Dipak Kumar Sen J.
1. The Shahdara (Delhi) Saharanpur Light Railway Company Ltd. went into voluntary liquidation on December 10, 1970, as a solvent company. The liquidation progressed to a considerable extent. Most of the assets of the company have been realised by the liquidators except a few claims remaining outstanding to which we shall advert later. The creditors whose claims were due as on the date of the liquidation which were admitted by the liquidator have all been paid in full. 40% of the capital has been returned to the contributories. Two claims of the company against the State Railways aggregating to Rs. 1,14,614 and a claim for damages against the Union of India for Rs. 35 lakhs for which a suit has been filed in this court have remained pending.
2. According to the liquidators, the claims pending against the company which are admitted aggregate to Rs. 1,48,179 and claims which are disputed aggregate to Rs. 2,61,762. The admitted claims of the State Railways for Rs. 1,44,901 are stated to be subject to set off by the claims of the company against the State Railways for Rs. 1,14,250.
3. In the course of liquidation, the liquidators have sold the assets of the company. The Income-tax Officer has assessed the company in liquidation through the liquidators for the years 1972-73 to 1982-83. The assessments were on the capital gains which are stated to have been assessed in the hands of the liquidator by reason of the sale of the assets of the company. The liquidators have disputed their liability to be assessed altogether and contend that, in any event, capital gains cannot be assessed where the assets of the company are sold in liquidation proceedings. Appeals were preferred by the liquidators against the assessments made by the Income-tax Officer up to the Income-tax Appellate Tribunal. The contentions of the liquidators have been rejected by the Tribunal and the assessments have been confirmed. Presently, the income-tax demands aggregate to Rs. 73,41,296. The said demands consist of tax-assessed, interest and penalty.
4. The application was made by the Income-tax Officer concerned in the company court, inter alia, for the following orders:
' (a) Leave be given to your petitioner to initiate recovery proceedings and to realise the demands due and payable by the company (now in voluntary liquidation) under the provisions of the Income-tax Act, 1961, and the rules framed thereunder ;
(b) Alternatively, the liquidators be directed to pay the amounts, due and payable by the company for the assessment years 1972-73, 1974-75, 1977-78 and 1978-79 to your petitioner in such manner and within such time as to this hon'ble court may deem fit and proper ;
(c) The liquidators be restrained from operating the bank accounts of the company or dealing with the assets and/or the funds of the company lying in their hands, until the disposal of this application.'
5. It is the contention of the Revenue that the income-tax demands have deen duly raised but have not been paid. It is contended that there is no stay of the realisation of the said demands nor any application by the liquidators before any competent authority for such stay. It is contended that the company is an assessee in default and either leave be given to the Revenue to initiate recovery proceedings under the Income-tax Act, 1961, or alternatively, the liquidators be directed to pay the said dues out of the funds lying in their hands.
6. The application of the Revenue was contested in the affidavit filed by one of the liquidators affirmed on July 23, 1984. It is, inter alia, contended that after the company was put to winding up, it ceased to be an assessee within the meaning of the Income-tax Act. It is denied that the assessments were lawfully made or that the demands on account of income-tax following such assessments are lawful or payable by the liquidators. Various points have been taken in the affidavit impugning the said assessments which have been set out in paragraph 8 of the said affidavit. It is alleged that the liquidators had applied before the Income-tax Officer for stay of recovery proceedings till the disposal of their appeals.
7. It is contended that the liquidation proceedings are not complete. There are legal proceedings by and against the company which are pending and the liquidators have to proceed with or defend the same. The liquidators are required to meet costs, charges and expenses of the liquidation.
8. An affidavit was affirmed by the Income-tax Officer concerned on November 26, 1984, which was filed in reply to the aforesaid affidavit of the liquidator.
9. The application was disposed of by a judgment and order dated November 27, 1984, The present appeal by the company is from thesaid judgment and order. The learned judge in the first court held, inter alia, following a decision of the Supreme Court in 5. V. Kondaskar, Official Liquidator & Liquidator of the Colaba Land & Mills Co. Ltd. v. V. M. Deshpande, ITO : [1972]83ITR685(SC) , that inasmuch as the assessments have been completed and demand notices have been issued, the amount claimed by the Revenue should be allowed to be so recovered, particularly as no stay has been obtained by the liquidators. It was held that the income-tax authorities were entitled to initiate recovery proceedings in respect of their claims. The learned judge directed the liquidators not to return any capital to the contributories or make any other payment without the leave of the court. This application which was made by the Revenue in the first court under Section 446 of the Companies Act, 1956, was, at the instance of the parties, treated as an application under Section 518 of the Act and was dealt with accordingly.
