Section 178

Section 178 — the law in short

What the courts have decided on section 178, in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• 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 Supreme CourtHelps departmentSuperseded by amendment
  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.
• Leo Edibles & Fats Ltd v Tax Recovery Officer High CourtHelps taxpayerValidity unconfirmed
  I bought a property at the liquidator's e-auction. The Income Tax Department had attached it before the liquidation started and the Sub-Registrar will not register my sale deed. Where do I stand?
  Section 178 has no application at all to a liquidation under the Insolvency and Bankruptcy Code, so the department cannot claim the priority that s.178(3) and (4) would otherwise give it. The Income Tax Department is not a secured creditor; at best it has a charge under its attachment order in terms of s.281, and an attached asset still forms part of the liquidation estate under s.36(3)(b) of the Code. The department must file its claim with the liquidator and take its place in the s.53(1) waterfall.
• Statutory position — s.178: the liquidator's thirty-day notice, the amount he must set aside, and his personal liability for the company's tax if he does not — and the Insolvency and Bankruptcy Code carve-out in s.178(6) from 1 November 2016 CBDT Circulars & InstructionsCuts both ways
  I have just been appointed liquidator of a company. What do I have to tell the income-tax department, by when, and what happens to me personally if I distribute the assets before I hear back?
  You are personally liable. Section 178(4) provides in terms that if the liquidator fails to give the notice required by sub-section (1), or fails to set aside the amount required by sub-section (3), or parts with any of the assets of the company or the properties in his hands in contravention of sub-section (3), 'he shall be personally liable for the payment of the tax which the company would be liable to pay', capped by the proviso at the amount notified under sub-section (2) if an amount has been notified. The two duties that trigger it are short and dated: within thirty days after becoming liquidator you must give notice of your appointment to the Assessing Officer entitled to assess the company's income (sub-section (1)); and once the Assessing Officer notifies you of the amount he considers sufficient to provide for the company's tax — which he must do within three months of receiving your notice (sub-section (2)) — you must set that amount aside, and until you do you must not part with any of the assets (sub-section (3)(b)). Before you are notified, you must not part with any assets at all without the leave of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner (sub-section (3)(a)).

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.