United Provinces Electric Supply Co. Ltd v. Commissioner Of Income-tax

SUHAS CHANDRA SEN, J.

(1). The Tribunal has referred the following three questions of law to this court under Section 256(1) of the Income-tax Act, 1961 (for short, "the Act") : "1. Whether, on the facts and in the circumstances of the case, the return signed by the liquidators in the present case is non est in law and in view thereof, the assessment is void ab initio 2. Whether, on the facts and in the circumstances of the case, the expenditure of Rs. 92,565 is allowable deduction under Section 57(iii) of the Income-tax Act, 1961, or otherwise, while computing the total income of the assessee for the accounting period relevant to the assessment year 1976-77 3. Whether, on the facts and in the circumstances of the case, in computing the income of Rs. 1,001 under Section 41(2) of the Income-tax Act, full effect should have been given to Section 41(2) read with Section 41(5) of the Income-tax Act, 1961"

(2). The assessment year involved is the assessment year 1976-77, for which the relevant accounting year is the financial year ended March 31, 1976.

(3). The facts as narrated by the Tribunal in the statement of case are as under : The assessee-company had gone into voluntary liquidation pursuant to the special resolution of the assessee-company at the annual general meeting of the shareholders of the said company held on September 30, 1966. By that resolution, it was decided that the assessee-company be wound up voluntarily as a members voluntary winding-up. By another resolution, A.G.M. Twining, A.B. Bhattacharya and L.H. Das, all of Calcutta, were appointed liquidators of the assessee-company for the purpose of winding up its affairs and distributing its assets with joint and several powers detailed therein including the authority to them to act jointly or severally and to exercise all or any of the powers enumerated in Clauses (a) to (d) of Sub-section (1) of Section 457 of the Companies Act, 1956. Therefore, for the year under consideration, the liquidator, Shri A. B. Bhattacharya, for himself and the other liquidators filed the return of income for the year under consideration. After the assessment for the year under consideration was completed by the Income-tax Officer, he (said liquidator), filed the appeal both before the Appellate Assistant Commissioner and the Tribunal. The preliminary objection of learned counsel for the assessee, Mr. Guha, is that the return filed on behalf of the assessee-company is non est in law, because it is not signed by the director or the managing director as required by Section 140(c) of the Act. It was signed by the aforesaid liquidator who, according to Mr. Guha, was not competent either to sign or to verify the return on behalf of the assessee for the year under consideration. Since the return was non est, so was the position of the appeals filed by the said liquidator both before the Appellate Assistant Commissioner and before the Tribunal.

(4). The Tribunal gave consideration to the above arguments and held as under : "The factual position in the case of the assessee is similar to that in the case of Upper Ganges Valley Electricity Supply Co. Ltd. (In voluntary liquidation). The arguments canvassed before us were also the same as canvassed before the Tribunal on the earlier occasion. We have perused the aforesaid earlier order of the Tribunal. For the reasons stated therein, with which we agree, we hold that the return filed by the liquidator in the present case is a valid return on the basis of which the assessment could be made. The appeals by the liquidator before the Appellate Assistant Commissioner and the Tribunal are also competent in law having been validly filed on behalf of the assessee-company (In voluntary liquidation)."

(5). Coming to the merits of the case, the assessee in the year under consideration had interest income on short-term deposits made by it and the income so earned amounted to Rs. 4,87,636, which has been taxed by the Income-tax Officer under the head "Income from other sources". There is no dispute in this behalf. Against the income so assessed, the assessee claimed the following expenses totalling Rs. 92,565 :

(6). The Income-tax Officer went through the details of the said expenses and he was of the opinion that all the said items of expenses could not be said to have been wholly and exclusively laid out for the purpose of earning the interest income. According to him, the expenses detailed below totalling Rs. 36,987 can be said to have been laid out wholly and exclusively for the purpose of earning the said income and he, accordingly, allowed the same for deduction under Section 57(iii) of the Act :

The view of the Income-tax Officer has been upheld by the Appellate Assistant Commissioner, A Range, Calcutta.

