I am the official liquidator. The Income-tax Officer has notified an amount under section 178(2) and is demanding payment now, before the list of creditors is settled. Can he do that, or must he prove his claim in the winding up like everyone else?
On the law as it stood before the Insolvency and Bankruptcy Code, he could. The Supreme Court dismissed the liquidator's appeal and affirmed the Kerala High Court Full Bench, holding that the amount set aside by the liquidator under section 178(3) is marked off as outside the area of the winding up proceedings and the jurisdiction of the winding up court, that on a total view of the statutory provisions the Income Tax Department is treated as a 'secured creditor', and that the crucial words in section 178(3) and 178(4) are that the Official Liquidator 'shall set aside' the amount notified by the Income Tax Officer and that if it is not so done the Official Liquidator is personally liable to pay the amount of tax which the company would be liable to pay. The Court held that the decisions of the Mysore, Calcutta, Rajasthan, Gujarat and Delhi High Courts to the contrary did not lay down the correct law.
Decided by the Supreme Court (Paripoornan, K.S., J. and Jeevan Reddy, B.P., J.; judgment delivered by Paripoornan, J.) on 1996-03-19, reported as Appeal from the judgment of a Full Bench of the High Court of Kerala dated 10 August 1978 in Report No. 53 in C.P. No. 7 of 1973; the Full Bench judgment is reported at 116 ITR 176 (F.B.). Counsel: Mr K. John Mathew for the appellant; Mr J. Ramamurthy, Senior Counsel, for the respondent-Revenue.. It bears on section 178, section 178(2), section 178(3), section 178(4), section 220(2) of the Income Tax Act 1961, in Demand, Recovery & Stay and How Tax Law Is Read matters.
This is the decision that gives section 178 its teeth, and it is the clearest judicial statement anywhere of why the personal liability in section 178(4) matters: the Court used it as an interpretive lever, reasoning that a provision which makes the liquidator personally liable for the company's tax if he fails to give notice cannot have been intended merely to secure a dividend. Read what the Court actually decided, though, because the scope is precise. It did not hold that income-tax has general priority in a winding up; it held that the amount SET ASIDE under section 178(3) is not part of the assets available for distribution at all — the Full Bench's language, which the Court approved, is that the set-aside amount 'is marked off as outside the area of the winding up proceedings', standing on the same footing as trust funds or a secured creditor's encumbrance. The Court also decided a second point that practitioners forget: it held that the same construction should govern section 17 of the Central Sales Tax Act, 1956, and that where similar orders are received under both Acts, priority goes by the date of receipt of the orders by the Official Liquidator. The decisive limit is one of date and of enactment. Section 178(6), on which the whole override rests, was amended so that the section now has effect notwithstanding any other law 'except the provisions of the Insolvency and Bankruptcy Code, 2016', and for a liquidation under the Code section 178 does not override at all. So this decision governs a winding up outside the Code and must not be applied to a liquidation under it.
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Imperial Chit Funds Private Limited was wound up by an order of the Kerala High Court dated 1 June 1973. After the commencement of the winding up, the Income Tax Officer completed the company's assessment for 1972-73 by an order dated 31 March 1975, assessing tax of Rs 934 and interest of Rs 93 under section 220(2), a total of Rs 1,027. The Official Liquidator wrote on 8 May 1975 that the tax and interest constituted a debt provable in the winding up, that he was not in a position to pay straightaway, and that as the tax was due and payable within twelve months before the relevant date in section 530(8)(c) of the Companies Act, section 530(1)(a) would not apply. The Income Tax Officer issued a certificate to the Tax Recovery Officer, demanded the sum by letter of 8 December 1976 and wrote again on 15 January 1977. The Official Liquidator filed Report No. 53 dated 20 January 1977 seeking a direction that the tax was not payable at that stage and that the Income Tax Officer should wait and prove his claim when the list of creditors was settled. The Company Judge referred the matter to a Division Bench, which referred it to a Full Bench; the Full Bench negatived the Liquidator's prayer, and the Liquidator appealed to the Supreme Court. The sole question was whether section 178 of the Income-tax Act affects or alters the existing law of priority or overrides the provisions for preferential payment in section 530 of the Companies Act, on which the Kerala and Andhra Pradesh High Courts had taken one view and the Mysore, Calcutta, Rajasthan, Gujarat and Delhi High Courts the other.
