Pure Drinks (New Delhi) Ltd. V. Income Tax Department and DCM Financial Services Pvt. Ltd.

CAPP/25/2015

AI Insights

The case involves multiple appeals related to the tax liabilities of M/s Pure Drinks (New Delhi) Ltd., which were under the jurisdiction of the Company Court due to winding up proceedings. The primary legal issue was whether the sale proceeds from the company's assets, sold under the orders of the Company Court, were subject to capital gains tax under section 45 of the Income Tax Act, 1961. The Company Court had earlier appointed retired High Court judges to oversee the sale of these assets, intending to distribute the proceeds to creditors if the company were ultimately wound up. The Income Tax Department contested the company's tax returns and assessed liabilities, leading to these appeals.

• Counselvise Citation: [2017] 140 COUNSELVISE.COM (IT) 815731 (HC-MISC)
• Appeal Type: Others
• Pronouncement Date: 24-05-2017
• Assessment Year: misc
• Laws Referred To: Income Tax Act, 1961, Companies Act, 1956
• Result in Favour of: Partly Allowed
• Court: HIGH COURT
• Department Lawyers: ZORA SINGH KLAR
• Assessee Lawyers: A S CHANDHIOK; MANMEET ARORA; AASHISH CHOPRA; SWETA KAKKAD; ANUKRIT GUPTA
• Keywords: Capital gains tax; Company in liquidation; Income Tax Liability; Winding up; Asset sale proceeds
• Section: 148; 271(1)(c); 529A; 45; 178; 530; 530(8)(c); 119(2)(d)

