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PETITIONER:

RAJRATHA NARANBHAI MILLS. CO. LTD.

Vs.

RESPONDENT:

SALES TAX OFFICER, PETLAD

DATE OF JUDGMENT19/02/1991

BENCH:

PUNCHHI, M.M.

BENCH:

PUNCHHI, M.M.

SAIKIA, K.N. (J)

CITATION:

1991 SCR (1) 527 1991 SCC (3) 283

JT 1991 (2) 117 1991 SCALE (1)244

ACT:

Companies Act, 1956: S. 530(1)(a)-State's claim to

priority in relation to sales tax dues from a company in

liquidation-Ambit of.

Expression 'having become due and payable within the

twelve months next before the relevant date'-Meaning and

scope of.

HEADNOTE:

The appellant company was ordered to be wound up by

Court's order dated 26.6.1967. The liquidator invited

creditors to prove their debts or claims and to establish

title, if any to determine priority under s.530(1)(a) of the

Companies Act, 1956. The Sales Tax Officer submitted a

comprehensive claim of sales tax plus penalty and claimed

priority. The liquidator rejected the claim for priority in

its entirety but admitted a part of it payable as debt with

other unsecured creditors.

The Revenue appealed to the High Court contending that

the liquidator erred in law in not granting priority to the

claim to sales tax payable by the company for the period

from 1.4.1957 to 31.12.1965 under the Bombay Sales Tax Act,

and for period from 1.7.1957 to 31.12.1965 under the Central

Sales Tax Act inasmuch as notice of demand was issued and

assessment order was made in respect thereof within a period

of 12 months before the relevant date.

The Company Judge, interpreting s. 530(1)(a) of the

Act, held that tax becomes due when taxing event occurs and

not when assessment orders passed; that even though the

amount for which priority was claimed was the amount of tax

arrears that became payable at the time of making assessment

orders after giving credit for what was paid alongwith

return, yet it was due for a period much prior to 12 months

next before the relevant date, and rejected the appeal on

that score, but allowed the claim to the extent of a small

amount of penalty under the two Sales Tax Acts upto the

relevant date.

The Revenue filed an intra court appeal, which along

with another referred matter was heard by a Division Bench.

The Division Bench held that sales tax becomes due and

payable when the tax has

528

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been assessed and notice of demand for its payment is

served. It allowed the claim of priority to the sales tax

due under the two Acts, assessment orders in respect of

which were passed within the period of 12 months immediately

preceding 26.6.1967. The balance amount was directed to

rank as ordinary debts since the relevant orders were passed

after the date of winding up order. The claim of recovery

of penalty was negatived, because the demand was held to be

without application of mind as to whether there was

reasonable cause for the official liquidator for not paying

the amount. Aggrieved, the company filed the present appeal

by certificate.

Allowing the appeal, this Court,

HELD: 1. Section 530(1)(a) of the Companies Act, 1956

provides that State has a priority over debts, liability and

obligation of which was born within the time frame of 12

months next before the relevant date and as such due and

becoming due and payable within those twelve months,

ascertainable, if necessary, later if not already

ascertained. Thus the legal philosophy which permeats the

provision is that the debts due and payable, so as to claim

priority must be appropriated to the period within 12 months

next before the relevant date and their liability for

payment must be founded during that period and no

other.[536G-H, 537 A-B]

2.1 The words 'having become due and payable within the

twelve months next before the relevant date' occurring in

clause (a) of s. 530(1) of the Companies Act need be

understood to mean putting a restriction or cordoning off

the amount for which priority is claimable and not in

respect of each and every debt on account of taxes, rates

and cesses, etc. which may be outstanding at that time and

payable. And that such priority is in respect only of debts

those of which became due and payable because the liability

to those is rooted, founded and belonging to that period of

twelve months prior to the relevant date and none other;

both the conditions existing. [537C-E]

Airedale Garage Co. In re:Anglo-South American v. The

Company, [1832] Vol. 2 Company Cases 570, referred to.

