Income‑tax‑‑‑

‑‑‑‑Recovery of tax‑‑‑Company I in liquidation‑‑‑Priority of debts‑‑ Secured creditors and workmen have priority over tax departments‑‑ Indian Companies Act, 1956, S.529‑A‑‑‑Indian Income Tax Act, 1961, S.178.

The English common law doctrine which has been recognized in India is that in a winding up, the claims of the Crown prevail over the claims of unsecured creditors and not over secured creditors. Imperial. Chit Funds (P.) Ltd. v. ITO (1996) 219 ITR 498 (SC) is, therefore, an authority for the proposition that between unsecured creditors, the claim of tax dues under section 178 of the Income Tax Act, 1961, would have preference over all other claims of unsecured creditors. The question whether the claims of income‑tax dues have preference over claims of secured creditors was not in issue.

If section 529‑A of the Companies Act, 1956, is considered it is clear that it has overriding effect. Section 529‑A was brought in by an amendment and was inserted in the Companies Act by the Act of 1985. The section makes it clear that notwithstanding anything contained in other provisions of the Act or any other law for the tithe being it force dues of workers and debts due to the secured creditors to the extent such debts rank under clause (c) of the provisions of subsection (1) of section 529 pari passu with such dues shall be paid in priority over all other debts. The Income‑tax Act was brought in 1961. Both are central legislations. Therefore, looking at the literal language of the two sections it would be clear that the rights of the secured creditors would prevail over the rights of all other creditors. Therefore, both under the general law as well under the "provisions of the Companies Act read with the provisions of the Income‑tax Act the rights of secured creditors and workers as set out under section 529‑A of the Companies Act would override the claims of the Income‑tax Authorities in respect of an order made under section 178 of the Income‑tax Act.

Imperial Chit Funds (P.) Ltd. (In liquidation) v. ITO ((1996) 219 ITR 498 (SC); 86 Comp. Cas. 555 (SC) explained and distinguished.

Bank of India v. John Bowman (1955) AIR 1955 Bom. 305; Builders Supply Corporation v. Union of India (1965) 56 ITR 91 (SC); Collector of Aurangabad v. Central Bank of India (1968) 21 STC 10; (1967) AIR 1967 SC 1831; Givoanola Binny Ltd. (In liquidation), In re: (1990) 67 Comp. Cas. 441 (Ker.); ITO v: Official Liquidator (1975) 101 ITR 470 (AP); (1976) 46 Comp. Cas. 46 (AP); Manickam Chettiar v. ITO (1938) 6.ITR 180 (Mad.); Polyolefins Industries Ltd. v. Kosmek Plastics Manufacturing Co. Ltd. (2000) 242 ITR 269 (Bom.); (1999) 98 Comp. Cas. 481 (Bom.); Secretary of State in Council for India v. Bombay Landing and Shipping Co. Ltd. (1868‑69) 5 Born. HC OC 23; Snowden Marshall (H.) v. People of the State of New York (1920) 65 Law Ed. 315; Starit India Ltd. (In liquidation), In re: (2000) .242 ITR 275 (Bom.); Superintendent and Remembrances of Legal Affairs v. Corporation of Calcutta (1967) AIR 1967 SC 997 ref.

Virag Tulzapurkar, instructed by Kanga & Co. for Applicants.

S.C. Gupta, Deputy Official Liquidator in person.

JUDGMENT

These applications arise from the order of winding up of Wester Works Engineers Limited. As the applicants have prayed for similar reliefs and as the same questions of law arise in the matter they are being disposed of by this common order. .

The applicants in Company Application No.116 of 1998 have prayed that respondent No.1 be ordered and directed to pay to the applicants a sum of Rs.19,48,552 together with interest thereon at the rate of 19.13 per cent. per annum from November 27, 1997, till payment and/or realization. The expenses4ere incurred by the applicants towards sale of securities given by the company in liquidation pursuant to the order passed by the Board for Industrial and Financial Reconstruction. A further direction which is sought is that a .sum of Rs.7,76,75,000 being approximately 75 per cent. of the amount due and payable by the company in liquidation to the applicants be paid to them.

Similarly, in Company Application No.117 of 1998 the applicants have prayed that the first respondent be ordered and directed to pay a sum of Rs.6,65,00,000 being approximately 75 per cent. of the amount due and payable by the company in liquidation to the applicants.