Judgement Text

"IN THE HIGH COURT OF PUNJAB & HARYANA AT CHANDIGARH Date of Decision: 24.05.2017 1. Company Appeal No. 25 of 2015 M/s Pure Drinks (New Delhi) Ltd. through its Director. …..Appellant versus Income Tax Department through its Commissioner and another …..Respondents 2. Company Appeal No. 26 of 2015 M/s Pure Drinks (New Delhi) Ltd. through its Director. …..Appellant versus Income Tax Department through its Commissioner and another …..Respondents 3. Company Appeal No. 27 of 2015 Commissioner of Income Tax, Patiala …..Appellant-non-applicant versus DCM Financial Services Pvt. Ltd. and another …..Respondents CORAM: HON’BLE MR.JUSTICE S.J.VAZIFDAR, CHIEF JUSTICE HON’BLE MR. JUSTICE ANUPINDER SINGH GREWAL, JUDGE. Present : Mr. A.S.Chandhiok, Senior Advocate with Ms. Manmeet Arora, Advocate, Mr. Aashish Chopra, Advocate, Ms. Sweta Kakkad, Advocate and Mr. Anukrit Gupta, Advocate, for the appellant(s). Mr. Zora Singh Klar, Advocate, for the respondent-revenue. **** Ravinder Sharma 2017.05.26 16:37 I attest to the accuracy and authenticity of this document Company Appeal No. 25 of 2015 and connected appeals 2 S.J.VAZIFDAR, CHIEF JUSTICE This is an appeal against the order and judgment of the learned Company Judge in an application filed on behalf of the company that is sought to be wound up. The petition is filed for winding up the company inter-alia on the ground that it is unable to pay its debts. By an order dated 28.08.1997 the company petition was admitted and was ordered to be advertised. In view of the nature of the impugned order, it is necessary to note that the company has not been ordered to be wound up. 2. The question that was raised in the company application in which the impugned order was passed is whether the sale proceeds of the assets of the company in liquidation under the orders of the Company Court are amenable to capital gains tax under section 45 of the Income Tax Act, 1961. Considering the stage at which the proceedings are before the Company Court and the order that we intend passing it is not necessary to set out the facts in detail. Suffice it to state that the Company Court had appointed retired Judges of the High Court at various points of time to sell the assets of the company obviously with a view ultimately to distributing the sale proceeds thereof to the creditors of the company in the event of the company being ordered to be wound up. 3. Two properties belonging to the company were sold. The company filed its tax return on 29.09.2011. Reassessment proceedings were initiated by the Income Tax Department under section 148 of the Act. The company resisted the penalty and interest imposed on account of it not having filed the returns within the prescribed time. It is contended on behalf of the company that it bona fide believed that the sale proceeds were not amenable to capital gains as the properties were sold pursuant to the orders of the Company Court. The company has Ravinder Sharma 2017.05.26 16:37 I attest to the accuracy and authenticity of this document Company Appeal No. 25 of 2015 and connected appeals 3 challenged the assessment order before the Commissioner of Income Tax (Appeal). The appeal is pending. 4. Pursuant to an interim order passed by the Company Court dated 04.08.2012, an amount of ` 18,34,44,615/- has been paid to the Income Tax Department as an interim measure. The applicant questioned the liability assessed under the Income Tax Act contending that the sale of its assets having been conducted under the orders of the Company Court in respect of the company in liquidation, the sale proceeds are not amenable to capital gains. The learned Judge noticed various provisions of the Companies Act, 1956 and the Income Tax Act. 5. It is important to note that throughout the judgment the learned Judge has referred to the company as being ‘in liquidation’ and that it is the asset of the company ‘in liquidation’ that was sold. The learned Judge was obviously aware of the fact that the company had not been ordered to be wound up. We do not think that the words ‘in liquidation’ used by the learned Judge indicate that the learned Judge was under a misapprehension that the company had been ordered to be wound up. That is the reason why the rights and liabilities of the parties have rightly not been crystallized by the learned Judge. The rights would be finally crystallized and determined only in the event of the company being ordered to be wound up. Till then all the interim payments made are only tentative. The learned Judge for instance noted as follows:- “Section 530(8)(c ) provides for expression, the relevant date to mean in the case of a company ordered to be wound up compulsorily, the date of the appointment or first appointment of a provisional liquidator or if no such appointment was made, the date of the winding up order. The statutory liabilities incurred by the company on the relevant date thus would have to be satisfied by the Official Liquidator in the order of prioritization indicated above. Such is not the question here as the disputed liability has been incurred by the company in winding up on sale of its assets under the orders of this Court after the relevant date and as per the assessment made by the Income Tax authorities subsequent to the relevant date. This means that a liability has been acquired after the relevant date. Ravinder Sharma 2017.05.26 16:37 I attest to the accuracy and authenticity of this document Company Appeal No. 25 of 2015 and connected appeals 4 The question of satisfaction of the statutory liability of a company in winding up would naturally fall upon the Official Liquidator who has to discharge such obligations in accordance with law and in terms of the precedence provided in the Act itself. The statutory authorities would naturally have to be in this queue of precedence if the liability of revenue, tax or cess is acquired after the relevant date to get their share from the resources of the company in liquidation i.e. after the claims of the workers and that of the creditors is satisfied.” These observations indicate that the learned Judge contemplated the rights and liabilities being determined finally only hereafter. 