2.2 Both Benches of the High Court gave to the

provision a very wide and varied interpretation and that too

on literality and gramaticals. The Single Judge was not

right in taking the view that the word 'due' in the first

part of clause (a) of s.530(1) of the Companies Act was to

mean 'outstanding and payable at the relevant date' and in

the expression ' having become due' in the later part of the

clause meant that the

529

event which brought the debt into existence occurred and

also it became payable so as to be enforced against the

company within twelve months before the date of order of

winding up. The Division Bench erred in holding that the

only meaning that could be assigned to the word 'due'

occurring in the section was 'it must be presently due' and

the words 'due and payable' meant that it must be presently

payable. [536G, 531D-E & 532F-G]

Sales Tax Officer, Petlad v. Rajratha Naranbhai Mills

Co. Ltd. and Another, [1974] Vol. 44, Company Cases 65 and

Baroda Board & Paper Mills Ltd. (in liquidation) v. Income

Tax Officer etc, [1976] Vol. 46 Company cases 25, overruled.

3. The liquidator was directed to re-examine the claim

and to ascertain as to whether the liability to sales tax

belonged to and was founded within the period of 12 months

next before 26 June, 1967, and as such due and payable, but

preserving the order of the Division Bench in relation to

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its view on penalties. [537E-G]

JUDGMENT:

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2891

(NT) of 1977.

Appeal by Certificate from the Judgment and Order dated

15.10.1975 of the Gujarat High Court O.J. Appeal No. 2 of

1975.

B. Datta, P.H. Parekh and J.P. Pathak for the Appellant.

Dushyant Dave, Anip Sachthey and Ashish Verma for the

Respondent.

The Judgment of the Court was delivered by

PUNCHHI, J. What is the ambit of the State's claim to

priority in relation to revenues, taxes, cesses and rates,

due from a company in liquidation, is the question which

stands posed in this appeal by certificate, granted by the

High Court of Gujarat, in O.J. Appeal No. 2 of 1975. The

question arises on the frame of section 530(1)(a) of the

Companies Act, 1956, as it stood at the relevant time, which

is set out below:

"In winding up, there shall be paid in priority to

all other debts-all revenues, taxes, cesses and

rates due from the company to the Central or a

State Government to a local authority at the

relevant date as defined in clause (c) of

530

sub-section (8), and having become due and payable

within the twelve months next before that date.

And sub-section (8)(c) of section 530 says:

"The expression 'the relevant date' means-(i) in

the case of a company ordered to be wound up

compulsorily, the date of appointment (or first

appointment) of a provisional liquidator, or if no

such appointment was made the date of the winding

up order, unless in either case the company had

commenced to be wound up voluntarily before that

date; and

(ii) in any case where sub-clause (i) does not

apply, the date of the passing of the resolution

for the voluntary winding up of the company."

The appellant-company was ordered to be wound up by an order

of Court made on June 26, 1967. The liquidator after

obtaining directions of the Court invited the creditors of

the company to prove their debts or claims and

simultaneously to establish any title they may have to

priority under section 530. Pursuant to this invitation the

Sales Tax Officer, Petlad submitted a comprehensive claim in

the sum of Rs. 70945.60 as the amount of sales tax plus

penalty payable by the company and claimed priority for the

whole amount. The liquidator rejected the claim for

priority in its entirety, but admitted claim to the tune of

Rs.42143.63 payable as debt paripassu with other unsecured

creditors of the company.

The Sales Tax Officer took the matter in appeal before

the Company Judge under Rule 164 of the Companies (Court)

Rules, 1959 which was heard by D. A. Desai, J. (as he was in

the Gujarat High Court). It was urged on behalf of the

Sales Tax Officer that out of the admitted claim in the

amount of Rs.42,143.83, the liquidator was in error in not

granting priority in payment of debt of Rs.22,280.96

consisting of Rs.11,064.46 being sales tax payable by the

company for the period from April 1, 1957 to December 31,

1965, under the Bombay Sales Tax Act and balance of Rs.

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11,216.50 being the amount of sales tax payable under the

Central Sales Tax Act for the period from July 1, 1957 to

December 31, 1965, because the assessment order was made in

respect of the aforementioned claim within a period of 12

months next before the relevant date and the notice of

demand which made the tax payable was also issued within a

period of 12 months next

531

before the relevant date. It was urged that apart from any

other consideration the petitioner is entitled to a priority

in payment for the amount of Rs.22,280.96 as the claim was

of sales tax which was due on the relevant date and which

became due and payable within 12 months next before the

relevant date. It was conceded that balance of the admitted

claim in the amount of Rs. 19,862.87 being the amount of

sales tax due and payable under the Bombay Sales Tax Act for

the period from January 1, 1966 to June 26, 1967, would not

be entitled to priority in payment. It was also conceded

that the claim for an amount of Rs. 196.42 had been rightly

rejected. It would appeal that from the claim admitted as

payable by the liquidator to the extent of Rs. 42,143.83

priority in payment was claimed for the amount of

Rs.22,280.96 on the submission that the claim represented

the claim for tax payable to the State Government as it was

due on the relevant date and had become due and payable

within 12 months next before the relevant date, and

therefore, it was entitled to a priority in payment as

envisaged by section 530(1)(a) of the Companies Act.

