Interest under Income Tax Act can’t be levied on a Wound-Up Company: Madras HC [Read Judgment]

The High Court of Madras, in a recent ruling, held that no levy of interest can be made under the provisions of Income Tax Act, 1961 against a wound-up company. The High Court, further observed that the Chief Commissioner of Income Tax has no power to grant a waiver of interest in the light of the specific instruction of the Central Board Of Direct Taxes, the Court in the exercise of its power under Article 226 of the Constitution of India can order waiver applying the legal principles applicable in the case of winding up of a company.

The petitioner, Tvl. Sanmac Motor Finance Ltd. was engaged in the business of sale of motor vehicles and also operated as a Non-Banking Financial Company (NBFC) and it had encountered difficulties in servicing the deposits to its depositors as a result of which it faced several hardships including the arrest of its Managing Director. All the other directors and principal and responsible officers of the petitioner company had resigned, as a result of which the interest of the company could not be protected. The official liquidator also failed to protect the petitioner. The department levied interest on the petitioner during the period in dispute between 18.06.2001 and 27.10.2006, where the company ceases to exist in the eye of law. The petitioner company contended that it was under a disability and could not discharge any liability without the permission of the court.

The petitioner has accepted the tax liability but prayed for waiver of interest under Sections 234A, 234B and 234C of the Income Tax Act, 1961, on the ground that at the time when the re-assessment proceedings were taken up pursuant to remand order of Commissioner of Income Tax (Appeals) for the Assessment Years notices were issued under Section 148, the petitioner company was already undergoing financial strains and was on the verge of being wound up.

The single-judge bench of Justice C. Saravanan observed that Chief Commissioner of Income Tax has no power to grant a waiver of interest in the light of the specific instruction of the Central Board Of Direct Taxes, the Court in the exercise of its power under Article 226 of the Constitution of India can order waiver applying the legal principles applicable in the case of winding up of a company.

Diving deeply into the facts of the case, the Court observed that“the Official Liquidator was discharged of his responsibilities only thereafter. The said order was followed by a final order dated 13.11.2007 in C.P.No.146 of 2006, wherein the promoters and directors of the petitioner company were also discharged from all pending proceedings. Since the petitioner company was being wound up, there cannot be any levy of interest under the provisions of the Income Tax Act, 1961 as it suffered a legal disability to pay the tax.”