' The present claim of the Income-tax and Sales Tax Department has arisen in the following circumstances ; Qasimpur Class Factory Ltd , Multan was ordered to be wound up on 14-ti-1971.
Sardar Zafarullab, deceased, an Advocate of this Court was appointed an Official Liquidator. After his death Mr. Shaukat Ali was appointed an Official Liquidator on the 24th of October, 1972. Since he declined to act as such, Mr. Masood Ghumman was appointed on the 29th of March, 1973 an Official Liquidator. He invited claims under section 191 of the Companies Act under orders of the Court. These claims were to be submitted by the 24th of March, 1974. The Income-tax and Sales Tax Department filed a claim on the 17th of September, 1973 for a sum of Rs, 5,74,298. Yet another claim in regard to Income-tax was filed by the Income-tax Officer before the Official Liquidator on the 12th of December, 1974 for a sum of Rs, 1,04,473. The third claim was filed in this Court on 26th July, 1976 for a sum of Rs, 9,33,749. The first claim for Rs, 5,74,298 was allowed by the Official Liquidator. A question arose about the second and third claim whether they were admissible in view of their having been filed after the expiry of the date fixed for inviting the claims as required by section 191 of the Companies Act. The matter came up for arguments in these circumstances before this Court.
2. I had an impression in this case that the second claim and the third claim included amounts for which the first claim had already been accepted. I, therefore, directed the Income-tax Department and Sales Tax Department to submit a detailed report in this connection. It is clear from this report that the Sales Tax in the third claim amounts to Rs, 8,29,278. The amounts already approved in the first claim are included in it. The main stress of the learned counsel for the Income-tax Department is upon the Income-tax. It appears from the statement filed before me that the claims of Income- tax for the years 1952-53, 1959-60, 1960-51, 1955-66 and 1967-68, have already been allowed. After the start of the winding-up proceedings some penal interest had been added which forms the subject-matter of the amount which is now being claimed in excess under the third claim.
3. In order to escape the provisions of section 191 of the Companies Act, Sh. Abdul Hach Advocate, relied upon two provisions of the Income-tax Act. One is section 43(c) which makes it obligatory upon an Official Liquidator to serve a notice of his appointment as such on the Income tax Officer entitled to assess the Company within 31 days of his appointment. Subsection (2) prevides that the Income-tax Officer shall notify to the Official Liquidator within three months of the date of receipt of the above notice, the amount, which in his opinion would be sufficient to provide for any tax which is then or is likely thereafter to become payable by the Company. Under subsection (3) the Official Liquidator is bound to set aside an amount equal to the amount so notified and until he sets such amount aside he shall not part with any of the assets of the Company or the properties in his hand except for the purpose aforesaid or for making any payment to secure any creditors whole debts are entitled under the law to remit for payment over debts due t3 Government on the date of liquidation. If the liquidator does not st aside the amount, subsection (4) provides for his personal liability to the extent of that amount for the payment of tax on behalf of the Company. Section 46(5) (a) is the second provision relied upon by the learned counsel. This provision authorises the Income-tax Officer to make recovery of the in Income-tax from the debtor of the assessee by serving notice upon such debtor. It also provides for discharge of liability of the debtor towards his creditor in case he pays the amount to the Income, tax Department. Since the debtor has been described as a 'person' in the section, there is an explanation clause explaining that the expression "person" as used in this subsection includes a trial Court, tribunal or any other authority.
4. The argument of the learned counsel is that since no notice as notified under section 43(c) was served in this case by the Official Liquidator upon the Income-tax Officer, the latter is not bound by the provisions of section 199, Companies Act and can file a claim at any time. So far as subsection
(5) (a) of section 47 is concerned, his argument is much more exhaustive. He argued that Income- tax Department is not bound to wait for the payment of its dues till all the assets are disposed of.
When confronted with the peovisions of section 230 of the Companies Act, he argued that the provision of subselion (5)(a) of section 46 which was added by Finance Act VI of 1950 impliedly repealed the provisions of section 230 and as such the Income-tax Officer need not even file a claim before the Court. The learned counsel referred t the pro visions of section 171 of the Companies Act which provides that when a win ling-up order has been made, no suit or other legal proceedings shall be proceeded with or commenced against the Company except by leave of the Court and subject to such term as the Court may impose. He relied upon the cases ; In re West Lalkdin Coal Co. Ltd. (I) and Commissioner of Income tax v. O official Liquidator, Agra Spinning & Weaving Mills Co. Ltd. (2), in support of the argument that in spite of this provision the Government has the right to proceed with the procedure of assessment and recovery of income-tax under the Income-tax Act without any leave of the Court. These two authorities do support the contention of the learned counsel.
5. There are two relevant provisions under the Companies Act, one provision is the provision of section 171 which has already been noticed. The other provision is section 232 which is as follows :- 232.-(1) Where any company is being wound up by or subject to the supervision of the Court, any attachment, distress or execution put in force without leave of the Court against the estate or effects (or any sale held without leave of the Court of any of the properties) of the Company after the commencement of the winding-up shall be void.