The learned Judge on interpretation of section

530(1)(a) took the view that the word 'due' implies or

conveys meanings in juxtaposition in which it is used in the

two parts of the same clause. The word 'due' in the first

part of the clause must mean 'outstanding at the relevant

date'. When it occurs in the expression 'having become due'

in the later part of the clause, it means that the event

which brought the debt into existence occurred and also it

became payable, meaning thereby that its payment could have

been enforced against the company within the twelve months

before the relevant date, that is, the date of the order of

winding up. Three specific conditions are prescribed in the

clause and all the three must co-exist and be satisfied in

respect of any particular debt for which priority is

claimed. The three conditions are:

(i) Debt of the kind mentioned in the clause must

be outstanding on the relevant date;

(ii) The debt must have become due, in the sense

that it must have been incurred at any time within

the twelve months next before the relevant date;

and

(iii) The debt must have payable at any time within

the twelve months next before the relevant date.

To conclude, the learned Judge observed that the tax becomes

due

532

when taxing event occurrs and not when assessment orders

passed and that the claim for priority was rightly negatived

by the liquidator because even though amount for which

priority was claimed was the amount of tax arrears that

became payable at the time of making assessment orders after

giving credit for what was paid alongwith return, yet it was

due for a period much prior to 12 months next before the

relevant date and even if it had become payable on the

assessment order being made and demand notice being issued,

as both the conditions did not co-exist and were not

satisfied, claim for priority had been rightly nagatived by

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the official liquidator requiring no interference in his

order. The appeal on that score was rejected but was

allowed to the extent of a small amount of Rs.1225.36 being

the amount of penalty under the Bombay Sales Tax Act and the

Central Sales Tax Act upto the relevant date and the

liquidator was directed to admit the said claim over and

above the claim admitted by him. The judgment of the D.R.

Desai, J. is reported as Sales Tax Officer, Petlad v.

Rajratha Naranbhai Mills Co. Ltd. & Another, [1974] Vol. 44,

Company Cases 65.

An intra Court Appeal was preferred by the Sales Tax

Officer, Petlad in the High Court. In the meantime in

another case of Baroda Board & Paper Mills Ltd., a company

in liquidation, the Income Tax Officer filed Company

Application No. 2 of 1973 before the Company Judge claiming

priority in respect of certain dues. The Company Judge, B.

K. Mehta, J. was engaged to determine the same question.

His attention was invited to the decision of D.A. Desai, J.

in the instant case. D.K. Mehta, J. was unable to agree

with the conclusion reached by D.A. Desai, J. and hence the

matter was referred to a Division Bench to have the entire

question decided along with O.J. Appeal No. 2 of 1975.

The division bench of the High Court differed from the

view of D.A. Desai, J. by holding that the only meaning that

could be assigned to the word 'due' occuring in the section

is 'it must be presently due' and the words 'due and

payable' mean the same thing, namely, that it must be

presently payable. On this understanding it was held that

all revenues, taxes, cesses and rates due from the company

to the Central or State Government or to a local authority

must be presently payable, that is, that the liability could

be enforced as at the relevant date and, secondly, it must

have so become presently payable within twelve months

immediately preceding the relevant date. Further regarding

sales tax it was held that it becomes due and payable when

the tax has been assessed and a notice of demand for payment

of that tax is served

533

upon the assessee or the dealer concerned and it is in this

sense that the word has to be interpreted. Taking that view

the appeal of the Sales Tax Officer was allowed inasmuch as

the sales tax due under the Bombay Sales Tax Act and the

Central Sales Tax Act in respect of which the assessment

orders were passed within the period of twelve months

immediately preceding June 26, 1967 were held to have

priority. The balance amount as dues was directed to rank

as ordinary debts without any priority, since the relevant

orders were passed after the date of the winding up order.

