OFFICIAL LIQUIDATOR v. ITO — 1977 DIGILAW 59 (KER)

Judgment :- 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 17-21975 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 30- 6-1975 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 8-4-1975. 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 6 61975 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 Ss 215 and 217(1A). This was found to be not legal and the Commissioner of Income-tax by his order dated 8-3-1976 reduced this amount from the tax demand of Rs. 97,057/-. Application No. 372 of 1975 was one seeking a direction as to whether the tax demand on the income of the company which comes 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 expanses' 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 19 1976. The Income-tax Officer by his order passed on 20 91976 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 26101976. 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 2171976 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 and to decide whether under the law the additional demand should be met as a lawful liability on the funds of the company in liquidation. 2. Notice of this application was served on the Income-tax Officer and counsel for the Department entering appearance contended that the demand comes under S.220 2) of the Income tax Act and that there is no illegally in the demand. The question for consideration is whether this Court can go into the correctness of the additional demand and issue the direction claimed by the Liquidator. The question for consideration is whether this Court can go into the correctness of the additional demand and issue the direction claimed by the Liquidator. The order of the Income-tax Officer under S.220 (2) of the Income-tax Act dated 20 91976 is in the following terms: "For the assessment year 1973 74 an amount of Rs. 1,00, 759/ was due from the assessee on or before 23 3 75 as per the demand notice issued on 17 2 75. Subsequently the demand was reduced to Rs. 73,187/. But the assessee has paid the demand only in instalments on 7 5 75 and 7 9 76. As there is delay in making the payment an amount of Rs. 6,228 is charged as interest u/s. 220 (2). The should be paid as per demand notice and challan enclosed." Sec. 220 to S.232 of the Act relate to the collection and recovery of tax. S.220 (1) requires the assessee to pay the tax demanded within a period of 35 days mentioned in the notice of demand. Sub-section (2) is in the following terms: "(2) If the amount specified in any notice of demand under S.156 is not paid within the period limited under sub-section (1), the assessee shall be liable to pay simple, interest at twelve per cent per annum from the day commencing after the end of the period mentioned in sub-section (I): Provided that, whereas a result of an order under S.154, or S.155, or S.250, or S.254, or S.260, or S.262, or S.264, the amount on which interest was payable under this section had been reduced, the interest shall be reduced accordingly and the excess interest paid, if any, shall be refunded." Rules 118,119 and 119 (a) prescribe, the procedure to be followed in calculating interest before or after recovery certificate is issued The purpose of S.220 is compensatory in character. It is provided by way of compensation for delay in the payment of tax and Sec 220 (2) makes the assessee liable to pay interest and it assumes that an order is required to demand the interest charged. The order is not appealable under S.246 of the Act. At the same time, it is a legal proceeding subsequent to the assessment of tax to recover the tax assessed. The order is not appealable under S.246 of the Act. At the same time, it is a legal proceeding subsequent to the assessment of tax to recover the tax assessed. The tax assessed in respect of the income of the company after liquidation is payable as costs, charges and expenses incurred in the winding up. It is for the Court to decide how much should be awarded as costs, charges or expenses. It may be that the entire tax demanded will be included as expenses of winding up. But, when it comes to the question of payment of interest on the tax demand it is for the Court to decide whether this should be paid or not. That will be a matter depending on the facts and circumstances of each case The Supreme Court had occasion to consider the power of the liquidation court to scrutinise the claim of the revenue in respect of assessment and recovery of income-tax In Kondaskar. Official Liquidator, v. Deshpande, I. T. O. (1972 (42) Company Cases 168 at page 181) it is observed thus: " We have not been shown any principle on which the liquidation court should be vested with the power to stop assessment proceedings for determining the amount of tax payable by the company which is being wound up. The liquidation court would have full power to scrutinise the claim of the revenue after income-tax has been determined and its payment demanded from the liquidator. It would be open to the liquidation court then to decide how far under the law the amount of income-tax determined by the department should be accepted as a lawful liability on the funds of the company in liquidation. At that stage the winding-up court can fully safe-guard the interests of the company and its creditors under the Act." Generally interest is not allowed in respect of claims against the company after the commencement of the winding up proceedings. The available assets may have to be distributed subject to preferential claims pari passu among the creditors. Though the income-tax payable in respect of income accruing to the company after the commencement of the winding up is payable as charges and expenses of the winding up, if interest has to be paid on the amount so due, it can practically swallow the entire assets and the interests of the other creditors will be very much affected. Though the income-tax payable in respect of income accruing to the company after the commencement of the winding up is payable as charges and expenses of the winding up, if interest has to be paid on the amount so due, it can practically swallow the entire assets and the interests of the other creditors will be very much affected. S.220(2), no doubt, makes the assessee liable to pay interest. But, the assessee in this case has not the freedom to utilise the funds without the approval of the Court and the claims of the other creditors. On the one hand, S.220(2) makes the assessee liable. On the other hand, the assessee is not free to pay the amount without the sanction of the Court. If any delay in getting the sanction of the Court will cause loss to the company in liquidation, it will be interfering with the power of the Court to issue directions regarding the distribution of assets of the company. So, the Income-tax Officer should obtain the sanction of the Court or move that Court that the claim for interest under S.220(2) of the Income-tax Act may be considered and orders passed in respect of it. Demand to pay the amount without observing this requirement of S.446(2) and (1) makes the demand unenforceable against the company in liquidation. It follows that the demand to pay Rs. 6,228/- as interest on the income-tax due is, for the above reasons, invalid and the Income-tax Officer, is, therefore, restrained from enforcing this claim except in the manner provided for by S.446(1) and (2) of the Companies Act. Ordered accordingly.