A company in liquidation continues to be liable to income tax as a person under section 4 of the Income Tax Act, and the Income Tax Officer must obtain leave from the winding-up court under section 446 of the Companies Act before taking any steps to collect the tax.

1. As almost all the details of work in connection with the winding-up of the affairs of the company had been concluded and there appeared to be available with the liquidator more than a lakh of rupees and requests were made on behalf of the petitioning-creditor and other that steps may be taken to declare a final dividend, I directed the liquidator to file a report giving particulars so that that I may give further directions for the above purpose.

2. The liquidator filed a report stating that though there was with him a sum of Rs. 1,47,483 in the account of the winding-up, it may not be possible to declare a dividend for the reason that large amounts would be required to pay the fees due to Central Government and also that the auditors had suggested that there was also a tax liability in respect of income arising out of the investments made in the course of winding up. As the liquidator appeared to entertain the opinion that it was a matter for doubt whether the company in liquidation could be held to be liable to tax in the light of the recent amendments of the Income Tax Act and the Companies Act, I asked him to take out a formal application for directions. The above Application No. 16 of 1967 is such an application.

3. So that I may have the benefit of the arguments from both the opposing points of view, I issued notice of the application to the Commissioner of Income Tax in Mysore and also permitted the official liquidator to engage the services of Mr. K. Srinivasan, Advocate. The Commissioner having entered appearance through counsel, his case was presented to me by Mr. Rajasekhara Murthy.

4. In the course of this winding-up, large sums of money came into the hands of the liquidator which could not be immediately applied for distribution of dividends to the creditors. The result was that he had to invest the same pursuant to the relevant provision of the Companies (Court) Rules. They were mostly by way of bank deposits. The following table gives the amounts of interest received from time to time;

Financial Year

Amount of interest

1960-61

52,510.02

1961-62

52,589.04

1962-63

38,142.50

1963-64

33,105.67

1964-65

12,587.72

1965-66

6,429.10

Total

1,95,364.05

5. In the course of the audit of accounts of the company for the half year ended 30th September, 1965, the auditors, M/s. B. K. Ramadhyani and Company, in their report dated 3rd March, 1966, observed that the above amounts of interest received by the liquidator would attract liability for Income Tax and that therefore appropriate steps should be taken to settle the question of such liability in order to avoid the possibility of excess distribution of dividends. In my order dated 18th March, 1966, while accepting the report of the auditors, I had also made a direction that the liquidator should take out a separate application for necessary directions in regard to the question of liability to Income Tax of the above amounts of interest.

6. According to the tentative calculation made by the auditors, the tax liability is estimated at Rs. 93,745.

In the course of the arguments on the application, two questions were formulated :-

(1) Whether the company in liquidation is at all liable to be assessed to Income Tax in respect of the any receipts by it or by the liquidator on its behalf in the course of winding up, which in ordinary course would be regarded as items of income to Income Tax ?

and

(2) Whether the amounts received by the liquidator by way of interest on bank deposits are liable to tax ?

7. I do not think that I need go into the second question because, if my answer to the first question is in the negative, the second question will not arise, and if my answer to the first question is in the affirmative, the more appropriate course would be to leave it to the Income Tax authorities to examine the liability in exercise of their statutory functions.

8. I shall therefore decide only the first question.

9. Upon certain points there could be no doubt whatever. According to sec