URGENT -winding up and income tax liability

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prathiba (Querist)
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17 June 2008 X Ltd; is in the course of being wound up.The winding up has been put on hold as a petition has been submitted u/s.391 of the companies act by a member. The company has amounts due to secured creditors. The company is a real estate company. So the land held by it is treated as
stock in trade. The question is 1) If the land is sold in auction , will the amount be treated as business income? 2) will the company be liable to pay tax on the amount received on the amt remaining after payment to secured creditors 3) will the expenses met by liquidator be deductible?
4) please suggest relevant case laws.5) Will the IT department waive the income tax in any case?

CA CS CIMA Prakash Somani

CA CS CIMA Prakash Somani (Expert)
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18 June 2008 It is a sad truth that many companies fail and this can occur for a variety of different reasons. The process of administration, liquidation and ‘winding up’ can be a long and arduous one – and, of course, financially fraught. In these circumstances, one would be forgiven for presuming that these worries would not be added to by corporation tax. This, however, is not the case.

Answers:
1)Yes, the amount will be treated as business income if land is held as Stock in Trade.
2) Yes, the company liable to pay all statutory dues including taxes.
3) Yes liquidation expenses required to be deducted for purpose of determining net taxable income of company in liquidation.

4) CASE LAW: Click on below link

http://law.incometaxindia.gov.in/Directtaxlaws/act2005/[2003]127Taxman0443(Mad).htm

5) I am not sure about it.but i guess there is no provision for waiver of Taxes as in liquidation first payment should be made to pay out STATUTORY DUES only.

prathiba

prathiba (Querist)
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19 June 2008 thanks a lot for your response

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prathiba

prathiba (Querist)
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19 June 2008 thanks a lot for your response. I have one more doubt
1) The property of the company is charged with the bank. The bank sells the property through debt recovery tribunal at a price which is above the book value of the land held as stock in trade. The amount remaining after settlement of the bank's claim is given to the company. Will the company have to pay tax on the sale of land 1) for the entire sale consideration or 2) for the net amount received after satisfying the bank's debts, because the company has not enjoyed the entire sale proceeds.

But another contention is that though the company snaps off bank loans and only gets the balance, the payment to creditors is not allowable as a revenue expenditure