The judgment establishes the principle that S.178 of the Income-tax Act ensures that the Government's existing rights and priorities under the law are not defeated by the sale of the company's assets or distribution among the shareholders or creditors.

1. This application has been referred by the learned judge dealing with company matters for decision by a Division Benchinview of the fact that an important question of law regarding the scope of S.178 of the Income-tax Act vis-a-vis S.530 of the Companies Act arises for consideration in this application. The company 'Swaraj Motors Private Ltd.' was ordered to be wound up by this Court on 3110 1969. During the course of liquidation the assets of the company were sold by the Liquidator and that sale resulted in a 'capital gain' within the meaning of that expression in the Income-tax Act, of Rs. 1,27,460/-. For the assessment year 1973 74 this was treated as income and assessed to tax. The assessment order was passed on 3-2-1975 and the notice of demand to pay a tax of Rs. 97,037/- was served on the Liquidator on 17-2-1975. Though the Liquidator took up the matter in appeal to the Appellate Assistant Commissioner, he did not succeed in that attempt. The Liquidator was not in a position to pay the tax within the time allowed in the notice. He applied for extension of time and the Income-tax Officer extended the time for payment up to 30 61975. The Liquidator paid a sum of Rs. 40,000/- and the balance of Rs. 57,037/- and interest still remained due. By the present application the Income-tax Officer has sought permission of the Court under S.446 (1) of the Act to take proceedings against the company for the recovery of the balance tax due. On receipt of notice of this application the Official Liquidator contended that the tax demand of Rs. 97,037/- can only be considered as a'debt' payable as contemplated in S.528 of the Companies Act, 1956, that in any event present demand is one coming under the category of 'future and contingent claims 'mentioned in S.528, and that it could be paid only in accordance with the provisions of S.511 thereof, namely, that the department must prove the claim and get dividend pari passu just like any other simple creditor of the company. It is further stated that the claim made by the Department cannot be considered as 'costs, charges and expenses incurred in winding up' and paid as such.

2. The preferential claim made by the Income-tax Officer will not come under either S.178 of the Income-tax Act or S.530 (1) (a) of the Companies Act. S.1 78 (1) of the Income-tax Act provides for giving notice of the appointment of a Liquidator of a company on its winding up to the Income-tax Officer who is entitled to assess the income of the company. That notice has to be served within 30 days of the appointment. On receipt of such a notice the Income-tax Officer shall, after making such enquiries or calling for such information as he may deem fit, notify to the Liquidator within three months from the date on which he receives the notice of the appointment of the Liquidator, the amount which, in the opinion of the Income-tax Officer, would be sufficient to provide for any tax which is then or likely thereafter to become payable by the company. On being so notified the Liquidator shall set apart an amount equal to the amount notified. The failure to give notice in accordance with the provisions of the Section or the failure to set apart the amount as required by the Incometax Officer or parting with the assets of the company otherwise than as provided for in sub-s. 3 of S 178 makes the Liquidator personally liable for the payment of the tax which the company is liable to pay. This provision shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force. In this case there is no case that the Liquidator did not notify the fact of his appointment to the Income-tax Officer. It is also not disputed that the Income-tax Officer did not notify within the period mentioned in sub-section 2 to S.178 to set apart any amount for tax payment. Further, the tax payment referred to in that Section is in respect of the income of a company accrued before its winding up. It