Bombay High CourtUnion Of India (Uoi) And Anr. vs Shantilal Jewellers And Ors. on 14 November, 2003Equivalent citations: AIR2004BOM49, II(2004)BC530, 2004(1)BOMCR1, (2004)192CTR(BOM)565, 2004(1)MHLJ879, AIR 2004 BOMBAY 49, (2004) 182 TAXATION 237, (2004) 1 MAH LJ 879, (2004) 2 BANKCAS 530, (2004) 192 CURTAXREP 565, (2004) 271 ITR 140, (2004) 136 TAXMAN 147, (2004) 1 BOM CR 1Author:R. M. LodhaBench:R.M. Lodha,A.V. MohtaJUDGMENT
 

 R. M. Lodha, J.1.    None appears for the appellants.2. The appeal is, accordingly, liable to be dismissed in default.3. Even otherwise, we are satisfied that there is no merit in the appeal. The respondents 1 to 4 herein were adjudicated insolvents in the insolvency proceedings under thePresidency Towns Insolvency Act, 1909on 3-11 -1987. The Official Assignee took over the assets of the insolvents and auctioned the properties of the insolvents. The sale proceeds thereof came in the hands of Official Assignee. The Tax Recovery Officer No. 7, Bombay made a claim of Rs. 41,09,658/- on 12-1-1995 before the Official Assignee. Out of the said claim made by the Tax Recovery Officer the claim of Rs. 35,02,277/- was rejected by the Official Assignee against the
estate of insolvents. The reason for such rejection was that such claim was not provable underSection 46(3)of Presidency Towns Insolvency Act as it was necessary that claim should pertain to the liability to which the debtor was subject when he was adjudged as insolvent or such claim to be pertaining to the obligation incurred by him before the date of adjudication. Aggrieved by the order of Official Assignee dated 25-7-1995 rejecting the claim of Rs. 35,02,277/-, the present appellants took out notice of motion being notice of motion No. 102/1995. The learned Single Judge, by the order dated 16-1-1996, upheld the order of the Official Assignee. Aggrieved thereby the present appeal has been preferred.Section 46(3)of the Presidency Towns Insolvency Act reads thus :46.  Debts provable in insolvency.--(1) & (2) ..............(3) Save as provided by sub-sections (1) and-(2), all debts and liabilities, present or future, certain or contingent, to which the debtor is subject when he is adjudged an insolvent or to which he may become subject before his discharge by reason of any obligation incurred before the date of such adjudication, shall be deemed to be debts provable in insolvency."4. The Division Bench of this Court way back in the year 1931 inGustasp Behram Irani v. Bhagvandas Sobharam, held that the debt to be provable against insolvent must be arising out of obligation incurred before order of adjudication or insolvent must become subject before discharge. The Division Bench held thus:"The question therefore arises whether the decretal debt with regard to the costs in the application for leave to sue is a provable debt within the meaning of  Sub-section  (3),Section 46. Apart from authority, in order that a debt should be provable, it must appear that the insolvent was subject to such debt or liability at any time before his discharge by reason of any obligation Incurred before the date of the adjudication. The debt or the liability would not be provable if the debtor becomes subject to it after his discharge, or if he becomes subject to it by reason of any obligation incurred after the date of the order of adjudication. In the present case the order for costs was passed after the date of the adjudication, and the obligation to pay the debt was incurred at the time when the order for costs
was passed. The liability therefore to pay the costs accrued on 9th August 1926, after the appellant was adjudged an Insolvent on 15th July 1924. Though the word "debt" includes a judgment-debt according toSection 2(b)of the Act, the obligation to pay the costs is one which accrued after the date of the adjudication and in respect of which there could be no proof in insolvency, and which remained a debt enforceable against the insolvent after and notwithstanding his discharge.According to the decision of Re Bluck; Ex parte Bluck, (1887) 57 LT 419 if a man brings an action he does not place on himself the obligation to pay the costs. The obligation arises when the judgment is given against him.In British Gold Fields of West Africa, In re, (1899) 2 Ch 7 it was observed as follows (p. 11):"If the action against a person who becomes bankrupt is unsuccessful, no costs become payable by him or out of his estate, and no question as to them can arise. But if an unsuccessful action is brought by a man who becomes bankrupt, then, if he is ordered to pay the costs, or if a verdict