Holding

Under s.530(1)(a) of the Companies Act, 1956, priority is confined to tax liabilities that both arose and became payable within the twelve months preceding the relevant date, and the statutory phrase serves to limit, not broaden, the amount eligible for priority.

Summary

The company Rajratha Naranbhai Mills Ltd. was ordered to be wound up on 26 June 1967 and the liquidator invited creditors to prove claims for priority under s.530(1)(a) of the Companies Act, 1956. The Sales Tax Officer claimed priority for sales tax and penalties, arguing that the assessment orders and demand notices were issued within twelve months before the winding‑up date. The High Court held that "due and payable" meant the tax became payable when assessed and therefore granted priority to the tax amounts, but rejected the penalty claim. On appeal, the Supreme Court examined the meaning of the phrase "having become due and payable within the twelve months next before the relevant date" and held that priority is limited to liabilities that both arose and became payable within that twelve‑month period. Consequently, the Court allowed the appeal, directing the liquidator to re‑examine the tax claim for priority in line with this interpretation while leaving the penalty decision unchanged.

Issues considered

The proper construction of s.530(1)(a) of the Companies Act, 1956 regarding the scope of priority for tax debts in liquidation
Whether the phrase "having become due and payable within the twelve months next before the relevant date" restricts priority to liabilities incurred and payable within that period
Whether sales tax assessed and demand notice issued within twelve months before the winding‑up date qualifies for priority
Whether penalty amounts can be claimed with priority under the same provision

Legislation cited

Bombay Sales Tax Act
Central Sales Tax Act
Companies Act, 1913s. 230
Companies Act, 1956s. 530(1)(a), s. 530(8)(c)
English Companies Act, 1948s. 264

Subjects

Companies Act 1956section 530priority of tax debtsliquidationsales taxstatutory interpretationrelevant dateassessment orderpenaltySupreme Court

Judgment

RAJRATHA NARANBHAI MILLS .. CO. LTD.
v._ A
SALES TAX OFFICER, PETLAD

FEBRUARY 19, 1991

[K.N. SAIKIA AND M.M. PUNCHHL JJ.] B
Companies Act, 1956: S. 530(J)(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.

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
c

s. 530(1)(a) of the Companies Act, 1956. The Sales Tax Officer submit-
ted a comprehensive claim of sales taX plus penalty and claimed prio- D
rity. 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 Hi~ Court contending that the
liquidator erred in law in not granting ptjority to the claim to sales tax
payable by the company for the perjod <from 1.4.1957 to 31.12.1965 E
under the Bombay Sales Tax Act, and for the 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 rel~vant date.

The Company Judge, interpreting s. 530(l)(a) of the Act, held F
that tax becomes due when taxing event occurs and not when ~ss
J-
' ---- ment 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 pa\d
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 G
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 Di.-ision
Bench held that sales tax becomes due and payable when the tax bas H

527
528 SUPREME COURT REPORTS [1991] 1 S.C.R.

been assessed and notice of demand for its payment is served. It anowed
A
the claim of priority to the sales tax due under the two Ac~, assessment
orders in respect of wWch were passed within the period of 12 month$
•mmediately 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
B negatived, because the demand was held to be without application of
mlnd as to whether there was reasonable cause for the official liquidatot
for not paJing the amount. Aggrieved, the company filed the present
appeal by certificate.

Allowing the appeal, this Court, -..,,(__
c HELD: 1 •. Section 530(1)(a) of the Companies Act, 1956 provid~
that State has a priority over debts, liability and obligation of which W8$
born witJrln the time frame of 12 months next before the relevant da1'· '"'f"
and as such due and becoming due and payable within those twelv'
months, ascertainable, if necessary, later if not already ascertained;.
D Thus the legal philosophy which penneats the provision is that the debts
due and payable, so as to claim priority must be appropriated to the period
within U months next before the relevant date and their liability for pay-
ment must be founded during that period and no other. [536G-H, 537A-Bl

2.1 The words 'having become due and payable within the twelve
·- x
E 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 everl' debt «._tn account ~t' 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
·p payable because the liability to thost iS rooted, founded and belonging
to that period of twelve months prior to the relevant date and none
'0
other; both the conditions existing. [537C-E]