The appeal was dismissed, without costs, and the judgment under appeal affirmed. The Supreme Court held that the decisions of the Kerala High Court in Income Tax Officer, Ernakulam v. Indian Traders Bank Ltd. (In Liquidation), 1968 KLT 595, as affirmed in A.S. No. 225 of 1968 and approved by the Full Bench under appeal, and the decision of the Andhra Pradesh High Court in I.T.O. v. Official Liquidator, 101 ITR 470, lay down the law correctly; that on a total view of the relevant statutory provisions the Income Tax Department is treated as a 'secured creditor'; and that the decisions of the Mysore, Calcutta, Rajasthan, Gujarat and Delhi High Courts had failed to give due importance to the legislative history and to the crucial words in sections 178(3) and 178(4). The Court further held that its interpretation of section 178 should govern cases arising under section 17 of the Central Sales Tax Act, 1956 as well, and that where similar orders are sent to the Official Liquidator under both Acts, priority is with respect to the date of receipt of the orders by the Official Liquidator.
The Court set out section 178 in full together with sections 446, 447, 456, 511, 529A and 530 of the Companies Act, 1956, and traced the legislative history relied on by the Full Bench — the report of the Company Law Reforms Committee, whose recommendation for an unlimited preferential right was not fully accepted, and the report of the Direct Taxes Administration Inquiry Committee, which pointed to the need to compel the liquidator to set aside amounts to cover tax due or which might become due, after which section 178 was enacted in its present form. It approved the Full Bench's conclusion that the effect of section 178(3)(b) is that the amount set aside by the liquidator is marked off as outside the area of the winding up proceedings and the jurisdiction of the winding up court, and the reasoning of Raman Nayar, Ag. C.J. that reading sub-sections (2), (3) and (4) together the section creates a first charge on the amount set aside for payment of the tax that might be admitted to proof, and that if this brings the section into conflict with section 530 of the Companies Act the section must prevail by reason of sub-section (6). It approved the Division Bench's reasoning in A.S. No. 225 of 1968 that the amount to be notified under sub-section (2) is not merely the amount for which preference is given under section 530 but the entirety of the income-tax dues including what may thereafter become payable, and that when that is read with sub-section (4), which makes the liquidator personally liable for the tax the company would be liable to pay if he fails to give notice under sub-section (1), section 178(3) imports much more than the liquidator contended. It approved the Full Bench's construction of 'set aside' as 'keeping separate for special purpose', synonymous with 'appropriate', conveying the idea of an appropriation or allocation of the income-tax dues so that they stand outside the winding up. In its own words, the Court then held that on a total view of the relevant statutory provisions the Income Tax Department is treated as a 'secured creditor', and that the contrary High Court decisions had failed to give due importance to the legislative history and to the crucial words in sections 178(3) and 178(4) — that the Official Liquidator 'shall set aside' the amount notified and that if it is not so done he is personally liable to pay the amount of tax which the company would be liable to pay. It noted that section 178 sits in Chapter XV, whose object is to fasten liability to pay the tax on the income received and to catch the income at the earliest point of time. Finally, on section 17 of the Central Sales Tax Act, 1956, which it described as similar, it held that the same interpretation should govern, and that where similar orders are sent under both Acts priority is by the date of receipt of the orders by the Official Liquidator.