is given against him before he becomes bankrupt, they are provable. On the other hand, if no verdict is given against him, and no order is made for payment of costs until after he becomes bankrupt, they are not provable. In such a case there is no provable debt to which the costs are incident, and there is no liability to pay them by reason of any obligation incurred by the bankrupt before bankruptcy; nor are they a contingent liability to which he can be said to be subject as the date of his bankruptcy."The same view is taken in A Debtor, In re, (1911) 2 KB 652 and also in Pilling, In re, (1909) 2 KB 788 and Vint v. Hudspith, (1885) 30 Ch D 24.'The case cited on behalf of the appellant in Buckwell v. Norman, (1898) 1 QB 622 is distinguishable on the ground that the order for costs was passed before the receiving order was made and the debt was therefore provable in insolvency notwithstanding the personal disqualification for proving it. Under  Sub-section  (2),Section 46the respondent having notice of the presentation of the Insolvency petition would not be in a position to prove the debt or liability contracted by the debtor subsequent to the date of his so having notice.In the present case the debt is not provable as the liability was incurred after the date of adjudication and there is also the personal disqualification under  Sub-section  (2), Section 46 for proving it.We think therefore that the liability incurred by the order for costs in the application for leave to sue is not a provable debt within the meaning of  Sub-section  (3),Section 46, Presi-. dency Towns Insolvency Act, and therefore the order of discharge would not release the insolvent from that debt."5. The learned single Judge of this Court in the impugned order has referred to the judgment of other single Judge in Insolvency petition No. 52/1969 delivered on 9-10-1978 wherein it was held that when the liability to pay the amount had arisen after the order of adjudication, such claim does not constitute a debt provable in insolvency under the provisions ofSection 46(3)of the Presidency Towns Insolvency Act. In the Insolvency Petition No. 52/1969 the claim was made by the Commissioner of Sales Tax before the Official Assignee in the insolvency of one Sureshchandra Jayantilal Thakkar. The claim related to sales tax dues, penalty, revised sales tax dues and rectification of earlier assessment orders made under the provisions of Bombay Sales Tax Act, 1959. The Official Assignee rejected the part of the claim which related to the period after the order of adjudication was made against the insolvent. Aggrieved thereby, the sales tax department took out notice of motion before the learned Judge and it was held therein as noted above that the rejected claim pertained to the liability which had arisen after the order of adjudication was made and, therefore, such claim did not constitute a debt provable in insolvency under the provisions ofSection 46(3). We are informed by the Official Assignee, who is present in Court, that the judgment and order dated 9-10-1978 passed in Insolvency petition No. 52/1969 has been upheld by the Division Bench in Insolvency Appeal No. 356/1979 in Insolvency Petition No. 70 of 1966, The State of Maharashtra v. The Official Assignee.6. The penalty proceedings under theIncome-tax Actare not the proceedings in continuation of proceedings relating to assessment. The liability to pay a penalty imposed under the provisions of the Act cannot be
said to arise until the point of time the penalty is imposed that is what has been held by the Apex Court in the case ofJain Brothers v. Union of India, .7. In the present case, admittedly the adjudication order was made on 3-11-1987 declaring respondents 1 to 4 as insolvents. The order of penalty has been Imposed in the year 1995 i.e. much after the order of adjudication was made and the respondents 1 to 4 were adjudged as insolvents. The liability of penalty, thus, was incurred after the date of adjudication and cannot be said to be provable underSection 46(3)of the Presidency Towns Insolvency Act. The legal position has been consistent in this regard that debt to be provable under insolvency must be arising out of obligation incurred before order of adjudication or insolvent must become subject before discharge. In the light of this legal position, the impugned order cannot be faulted nor can the Official Assignee be said to have erred in rejecting the claim of the appellants to the tune of Rs. 35,02,277/-.8. Thus, on merits also the appellants have no case.9.   We, accordingly, dismiss the appeal.No costs.