Airedale Gara[Je Co. In re: Anglo-South American v . .The Com-
pany, (1832] Vol. 2 Company Cases 570, referred to.
G
2.2 :S~th Benches of the High Court gave to the pr<;>vision a very
~-
wide and varied interpretation and that too on literality and gramati-
cals. The Single Judge was not right in taking the view that the word
'due' in the first pa,rt of clause (a) of s. 530(1) of the Companies Act was
to mean 'outstanding and payable at the relevant date' and in the expre-
Ji ssion 'having become due' in the later part of the clause Qieant that the.
R.N. MILLS v. S.T. OFFICER [PUNClllil, J.] 529

~ event which brought the debt into existence occurred and also it became -A
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 hold-
ing tha~ the only meaning that could be assigned to the word 'due' occurr-
ing in the section was 'it must be presently due' and the words 'due and
payable' meant that it must be presently payable. [536G, 5310-E & 532F-G]
B
.J.. Sales Tax Officer, Petlad v. Rajratha Naranbhai Mills Co. Ltd. and
Another, [1974] Vol. 44, Company Cases 65 and Baroda Board &
Paper Mllls 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 c
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 its view on penalties. [537E-G]

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 2891 D
(NT) of 1977.

Appeal by Certificate from the Judgment and Order dated
15.10.1975 of tlie'Gujarat High Court in O.J. Appeal No. 2 of 1975.

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

- Dushyant Dave, Anip Sachthey and Ashish Verma for the
Respondent.

The Judgment of the Court was delivered by
F
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 certifi-
cate, granted by the High Court of Gujarat, in 0.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 G
below:

"In a ~inding 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 or to a local
authority at the relevant date as defined in clause (c) of H
530 SUPREME COURT REPORTS [1991] 1 S.C.R.

sub-section (8), and having become due and payable within
A 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
B 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 volnntarily before that
date; and
c (ii) in any cai;e where sub-clause (i) does not apply, the
date of the passing of the resolution for the voluntary wind-
ing up of the company."

The appellant-company was ordered to be wound up by an order of
D 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 th~Sales
Tax Officer, Petlad •submitted a comprehensive claim in the sum of
Rs.70945.69 as the amount of sales tax plus· penalty payable by the
E 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 Com-
F pany 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 con-
sisting of Rs. 11,064.46 beingcsales tax payable by the company for the
G period from April 1, 1957 to December 31, 1965~- under the Bombay
Sales Tax Act and balance of Rs.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
H the tax payable was also issued within a period of _12 months next
R.N. MILLS v. S.T. OFFICER [PUNCHHI, J.] 531
-,.
before the relevant date. It was urged that apart from any other con-
A
sideration 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 B
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 c
date and had become due and payable within 12 months next before
the relevant date, and therefore, it was entitled to a priority in pay-
ment as envisaged by section 530(1)(a) of the Companies Act.

The learned Judge on interpretation of section 530(1)(a) took D
the view that the word 'due' implies or conveys different 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 occurrs 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, E
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: F

(i) Debt of the kind mentioned in the clause must be out-
standing 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 G
next before the relevant date; and

(iii) The debt must have become payable at any time
within the twelve months next before the relevant date.

To conclude, the learned Judge observed that the tax becomes due H
532 SUPREME COURT REPORTS [1991] 1 S.C.R.

when taxing event occurrs and not when assessment orders passed and
A 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
B the relevant date and even if it had become payable on the assessment
order being made and demand notice being issued, as both the condi-
tions did not co-exist and were not satisfied, claim for priority had
been rightly nagatived by the official liquidator requiring no interfer-
ence 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 Salex Tax Act and the Central
c Sales Tax Act upto the relevant date and the liquidator was directed to
abmit 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. Rajrath'a Naranbhai Miils Co. Ltd. & Another, [1974] Vol. 44,
Company Cases 65.
D
An intra Court Appeal was preferred by the Salex 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
E 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. 2of1975.
F
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
G 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
H been assessed and a notice of demand for payment of that tax is served
R.N. MILLS v. S.T. OFFICER [PUNCHHI, J.] 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 A
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 prio-
rity. The bala~ce amount as dues was directed to rank as ordinary B
debts without any priority, since the relevant orders were passed after
the date of the winding up order. The claim of the Sales Tax Office.t 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 c
& Paper Mills Ltd. (in Liquidation) v. Income-Tax Officer etc., [1976]
Vol. 46 Company Cases 25. Clash of interpretations of section
530(1)(a) is the cause in this appeal.

