. Ltd. (in voluntary liquidation) against the order of the CIT (Appeals) arising out of the assessment order for the assessment year 1981-82.
2. The assessee-company was in voluntary liquidation and a liquidator was appointed for winding it up. A return of income was filed on 24-7-81 by the liquidator showing a business loss of Rs. 23,447. Income from interest and under other heads was shown at Rs. 2,16,265 and against that expenses were claimed at Rs. 2,39,712. However, it was claimed by the assessee that the said receipt of Rs. 2,16,265 was not its income and even otherwise net income of a company in liquidation could be taxed. In this connection the assessee took the following grounds of appeal : (1) For that the company being in liquidation has no income referred to in Section 5 of the Income-tax Act 1961.
(2) For that the Finance Act, 1981 has not fixed any rate of tax for a company in liquidation which is neither a company in which the public are substantially interested nor a company in which the public are not substantially interested.
(3) For that no valid assessment can be made on the basis of a return of income signed and verified by one of the liquidators which return is non est in law having regard to Section 140(c) of the Income-tax Act, 1961.
3. The contention of learned counsel for the assessee is that there is vast distinction between a company which is a going concern and a company in liquidation. He took us through several provisions of the Companies Act, 1956 and the Companies (Court) Rules, 1959 and enumerated several distinctive features between a company as a going concern and a company in liquidation. He pointed out that the method of accounting prescribed for these two types of companies is also different. It is contended by him that no profit & loss account is required to be prepared in the case of a company in liquidation and only an account of receipts and payments is required to be maintained and that too not yearwise. It is also pointed out by him that as provided in Section 491 of the Companies Act, an appointment of a liquidator, all the powers of the Board of Directors cease. Thus, according to him because of the several distinctive features between these two categories of the companies the company in liquidation cannot be treated as a company as a going concern. It is further contended by him that the function of a liquidator of a company in liquidation, broadly speaking, is to realise assets of the company and to distribute them amongst the creditors and the shareholders according to law and in accordance with the directions of the Court. Thus, the learned counsel for the assessee contended, the company in liquidation has no income, as such liable to be taxed.
4. He contended that full effect should be given to the provisions of the Companies Act and for that, in support, he placed reliance upon judgment of the Hon'ble Supreme Court in the case of CIT v.Bagyalakshmi and Co. [1965] 55 ITR 660. In support of his argument that no income arises to a company in liquidation he placed reliance upon CIT v. Madurai Mills Co. Ltd. [1973] 89 ITR 45 (SC). He also placed reliance upon judgment of House of Lords in the case of Ayerst (Inspector of Taxes) v. C.K. (Construction) Ltd. [1975] 3 W.L.R.16 (HL.).
5. He referred to the Finance Act of 1981 and Section 2(18) of the Income-tax Act and so also Sections 104 & 108 of the Income-tax Act and contended that these provisions do not envisage the company in liquidation. According to him, a company in liquidation is neither a public company nor a private company.
6. He further referred to Section 140(c) of the Income-tax Act as was amended by the Taxation Laws (Amendment) Act, 1975 with effect from 1-4-76. Prior to this amendment Clause (c) of Section 140 was as under :- In the case of a company or local authority, by the Principal Officer thereof.
Thus, prior to the amendment the return of income of a company was required to be signed by its Principal Officer as defined in Section 2(35) of the Act. The amended provision required the return to be signed by the Managing Directors. The line of reasoning of the learned counsel is that prior to the amendment even the return filed under the signature of a liquidator could be taken as valid, taking the liquidator as the Principal Officer of the company; but after the amendment there is no provision left for signing the return by the liquidator and this is indicative of the intention of the Legislation that a company in liquidation is not required to file any return of income. It is also contended by him that the return of income signed and verified by the liquidator is non est in law and the assessment based thereupon is a nullity.
7. In reply, the learned departmental representative contended that a company in liquidation is a taxable entity. He supported the orders of the tax authorities below. Further, it is contended by him that even if it was an invalid return the assessment order is valid since it could well be framed in absence of any return.