6. It was contended before us that the learned Judge positively held that the Company Court cannot determine the liability of the company under the Income Tax Act. The learned Judge has referred to this contention and dealt with the role of the Company Court in such cases. The learned Judge has also referred to various authorities on this issue. The grievance is that the learned Judge has held that the Company Court cannot determine the liabilities under the Income Tax Act. The learned Judge for instance observed that the said satisfaction of the statutory liability would arise once the proceedings before the competent authority are determined and the Company Court cannot take upon itself the role of the competent authorities under a statute to establish a liability which has its genesis in the process initiated by the another authority. The learned Judge observed that the authorities indicated that the Company Court would not take over the functions of the authorities under the Act and would leave the company to its remedies under the law and that once the issue is determined conclusively the liberty would be granted to the Income Tax Authorities to press their claim for satisfaction of the liability in accordance with the procedure envisaged in the Companies Act. Having said that the learned Judge concluded as follows:- “The plea of the respondents that under Section 178 of the Income Tax Act, the Official Liquidator would have to set aside the amount to satisfy statutory obligations is incorrect and has to be Ravinder Sharma 2017.05.26 16:37 I attest to the accuracy and authenticity of this document Company Appeal No. 25 of 2015 and connected appeals 5 negated for the simple reason that this liability which is now in question, was not incurred by it prior to the relevant date. The mere fact that liability was attracted subsequent to the date contemplated under Section 530(8)(1), would require the statutory authorities to join the queue as per order of precedence given in Sections 529A and 530 of the Companies Act. The amount of Rs.18,34,44,615/- deposited under the order of this Court shall be returned to this Court to satisfy the liability of the workmen and creditors secured and unsecured and in the eventuality of the liability of the workmen and the creditors secured and unsecured stands largely satisfied, then this amount shall be unhesitatingly given to the share of the revenue.” 7. The views are by no means conclusive. They are only tentative and rightly so as the order is passed only at the interim stage. The proceedings before the Company Court and before the authorities are pending. They may proceed. The issue whether the findings in the assessment proceedings bind the Company Court or the Official Liquidator or not can be decided subsequently. If the answer is in the negative the assessment order as finally determined would bind the Official Liquidator. If not the Company Court or the Official Liquidator, as the case may be, may go into the issue. If the Company is for any reason not wound up the parties would be left to their remedies in accordance with law. In any event the assessment order as finally settled would benefit even the Company Court in determining the issue. 8. Company Appeal No. 26 of 2015 was also filed by the company against the same order of the learned Single Judge which disposed of CA No. 679 of 2012, CA No. 55 of 2014 and CA No. 137 of 2015. In CA No. 679 of 2012, the company sought an order from the learned Company Judge directing the Income Tax Authorities to exercise its powers under section 119(2) (d) of the Income Tax Act in favour of the company by waiving the interest, if any, on the capital gains. The authorities under the Income Tax Act, however, refused to waive the interest. The rate of interest was reduced. The company, therefore, filed Ravinder Sharma 2017.05.26 16:37 I attest to the accuracy and authenticity of this document Company Appeal No. 25 of 2015 and connected appeals 6 CA No. 55 of 2014 to challenge this decision. CA No. 137 of 2015 was filed by the company for setting aside the demand notice levying penalty under section 271(1)(c ) of the Act for the financial years 2008-09 and 2009-10. The issues raised in these civil applications would also be decided subsequently alongwith other issues that we have referred to earlier. These applications cannot be dealt with separately at the same time. 9. The Company Petition No. 27 of 2015 has been filed by the Income Tax Department insofar as the learned Judge has directed the department to return an amount of about ` 18 crores. As far as the observations regarding the priorities are concerned, the same would be decided by the learned Company Judge subsequently alongwith other issues referred to above. It is not necessary to deal with the issue regarding the return of a sum of ` 18 crores in view of the statements made by the parties before us. 10. Mr. Chandok rightly agreed that the order of the learned Single Judge be modified by permitting the Income Tax Department to retain the amount of about Rs.18 crores as that would safeguard the company in the event of it held to be liable to capital gains tax. It is also agreed that an additional amount of ` 55 lacs shall also be paid to the Income Tax Department being the additional amount allegedly due towards the companies basic tax demand. The Registrar General shall by 15.07.2017 pay a sum of ` 55 lacs to the Income Tax Department from the amounts lying with him to the credit of the company. However, the Income Tax Department shall be entitled to retain the amounts without prejudice to the rights not only of the Company but all other parties concerned/interested. The same shall also be retained subject to orders in any proceedings including under the Income Tax Act or in the above proceedings. Ravinder Sharma 2017.05.26 16:37 I attest to the accuracy and authenticity of this document Company Appeal No. 25 of 2015 and connected appeals 7 11. All the appeals are accordingly disposed of. All the contentions of the parties including as to whether it is open to the Company Court/Liquidator to question the findings of the authorities under the Income Tax Act are kept open. (S.J. VAZIFDAR) CHIEF JUSTICE (ANUPINDER SINGH GREWAL) JUDGE 24th May, 2017 ravinder Whether speaking/reasoned √Yes/No Whether reportable Yes/No√ Ravinder Sharma 2017.05.26 16:37 I attest to the accuracy and authenticity of this document "