the Official Liquidator is personally liable to pay the amount of tax which the company would be liable to pay
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Handle my notice → Ask a CA on WhatsAppOn the law as it stood before the Insolvency and Bankruptcy Code, he could. The Supreme Court dismissed the liquidator's appeal and affirmed the Kerala High Court Full Bench, holding that the amount set aside by the liquidator under section 178(3) is marked off as outside the area of the winding up proceedings and the jurisdiction of the winding up court, that on a total view of the statutory provisions the Income Tax Department is treated as a 'secured creditor', and that the crucial words in section 178(3) and 178(4) are that the Official Liquidator 'shall set aside' the amount notified by the Income Tax Officer and that if it is not so done the Official Liquidator is personally liable to pay the amount of tax which the company would be liable to pay. The Court held that the decisions of the Mysore, Calcutta, Rajasthan, Gujarat and Delhi High Courts to the contrary did not lay down the correct law. This was decided by the Supreme Court (Paripoornan, K.S., J. and Jeevan Reddy, B.P., J.; judgment delivered by Paripoornan, J.) and bears on section 178, section 178(2), section 178(3), section 178(4), section 220(2) of the Income Tax Act 1961. It is reported as Appeal from the judgment of a Full Bench of the High Court of Kerala dated 10 August 1978 in Report No. 53 in C.P. No. 7 of 1973; the Full Bench judgment is reported at 116 ITR 176 (F.B.). Counsel: Mr K. John Mathew for the appellant; Mr J. Ramamurthy, Senior Counsel, for the respondent-Revenue.. This is the decision that gives section 178 its teeth, and it is the clearest judicial statement anywhere of why the personal liability in section 178(4) matters: the Court used it as an interpretive lever, reasoning that a provision which makes the liquidator personally liable for the company's tax if he fails to give notice cannot have been intended merely to secure a dividend. Read what the Court actually decided, though, because the scope is precise. It did not hold that income-tax has general priority in a winding up; it held that the amount SET ASIDE under section 178(3) is not part of the assets available for distribution at all — the Full Bench's language, which the Court approved, is that the set-aside amount 'is marked off as outside the area of the winding up proceedings', standing on the same footing as trust funds or a secured creditor's encumbrance. The Court also decided a second point that practitioners forget: it held that the same construction should govern section 17 of the Central Sales Tax Act, 1956, and that where similar orders are received under both Acts, priority goes by the date of receipt of the orders by the Official Liquidator. The decisive limit is one of date and of enactment. Section 178(6), on which the whole override rests, was amended so that the section now has effect notwithstanding any other law 'except the provisions of the Insolvency and Bankruptcy Code, 2016', and for a liquidation under the Code section 178 does not override at all. So this decision governs a winding up outside the Code and must not be applied to a liquidation under it. If it applies to you, the first step is this: Establish which enactment the liquidation is under before you do anything else. For a liquidation under the Insolvency and Bankruptcy Code, 2016 this decision does not apply, because section 178(6) now excepts the Code.