8. Lot of confusion is being created in making distinction between a company as a going concern and a company in liquidation. Simply because of winding up proceedings a company does not lose its original character. During the entire winding up proceedings till its dissolution the company retains its original character. There cannot be two categories of companies, viz., the company as a going concern and a company in liquidation. They are different phases of the same company.
Because of winding up proceedings change in the maintenance of methods of accounting is bound to occur. In the winding up a liquidator is appointed and on appointment of a liquidator, all the powers of the Board of Directors cease and the liquidator exercises the powers mentioned in Section 512 of the Companies Act including the powers to do such things as may be necessary for winding up the affairs of the company and distributing its assets. These observations of the Hon'ble Madras High Court in the case of Artisan Press Ltd. v, IT AT [1958] 33 ITR 670 are pertinent :- A company exists until dissolution and merely because its activities are reduced and its commercial operations cease and its directors cease to manage it does not mean that it ceases to exist or that it has become transformed into a new entity. It is still a company, a unit of assessment with its identity unchanged.
In the case of C1T v. Gaya Sugar Mills Ltd, [1985] Taxation 79(3)-101 it has been held by the Hon'ble Patna High Court that the restriction placed on the transfer of shares as a result of liquidation did not affect the character of the company as one in which the public are substantially interested. Further it is advantageous to refer the following observation of the Supreme Court in the case of Hari Prasad Jayantilal and Co. v. V.S. Gupta, ITO [1966] 59 ITR 794, 798 :- On the passing of a special resolution by the company that it be wound up voluntarily under the Companies Act, 1956 (1 of 1956), the company does not stand dissolved. That is so expressly provided by Section 487 of the Companies Act. A company which has resolved to be voluntarily wound up may be dissolved in the manner provided by Section 497(5): till then the company has corporate existence and corporate powers. The property of the company does not vest in the liquidator : it continues to remain vested in the company, On the appointment of a liquidator, all the powers of the board of directors and of the managing or whole-time directors, managing agents, secretaries and treasurers cease (Section 491), and the liquidator may exercise the powers mentioned in section 512, including the power to do such things as may be necessary for winding up the affairs of the company and distributing its assets.
The liquidator appointed in a members' winding up is merely an agent of the company to administer the property of the company for purposes prescribed by the statute. In distributing the assets including accumulated profits, the liquidator acts merely as an agent or administrator for and on behalf of the company.
These observations of the Hon'ble High Court in the case of Official Liquidator v. CIT [1971] 80 ITR 108, 124 (Cal.) are pertinent : The contention of the Official Liquidator that there cannot be any question of any assessment of a company in liquidation, also appears to be of no material consequence.... There is no provision, either in the Income-tax Act, or in the Companies Act, which exempts a company in liquidation from assessment. On the other hand, section 178 of the Income-tax Act clearly indicates, to my mind, that a company in liquidation is liable to assessment, as otherwise, there cannot be any question of setting apart any sum of money which may be payable by the company at a later date. Whether as a result of assessment, any liability will, in fact, arise or not is a matter to be determined in the assessment proceeding. It appears that the decision of the Allahabad High Court in the case of Offl. Liq. of the Agra Spg. and Wvg. Mills Co. Ltd. (2 ITR 79), and the decision of the Mysore High Court in the case of Mysore Spun Silk Mills Ltd. (In liquidation) (68 ITR 295) support this view.
We do not find force in the contention of the learned counsel for the assessee that there could be other view of the matter in view of the decision of the Hon'ble Supreme Court in the case of Bagya-lakshmi and Co. (supra). The said decision of the Hon'ble Supreme Court has no relevance here. Reliance by the learned counsel on another judgment of the Hon'ble Supreme Court in the case of Madurai Mills Co. Ltd. (supra) is wholly misplaced. That case relates to an assessee holding shares of a company which had gone in liquidation. Different considerations arise as to taxability of the receipts in the hands of a shareholder of a company in liquidation. In the instant case we are concerned with the income of the company in liquidation and not of its shareholder.