On behalf of the official liquidator it is pointed out that the sum of Rs.22,24,38,315 excluding an amount of Rs.50,57,080 towards TDS has been deposited with the official liquidator on November 3, 1997. An affidavit in reply has been filed by Shri Ujwal Roy, official liquidator to meet the contentions as raised in the application. It is therein set out that an amount of Rs.22,24,00,000 has been invested in fixed deposits with various banks out of the sum of Rs.22,24,38,318 alongwith interest to his credit as on December 10, 1998. It is, therefore, set out that the claims received by his office are Rs.73,33,10,668.34 which includes claims by workers and employees amounting to Rs.41,89,68,067.38. The claims of Syndicate Bank and Oriental Bank of Commerce work out to Rs.21 lakhs odd. There is also a claim in an amount of Rs.6,13,50,193, being the claim of the Income‑tax Department and Rs.58,93,163, being the claim of the Sales Tax Department. The claims of the Income‑tax Department were received pursuant to letter, dated November 18, 1996, of the Deputy Commissioner of Income‑tax and of the Sales Tax Department on receipt of copy of Form No.66, dated December 13, 1996. The applicant‑Banks were secured creditors in respect of the property situated at Bhandup from which an amount of Rs.14.5 crores were realized as sale proceeds. The applicants are not ‑secured creditors in respect of other properties which have been sold. The official liquidator out of the said sum of Rs.14.5 crores has to sex aside the sum of Rs.6,13,50,193 towards income‑tax dues and a sum of Rs.12,12,901 towards sales tax dues. After deducting these amounts it is claimed only an amount of Rs.8,24,36,906 will be available subject to other deductions.

On behalf of the applicants it is contended that they are secured creditors in respect of the proceeds arising from sale of the Bhandup property and as such the amount which the official liquidator purports to pay towards income‑tax and sales ‑ tax demand cannot have preference over the claims of secured creditors.

The question, therefore, is, whether the tax liabilities like income‑tax or sales tax have preferred over the rights of the secured creditors and workers in so far as the sale proceeds of the Bandup property are concerned. Learned counsel for the applicant‑Banks contend that the claims of secured creditors are outside the winding up proceedings and, consequently, there can be no preferential right by the Income‑tax Authorities under section 178 of the Income‑tax Act or the sales tax authorities order section 530 of the Companies Act. Even otherwise, it is contended that the State has no preferential claim over the rights of secured creditors even under the general law and, consequently, the State would have no right of preference over the proceeds from sale of the Bhandup property. It is then contended that the Companies Act is a complete code by itself for payment to creditors and there can be no other priority for payment over the provisions of the Companies Act unless there is a statutory, law to that effect. It is further contended that section' 529‑A of the Companies Act overrides the provisions of other Acts in respect of the claim of other creditors. Even otherwise, it is contended that the property was mortgaged to .the applicants and all that was left to the mortgagor was the right of redemption. It is, therefore, contended that considering the above aspect the objections as raised must be rejected.

On behalf of the official liquidator, the deputy official liquidator contends that section 529‑A does not have an overriding effect over section 178 of the Income‑tax Act but is only restricted to inter se claims in respect of the secured creditors and workers. It is further contended that under section 178 of the Income‑tax Act, the income‑tax dues have a preferential right. If an order is made under section 178 as has been held by the apex Court in the case of Imperial Chit Funds (P.) Ltd. v. ITO (1996) 219 ITR 498,; (1996) 86 Comp. Cas. 555 (SC) and which has been considered by this Court in Starit India Ltd. (In liquidation), In re:. (2000) 242 ITR 275 it has preference over the claims of secured creditors. Considering the above, the following questions need to be formulated for decision:

(1) Whether, under the general law, claims of the State have preferential rights over the claims of secured creditors?

(2) If not, whether section 178 of the Income-tax Act makes a claim of the State for income‑tax dues a preferential right over the rights of the secured creditors under section 529‑A of the Companies Act?

(3) Whether the claims of workers under section 529‑A have preference over claims of tax dues under section 178 of the Income‑tax Act or the Sales Tax Act?

The third question does not directly arise in the matter. It is, however, being answered as there are claims of workers and further to clarify the observations in Starit India Ltd. (In liquidation), In re: (2000) 242 ITR 275.