10. At the hearing of this appeal, it was contended by the learned advocate for the appellant that the judgment and order dated November 27, 1984, were erroneous inasmuch as before permitting the Revenue to initiate recovery proceedings in respect of their tax claims, it was incumbent on the court to examine the claims. This was the ratio of the decision of the Supreme Court in S. V. Kondaskar's case : [1972]83ITR685(SC) . The learned judge proceeded on the basis that the assessment has become final in spite of the fact that the appeals were pending therefrom and without examining the claims at all, he was permitted to initiate recovery proceedings. We were invited to examine the demands raised and it was contended that it would appear on scrutiny that the demands were not legal and invalid on the grounds stated in the petition. In support of his contentions, learned advocate for the appellant cited a number of decisions noted as follows:
In support of his contentions, the learned advocate for the appellant cited the following decisions :
(a) Governor-General in Council v. Sargodha Trading Company Ltd, . This decision of a Full Bench of the Lahore High Court was cited for the propositions laid down in the judgment of Harries C.J., that the liquidation court should treat an income-tax assessment as prima facie evidence of the amount of tax due from the company in liquidation. The liquidator, however, might be permitted to resist the tax claimed by producing documents or other evidence as may be in his possession. The onus of proving that the assessment order does not represent the real taxable income was on the liquidator. The liquidation court could go behind the income-tax assessment if there were suspicious circumstances.
When income-tax becomes due and payable after the winding up order is made, the Revenue could not claim any priority for payment of such tax.
(b) In re Suburban Bank Ltd. : [1953]24ITR67(Cal) . This decision of a learned judge of this court was cited for the proposition that it was open to a company in liquidation through the liquidator to show to the court that an assessment was required to be set aside or reopened for good reasons and on proper material. It has to be established, however, that the assessment was improper.
(c) Official Liquidator, High Court, Calcutta v. CIT : [1971]80ITR108(Cal) . This decision of A. N. Sen J., as his Lordship then was, was cited for the following propositions.
(i) The Income-tax Officer was the only authority competent to make an assessment and had exclusive jurisdiction to make such assessment under the Income-tax Act, 1961.
(ii) The company court had no power or jurisdiction to entertain or dispose of any assessment proceeding or to make an assessment by itself.
(iii) Once the assessment was completed, it would be open to the Revenue to prove the debt in liquidation and the claim of the Revenue could be paid in the same manner as the debts of other creditors of the same class.
(iv) It remained open to the Revenue to proceed to recover the debt under the provisions of the Income-tax Act, for, this right would be subject to Section 446(1) of the Companies Act, 1956, and might be exercised subject to leave of court.
(v) The recovery proceedings would affect the estate and the assets of the company and if such proceedings were allowed to be effected without leave of court, the Revenue might obtain an undue preference over other creditors.
(d) S. V. Kondaskar, Official Liquidator & Liquidator of the Colaba Land & Mills Co. Ltd. v. V. M. Deshpande, ITO : [1972]83ITR685(SC) .
11. This decision of the Supreme Court was cited for the following observations (p. 699):
' We have not been shown any principle on which the liquidation court should be vested with the power to stop assessment proceedings for determining the amount of tax payable by the 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 liqui-dation 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. '
(e) Official Liquidator, High Court of Karnataka v. Smt. V. Lakshmikutty [1981] 51 Comp Cas 566. This decision of the Supreme Court was cited for the proposition that the rule enacted in Section 46 of the Provincial Insolvency Act, 1920, with regard to the debts provable by a creditor against the insolvent would also apply in regard to the debts provable against a company for winding up.
(f) ITO v. Official Liquidator [1982] 52 Comp Cas 156. This decision of a learned judge of the Kerala High Court was cited for the proposition that the income-tax authorities were not entitled to prove their claim for interest for periods subsequent to the winding up order under Section 220(2) of the Income-tax Act, 1961, against a company in liquidation without leave of the company court under Section 446 of the Companies Act, 1956. The Companies Act and the Rules framed, thereunder placed legal impediments against the liquidator complying with the demand for payment of tax within the required time. In such cases, Section 220(2) of the Income-tax Act would not apply but the insolvency rules under the Companies Act have to be applied.