Imperial Chit Funds Private Limited was wound up by an order of the Kerala High Court dated 1 June 1973. After the commencement of the winding up, the Income Tax Officer completed the company's assessment for 1972-73 by an order dated 31 March 1975, assessing tax of Rs 934 and interest of Rs 93 under section 220(2), a total of Rs 1,027. The Official Liquidator wrote on 8 May 1975 that the tax and interest constituted a debt provable in the winding up, that he was not in a position to pay straightaway, and that as the tax was due and payable within twelve months before the relevant date in section 530(8)(c) of the Companies Act, section 530(1)(a) would not apply. The Income Tax Officer issued a certificate to the Tax Recovery Officer, demanded the sum by letter of 8 December 1976 and wrote again on 15 January 1977. The Official Liquidator filed Report No. 53 dated 20 January 1977 seeking a direction that the tax was not payable at that stage and that the Income Tax Officer should wait and prove his claim when the list of creditors was settled. The Company Judge referred the matter to a Division Bench, which referred it to a Full Bench; the Full Bench negatived the Liquidator's prayer, and the Liquidator appealed to the Supreme Court. The sole question was whether section 178 of the Income-tax Act affects or alters the existing law of priority or overrides the provisions for preferential payment in section 530 of the Companies Act, on which the Kerala and Andhra Pradesh High Courts had taken one view and the Mysore, Calcutta, Rajasthan, Gujarat and Delhi High Courts the other. The matter was decided on 1996-03-19 by the Supreme Court (Paripoornan, K.S., J. and Jeevan Reddy, B.P., J.; judgment delivered by Paripoornan, J.). On those facts the Supreme Court held as follows. The appeal was dismissed, without costs, and the judgment under appeal affirmed. The Supreme Court held that the decisions of the Kerala High Court in Income Tax Officer, Ernakulam v. Indian Traders Bank Ltd. (In Liquidation), 1968 KLT 595, as affirmed in A.S. No. 225 of 1968 and approved by the Full Bench under appeal, and the decision of the Andhra Pradesh High Court in I.T.O. v. Official Liquidator, 101 ITR 470, lay down the law correctly; that on a total view of the relevant statutory provisions the Income Tax Department is treated as a 'secured creditor'; and that the decisions of the Mysore, Calcutta, Rajasthan, Gujarat and Delhi High Courts had failed to give due importance to the legislative history and to the crucial words in sections 178(3) and 178(4). The Court further held that its interpretation of section 178 should govern cases arising under section 17 of the Central Sales Tax Act, 1956 as well, and that where similar orders are sent to the Official Liquidator under both Acts, priority is with respect to the date of receipt of the orders by the Official Liquidator.
The Court set out section 178 in full together with sections 446, 447, 456, 511, 529A and 530 of the Companies Act, 1956, and traced the legislative history relied on by the Full Bench — the report of the Company Law Reforms Committee, whose recommendation for an unlimited preferential right was not fully accepted, and the report of the Direct Taxes Administration Inquiry Committee, which pointed to the need to compel the liquidator to set aside amounts to cover tax due or which might become due, after which section 178 was enacted in its present form. It approved the Full Bench's conclusion that the effect of section 178(3)(b) is that the amount set aside by the liquidator is marked off as outside the area of the winding up proceedings and the jurisdiction of the winding up court, and the reasoning of Raman Nayar, Ag. C.J. that reading sub-sections (2), (3) and (4) together the section creates a first charge on the amount set aside for payment of the tax that might be admitted to proof, and that if this brings the section into conflict with section 530 of the Companies Act the section must prevail by reason of sub-section (6). It approved the Division Bench's reasoning in A.S. No. 225 of 1968 that the amount to be notified under sub-section (2) is not merely the amount for which preference is given under section 530 but the entirety of the income-tax dues including what may thereafter become payable, and that when that is read with sub-section (4), which makes the liquidator personally liable for the tax the company would be liable to pay if he fails to give notice under sub-section (1), section 178(3) imports much more than the liquidator contended. It approved the Full Bench's construction of 'set aside' as 'keeping separate for special purpose', synonymous with 'appropriate', conveying