(7). The factual position in the present case is similar to that in the case of Upper Ganges Valley Electricity Supply Co. Ltd. (In voluntary liquidation) [Income-tax Appeal No. 4332/(Cal) of 1977-78, dated February 5, 1979] to which one of us (Judicial Member) was party. The arguments canvassed before us were the same as canvassed before the Tribunal on the earlier occasion. We have perused the aforesaid order of the Tribunal. For the reasons stated therein with which we agree, we uphold the order of the Appellate Assistant Commissioner on the point at issue.

(8). The first question was argued at great length. It was emphasised that Section 140(c), introduced in the statute with effect from April 1, 1976, was applicable to the assessment year 1976-77. It was the requirement of the statute under the specific provision of Section 140(c) that the return under Section 139 of the Act shall be signed and verified, in the case of a company, by the managing director thereof but if for any unavoidable reason, the managing director is unable to sign and verify the return or where there is no managing director, any other director of the company can sign the return.

(9). In the instant case, the return was signed by the liquidator. It has been argued that the liquidator is not authorised by Section 140 to sign or verify the return on behalf of the company. After the winding up of a company, the board of directors cease to exist and the liquidator assumes the powers and authority to perform his duties and exercise powers in terms of the provisions of Part VII of the Companies Act, 1956. None of the powers of the board of directors of a company survives after the liquidation of the company. The liquidator cannot lawfully sign and verify the return. The return signed by the liquidator has to be treated as non est and the assessment is void ab initio and bad.

(10). I am unable to uphold this argument. Section 140 specifies the persons who can sign and verify the returns of income. In the case of a company, the return is to be signed and verified by the managing director. If the managing director, for any unavoidable reason, is unable to sign and verify the return, any director of the company may do so. Section 140 does not specifically provide as to who will sign and verify the return filed on behalf of a company in liquidation. Previous to the amendment made by the Taxation Laws (Amendment) Act, 1975, which came into effect from April 1, 1976, a return filed by a company could be signed and/or verified by the principal officer thereof. The change brought about by the Amendment Act, 1975, became effective from April 1, 1976. There is no specific provision in the Act as to how a return of income of a company (in liquidation) is to be verified and signed. There is, however, a residuary provision in Sub-clause (f) of Section 140 by which it has been provided that the return may be signed and verified in the case of any other person, by that person or some person competent to act on his behalf. The case of a company (in liquidation) has not been specifically provided for in any of the Sub-clauses (a) to (e) of the Act. The residuary clause can be invoked in a case like this. Moreover, under Section 457(2) of the Companies Act, 1956, the liquidator has been empowered "to do all acts and to execute, in the name and on behalf of the company, all deeds, receipts and other documents and for that purpose to use, when necessary, the companys seal". There is no reason why the liquidator cannot, in the name and on behalf of the company in liquidation sign and verify a return of income. The liquidator is competent to do all acts and execute all documents in the name and on behalf of the company and as such may sign and verify a return of income on behalf of the company in liquidation in terms of Section 140(f) of the Act.