(g) ITO v. Official Liquidator : [1985]155ITR510(Ker) . This is a decision of a Full Bench of the Kerala High Court. It was laid down in this case by the High Court that proceedings by way of assessment or reassessment to income-tax were not legal proceedings within the meaning of Section 446 of the Companies Act, 1956. It was laid down further that proceedings for recovery of interest for delayed payment of tax under Section 220(2) of the Income-tax Act, 1961, could not be commenced or concluded without the prior sanction of the winding up court and recovery effected without such prior leave would be invalid.
(h) ITO v. Official Liquidator [1986] 59 Comp Cas 514. In this case, a Division Bench of the Kerala High Court has laid down that the provisions of Sections 156 and 220 of the Income-tax Act, 1961, under which an assesste on his failure to pay a valid demand for payment of tax within the statutory period became liable to pay interest on arrears of tax, did not apply where the assessee was a company in liquidation under the control of the liquidator and the company court. In such a case, the Revenue would be treated as an unsecured creditor and could recover the debt in the liquidation proceedings after proving the debt butthe company in liquidation, not being a free agent to pay all demands, will not incur any liability to pay interest or penalty under the Income-tax Act for default of payment. Interest under Section 220 of the Income-tax Act, 1961, for delayed payment of tax could not be claimed in respect of a period subsequent to the winding up of the company.
(i) National Westminster Bank Ltd. v. Halesowen Presswork and Assemblies Ltd. [1972] 1 All ER 641. This decision of the House of Lords was cited for the proposition that in English law also the provisions of the English Bankruptcy Act would apply in the case of winding up of an insolvent company.
Learned advocate for the assessee also cited Sudhir Sareen v. ITO : [1981]128ITR445(Delhi) , where it was held by a learned judge of the Delhi High Court that under Section 144B of the Income-tax Act, 1961, only one draft order could be issued.
12. Learned advocate for the Revenue contended to the contrary. He submitted that so far as assessment is concerned, it is not for the company court to go into the validity or legality of assessments which had to be adjudicated in a different forum and in different proceedings. The Income-tax Act is a code complete in itself and provides for assessment and determination of tax. He submitted that in the instant case, the assessments had been made and sustained up to the Tribunal stage. No order had been obtained staying realisation of the demands. Admittedly, most of the creditors of the company had been paid off and even the shareholders have been paid 40% of their contribution. There was no reason why the claims of the Revenue should not be met at least in part out of the funds in the hands of the liquidators. In support of his contentions, learned advocate for the Revenue cited the following decisions :
(a) CIT v. James Anderson : [1954]26ITR699(Bom) . This decision of a Division Bench of the Bombay High Court was cited for the proposition that an administrator or executor would be an assessee within the meaning of the Indian Income-tax Act, 1922. Where the administrator or executor sold capital assets for the purpose of distribution of the proceeds to the beneficiaries, the capital gain accruing from such sale would be taxable under Section 12B(1) of the Indian Income-tax Act, 1922.
(b) Official Liquidator, Mysore Spun Silk Mills Ltd. v. CIT : [1971]79ITR399(KAR) . This decision of a Division Bench of the Mysore High Court was cited for the following propositions :
(i) Even after a winding up order was passed, a company continued to be a ' person ' within the meaning of Section 4 of the Income-tax Act, 1961, and the liquidator would be the principal officer of such company within the meaning of Section 2(35)(a) of the Income-tax Act.
(ii) Receipt of any income by the company in the course of winding up would attract liability to income-tax and it would be the duty of the court to ensure that the liabilities of the company were duly met in accordance with law.
(c) S. V. Kondaskar, Official Liquidator & Liquidator of the Colaba Land & Mills Co. Ltd. v. V. M. Deshpande, 1TO : [1972]83ITR685(SC) .