the idea of an appropriation or allocation of the income-tax dues so that they stand outside the winding up. In its own words, the Court then held that on a total view of the relevant statutory provisions the Income Tax Department is treated as a 'secured creditor', and that the contrary High Court decisions had failed to give due importance to the legislative history and to the crucial words in sections 178(3) and 178(4) — that the Official Liquidator 'shall set aside' the amount notified and that if it is not so done he is personally liable to pay the amount of tax which the company would be liable to pay. It noted that section 178 sits in Chapter XV, whose object is to fasten liability to pay the tax on the income received and to catch the income at the earliest point of time. Finally, on section 17 of the Central Sales Tax Act, 1956, which it described as similar, it held that the same interpretation should govern, and that where similar orders are sent under both Acts priority is by the date of receipt of the orders by the Official Liquidator. In the words reproduced by the source cited on this page: "the Official Liquidator is personally liable to pay the amount of tax which the company would be liable to pay"
It was decided by the Supreme Court on 1996-03-19 and is reported as Appeal from the judgment of a Full Bench of the High Court of Kerala dated 10 August 1978 in Report No. 53 in C.P. No. 7 of 1973; the Full Bench judgment is reported at 116 ITR 176 (F.B.). Counsel: Mr K. John Mathew for the appellant; Mr J. Ramamurthy, Senior Counsel, for the respondent-Revenue.. Binding on every court and authority in India. A Supreme Court decision binds every assessing officer, every Commissioner (Appeals), every bench of the Income Tax Appellate Tribunal and every High Court in India. An officer who declines to follow it is acting contrary to law, and that refusal is itself a ground of appeal. On section 178, section 178(2), section 178(3), section 178(4), section 220(2), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the department, and it appears in this library for that reason — you need to know what the Assessing Officer will cite against you. The appeal was dismissed, without costs, and the judgment under appeal affirmed. The Supreme Court held that the decisions of the Kerala High Court in Income Tax Officer, Ernakulam v. Indian Traders Bank Ltd. (In Liquidation), 1968 KLT 595, as affirmed in A.S. No. 225 of 1968 and approved by the Full Bench under appeal, and the decision of the Andhra Pradesh High Court in I.T.O. v. Official Liquidator, 101 ITR 470, lay down the law correctly; that on a total view of the relevant statutory provisions the Income Tax Department is treated as a 'secured creditor'; and that the decisions of the Mysore, Calcutta, Rajasthan, Gujarat and Delhi High Courts had failed to give due importance to the legislative history and to the crucial words in sections 178(3) and 178(4). The Court further held that its interpretation of section 178 should govern cases arising under section 17 of the Central Sales Tax Act, 1956 as well, and that where similar orders are sent to the Official Liquidator under both Acts, priority is with respect to the date of receipt of the orders by the Official Liquidator. It arises in Demand, Recovery & Stay and How Tax Law Is Read matters, on section 178, section 178(2), section 178(3), section 178(4), section 220(2) of the Income Tax Act 1961, and was decided by Paripoornan, K.S., J. and Jeevan Reddy, B.P., J.; judgment delivered by Paripoornan, J.. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. For a winding up outside the Code, treat the notified amount as a fund to be set aside and kept out of the distribution, not as a claim to be admitted to proof at a dividend. As liquidator, give the section 178(1) notice within thirty days and keep proof: the Court read sub-sections (2), (3) and (4) together, and the personal liability under sub-section (4) is uncapped where no amount has been notified. If you are resisting the department's demand, do not run the argument the Mysore, Calcutta, Rajasthan, Gujarat and Delhi High Courts accepted — that section 178 does not affect the priority scheme — because the Supreme Court held those decisions do not lay down the correct law. Where both an income-tax notification and a Central Sales Tax notification are received, record the dates of receipt: the Court held that priority in such a case is by the date of receipt of the orders by the Official Liquidator. Read this with the statutory entry on section 178 in this library, and with Leo Edibles and Fats Ltd v. Tax Recovery Officer, which deals with the position under the Code.
