Assessment proceedings under the Income-tax Act do not require leave of the Winding-up Court, but recovery proceedings do. Recovery of interest without prior leave of the Court under S.446(1) of the Companies Act is invalid.

1. Division Bench of this Court has doubted the correctness of the decision in Income-tax Officer. B-Ward Companies Circle, Ernakulam v. Official Liquidator, Swaraj Motors (P) Ltd., (134 ITR. 132) and that is why this case has come up before a Full Bench.

2. The Palai Central Bank Ltd., (in liquidation) (hereinafter referred to as the Company) was assessed to Income-tax for the years 1975-76 and 1976-77, allowing permissible deduction to the extent only of Rs. 7,500/-for each year as against the claim of the Official Liquidator for much larger deductions. In appeal by the Official Liquidator, the Appellate Assistant Commissioner allowed the deductions claimed and the taxable income of the Company in liquidation was reduced considerably. In further appeal at the instance of the Department, the Income-tax Appellate Tribunal set aside the orders of the Appellate Assistant Commissioner and allowed deduction to the extent of Rs. 10,000/ -for each year. Fresh demands were made by the Income-tax Officer for payment of the tax assessed in pursuance to the orders of the Tribunal and the entire tax demanded was paid by the Official Liquidator on 27-4-1981. Thereafter fresh notices were issued under S.154 of the Income-tax Act, for rectification of the orders of assessment to include also interest accrued under S.220 (2) of the Income-tax Act. Objections raised by the Official Liquidator were overruled and demand notices were issued for payment of Rs. 7,790.00 for the year 1975-76 and Rs. 6.422,00 for the year 1976-77 by way of interest accrued under S.220 (2) of the Act. The demand notices

were accompanied by an order rectifying the order of assessment. The Official Liquidator thereafter filed application No. 839 of 1981 before the Winding-up Court for a declaration that the demand of interest under S.220 (2) of the Act is illegal and unenforceable for the reason that the assessment of interest under S.220 (2) of the Act was without the leave of the Court as required by S.446 (1) of the Companies Act, 1956. A learned judge of this Court allowed the application holding that the levy of interest without the prior sanction of the Company Court is illegal and unenforceable as against the Official Liquidator. It is against this order of the Company Court that the Income-tax Officer has filed this appeal.

3. S.446 (1) of the Companies Act is extracted below:-"Suits stayed on winding up order-(1) When a winding up order has been made or the Official Liquidator has been appointed as provisional liquidator, no suit or other legal proceeding shall be commenced, or if pending at the date of the winding up order, shall be proceeded with against the Company, except by leave of the Court and subject to such terms as the Court may impose".

Interest accrues under sub-section (2) of S.220 of the Income-tax Act on failure of the assessee to pay the tax demanded within the time specified in the notice of demand.

4. In Union of India v. India Fisheries (P) Ltd. (57 I.T.R 331), the Supreme Court held that once the claim of the Income-tax Department has to be proved and is proved in liquidation proceedings it cannot by exercising its rights under S.49-E of the Ineome-tax Act of 1922 get priority over other unsecured creditors. It was further held that S.49-E of the Income-tax Act of 1922 is a general provision applicable to all assessees in all circumstances while S.228 and 229 of the Companies Act of 1913 are special provisions dealing with proof of debts and their payments in liquidation proceedings. S.49-E of the Income-tax Act authorising set off against refund, it was held would apply only when Insolvency Rules do not apply. Construing S.171 of the Companies Act 1913 (corresponding to S.446 of the 1956 Act), the Federal Court in Governor-General in Council v. Shiromani Sugar Mills Ltd., (1946(14) IT.R. 248) held that the words 'other legal proceedings' in the section comprise any proceedings by the Revenue Authorities for recovery of the tax ass