(2) Nothing in this section applies to proceedings by the Government.
' The correctness of authorities relied upon by the learned counsel came up for consideration before the High Court of Allahabad in Shtromani Sugar Mills Ltd. v. Governor-General-fn-Council (3). These two cases were specifically dissented from on the ground that the learned Judges who decided them had relied upon Henly & Company Ltd. (4) and Oriental Bank Corporation Limited (5), but these cases were no longer good law, under the latter English Companies Act. In Food Controller and others v. Cork (6) it was clarified by the House of Lords that the case cited as (1878)
9 Ch. D. 469 "though rightly decided as the English law stood in 1878, had ceased to be any authority, for the law as it stood from 1888 on wards." The House of Lords held in Food Controller and another v. Cork that "Section 209 of the Act of 1908 does bind the Crown, and it binds the Crown to a statutory scheme of administration of the assets wherein the prerogative right of the Crown to priority no longer exits."
6. As regards the distinction between sections 171 and 232 of the Companies Act, the Allahabad High Court took the view that while section 232 rendered void certain attachment, distress or execution, section 171 did not make reference to any such result and as such that is a provision which stands by itself irrespective and independent of section 232. A Full Bench of the Lahore Sigh Court had held in Smt. Shukantla v. People? Bank of Northern Ind a Ltd. (7) that the words "legal proceedings" in section 171 were ejusdem generis with the word "suit" used in that section. The Allahabad High Court dissented from this view and held that even the proceedings before the Income-tax Officer were included within the expression
(1) AIR 1926 Cal. 781 (2) AIR 1934 All. 170
(3) AIR 1946 All. 354 (1878) 9 Ch D 469
(4) (1884) 28 Ch. D 643 1923 A C 647
(5) A I It 1941 Lab. 392 'legal proceedings', although it was not the proceedings either by way of a suit or a proceeding before a Court of law. It was, therefore, found that such proceedings were hit by the barring provisions of section 171.
7. An appeal was taken against the judgment of the Allahabad High Court to the Federal Court of India. The view of the Allahabad High Court on all the above points was upheld by the Federal Court although the appeal was allowed on the interpretation of section 226 of the Government of India Act, 1935. It was held specifically that the view of the Lahore High Court in the Full Bench case was not correct. The same view about Income-tax Authorities being bound by the provisions of section 171 of the Companies Act was taken by a Bench of the Patna High Court in The Bank of B.Har Ltd. Patna v. Secretary of State and others (1). In this case also reliance was placed upon Food Controller v. Cork.
8. Again a similar question came up for consideration before the Chief Court of Sind In re : Companies Act, 1913 and of the Exchange Bank of India and Africa Ltd. (2). In that case the orders of assessm ent related to the years 1947-48, 1948-49, 1949-50 and 1950-51. The demand notice under section 29 of the Companies Act respecting the amounts found due under these assessment orders, was issued on the 2nd of March, 1953 and served upon the Official Liquidator of the Company which was wound up in the year 1949. The Official Liquidator asked for direction of the Court on two questions (1)Whether the Income-tax Officer is also bound to file his claim as regards income-tax amount due from the Company before the Official Liquidator or not ?
(2)Whether the claim of the Income-tax Officer regarding the above amounts of assessment dues should be given priority or preferential right or treatment or should the claim be treated as an ordinary claim for dividend?
' The first question was answered in the affirmative not only on the concession of the learned counsel of the Income-tax Department, but also by an Independent finding given by the Court itself. The second question was decided on the strength of the Federal Court authority referred to above. It is thus clear from these authorities that the Income-tax authorities or any authority of the Government dealing with matters of tax is bound by the provisions of the Companies Act regarding filing of the claim before the Official Liquidator.
9. The second and the third claims having been filed long after the expiry of the date fixed for the invitation of claims under section 191, the same are liable to be rejected as belated. I would have allowed these claim in spite of their being belated if there had been sufficient money with the Official Liquidator to satisfy them, but it appears from the statement of the Official Liquidator that the amount in his hand is less than Rs, 22,000 which is not sufficient even to meet the first claim already approved by this Court.
10. The reference to section 43-C of the Income-tax Act in this connection is absolutely misconceived for several reasons. The filing of the claim by the Income-tax Officer under section 191 of the Companies
(1) AIR 1932 Pat. 1 (2) PLD 1954 Sind 222 ' Act amounts to a waiver of his rights, if any, under the provisions of section 43-C. Section 43-C only provides for a procedure for setting aside a particular amount adjudicated upon by the Intone-tax Officer during the proceedings of winding up. It dots not take away the right of the Income-tax Officer to file a claim for the amount of the tax payable by the assessee-Company nor does that section provide for any exclusive method of filing a claim. Its object, discoverable from its language, is at most to provide for a machinery for claim of Income-tax Department which otherwise has a priority under section 230 of the Companies Act, at a stage much earlier than the one contemplated by section 191 of the Companies Act. The provision about service of a specific notice by the Official Liquidator within thirty days of his appointment as such is evidently to ensure knowledge on the part of the Income-tax Officer about the liquidation proceedings and safeguard of the payment of dues to the federal exchequer in consonance with the principle of priority of such dues over the other dues. A general notice under section 191 of the Companies Act may escape notice of the Income-tax Authorities Service of specific notice of liquidation eliminates this risk.
