OFFICIAL LIQUIDATOR OF vs. THE TAX RECOVERY OFFICER

1 THE HIGH COURT OF KARNATAKA AT BENGALURU

DATED THIS THE 6TH DAY OF OCTOBER 2015

BEFORE

THE HON’BLE MR.JUSTICE H.BILLAPPA

COMPANY APPLICATION No.1374/2014 in COMPANY PETITION No.32/2011 BETWEEN:

Official Liquidator of; M/s.Jupiter Bioscience Limited (In Liqn) Attached to the High Court of Karnataka, “Corporate Bhavan”, No.26-27, 12th Floor, Raheja Towers, M.G.Road, Bengaluru – 01. …Applicant

(By Sri.K.S.Mahadevan, Adv., & V.Jayaram, Adv., for Official Liquidator)

AND:

Raichur Range, Udayanagar, Station Road, Raichur.

Circle – 1, Aayakar Bhavan,

2nd Floor, Sedam Road,

Kalaburagi. …Respondents

(By Sri.E.R.Indrakumar, Sr.Counsel for Sri.E.I.Sanmathi, Adv., for R1 & R2)

2 C.A.No.1374/2014 is filed u/s.446 of the Companies Act 1956 r/w.Rule 6 & 9 of the Companies (Court) Rules, 1959, praying that this Hon’ble Court to direct the respondent to remove the attachment and not to proceed for auction sale of the property of Company (in liqn) situated at No.24, Kolhar, IDA, Bidar and handover the possession of the Official Liquidator and etc.,

This C.A. coming on for Orders this day, the Court made the following: O R D E R

The applicant/Official Liquidator has filed the application praying to remove the attachment and direct the respondents not to proceed with auction sale of the property of the Company (in liquidation) situated at No.24, Kolhar, IDA, Bidar, Karnataka, and direct the respondents to hand over possession of the property to the Official Liquidator and for other reliefs.

3 3. The company in liquidation possessed the following properties. Unit Address Particulars of the property Whether sale has taken Sale consider ation Whom it was sold Unit 1: No.24 Kolhar, IDA, Bidar, Karnataka – 585401 Land and Buildings and plant and machinery situated at Sy.No.295, 296, 297 in the industrial area within the village limits of Kolhar Hobli, Kasaba Taluk, Bidar Dist. No

Income Tax Attachment is thereon NA NA Unit 2: Survey No.111, Cheriyal Village, Sangareddy Mandal, Medak District, Andhra Pradesh Land & Buildings and plant and machinery situated at Sy.No.111/E Sold by IFCI Ltd under SARFAESI Act, 2002 3.18 Crores M/s.Reddy Pharmac- euticals Ltd., New Delhi. Unit 3: Survey No.10 & 10/E2/A2, Goddapotharam Village, Jinnaram Mandal, Medak Dist, Andhra Pradesh. Land & Building and plant and machinery Sy.No.10 and 10/E2/A2 Sold by IFCI Ltd under SARFAESI Act, 2002 3.41 crores M/s.Sare Construct- ions Secunds Ltd.,

4 11.7.2014 was sent to the Dy. Commissioner of Income Tax Circle-1, Ayakar Bhavan, Gulbarga asking for information regarding income tax attachment on Unit No.1, property situated at Bidar, Karnataka.

5 valuation report. It is stated, the Income Tax Authorities have no locus standi to continue with the auction proceedings.

6 company (in liquidation). Therefore, the Official Liquidator has prayed to remove the attachment and direct the respondents to hand over possession of the property and books and records of the Company (in liquidation) to the Official Liquidator.

7 10. It is stated, the total demand outstanding for the years 2001-02, 2002-03, 2005-06, 2007-08, 2008-09, 2009-10 is to the tune of `.71.23 crores excluding the mandatory interest. The attachment is prior to the order of winding up. Therefore, the Revenue may be permitted to auction the attached properties. It is stated, the winding up proceedings will not bar or restrict the Revenue from recovering the amount due to the Government i.e., the respondents herein. The Revenue cannot be restrained from recovering the amount since right of Revenue is preserved under section 335(2) of the Companies Act, 2013. The Revenue’s right to recover the amount has to be given much importance than any other amount due. It is stated, the winding up proceedings will not come in the way of Revenue recovering the tax due from the assessee. Therefore, the attachment of property by the Revenue cannot be lifted and the Revenue may be permitted to proceed with recovery of dues. After adjusting the sale proceeds towards tax amount, the Revenue may be permitted to transmit the balance amount to the Official Liquidator. Therefore, the respondents have prayed to dismiss the application.

9 properties were attached prior to the winding up order. The Income Tax Authorities cannot be restrained from recovering the tax due. In response to the communication of the Official Liquidator, the respondents have informed the Official Liquidator about the dues of the company in liquidation. Under Section 178 of the Income Tax Act, on being notified, the Official Liquidator is bound to set apart the amount due and which becomes payable in future. Therefore, the Official Liquidator is bound to comply with the requirement of section 178 of the Income Tax Act. In support of his submission, he placed reliance on the decision of the Hon’ble Supreme Court reported in (1996)219 ITR page 498(SC).

