The Income Tax Officer must obtain court sanction before enforcing tax demands on companies in liquidation, particularly concerning interest on tax liabilities.

1 By this report the Official Liquidator seeks for a decision and direction regarding his liability to pay Rs. 6,228 as interest on the tax demand of Rs. 73,187 demanded under S.220(2) of the Income Tax Act by the Income Tax Officer. For the assessment year 1973-74 the company in liquidation was assessed under the Income Tax Act to pay a tax of Rs. 1,00,759 and a notice of demand dated 17th February 1975 was served on the Liquidator, Subsequently the assessment order was rectified by the Income Tax Officer and a revised tax demand to pay Rs. 97,037 was served on the company. This assessment was considered to be legally unsustainable by the Official Liquidator and so he filed an appeal. Pending that appeal the Official Liquidator requested the Income Tax Officer to stay the collection of tax under demand. But the Income Tax Officer directed the payment of Rs. 40,000 within the due date and gave time till 30th June 1975 or the date of the disposal of the appeal whichever is earlier to pay the balance. This sum of Rs. 40,000 was paid on 28th April 1975. After that the liquidator submitted a report to the court for ratification of the said payment and for stay of collection of the balance demand till the disposal of an application filed by him as application No. 372 of 1975. By order dated 6th June 1975 this court ratified the said payment and also issued an interim order restraining the Income Tax Officer from enforcing the demand to pay the balance till the Company-Court considered the legality of the assessment. The appeal filed by the Liquidator against the order of assessment was later dismissed. The revised demand of Rs. 97,037 was inclusive of Rs. 23,850 as interest under S.215 and 217(1A). This was found to be not legal and the Commissioner of Income Tax by his order dated 8th March 1976 reduced this amount from the tax demand of Rs. 97,037. Application No. 372 of 1975 was one seeking a direction as to whether the tax demand on the income of the company which conies under the category of 'capital gains' arising on account of the sale of the assets of the company during the course of its winding up has to be treated as a preferential claim or as an ordinary claim or as expenses of the winding up to be met before the distribution of dividends. A Bench of this court held that this tax demand will come under the expression 'costs, charges and expenses' referred to in S.476 and 520 of the Companies Act and the same has to be paid before distributing the dividend - see Income Tax Officer v. Official Liquidator (1976 KLT 850). The Division Bench gave one month's time to pay the tax demand. But, since there was some other difficulty in getting back the amounts previously invested in the fixed deposits the balance tax of Rs. 33,187 was remitted by the Liquidator only on 1st September 1976. The Income Tax Officer by his order passed on 20th September 1976 has charged a sum of Rs. 6,228 as interest payable under S.220(2) of the Income Tax Act and a demand was made on the Liquidator to pay the sum on or before 26th October 1976. By the present report the Liquidator submits that there has not been any default in the case, because there was an order of interim stay passed by this court during the pendency of the appeal and application No. 372 of 1975 and that application was disposed of only on 21st July 1976 and the delay of 7 days to comply with the direction of this court to pay within the period of one month allowed was on account of the procedural delay and cannot be treated as default. As such, it is submitted, the levy of interest is not just and proper and the same is not payable. Further he submits that leave of the court has not been obtained before issuing the notice of demand. For these reasons the order of the Income Tax Officer is contended to be erroneous and since there is no appeal provided for under the statute against that order the Liquidator has moved this court to scrutinise the claim made by the Income Tax Officer