Then it provides for setting aside of an amount by the Official Liquidator of the amount notified by the Income-tax Officer as due, at his own risk. This also accords with the principle of priority since it restricts the use of the money required to be set aside except for the purpose of payment of the Income-tax dues.
10-A. The Income-tax Officer is nonetheless a gainer in another respect. Having obtained knowledge and information about the appointment of Official Liquidator and impossibility of payment of the income-tax dues except at a stage contemplated by the Companies Act, he is saved the botheration of taking proceedings of recovery of tax under section 46 of the Income-tax Act or of imposing penalties for its non-payment. The section thus aims at eradicating futile proceedings.
11. This being the evident object of the section, it cannot be invoked for nullifying the proceedings taken by the Official Liquidator under the Companies Act. The Income-tax Officer having filed a claim of income-tax dues is presumed to have obtained knowledge and information about the liquidation proceedings. He has already done under section 191, Companies Act what he was expected to do under section 43-C, Income-tax Act. This amounts to waiving by him of his rights, if any, under the last mentioned provision. A reference to it at this belated stage is hardly relevant. As regards the personal liability of the Official Liquidator, the Income-tax Officer cannot rely upon it after the death of Sardar Zafar Ullab Khan. In any case once the claim has been submitted and has been allowed and the amount to meet that claim falls short, the reference to a personal liability would be absolutely futile.
12. Although the learned counsel argued that subsection (5)(a) of section 46 has been added in the year 1950 in the Companies Act to meet the decision of the Federal Court of India, he has not been able to show any data in support of this proposition. Since section 230 ran counter to this argument, the learned counsel hid to urge that this section stood impliedly repelled. He referred to the dictum that if there are two conflicting provisions, they can be reconciled only by holding that the earlier provision stood impliedly repelled by the latter provision of law. But I do not agree with this proposition. In my view this is the duty of the Court to try to remove a conflict and to make an attempt to forge a reconciliation between the two provisions.
13. In the present case there is no conflict at all. The Income-tax Officer as stated above, is bound by the provisions of the Companies Act. He is bound to file a claim for the purpose of making recovery of the income-tax recoverable by him. Section 46 (5-A) which deals with proceedings of recovery against garnishee cannot be invoked merely on the strength of an explanation making the Court a person. The effect is only to declare a Court or Tribunal to be a garnishee. The explanation does not transcend this limit and declare expressly or impliedly the repeal of the provisions of D the Companies Act. Moreover the principle of garnishee is hardly applicable to the High Court dealing with cases under the Companies Act. The Court at no stage is substituted for the assessee nor is there any justification for declaring the Court to be his debtor. The Court only manages the property of the assessee-Company through an Official Liquidator pending its alienation and disbursement of the amount obtained thereby among the Companies' creditors in accordance with the provisions of the Companies Act.
14. This interpretation finds support from section 43-C, Income-tax Act which is relied upon by the learned counsel in another context. That section merely provides for the setting aside by the Official Liquidator of an amount notified by the Income-tax Officer as due against the assessee presumably pending payment of the same under the Companies Act. The disregard of such direction by the Official Liquidator makes him personally liable and not the Court. Section 43-C in its subsection (3) notices the priority of the debt of the secured creditor over the Income-tax dues and provides for sale of the property of the Company for satisfaction of such debt. It is therefore clear that the Court under the Companies Act is not a substitute for the Company or its debtor. The argument based on the explanation to subsection (5-A) of section 46 making the expression 'person' as including Court Is without any merit.
15. Section 230 of the Companies Act which is available to the Income-tax Authorities for the discharge of the liability of the Company, provides in its clause (a) that in a winding-up there shall be paid in priority to all other debts, inter alia all taxes, payable to the Government due from the Company at the date hereinafter mentioned and after becoming due and payable within the twelve months next before that date. Subsection (5)(a) of this section provides that the date hereinbefore mentioned in the case of a Company ordered to be wound up compulsorily is the date of winding-up order. It is clear from this that the Government can only recover that debt which was due from the Company on the date of the winding-up order and which bad become due and payable within twelve months before that date. In view of this clear provision the Income- tax Authority could neither impose any penal interest nor could claim its recovery.
16. So far as the claim under the Sales Tax Act is concerned, it was conceded by the learned counsel that there was no provision corresponding to section 43-C of the Income-tax Act in the Salee Tax Act and that his arguments about the third claim as also the second one were confined to the claim for the income-tax dues.
17. The upshot of the discussion is that the two claims filed contrary to the provisions of section 191 of the Companies Act, cannot be entertained and are hereby rejected.