Similar as in Madurai Mills Co. Ltd.'s case (supra) is the situation in the case from the House of Lords referred to above. The case of CIT v.Express Newspapers Ltd. [1960] 40 ITR 38 (Mad.) had also quite different facts. In that case the company was struck off from the register and as such it was non-existent.
9. In view of the above discussion it is futile to make exercise in finding out definition of "company in liquidation" or to make any attempt to fit in "company in liquidation" in any of the definitions of "company" given in the Income-tax Act.
10. As observed by the Hon'ble Supreme Court in the case of Hari Prasad Jayantilal and Co. (supra), the liquidator appointed in a Member's winding up is an agent of the company who administer the property of the company for the purposes prescribed by the statute, and, therefore, he becomes the representative assessee within the meaning of Section 160 of the Income-tax Act. He is duty bound to furnish the return of income. The return of income thus furnished by him cannot be said invalid in law. Even other-wise the ITO was competent to frame the assessment since the said invalidity was not such as to oust his jurisdiction. We, therefore, find no merit in the contention of learned counsel for the assessee that the return of income filed by the liquidator was non est in law.
For that having regard to the law laid down by the Supreme Court in 70 ITR 95 as well as in view of the C.B.D.T. Circular dated 14-1-77 in exercise of powers under Section. 119(2)(a) of the Income-tax Act, 1961 there has been no levy of income-tax authorised by law.
12. Learned counsel for the assessee made reference to Section 143(3) of the Income-tax Act which requires the ITO to make an assessment of the total income or loss of the assessee and determine the sum payable by him or refundable to him on the basis of such assessment. In the instant case the ITO determined the total income of the assessee but did not compute in the order of assessment itself the amount of tax payable by the assessee. This has been taken by the learned counsel for the assessee as a serious defect making the assessment order invalid.
This ground was unsuccessfully raised before the CIT (Appeals). He observed as under:- It is no doubt true that in the body of the assessment order, tax payable has not been mentioned by the ITO. However, this deficiency neither invalidates the order nor justifies the appellant's contention that no tax payable. Tax payable has been determined by the ITO in Form No. ITNS-150 which has to be taken as part and parcel of the order. The Form No. ITNS-150 is also under the signature of the ITO. Further, the assessment order communicated to the appellant was accompanied by a demand notice under Section. 156 where-in the computation of tax payable has been incorporated by the ITO. The demand notice is also part of the order under Section 143(3). In this connection, it may, however, be mentioned that it is desirable that the ITO mentions the computation of tax, payable in the body of the main order wherein the total income is computed, 13. Learned counsel for the assessee referred to judgment of the Hon'ble Supreme Court in the case of Ishwarlal Girdharilal Parekh v.State of Maharashtra [1968] 70 ITR 95 and contended that computation of tax in the body of the assessment order is integral part of the assessment order without which the assessment order is non est. Learned departmental representative on the other hand contended that the assessment order is valid since tax has been determined by the ITO in Form No. ITNS-150 which bears signature of the ITO and is part and parcel of the assessment order. He fully supported the order of the CIT (Appeals).
14. We find no infirmity in the order of the CIT (Appeals). Following observations of the Hon'ble Supreme Court in the case of Ishwarlal Girdharilal Parekh (supra) are significant :- It is well known that under the Indian Income-tax Act, liability to pay income-tax arises on the accrual of the income and not from the computation made by the taxing authorities in the course of assessment proceedings.
15. The said judgment of the Hon'ble Supreme Court is not at all helpful to the assessee. The Hon'ble Supreme Court construed the assessment order in a quite different context, viz., whether, it was "movable property" as defined in Section 22 of the Indian Penal Code.
We, entirely agree with the CIT (A) and do not find merit in this ground of objection.