It is, therefore, necessary to first deal with the contention whether under the general law, the claims of the State for tax dues have preferential rights over the claims of secured creditors. That matter need not detain us for long as in my opinion the issue is no longer res integra being covered by the judgment of the ‑ apex Court in Collector of Aurangabad v. Central Bank of India (1968) 21 STC 10; (1967) AIR 1967 SC 1831. In that case, the firm. Chandmal Marmal, was indebted to the Central Bank of India. The Central Bank of India, therefore, filed a suit against the firm, Chandmal Marmal, for recovery of an amount of Rs.14,541 odd. An injunction was granted against certain properties of the firm. The Court directed the firm to furnish security for the amount of the decree which may be‑ passed against the firm in the suit. 'One Jogilal Mulchand, a partner of the firm on April 28, 1955, furnished security by creating a charge on his immovable property which was a house situated at Aurangabad. A decree was passed on April 30, 1955. The bank moved for execution of the decree. In execution, the house was sold to one Girdhardas. The auction was confirmed by the Court on August 14, 1958, and the proceeds deposited in the execution Court: On August 17, 1958, the Sales Tax Officer wrote a letter to the District 'Judge claiming an amount of Rs.9,672 as due to the Government as arrears of sales tax. On September 23, 1958, the District Judge directed the subordinate Judge not to pay the sale proceeds of the house to the bank, the decree holder. Thereafter, the Collector of Aurangabau by an order, distained the amount of Rs.9.672 out of the sale proceeds under section 119 of the Hyderabad Land Revenue Act. The bank moved an application challenging the order of the Collector. The same was rejected on the ground that the Civil Court would have no jurisdiction. In an appeal preferred to this Court, a learned Single Judge dismissed the appeal on the, ground that the bank has preferential claim in view of sections 104 and 119 of the Hyderabad Land Revenue Act. In appeal preferred before a Division Bench of this Court, the Division Bench held that section 119 of the Hyderabad Land Revenue Act applied only to property which was in the custody and possession of the judgment‑debtor and not in the custody or possession of the Court. It was further observed that the priority was only in respect of land Revenue and not in respect of the other taxes and that the bank as a decree‑holder had a prior charge as the quality of debt was not the same as that of the debt due to the Government and, therefore, in respect of the sales tax, the State had no priority. That is how the matter went to the apex Court. We are not concerned with other aspects of the matter except the issue. Whether the debt of the State has preference over the debts of secured creditors'. In para.7, the apex Court considered the common law doctrine of "priority of Crown debts" as set out in Halsbury's Laws of England, 3rd edition, volume 7, page 221. The apex Court quoted the following observations (page 1835):

"The royal prerogative may be defined as being that pre eminence which the sovereign enjoys over and above all other persons by virtue of the common law, but out. of its ordinary course, in right of her regal dignity, and comprehends all the special dignities, liberties, privileges, powers and royalties‑allowed by the common law to the Crown of England."

The Court also observed that this Court in Secretary of State in Council for India v. Bombay Landing and Shipping Co. Ltd. (1968‑69) 5 Bom. HC OC 23, had held that a judgment‑debt due to the Crown, was entitled to the same precedence in execution as a like judgment‑debt its England, if there is no‑special legislative provision affecting that right in the particular case. This view was reiterated by Chagla, C.J. Bank of; India v. John Bowman (1955) AIR 1955 Bom. 305. This view was followed by a Full Bench of the Madras High Court in Manickam Chettiar v. ITO (1938) 6 ITR 180; AIR 1938 Mad. 360. After considering all the judgments, the apex Court held that the English common law doctrine having been incorporated into Indian law, was a law in force in the territory of India and by virtue of Article 372(1) of the Constitution of India it continued to be in force until it was validly altered, repealed or amended. All these authorities had been quoted and approved b the apex, Court in Builders Supply Corporation v. Union of India (1965) 56 ITR 91, AIR 1965 SC 1061, which had taken the view that the income‑tax claims of the Government of India were entitled to preference over debts of unsecured creditors. It was sought to be argued that the said view of the apex Court had been modified by the subsequent judgment of a larger Bench in the case of Superintendent and Remembrances of Legal Affairs v. Corporation of Calcutta AIR 1967 SC 997. The apex Court held that there was nothing in that judgment which affected the law as declared in the case of Builders Supply Corporation v. Union of India (1965) 56 ITR 91; AIR 1965 SC 1061. The apex Court noted that the majority judgment of the learned Chief Justice had referred to the decision in Snowden Marshall (H.) v. People of the State of New York (1920) 65 Law Ed. 315, which lays down a similar doctrine, namely, that the State of New York has the common law prerogative right of priority over unsecured creditors. Therefore, it is clear that the priority of the State is qua unsecured creditors and not qua secured creditors. Having said so the first contention of the applicants must be accepted that the common law doctrine which has been recognized in India and saved is that the claims of the Crown prevail over the claims of unsecured creditors and not over secured creditors. Imperial Chit Funds (P.) Ltd. v. ITO (1996) 219 ITR 498 (SC); (1996) 86 Comp. Cas. 555 (SC) is, therefore, an authority for the proposition that between unsecured creditors the claim of tax dues under section 178 of the Income‑tax Act, would have preference over all other claims of unsecured creditors.

