Case: COMMISSIONER OF INCOME-TAX Vs. KTC TYRES (INDIA) LTD

1. These appeals by special leave are directed against the judgment and order of the High Court of Kerala at Ernakulam dated October 11, 2002, whereby the High Court in exercise of its original jurisdiction passed orders on Report No. 58 in C.P. No. 19 of 1992, Report No. 40 in C.P. No. 2 of 1995 and Report No. 51 in C.P. No. 29 of 19951. It passed directions on the report of the official liquidator to the effect that no income-tax was payable on the sale proceeds of the charged assets of the company until the dues of the secured creditors and workmen were paid in full as envisaged by Section 529A of the Companies Act, 1956. We may refer to the representative facts from the case of M/s. KTC Tyres (India) Ltd. (in liquidation). 2. The company was ordered to be wound up on January 22, 1993. The movable and immovable assets of the company were sold by public auction in May, 1996, for a sum of Rs. 1,78,37,000. The Canara Bank and the IDBI Bank had a charge on the assets. After sale of such assets, the official liquidator settled the dues payable to the secured creditors and workmen which amounted to Rs. 12,57,12,181. The official liquidator filed income-tax returns on behalf of the company till the assessment year 1999-2000. The income-tax return disclosed that till the assessment year 1996-97, the company earned no income and it was only in the year 1996 that on sale of the charged assets, the amount of Rs. 12,57,12,181 was received. The official liquidator submitted his report to the court and prayed for a direction that the tax liability should be discharged only after fully satisfying the claims of the secured creditors and workmen as provided Under Section 529A of the Companies Act. The said contention has been upheld by the High Court. Section 529A provides as follows: 529A. Overriding preferential payment.-- (1) Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company-- (a) workmens dues; and (b) debts due to secured creditors to the extent such debts rank Under Clause (c) of the proviso to Sub-section (1) of Section 529 pari passu with such dues, shall be paid in priority to all other debts. (2) The debts payable Under Clause (a) and Clause (b) of Sub-section (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions. 3. The language of the section is clear and unambiguous and having regard to the clear language employed by the Legislature, there can be no doubt that notwithstanding any other provision in the Companies Act or any other law for the time being in force, in the winding up of a company, the workmens dues and debts due to the secured creditors to the extent such debts rank Under Clause (c) of the proviso to Sub-section (1) of Section 529 pari passu with such debts, shall be paid in priority to all other debts. There is no dispute that the debts due to the secured creditors are those described Under Section 529A (1)(b). 4. Having regard to the clear language of the section, Mr. Rajeev Dutta, learned senior Counsel appearing on behalf of the Union of India, submitted that the capital gains tax which was payable by the company to the Union of India must be treated as liquidation expenses and, therefore, must be paid first, even before the dues of the workmen and secured creditors are discharged. The submission must be rejected in view of the provisions of Section 530 of the Companies Act which puts the matter beyond controversy. Section 530 of the Companies Act in clear terms provides that in a winding up, in priority to all other debts all revenues, taxes, cesses, etc., shall be paid but this is made expressly subject to the provisions of Section 529A. The Act, therefore, does not treat the revenue taxes as liquidation expenses. Reading Sections 529A and 530 together, there is no escape from the conclusion that the liability towards workmens dues and debts due to secured creditors as provided Under Clause (b) of Section 529A (1), has to be paid in priority to all other debts, including tax dues to the Revenue. In view of the clear language of Sections 529A and 530, there is no escape from this conclusion, and we must, therefore, hold that the High Court was right in its decision.

Decision reasoning: 0[ds]3. The language of the section is clear and unambiguous and having regard to the clear language employed by the Legislature, there can be no doubt that notwithstanding any other provision in the Companies Act or any other law for the time being in force, in the winding up of a company, the workmens dues and debts due to the secured creditors to the extent such debts rank Under Clause (c) of the proviso to Sub-section (1) of Section 529 pari passu with such debts, shall be paid in priority to all other debts. There is no dispute that the debts due to the secured creditors are those described Under Section 529A (1)(b).The submission must be rejected in view of the provisions of Section 530 of the Companies Act which puts the matter beyond controversy. Section 530 of the Companies Act in clear terms provides that in a winding up, in priority to all other debts all revenues, taxes, cesses, etc., shall be paid but this is made expressly subject to the provisions of Section 529A. The Act, therefore, does not treat the revenue taxes as liquidation expenses. Reading Sections 529A and 530 together, there is no escape from the conclusion that the liability towards workmens dues and debts due to secured creditors as provided Under Clause (b) of Section 529A (1), has to be paid in priority to all other debts, including tax dues to the Revenue. In view of the clear language of Sections 529A and 530, there is no escape from this conclusion, and we must, therefore, hold that the High Court was right in its decision.