16. Lastly, the objection of the assessee is that the tax authorities below should have allowed the entire amount of Rs. 2,39,712 claimed as expenses of liquidation. Out of the said amount the ITO allowed Rs. 40,766 and on appeal the CIT (Appeals) modified the order of the ITO and allowed Rs. 74,306 instead of Rs. 40,766. Following grounds of objection have been taken by the assessee :- (1) For that the expenses of liquidation amounting to Rs. 2,39,712 should have been regarded as forming no part of income of the company in view of the charge created by Section 520 of the Companies Act, 1956.
(2) For that having regard to the combined effect of Sections 560(4), 520 and 518 of the Companies Act, 1956 excluding the operation of computation provisions contained in Section 57(iii) of the Income-tax Act, 1961 making it impossible for the charging Section 56 go together with Section 57 the ratio laid down by the Supreme Court in 128 ITR 294 applies with the result that interest on short-term deposits is not taxable.
17. Contention of learned counsel for the assessee is that the entire amount of Rs. 2,39,712 is the cost of voluntary winding up which is charged on the assets of the company and subject to the rights of secured creditors, if any, is payable out of the assets of the company in priority to all other claims, It is also contended by him that the company court only has jurisdiction to supervise the propriety of.
incurring those costs and expenses and the ITO has no jurisdiction to question or otherwise assess the reasonableness of those expenses. From these premises the learned counsel has further developed an argument that having regard to the combined effect of Sections 560(4), 520 & 518 of the Companies Act, 1956 the ITO is left with no jurisdiction to compute the deductions under Section 57 of the Income-tax Act and as such the machinery provision fails and, therefore, there cannot be assessment of income under Section 56 of the Income-tax Act. His contention is that where there is no jurisdiction to compute deductions to be made from the income, "there cannot be assessment of income itself. In the light of this reasoning also, the learned counsel contended, no income of the company in liquidation can be assessed.
Alternatively, his contention is that deduction of the entire cost of liquidation should be allowed from the income.
18. Learned departmental representative on the other hand repelled these arguments. According to him the Income-tax Act is a self-contained code and the ITO has jurisdiction to make proper assessment of the income and the deductions allowable therefrom.
19. The argument advanced by the learned counsel for the assessee is apparently fallacious. No doubt, the company court has power of supervision over the winding up, but thereby the company court cannot and does not control the powers of other courts and Tribunals and statutory authorities in discharging their functions in accordance with law. Power of supervision of the company court includes the power to supervise that the receipts and payments have been properly accounted for and the assets of the company have been properly realised and costs, charges and expenses have been properly incurred. The ITO is unconcerned with all these. The jurisdiction of the ITO is to find out as to which receipts are revenue receipts and which expenses are allowable as deductions under the Income-tax Act. The company court while exercising power of supervision does not assume jurisdiction of the ITO. These observations of the Hon'ble Supreme Court in the case of S.V. Kondaskar, Official Liquidator and Liquidator of the Colaba Land and Mills Co. Ltd. v. V.M. Deshpande, ITO [1972] 83 ITR 685, 699 are pertinent: It would lead to anomalous consequences if the winding up court were to be held empowered to transfer the assessment proceedings to itself and assess the company to income-tax.
20. In the aforesaid case it has been held by the Hon'ble Supreme Court that leave of court is not necessary to commence or continue assessment or re-assessment proceedings in respect of a company ordered to be wound up by the court. Thus when leave of the court is not necessary under Section 446(1) of the Companies Act the ITO has complete jurisdiction to frame assessment and re-assessment in accordance with the provisions of the Income-tax Act and his jurisdiction is not at all controlled by the Companies Act, 1956.
21. Cost of liquidation is no doubt payable out of the assets of the company in priority but thereby it cannot be assumed that all the costs and expenses are legally deductible under Section 57 of the Income-tax Act. Learned counsel for the assessee did not point out as to which item of cost has been improperly disallowed by the CIT (Appeals). He has no grievance as to the quantum of the deductions allowed by the CIT (Appeals). We, therefore, find no merit in these grounds too.