10 liquidation). The Official Liquidator has received information that the company possessed the following properties: Unit Address Particulars of the property Whether sale has taken Sale consider ation Whom it was sold Unit 1: No.24 Kolhar, IDA, Bidar, Karnataka – 585401 Land and Buildings and plant and machinery situated at Sy.No.295, 296, 297 in the industrial area within the village limits of Kolhar Hobli, Kasaba Taluk, Bidar Dist. No

Income Tax Attachment is thereon NA NA Unit 2: Survey No.111, Cheriyal Village, Sangareddy Mandal, Medak District, Andhra Pradesh Land & Buildings and plant and machinery situated at Sy.No.111/E Sold by IFCI Ltd under SARFAESI Act, 2002 3.18 Crores M/s.Reddy Pharmac- euticals Ltd., New Delhi. Unit 3: Survey No.10 & 10/E2/A2, Goddapotharam Village, Jinnaram Mandal, Medak Dist, Andhra Pradesh. Land & Building and plant and machinery Sy.No.10 and 10/E2/A2 Sold by IFCI Ltd under SARFAESI Act, 2002 3.41 crores M/s.Sare Construct- ions Secunds Ltd.,

11 Income Tax attachment on Unit-I property situated at No.24, Kolhar, IDA, Bidar, Karnataka. In response to that, the representative of the Income Tax Authorities has visited the office of the Official Liquidator on 23.7.2014 and informed about the pending tax liability of the company in liquidation to the tune of `.71.23 crores and also regarding attachment of Unit 1 belonging to the company (in liquidation) situated at No.24, Kolhar, IDA, Bidar. It is stated, the Tax Recovery Officer, Raichur, has initiated process of auction sale of the said property. The proceedings are pending for want of valuation report. Therefore, the Official Liquidator has prayed to raise the attachment and direct the respondents not to proceed with the auction sale. When once the company is in liquidation, it is deemed that the properties are in the custody of the court.

12 Funds (P) Limited Vs. Income Tax Officer reported in (1996) 219 ITR page 498 (SC) has dealt with the scope of section 178 and the provisions of Section 530(1)(a) of the Companies Act. It is observed as follows;

“In the judgment under appeal, the Full Bench has followed the judgment of a learned Single Judge of the Kerala High Court in ITO Vs. Indian Traders Bank Ltd (1968) KLT 595. In the said decision Raman Nair, Acting Chief Justice, a Judge with considerable experience in company law, dealt with section 178 of the Income-Tax Act and section 529 and 530 of the Companies Act, and observed in his characteristic style, thus : “One wishes that section 178 of the Income- Tax Act, 1961, were more explicit, but, as I read that provision, I do not think that it affects the scheme of priority in section 530 of the Companies Act although its effect no doubt is that the amount set aside under sub-section (3) thereof has first to be applied to the satisfaction of the tax liability and in that sense the tax liability gets priority over the other debts of the company in the same way as a secured creditor who stands outside the winding up, or whose security is

13 redeemed under sub-section (4) of section 47 of the Provincial Insolvency Act r/w section 529 of the Companies Act, gets priority to the extent of the value of his security. But, although sub-section (3) of section 178 of the Income-Tax Act, which speaks of the liquidator making ‘payment to secured creditors whose debts are entitled under law to priority of payment over debts due to Government’ - the only payment I can think of by the liquidator to a secured creditor who has not relinquished his security is a payment under sub-section (4) of section 47 of the Provincial Insolvency Act, or to a creditor who, although he has not relinquished his security, has agreed to the liquidator selling the property free of his incumbrance on condition of his being given the same charge over the sale proceeds - seems to regard these as cases of priority, they are really not so much cases of priority as of the particular asset not being available for distribution among the creditors in the winding up. They stand on the same footing as, for example, trust funds. What is really available for distribution are the assets which come into the hands of the liquidator minus the trust monies, or the incumbrance of a secured creditor, or, in a case falling u/s 178 of the Income- Tax Act, the amount set aside or earmarked for

14 payment of the tax. For, reading sub-sections (2), (3) and (4) of that section together there can be no doubt that what the section does is to create a first charge on the amount set aside by sub-section (3) thereof for payment of the tax that might be admitted to proof. To say as the liquidator has done that the amount is set aside only for the purpose of paying the dividends that might be declared in respect of the tax liability and not the entire liability as proved in the winding up, so that the section serves only the limited purpose of ensuring that the assets of the company are not distributed beyond recall without reserving sufficient funds for the payment of dividends in respect of the tax liability which might not yet have been determined, and, therefore, not proved, is hardly in keeping with the wording of the section defective though it be. Sub- section (2) of the section, it may be noted, speaks of the tax payable by the company, and, sub-section (4), of the payment of the tax on behalf of the company, not of the dividends payable in respect of the tax liability. What the section contemplates is the payment of the tax eventually found due out of the amount set aside, not the payment of dividends in respect of the tax eventually found due. And, if this brings the section into conflict with section 530