We have gone through both the judgments afore-referred to very D
carefully and minutely and have heard learned counsel on the conflict-
ing 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 expressions meant to convey.differently or
they mean the same thing. With due respect to the High Court, we feel E
that relevant and important considerations and material though avail-

- able, 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 F
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: G

"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 ...... asses-
sed taxes .. ~ .. property or income tax .... wages or salary
of any clerk or servant 'during four months next before the H
534 SUPREME COURT REPORTS [1991] 1 S.C.R.

A 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
B
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 ail the debts for local rates
which maybe outstanding at that time; the priority is in re-
c spect only of such rates as became d~e 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 be-
D
came 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 oommencement
·of the period in respec! of which the rate was made. In
those circumstances it seems quite plain that the sum 'in
E contest in the present case must be appropriate to that
period and that period alone, and, although ascertained at
a l.ater 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
•
F
'+'Ords, as Eve, J., has done. I think the words referred to in
section 264 of the Companies Act, 'd~e 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 h:ive
accrued within the period of the twelve months next before
the relevant date."
G
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 in the light of tlie following
recommendations (exerpted) of the Company ·Law Committee in
paragraph 218 of their Report:
H
- ~
R.N. MILLS v. S.T. OFFICER [PUNCIDU, J.]

"Section 230 of the Act of 1913 deals with the important
subject of preferential payment. The principle underlying A
535

this section is that the debts and liabilities enumerated in it
should be treated as preferential debts as compared with
ordinary unsecured debts. The rights of secured creditors
other than debenture-holders secured by a floating charge
are not affected in any way. They remain outside-the scope B
of the winding-up proceedings and their security remains
_L, unaffected by the provisions of this section. We have set
out in the Annexure to our Report the details of our recom-
mendations, whieh broadly follow the provisions of the
.~ English Companies Act. Briefly, the more important of
these recommendations are as follows:
c
(i) xxxxx
(ii) xxxxx
(iii) xxxxx .
D
In this connection we should like to refer to a memo-
randum 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-
,J,.. tax, super tax and corporation tax. It was suggested that
there should be no time-limit for the, preferential payment E
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 F
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 circum-
· stances, it may be extremely difficult for the company to
raise capital for its working. In this connection, we would G
draw attention to the provisions of clause (a) of sub-section
-'r--' (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 asses- I
sed on the company up to a particular date, namely, 5th H
536 SUPREME COURT REPORTS [ 1991] 1 S.C.R.

April or prior to the appointment of the liquidator or reso-
A lution for the winding up of the company aild 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-
B 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
companies, which are in liqudation, but we would venture
c 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 assess-
ment proceedings and vigorous measures for the collection
D 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
~~= ~
"The Inland Revenue may select the unpaid corporation or
income tax for any oqe 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
F 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
G 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 litera-
lity and grammaticals seemingly overlooking. the legal philOsophy
H which permeats the provision, the same being that the debts due and
R.N. MILLS v. S.T. OFFICER [PUNCHHI, J.] 537

payable, so as to claim priority, must be appropriated to the period· A
within 12 months next before the relevant date and their liability for
payment must be founded during that period and no other. To put 1t in
simpler words, the State has a priority over debts, liability and obliga-
tion of which was born within the time frame of those twelve months
and as such due and becoming due and payable within those twelve
B
months next before the relevant date, ascertainable if necessary later,
if ll.Ot 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 mat- c
ter, we need not elaborately comment, discuss or demolish, sentence
by sentence, the reasoning given by the single bench as also the divi-
sion 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
D
cordoning off the amount for which prioirty 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. E

For the view above taken, we allow the appeal of the Company
in liquidation and direct that liquidator to re-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 F
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. G

,._.