Superseded by amendment. Superseded ONLY so far as a liquidation under the Insolvency and Bankruptcy Code, 2016 is concerned, and not otherwise. The whole of this decision rests on the unqualified non obstante in section 178(6). That sub-section was amended by section 247 of the Insolvency and Bankruptcy Code, 2016 read with the Third Schedule, with effect from 1 November 2016, so that the section now has effect notwithstanding any other law 'except the provisions of the Insolvency and Bankruptcy Code, 2016'. The amendment and its date are recorded in the Telangana High Court's judgment in Leo Edibles and Fats Limited v. Tax Recovery Officer (Central), 26 July 2018, which held in its own words that in a liquidation under the Code section 178 'stands excluded', that the Income-tax Department 'can no longer claim a priority in respect of clearance of tax dues of the said company, as provided under Sections 178(2) and (3)', and that not being a secured creditor it 'must necessarily take recourse to distribution of the liquidation assets as per Section 53 of the Code'. Leo Edibles is already in this library. For a winding up that is NOT under the Code, nothing displaces the present decision, which remains the Supreme Court's construction of section 178. Within that field it continues to carry three propositions: that the amount set aside under section 178(3) is marked off as outside the winding up and outside the jurisdiction of the winding up court; that the Official Liquidator who does not set it aside is personally liable under section 178(4) for the tax the company would have been liable to pay; and that where orders under this section and under section 17 of the Central Sales Tax Act, 1956 are both received, priority goes by the date of receipt of the orders by the Official Liquidator. Whether any later decision doubts the judgment has not been established here, and that check remains outstanding rather than certified. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The report of this judgment is the raw one: it carries the counsel block, the bench of Paripoornan, K.S. (J) and Jeevan Reddy, B.P. (J), the date of judgment 19/03/1996, and optical-recognition artefacts such as 'Payable by he company' and 'the Andhra Praesh High Courts'. That the court is the Supreme Court is clear from the text itself, which records that the Official Liquidator 'has come up in appeal' from a Full Bench of the High Court of Kerala and concludes that the judgment under appeal 'does not merit interference by this Court'. STRUCTURE: the numbered paragraphs run 1, 2, 3, 4, 5, 6, 8, 9 — the number 7 does NOT appear in the text as reported, so the numbering is not continuous and a citation to 'paragraph 7' of this judgment should be treated as suspect. WARNING ON LOCATORS: the block numbered 6 contains long verbatim extracts from the Kerala Full Bench judgment under appeal, from the judgment of Raman Nayar, Ag. C.J. in Income Tax Officer, Ernakulam v. Indian Traders Bank Ltd. (In Liquidation), 1968 KLT 595, and from the Division Bench judgment in A.S. No. 225 of 1968. The Supreme Court's own concluding words, including the sentence about the Income Tax Department being treated as a 'secured creditor' and the sentence quoted below, follow those extracts and probably belong to the paragraph that is missing from the numbering. This entry therefore attributes them to the Court's own concluding discussion immediately before the paragraph numbered 8 and gives them NO paragraph number. Anyone quoting from block 6 should check whether the words are the Supreme Court's or the Kerala Bench's, because the two are run together. The judgment reproduces section 178 as it stood in 1996, with sub-section (6) in its unqualified form and with 'Chief Commissioner or Commissioner' rather than the present 'Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner'. That reproduction is legislative history and must not be read as the current text of the section. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed, without costs, and the judgment under appeal affirmed. The Supreme Court held that the decisions of the Kerala High Court in Income Tax Officer, Ernakulam v. Indian Traders Bank Ltd. (In Liquidation), 1968 KLT 595, as affirmed in A.S. No. 225 of 1968 and approved by the Full Bench under appeal, and the decision of the Andhra Pradesh High Court in I.T.O. v. Official Liquidator, 101 ITR 470, lay down the law correctly; that on a total view of the relevant statutory provisions the Income Tax Department is treated as a 'secured creditor'; and that the decisions of the Mysore, Calcutta, Rajasthan, Gujarat and Delhi High Courts had failed to give due importance to the legislative history and to the crucial words in sections 178(3) and 178(4). The Court further held that its interpretation of section 178 should govern cases arising under section 17 of the Central Sales Tax Act, 1956 as well, and that where similar orders are sent to the Official Liquidator under both Acts, priority is with respect to the date of receipt of the orders by the Official Liquidator.
TaxSphere, “Imperial Chit Funds (P) Ltd v. Income Tax Officer, Ernakulam (Supreme Court, 19 March 1996) — the amount the liquidator must set aside under section 178(3) stands outside the winding up, and if he does not set it aside he is personally liable”, https://taxnotice.vittsphere.com/caselaw/case/imperial-chit-funds-178-set-aside-amount-stands-outside-the-winding-up/ (validity last checked 2026-09-08)
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