Income tax liabilities do not have automatic priority over other debts in winding up; priority arises only under specific legislative conditions.

1 The Imperial Chit Funds (P) Ltd. is a private company which was wound up as per orders dated 1-6-1973 of this Court on C P. No. 7 of 1973 filed by a creditor. After winding up commenced, proceedings for assessment for the year 1972 73 were finalised by the Income Tax Officer by his order dated 31-3-1975. A sum of Rs. 934 was assessed as tax payable by the Company and Rs. 93/- as interest payable under S.220(2) of the Income Tax Act. The total amount thus payable was Rs 1,027/-. The Official Liquidator of the Company intimated the Income Tax Officer by his letter dated 8 5 1975 that tax and interest constituted a debt provable in the winding up proceedings and he was not in a position to pay the amounts straight away. The tax was due and payable within twelve months before the relevant date mentioned in S.530(b)(c) of the Companies Act - vide S.530(1)(a) of the Act. A notice to pay the amount was received from the Tax Recovery Officer on 8-12-1976; whereupon, the Official Liquidator filed Report No. 53 seeking the direction of Court that the tax claimed is not payable at this stage, as the Income Tax Officer will have to wait and prove his claim when the list of creditors is settled; and that the interest amount was not payable as it was against the provisions of the Companies Act and the Rules. A learned Judge of this Court referred to the judgment of this Court in A.S. No. 224 of 1968 which had taken the view that the amount set aside under S.178 of the Income Tax Act will not be available for distribution in accordance with the provisions of the Companies Act, and that therefore there was no question of any priority in the distribution of assets. The learned Judge felt that certain aspects of the Company Law were apparently not brought to the notice of the Court and that the decision required reconsideration. The learned Judge referred to the view taken in some of the other High Courts that S.18 of the Income Tax Act does not affect or alter the existing law of priority; nor override the provisions for preferential payment under S.530 of the Companies Act. Reference was made to the decision of the Gujarat High Court in Baroda Board & Paper Mills Ltd. v. I.T.O. (102 ITR 153), Income Tax Officer v. Official Liquidator, Mysore High Court (63 ITR. 810), Official Liquidator, Calcutta High Court v. Commissioner of Income Tax (80 ITR. 108); and Commissioner of Income Tax v. Official Liquidator, Golcha Properties Ltd. (95 ITR 488). As against these the Andhra High Court in Income Tax Officer v. Official Liquidator (101 ITR. 470) had taken a view similar to the one in A.S. No. 224 of 1968. It was in view of this, that the question was adjourned for hearing by a Division Bench and the Division Bench in its turn adjourned the matter for hearing by a Full Bench.

2 S.446 of the Companies Act provides that 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 proceeded with against the Company except by leave of Court. Counsel for the Official Liquidator drew our attention to S.447 of the Act that the effect of a winding up order shall operate in favour of all the creditors and all the contributories as if it had been made on the joint petition of all of them He also invited our attention to S.448 (a), 44, 451 and 456(2), 457(e), 511, 528 & 529 of the Act to show that after the winding up, the Official Liquidator is in full charge of the assets of the Company, is to conduct or proceed on behalf of the Company, and that all the property and the assets of the Company are in the custody of the Court He referred next to S.178 of the Income Tax Act which reads:
"178. (1) Every person--
(a) who is the liquidator of any company which is being wound up, whether under the orders of a court or otherwise; or
(b) who has been appointed the receiver of any assets of a company, (hereinafter, referred to as the liquidator) shall, within thi