(11). The position has been made abundantly clear by the provisions of Section 178; "178. Company in liquidation.--(1) Every person - (a) who is the liquidator of any company which is being wound up, whether under the orders of a court or otherwise; or (b) who has been appointed the receiver of any assets of a company, (hereinafter referred to as the liquidator) shall, within thirty days after he has become such liquidator, give notice of his appointment as such to the Income-tax Officer who is entitled to assess the income of the company. (2) The Income-tax Officer shall, after making such enquiries or calling for such information as he may deem fit, notify to the liquidator within three months from the date on which he receives notice of the appointment of the liquidator the amount which, in the opinion of the Income-tax Officer, would be sufficient to provide for any tax which is then, or is likely thereafter to become, payable by the company. (3) The liquidator,-- (a) shall not, without the leave of the Commissioner, part with any of the assets of the company or the properties in his hands until he has been notified by the Income-tax Officer under Sub-section (2); and (b) on being so notified, shall set aside an amount equal to the amount notified and, until he so sets aside such amount, shall not part with any of the assets of the company or the properties in his hands : Provided that nothing contained in this sub-section shall debar the liquidator from parting with such assets or properties for the purpose of the payment of the tax payable by the company or for making any payment to secured creditors, whose debts are entitled under law to priority of payment over debts due to Government on the date of liquidation or for meeting such costs and expenses of the winding-up of the company as are in the opinion of the Commissioner reasonable. (4) If the liquidator fails to give the notice in accordance with Sub-section (1) or fails to set aside the amount as required by Sub-section (3) or parts with any of the assets of the company or the properties in his hands in contravention of the provisions of that sub-section, he shall be personally liable for the payment of the tax which the company would be liable to pay : Provided that if the amount of any tax payable by the company is notified under Sub-section (2), the personal liability of the liquidator under this sub-section shall be to the extent of such amount. (5) Where there are more liquidators than one, the obligations and liabilities attached to the liquidator under this section shall attach to all the liquidators jointly and severally. (6) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force."

(12). Therefore, the liability of the liquidator for payment of income-tax of a company has been specifically provided for in Section 178. The liquidator has to notify the Income-tax Officer within 30 days after his appointment as liquidator; the Income-tax Officer has to give notice to the liquidator for the purpose of recovery of any income-tax payable by the company; the liquidator cannot part with any assets of the company without the leave of the Commissioner; when the taxes are due from the company, if the liquidator fails to give notice under Sub-section (1) of Section 178 or parts with any asset of the company, then he will be personally liable to pay the taxes which were the legal obligation of the company to pay.

(13). This being the legal obligation of the liquidator, I fail to see why the liquidator cannot file the return of income and how such return can be treated as non est. The Income-tax Officer can notify to the liquidator not only the amount which would be sufficient to provide for any present liability of tax but also the amount which is likely to become payable by the company. That can only mean that the liquidator is liable to pay the tax which has already been assessed and also the tax which may be found due on assessment. If any return has to be filed for ascertainment of the tax liability of a company in liquidation, the liquidator will have to file a return of income. It is well-settled that the machinery section of a taxing statute must be construed in a manner which makes the statute workable and which effectuates the levy of tax.

(14). In the case of Official Liquidator, High Court v. CIT [1971] 80 ITR 108 (Cal), the position of the liquidator was examined by A.N. Sen J. There the question was whether the Income-tax Officer could proceed to recover income-tax from the assets of the company in liquidation without leave of the court and give a notice to the official liquidator. It was held by A.N. Sen J. that the leave of the court was not necessary in respect of any and every proceeding against a company in liquidation. It was also held that Section 446(1) of the Companies Act, 1956, did not make it obligatory to obtain the leave of the court for giving notice to the official liquidator. The Income-tax Officer was the only authority to make an assessment and the jurisdiction as to assessment was vested exclusively in the Income-tax Officer and the court had no power or jurisdiction to entertain or dispose of any assessment proceeding.

(15). It was further held in that judgment that it was open to the Department to seek to enforce its right for recovery of the tax dues in accordance with the provisions of the Act, but this right to enforce recovery against the assets of the company in liquidation would attract the provisions of Section 446(1). For this purpose, it will be necessary for the Income-tax Officer to obtain the leave of the court as the recovery might affect the estates and effects of the company. In that case, it was categorically held that, in the case of assessment of a company in liquidation, it was open to the Department to make an assessment by serving notice upon the liquidator.

(16). In the aforesaid case, the Income-tax Officer had served a notice under Section 148 without obtaining any leave of the court. The official liquidator challenged this notice. It was held by the court that the notice was properly issued.

(17). If the Income-tax Officer can properly serve a notice under Section 148 upon the official liquidator calling upon him to file a return of income, then we fail to see why the official liquidator cannot file a return in accordance with law. It is to be noted that the official liquidator was called upon by the Income-tax Officer by serving notice under Section 148 to file a return of income.