The claim of the Sales Tax Officer to the recovery of

penalty in liquidation proceedings was negatived because the

demand was held to be without application of mind as to

whether there was reasonable cause for the official

liquidator for not paying the amount. O. J. Appeal No. 2 of

1975 was allowed to this extent. The Judgment of the High

Court is reported as Baroda Board & Paper Mills Ltd. (in

Liquidation) v. Income-Tax Officer etc., [1976] Vol. 46

Company Cases 25. Clash of interpretation of section

530(1)(a) is the cause in this appeal.

We have gone through both the judgments afore-referred

to very carefully and minutely and have heard learned

counsel on the conflicting decisions. There are wide ranging

discussions in the interpretative process relating to the

word 'due' occuring in the earlier part of the provision and

the words 'due and payable' in the later part, and whether

they are different expression meant to convey differently or

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they mean the same thing. With due respect to the High

Court, we feel that relevant and important considerations

and material though available, which could go to interpret

the section purposively was over looked, and at this

juncture we wish to put it to use.

Section 530 of the Companies Act, 1956 is the same as

section 230 of the Indian Companies Act, 1913. The old

section 230(1)(a) of the Indian Companies Act, 1913 was

analogous to Section 261 of the English Companies Act

laying down that there shall be priority on certain debts

named therein. In Airedale Garage Co. In re: Anglo-South

American Bank v. The Company, [1932] Vol. 2 Company Cases

570 in the Court of Appeal, Lord Hanworth, Master of Rolls

explained the meaning of the provision at page 574 in the

following words:

"Now section 264 says that in the winding up of a

company 'there shall be paid in priority to all

other debts' certain debts, namely, 'parochail or

other local rates .....assessed taxes ....property

or income tax .....wages or salary of any clerk or

servant 'during four months next before the

534

relevant date ....not exceeding fifty pounds,'and

others, and it is these debts which are to be

marshalled and paid in accordance with the priority

given to them by section 264. With regard to local

rates it is provided that priority shall be given

to 'All parochial or other local rates due from the

company at the relevant date'-The relevant date

being the date of the appointment of the receiver,

in this case, January 28, 1931-'and having become

due and payable within twelve months next before

that date'. Those words are put in to restrict the

amount for which priority is given. It is not

priority in respect of all the debts for local

rates which maybe outstanding at that time; the

priority is in respect only of such rates as became

due and payable within twelve months before, in

this case, January 28, 1931."

And further at pages 577-78 as follows:

"The rate was made on April 1, 1930; at that time

it became due and payable. The alteration that has

been made subsequently in September of the year

1931 is to fit into the section to which I have

referred, and by that section it is to be deemed to

have had effect as from the commencement of the

period in respect of which the rate was made. In

those circumstances it seems quite plain that the

sum in contest in the present case must be

appropriate to that period and that period alone,

and, although ascertained at a later date, it

nonetheless belongs to and is founded upon the

liability to rates during that period and no other.

I find myself, therefore, unable to give a limited

meaning to the words, as Eve, J., has done. I think

the words referred to in section 264 of the

Companies Act, 'due and payable', meant to refer to

a liability in respect of which there had to be a

solution-Solvendum in futuro-of that particular

debt, and that particular debt is now to be deemed

to have accrued within the period of the twelve

months next before the relevant date."

In A. Pamaiya's the Companies Act, Eleventh Edition,

1988, it has been noticed at page 1320 that Section 530 of

the Companies Act, 1956 has been largely recast and amended

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in the light of the following recommendations (exerpted) of

the Company Law Committee in paragraph 218 of their Report:

535

"Section 230 of the Act of 1913 deals with the

important subject of preferential payment. The

principle underlying this section is that the debts

and liabilities enumerated in it should be treated

as preferential debts as compared with ordinary

unsecured debts. The right of secured creditors

other than debenture-holders secured by a floating

charge are not affected in any way. They remain

outside the scope of the winding-up proceedings and

their security remains unaffected by the provisions

of this section. We have set out in the Annexure

to our Report the details of our recommendations,

which broadly follow the provisions of the English

Companies Act. Briefly, the more important of these

recommendations are as follows:

(i) xxxxx

(ii) xxxxx

(iii) xxxxx

In this connection we should like to refer to a

memorandum that we received from the Central Board

of Revenue, on the question of a priority to be

given to crown demands generally and, in

particular, to arrears of income-tax, super tax and

corporation tax. It was suggested that there

should be no time-limit for the preferential

payment of these crown debts and that section 230

of the Indian Companies Act should be amended

accordingly. The practical difficulty of giving

effect to the suggestion is that it would place a

great majority of the unsecured creditors of the

company at the mercy of the income-tax authorities,

inasmuch as, whatever may be the nature of the

security on which they may have lent money to a

company at the time of the loan, the unforeseeable

demands of the income-tax authorities on the

company without any time-limit would rank over the

claims of such creditors. In these circumstances,

it may be extremely difficult for the company to

raise capital for its working. In this connection,

we would draw attention to the provisions of clause

(a) of sub-section (1) of section 319 of the

English Companies Act, 1948, under which arrears of

land tax, income-tax, profits tax, excess profits

tax or other assessed taxes rank in priority over

other debts of a company only if they have been

assessed on the company up to a particular date,

namely, 5th

536

April or prior to the appointment of the liquidator

or resolution for the winding up of the company and

do not exceed in amount the whole of one year's

assessment. It will be noticed that by comparison

the provision of clause (a) of sub-section (1) of

section 230 of the Indian Companies Act, is much

wider and gives much more latitude to the income

tax authorities for under these provisions, arrears

to taxes would rank in priority if they have become

due and payable within twelve months next before

the date on which they are payable irrespective of

whether such taxes have been assessed on the

company or not. We are aware of the large arrears

of income and other taxes which are due by many

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companies, which are in liqudation, but we would

venture to think that the remedy for this

unsatisfactory situation is not the conferment of

preferential rights without limit to the income-tax

authorities under section 230 of the Indian

Companies Act, but the energetic completion of

assessment proceedings and vigorous measures for

the collection of the assessed taxes."

In Pennington's Company Law, Fourth Edition, Chapter 26

titled 'Rules Common to All Liquidations; occuring under the

head "Preferential Claim and Payments" at page 768 it is

observed as follows:

"The Inland Revenue may select the unpaid

corporation or income tax for any one year as its

preferential claim, and is not restricted to

claiming the tax for the most recent year which

ended on or before April 5 immediately preceding

the relevant date. Moreover, when there are two or

more kinds of unpaid taxes, the Crown may select

different years for different taxes, but since

advance corporation tax is paid as an advance

instalment of the company's liability for

corporation tax for the accounting period in which

the advance corporation tax falls due, it would

seem that the Inland Revenue may claim preference

for both advance corporation tax and mainstream

corporation tax only in respect of the same year.

Both benches of the High Court, with due respect, gave

to the provision a very wide and varied interpretation and

that too on literality and grammaticals seemingly

overlooking the legal philosophy which permeats the

provision, the same being that the debts due and

537

payable, so as to claim priority, must be appropriated to

the period within 12 months next before the relevant date

and their liability for payment must be funded during that

period and no other. To put it in simpler words, the State

has a priority over debts, liability and obligation of which

was born within the time frame of those twelve months and as

such due and becoming due and payable within those twelve

months next before the relevant date, ascertainable if

necessary later, if not already ascertained. We are in

respectful agreement with the interpretation put by the

Court of Appeal to section 264 of the English Companies Act

in Airedale Garage's case (supra), analogous as it is to the

provision in hand, warranting the same interpretation; more

so when any other interpretation would lead to the results

feared by the Company Law Committee extracted above. In

such view of the matter, we need not elaborately comment,

discuss or demolish, sentence by sentence, the reasoning

given buy the single bench as also the division bench of the

High Court towards interpreting the provision. The words

'having become due and payable within 12 months next before

the relevant date' need be understood to mean putting a

restriction or cordoning off the amount for which priority

is claimable and not in respect of each and every debt on

account of taxes, rates and cesses etc. which may be

outstanding at that time and payable. And further that such

priority is in respect only of debts those of which become

due and payable because the liability to those is rooted,

founded and belonging to that period of twelve months prior

to the relevant date and none other; both the conditions

existing.

For the view above taken, we allow the appeal of the

Company in liquidation and direct that liquidator to re-

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examine the claim for priority in accordance with the

interpretation of the provision put by us, that is to say,

he must first ascertain as to whether the liability to sales

tax belongs to and is founded within the period of 12 months

next before 26 June, 1967, and as such due and payable but

preserving, however, the order of the division bench in

relation to the view it has taken about penalties. In the

facts and circumstances of the case, we order that there

should be no order as to costs.

R.P. Appeal allowed.

538