That brings us to the second and third questions, viz., whether 'section 178 of the Income‑tax Act has made any difference and/or it prevails over the provisions of section 529‑A of the Companies Act. It was sought to be contended on behalf of the deputy official liquidator that considering the judgment in Imperial Chit Funds (P.) Ltd. v. ITO (1996) 219 ITR 498 (SC); (1996) 86 Comp. Cas. 555 (SC), the income -tax dues under section 178 of the Income‑tax Act will prevail over the rights of the secured creditors. A careful analysis of the said judgment would show that the issue, whether an order passed under section 178 of the Income‑tax Act would have preference over the rights of secured creditors was not in issue before the apex Court. In the case of Imperial Chit Funds (P.) Ltd. (In liquidation) v. ITO (1996) 219 ITR 498 (SC); (1996) 86 Comp. Cas. 555 (SC), as already observed what was in issue before the apex Court was qua section 530(1)(a), i.e., over unsecured creditors. It is in that context, considering the provision of section 178 of the Income‑tax Act, the apex Court held, if an order was passed under section 178, bearing in mind that the amendment was brought, by the Income Tax Act; 1961, and considering the equality amongst the creditors as set out in section 530(5) the order under section 178 for income‑tax dues would have preference over other unsecured creditorsset out in section 530(1). The said judgment had come up for consideration before me in Starit India Ltd. (In liquidation), In re: (2000) 242 ITR 275 (Bom.). In that case after the official liquidator had been appointed and, during the pendency of the proceedings properties belonging to the company were sold. The question was whether capital gains, tax would have preference over the claims of secured and unsecured creditors. It was contended on behalf of the Income‑tax Department that another judgment of this Court in the case of Polyolefins Industries Ltd. v. Kosmek Plastics Manufacturing Co, Ltd. (1999) 98 Comp. Cas. 481 (Bom.), wherein the Court held that the claim of the workers would have preferential rights over that of tax authorities was passed without considering the judgment of the apex Court in Imperial Chit Funds (P.) Ltd. (In liquidation) v. ITO (1996) 86 Comp. Cas. 555. In Polyolefins Industries Ltd. v. Kosmek Plastics Manufacturing Co. Ltd. (1999) 98 Comp. Cas. 481 (Bom.), A.P. Shah, J. was considering a case where there were no secured creditors except the claims of the workers under section' 529‑A of the Companies Act. By virtue of section 529‑A of the Companies Act the claims of the workers are pari passu with the claim of the secured creditors. The learned Single Judge held that claims of the workers would have preference over fax dues. It true that the question as framed by me in Starit India Ltd. (In liquidation), In re: (2000) 242 ITR 275 (Bom.) was whether 5th capital gains tax payable under section 45 of the Income‑tax Act has precedence over the claim of other secured creditors covered by section 530 read with section 529‑A of the Companies Act. I had negatived the contention of the tax department after considering the judgment in Imperial Chit Funds (P.) Ltd. (In liquidation) v. ITO (1996); 86 Comp. Cas. 555 (SC) on the ground that section 178 is restricted to an order in respect of dues passed after notice was issued to the Assessing Officer under section 178 of the Income‑tax Act and within the time as set out therein and will not apply to subsequent tax dues. In the said judgment what really was in issue, was whether the tax dues of the State under the Income‑tax Act have preference over the dues of workers. The question whether the claims of income‑tax dues, have preference over claims of secured creditors was not at all in issue. If section 529‑A is considered it is clear that it has an overriding effect. Section 529‑A was brought in by an amendment and was inserted in the Companies Act by Act of 1985. The section makes it clear that notwithstanding anything contained in other provisions of the Act or any other law for the time being in force, dues of workers and debts due to the secured creditors to the extent such debts rank under clause (c) of the provisions of subsection (1) of section 529 pari passu with such dues shall be paid in priority over all other debts. To that extent it can be said that the question as posed in Starit India Ltd. (In liquidation), In re: (2000) 242 ITR 275 (Bom.) was not really required to be answered as workers dues under section 529‑A have preference over tax dues under section 178 of the Income‑tax Act as they are considered pari passu with the claims of secured creditors. The amendment to the Income‑tax Act was brought in 1961. Both are central legislations. Therefore, looking at the literal language of the two sections .it would be clear that the rights of the secured creditors would prevail over the rights of all other creditors. As seen from the judgment in Imperial Chit Funds (P:) Ltd. v. ITO (1996) 219 ITR 498 (SC), the question posed by the apex Court was whether the claim of tax would have precedence over the claim of the other creditors under section 530 in view of the provisions of subsection (5) of section 530 of the Companies Act. It is to that extent that the apex Court held that an order passed under section 178 of the Income‑tax Act will prevail over the rights of other unsecured creditors under section 530 of the Companies Act. This is also the view taken by a learned Single Judge of the Kerala High Court in Giovanola Binny Ltd. (In Liquidation), In re: (1990) 67 Com. Cas. 441. Though this question was not directly posed in the case of Polyolefins Industries Ltd. v. Kosmek Plastirs Manufacturing Co. Ltd. (1999) 98 Comp. Cas. 481 (Bom.), the learned Single Judge, while construing the provisions, held that in view of section 529‑A of the Companies Act the claims of the workers would have preference over those of the tax authorities under section 178 of the Income‑tax Act.