15 of the Companies Act, the section must prevail by reason of sub-section (6) thereof - the question why income-tax alone of all Government dues should ride this high horse is not for me to answer. But, for purposes of section 530 of the Companies Act, the tax liability is an ordinary and not a preferential claim and it is only out of the amount set aside under sub-section (3) of section 178 of the Income- Tax Act, that the Revenue can claim payment of its debt to the exclusion of other creditors.” And the Division Bench in A.S.No 225 of 1968, affirming the above decision, observed thus : “…… we cannot ignore the provision in sub-section (2) of section 178 that the amount to be notified is not only the amount for which preference is given u/s 530 of the Companies Act, 1956, but the entirety of the income-tax dues of the company including that which may thereafter become payable. When we read this provision with the provision in sub- section (4) of section 178 of the Act which makes the liquidator personally liable for the payment of the tax which the company would be liable to pay if the liquidator failed to give notice in accordance with sub-section (1) of section 178, it appears to us that the provision in section 178(3) imports much more

16 than what was contended by counsel for the appellant. This is the view that has been taken in the judgment under appeal which, if we may say with great respect, deals with all aspects in a few sentences. We respectfully agree with the view taken by the learned Judge.” Approving the above dicta, the Full Bench has further laid stress on the crucial words occurring in section 178(2), 178(3) (b) of the Income-Tax Act, which behoves the official liquidator “to set aide the amount” equal to the amount notified by the Income-Tax Officer and held that these words mean “keeping separate for special purpose” and the words “set aside” or “set apart” are synonymous with the word “appropriate”. The Full Bench has observed in paragraph 6 of the judgment thus: “The shades of meaning thus attached to the expression “set aside” convey the idea of an appropriation or an allocation of the income-tax dues; with the result, that it stands outside the winding up by the company Court - an idea suggested in the judgment of Actg CJ, Raman Nayar, confirmed by the Division Bench.”

17 The Andhra Pradesh High Court in the decision reported in ITO Vs Official Liquidator (1975) 101 ITR 470; (1976) 46 Comp Cas 46 has taken a similar view. We are of the opinion that the judgment of the learned Single Judge of the Kerala High Court in ITO Vs Indian Traders Bank Ltd (1968) KLT 595, affirmed in A.S.No. 225 of 1968 and approved by the Full Bench in the judgment under the appeal as also the decision of the Andhra Pradesh High Court in ITO Vs Official Liquidator (1975) 101 ITR 470; (1976) 46 Comp Cas 46; lay down the law correctly. On a total view of the relevant statutory provisions, it appears to us, that the Income-Tax Department, is treated as a “secured creditor.” The decisions of the Mysore, Calcutta, Rajasthan, Gujarat and the Delhi High Courts have failed to give due importance to the legislative history and background that led to the enactment of the section and the crucial words occurring in section 178(3) and 178(4) of the Income-Tax Act to the effect that the official liquidator “shall set aside” the amount notified by the Income-Tax Officer and if it is not so done, the official liquidator is personally liable to pay the amount of tax which the company would be liable to pay. It should be remembered that section 178 of the Income-Tax Act occurs in Chapter XV of the Act.

18 The object sought to be achieved by the provisions in the said Chapter is “to fasten liability to pay the tax” on the income received and to catch the income at the earliest point of time and tax the same where it is found, instead of waiting for long. We, therefore, hold that the judgment under appeal does not merit interference by this Court 17. It is clear from the above decision, the Hon’ble Supreme Court has considered the scope of section 530(1)(a) of the Companies Act and section 178 of the Income Tax Act. The Official Liquidator is bound to follow it. The attachment made by the Tax Recovery Officer, Raichur range, Raichur, is in force. Therefore, the Official Liquidator cannot take possession or deal with the property. The property is deemed to be in the custody of this court in view of the winding up proceedings. Therefore, it is appropriate to raise the attachment and permit the Official Liquidator to take possession of property and proceed in accordance with law. It is also necessary to direct the respondents to hand over books and records, if any with them, to the Official Liquidator.

19 Accordingly, C.A.No.1374/14 is allowed and the attachment made by the Tax Recovery Officer, Raichur Range, Raichur in respect of the property situated at No.24, Kolhar, IDA, Bidar, Karnataka, is hereby set aside. The Official Liquidator is permitted to take possession of the property situated at No. 24, Kolhar, IDA, Bidar, Karnataka, belonging to the company (in liquidation) and proceed in accordance with law. The respondents 1 and 2 are directed to hand over books and records, if any with them, to the Official Liquidator. Insofar as the appointment of approved valuer is concerned, the Official Liquidator can move this court after taking possession of the property. The Official Liquidator shall consider the claim of the Revenue i.e., the respondents keeping in view Section 178 of the Income Tax Act and also Sections 529, 529A and 530(1)(a) of the Companies Act and also the decision of the Hon’ble Supreme Court reported in (1996)219 ITR page 498(SC).

Sd/-

JUDGE Dvr: