Introduction 

• This is a landmark judgment relating to assessment of tax of a company which is being liquidated.      

Facts 

• The petitioner in this case is a private limited company and a notice was served under Section 22 (2) of the Income Tax Act, 1922 on the petitioner in respect of year 1958-59. 
• While the above assessment was pending, an application was made for winding up of the company under Section 439 of the Companies Act, 1956. 
• The Court ordered the winding up of the company on the ground that it was just and equitable to do so. 
• The winding up order was directed to be published in the newspapers as per Rules 112 and 113 of the Companies (Court) Rules. 
• The official liquidator took charge of the property and the statement of affairs of the company was made to him where the Income Tax Department was not shown as the creditor. 
• During the continuance of the liquidation proceedings a compromise was entered into between the company and it’s creditors and the company judge ordered the holding of the meeting for the purpose of consideration of the compromise. 
• Notice of the meeting was sent to the creditors by registered post and also published in the leader and the Bharat. 
• The meetings were held but the Income Tax Officer did not put any claim as no notice was served on him as such. 
• No proceedings were taken by the income tax department till 8th May 1962 when the income tax officer issued notice to the petitioner under Section 23 (2). 
• The company protested against these on the ground that the Income Tax Officer no longer had jurisdiction as the proceedings had commenced prior to the winding up order. 
• However, the Income Tax Officer did not accept the contention of the petitioner and held that he had jurisdiction to proceed. 
• Challenging this decision of the Income Tax Officer the present writ petition was filed under Article 226 of the Constitution of India, 1950 (COI). 

Issue Involved

• Whether even before an assessment is made the department can be said to be a creditor, contingent or prospective, of the company within the meaning of section 391 of the Companies Act, 1956? 
• Whether income-tax assessment proceeding are "other legal proceedings" which cannot thereafter be proceeded with within the meaning of section 446 of the Companies Act, 1956? 

Observation  

• Section 391: Compromise or Arrangement 
  • Allows compromise/arrangement between a company and its creditors/members if approved by three-fourths in value and sanctioned by the court.   
  • The Income Tax Department becomes a creditor only after an assessment and demand are made.   
  • Without assessment, the department cannot claim dues under a sanctioned scheme. 
• Section 446: Stay of Legal Proceedings in Liquidation 
  • No legal proceedings against a company in liquidation can continue without court approval.  
  •  Tax assessment proceedings are administrative and not considered "legal proceedings" under Section 446.   
• Tax Liability and Creditor Status 
  • Tax liability arises only after assessment and demand, making the department a creditor at that stage.   
  • Before assessment, there is no debtor-creditor relationship 
• Impact of Winding-Up Orders on Tax Proceedings 
  • Tax assessment proceedings can continue during liquidation without court permission.  
  •  Post-assessment recovery actions may require court approval under Section 446.  
• Judicial Precedents 
  • Tax assessments are governed by the Income Tax Act, a self-contained code.   
  • Recovery actions after assessment may fall under "legal proceedings" and need court approval. 

Conclusion 

• Tax authorities can only claim dues as creditors post-assessment, as tax liability crystallizes after demand.  
• Tax assessments are administrative and unaffected by liquidation, but recovery actions may need court approval. 

[Original Judgment]