Once having so held, it is now clear that both under the general law as well as under the provisions of the Companies Act read with the provisions of the Income‑tax Act the rights of, secured creditors and workers as set out under section 529‑A would override the claims of tax authorities in respect of an order made under section 178 of the Income tax Act. Having said so, the objections raised on behalf of the official liquidator must be rejected.

I may mention here that my attention was invited to the judgment of the Division Bench of the Andhra Pradesh High Court in ITO v. Official Liquidator (1975) 101 ITR 470. The Division Bench of the Andhra Pradesh High Court has not taken any different view. There also what was under consideration was the claim of the unsecured creditors and claims under section 530(I)(a) read with the remand under section 178 of the Income‑tax Act.

The question is what relief is to be granted in so far as Company Application No. 116 of 1998 and Company Application No. 117 of 1998 are concerned. It has been brought to my notice that the claim by the applicants in both the cases is beyond time and there is no application for condonation of delay. In the light of that, prayer (b) in Company Application No.1.16 of 1998 cannot be considered as also prayer (a) in Company Application No‑117 of 1998. Considering the above at this stage, I do not propose to consider prayer clause (b) in Company Application No. 116 of 1998 and prayer clause (a) in Company Application No.117 of 1998 as even otherwise, the amounts claimed, considering the claims of the workers and the claim of the secured creditors, being part passu, pro rata would be to the extent of 50 per cent. of the sale proceeds. However, liberty to the applicants for taking out an application for condonation of delay and to reapply for the reliefs.

In so far as prayer (a) in Company Application. No. 116 of 199E is concerned there can be no objection to the same as it is the amount spent by way of expenses for sale. It is true that it has not been possible to separate the costs towards the two properties. That can be obviated by proportionately apportioning the costs bearing in mind the sale proceed realized in the sale of the two properties.

There has been another prayer by the applicants that money be deposited with them and that they are willing to give. a higher rate of interest compared to the interest presently received by the office of the official liquidator. The said offer can be made at the same time if the application for payment ~of part proceeds is made, if so advised as earlier set out. The deposits which have matured can be reinvested up to March 31, 1999.

In the light of that in Company Application No. 116 of 1998 rule is made absolute in terms of prayer clause (a) with interest at the rate of 11 per cent. per annum.

In the circumstances of the case, all parties to bear their own costs.

M.B.A./695/FCRule made absolute