13. This decision has also been relied on by the appellant. The following observation in the judgment of the Supreme Court was relied on by the Revenue (p. 698):
' The liquidation court, in our opinion, cannot perform the functions of the Income-tax Officers while assessing the amount of tax payable by the assessees even if the assessee be the company which is being wound up by the court. The orders made by the Income-tax Officer in the course of assessment or reassessment proceedings are subject to appeal to the higher hierarchy under the Income-tax Act. There are also provisions for reference to the High Court and for appeals from the decisions of the High Court to the Supreme Court and then there are provisions for revision by the Commissioner of Income-tax. 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.... The language of Section 446 must be so construed as to eliminate such startling consequences as investing the winding up court with the powers of an Income-tax Officer conferred on him by the Income-tax Act, because, in our view, the Legislature could not have intended such a result. '
(d) ITO v. Official Liquidator, Swaraj Motors (P) Ltd. : [1978]111ITR77(Ker) . In this case, a Division Bench of the Kerala High Court laid down that the rates and taxes falling due subsequent to the winding up of a company were part of the expenses of the winding up. Income-tax was a necessary consequence following the acts of the liquidator taken for the purpose of realising the assets of the company. Such expenses were payable in priority over the claims of unsecured creditors and of the contributories under sections 520 and 476 of the Companies Act.
14. On a consideration of the facts and circumstances, the respective submissions on behalf of the parties and the decisions cited, it appears to us that in S. V. Kondaskar's case : [1972]83ITR685(SC) , the Supreme Court has clearly laid down that the company court cannot involve itself in the income-tax assessment of the company in liquidation. Itwas laid down that the assessment proceedings had to be initiated and concluded in a different hierarchy starting from the Income-tax Officer up to the Supreme Court. The winding-up court was not entitled to take part in such proceedings. Only after the assessment proceedings were completed and payment demanded from the liquidators on the basis of such assessment, would the matter come before the liquidation court which could then assume and exercise power to scrutinise the claim of the Revenue.
15. Reading the said judgment of the Supreme Court in its entirety, it appears to us that such scrutiny by the company court of the demand for the assessed tax would be for a limited purpose. The liquidation court, in our view, cannot decide whether the assessments are correct or incorrect or whether the demands arising therefrom are legal or not. Keeping in view the overall position of the company in liquidation, the liquidation court is required to decide to what extent tax claims should be paid by the liquidators. The liquidation court has to keep in view the claims of other creditors and the pending liquidation proceedings. If it is found that by permitting realisation of the entire dues of the Revenue, other creditors who may have an equal or superior claim to that of the Revenue are deprived, then the liquidation court will not permit the realisation of the entire demand of the Revenue. It also appears to us that if it is found that by allowing realisation of the tax demands from the liquidators in full, the entire funds in the hands of the liquidators are depleted, they may not be in a position to continue the liquidation proceedings to the detriment of other creditors and contributors. In such a case also, the liquidation court may stay the realisation of the entire demand.
16. In the instant case, the balance in the hands of the liquidators as of today is Rs. 25,53,973. Under an order of court passed on December 10, 1984, Rs. 20 lakhs out of the said amount has been directed to be set apart to meet the claim of the Revenve. The liquidators are left with a balance of Rs. 5,53,973. We also note that there are outstanding claims of other creditors aggregating Rs. 2,95,691. Questions of priority as between the Revenue and the other unpaid claimant may have to be adjudicated. Therefore, some funds should be allowed to remain in the hands of the liquidators for the aforesaid purposes.
17. We note that in the event the liquidators ultimately succeed in further proceedings relating to the assessments by way of a reference to this court and finally before the Supreme Court, there will be refund of the money realised on account of tax with interest. We also note the outstanding claims of the company in liquidation. In the pending suit against the Union of India, the claim of the company is Rs. 33 lakhs. Inthe event the said suit is decided in favour of the company in liquidation, it would enure to the benefit of the creditors including the Revenue as also the contributors. The liquidation proceedings ought to be continued and for that purpose, some funds should be left in the hands of the liquidators.
18. For the reasons as aforesaid, we direct the liquidators to set apart a sum of Rs. 1,80,000 out of the said amount of Rs. 20 lakhs as against the outstanding claims of other creditors against the company in liquidation and direct the liquidators to pay the balance to the Income-tax Officer against their pending demands. This order is made without prejudice to the rights and contentions of the company in liquidation in the pending income-tax proceedings. We make it clear that we have not adjudicated on the merits of the assessments. The balance of Rs. 5,53,973 which will remain in the hands of the liquidators, in our view, will be sufficient to provide for future liquidation expenses.
19. According to the liquidators, a sum of Rs. 4,50,000 would be a suitable provision for such future expenses.
20. The appeal is disposed of accordingly.
21. On the facts and circumstances, each party will pay and bear its own costs.
Monjula bose , J.
22. I agree.