(18). In the case of Official Liquidator, Mysore Spun Silk Mills Ltd. v. CIT [1971] 79 ITR 399 (Mys), it was held by a Division Bench that, even after a winding-up order was passed, the company continued to be a "person" within the meaning of Section 4 of the Income-tax Act, 1961, and, therefore, any receipt of income in the course of the winding-up which would attract liability to income-tax under its appropriate provisions would be liable to income-tax.

(19). It was further held that a company judge had the power to require the liquidator to file returns before the Income-tax Officer and the legal position of the liquidator, whether he was a liquidator appointed in a voluntary winding up or under the compulsory winding-up orders of the court, was not different, as the official liquidator was an officer of the court employed for the purpose of winding-up of the affairs of the company. It was further held in that case that, during the course of the winding-up, the company was represented by the liquidator who functioned as its agent for the purpose of winding-up. Therefore, the company being a person had to file a return of income and the return of income must be signed by a competent person. When the company is not run or managed by a board of directors or there is no managing director and the company cannot function with its board of directors and the official liquidator has taken charge of the company, the official liquidator is the proper person who can sign and file the return.

(20). Strong reliance was placed on behalf of the assessee in the case of CIT v. Express Newspapers Ltd. [1960] 40 ITR 38 (Mad) [LQ/MadHC/1960/68] . It was held in that case that the existence of an assessee was essential for an assessment; there could not be an assessment of a non-existent person. The assessment made on the Free Press Co. long after it was struck off the register of companies was not valid and a fresh assessment was not possible on the original return as the company had ceased to exist.

(21). I fail to see how this case can be of any assistance to the assessee. In the instant case, at the time when the return was filed, the assessee-company, namely, the United Provinces Electric Supply Co. Ltd., had not become a defunct company and its name had not been struck off the register of companies. Liquidation proceedings were pending. It cannot be said that the assessee was not in existence. Section 178 specifically deals with companies in liquidation. The return filed by the liquidator cannot be treated as a return filed on behalf of a non-existing person.

(22). Therefore, on the first question, the contentions on behalf of the assessee must fail.

(23). On the second question, the dispute is regarding the claim of the assessee for deduction of the expenses of liquidation in computing the income from other sources. The dispute is really as to the quantum. The Tribunal allowed Rs. 36,987 by way of deduction, but the assessee claimed a deduction of Rs. 92,565. There was no dispute that the income from interest was to be assessed. In view of the decision given by the Tribunal in an earlier case of Upper Jamuna Valley Electricity Supply Co. Ltd. in Income-tax Appeal No. 760/(Cal) of 1977-78, the deductions claimed had to be allowed only to the extent they were wholly and exclusively incurred for making and earning that particular income. The Tribunal observed that : "In the absence of any argument regarding the quantum of allowance, we do not propose to consider that question."

(24). There the quantum of allowance was not in dispute before the Tribunal. What was the exact amount spent wholly and exclusively for earning the income is basically a question of fact.

(25). An argument on the basis of the doctrine of real income was sought to be made out. I am unable to see how that doctrine can be invoked in the facts of this case. It is not the case of the assessee that the assessee did not receive any income in this year nor is it the case of the assessee that there has been no accrual of income. The expenditures which are specifically allowable have to be allowed under the provisions of the Act. There is no general principle on the basis of which the expenditures claimed as deductible can be allowed as deduction. It is true that income-tax is not chargeable on gross profit. The profits must be computed in accordance with the provisions of the Act. The specific provision as to deductions from business income laid down in Sections 30 to 43A of the Act cannot be disregarded on any assumed principle of real income.

(26). So far as the third question is concerned, the Tribunal has referred to an earlier order passed in respect of an earlier assessment year. That order has not been included in the paper book and we have not been shown how the Tribunal has gone wrong in its reasoning. In the premises, all the three questions are answered in the negative and in favour of the Revenue. There will be no order as to costs.