Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Provision: Live. Part O of Chapter XV (Company in liquidation).
Subject: A liquidator of a company in winding-up must, within 30 days of appointment, give notice to the Assessing Officer, who notifies the amount to be set aside to meet tax liabilities; the liquidator must set aside that amount and may not part with the company's assets in priority over it; and a liquidator who fails to give notice or parts with assets in contravention is personally liable for the tax to the notified extent.
Finance Act, 2026: No change. Chapter XV is untouched by the Finance Act, 2026; the section stands as amended up to the Finance Act, 2025.
A. SECTION COMMENTARY
1. Protecting the revenue in a winding-up
Section 178 protects the revenue when a company goes into liquidation. The liquidator must give notice of his appointment to the Assessing Officer within thirty days; the officer then notifies, within three months, the amount which in his opinion would be sufficient to provide for the company's tax liabilities (assessed or likely). The liquidator must set that amount aside and may not part with the company's assets in a manner that defeats it; a liquidator who fails to give notice, or who parts with assets in contravention of the section, is made personally liable for the tax to the extent of the notified (or, where no amount is notified, the assessable) sum. The personal liability is the section's teeth.
2. Assessment without leave of the winding-up court
The interface with the Companies Act winding-up jurisdiction was settled in S.V. Kondaskar: the Income-tax Officer does not require the leave of the company (winding-up) court under the Companies Act to commence or continue assessment or reassessment proceedings against a company in liquidation, because the Income-tax Act is a complete code and the officer, in assessing, does not act as a court within the leave provision. The boundary the Court drew is between quantification (assessment), for which no leave is needed, and realisation/recovery, which is subject to the winding-up court's control and the statutory priority regime.
3. The 'set aside' duty and the Revenue's priority
The operative effect of the set-aside duty was explained in Imperial Chit Funds: the words requiring the liquidator to 'set aside' the notified amount mean to keep it separate and appropriate it for the special purpose of meeting the tax, so that the amount stands outside the ordinary winding-up distribution and the Department is, to that extent, in the position of a secured/preferential creditor. Section 178 thus gives the notified tax a protected status in the liquidation that it would not otherwise enjoy under the general scheme of preferential payments.
B. STATUTORY POSITION (verbatim text)
The text of the section, as it stands in the Act (FA-2025 base), is set out below.
178. (1) Every person—
(a) who is the liquidator of any company which is being wound up, whether under the orders of a court or otherwise; or
(b) who has been appointed the receiver of any assets of a company, (hereinafter referred to as the liquidator) shall, within thirty days after he has become such liquidator, give notice of his appointment as such to the Assessing Officer who is entitled to assess the income of the company.
(2) The Assessing Officer shall, after making such inquiries or calling for such information as he may deem fit, notify to the liquidator within three months from the date on which he receives notice of the appointment of the liquidator the amount which, in the opinion of the Assessing Officer, would be sufficient to provide for any tax which is then, or is likely thereafter to become, payable by the company.
(3) The liquidator—
(a) shall not, without the leave of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, part with any of the assets of the company or the properties in his hands until he has been notified by the Assessing Officer under sub-section (2) ; and
(b) on being so notified, shall set aside an amount, equal to the amount notified and, until he so sets aside such amount, shall not part with any of the assets of the company or the properties in his hands :
Provided that nothing contained in this sub-section shall debar the liquidator from parting with such assets or properties for the purpose of the payment of the tax payable by the company or for making any payment to secured creditors whose debts are entitled under law to priority of payment over debts due to Government on the date of liquidation or for meeting such costs and expenses of the winding up of the company as are in the opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner reasonable.
(4) If the liquidator fails to give the notice in accordance with sub-section (1) or fails to set aside the amount as required by sub-section (3) or parts with any of the assets of the company or the properties in his hands in contravention of the provisions of that sub-section, he shall be personally liable for the payment of the tax which the company would be liable to pay :
Provided that if the amount of any tax payable by the company is notified under sub-section (2), the personal liability of the liquidator under this sub-section shall be to the extent of such amount.
(5) Where there are more liquidators than one, the obligations and liabilities attached to the liquidator under this section shall attach to all the liquidators jointly and severally.
(6) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force except the provisions of the Insolvency and Bankruptcy Code, 2016 (31 of 2016).
C. AUTHORITIES
Section 178 rests on two Supreme Court authorities — one on the assessment/leave interface, one on the set-aside duty and priority. Both are web-verified. The generic lead 'ITO v. Official Liquidator' could not be pinned to a verifiable section 178 citation and has been omitted.
Cluster A — Leave of the winding-up court / power to assess a company in liquidation
S.V. Kondaskar, Official Liquidator v. V.M. Deshpande, ITO
Citation: (1972) 83 ITR 685 (SC)
Facts: A liquidator contended that the Income-tax Officer required the leave of the winding-up court under section 446(2) of the Companies Act, 1956 before reopening the company's assessments.
Held: The officer need not obtain the leave of the winding-up court to commence or continue assessment/reassessment; the Income-tax Act is a complete code, assessment is not a 'suit or legal proceeding' before the company court, and the officer does not act as a court. Leave is required only at the stage of recovery/realisation, not assessment.
Relevance: Foundational on the section 178 / Companies Act interface — fixes the boundary between quantification (no leave) and recovery (leave/priority regime).
Cluster B — The set-aside duty and the Department as preferential/secured creditor
Imperial Chit Funds (P) Ltd. v. ITO, Ernakulam
Citation: (1996) 219 ITR 498 (SC)
Facts: Whether amounts notified by the officer and set aside by the liquidator under section 178 enjoy priority, or merely rank for distribution under the Companies Act preferential-payment scheme.
Held: The words requiring the liquidator to 'set aside' the notified amount mean to keep it separate and appropriate it for a special purpose; that amount stands outside the winding-up distribution, and the Income-tax Department is, to that extent, to be treated as a secured creditor.
Relevance: The leading authority on the operative effect of section 178(2)–(4) — gives the set-aside amount priority and quasi-secured status.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced from the Income-tax Act, 1961 (text as printed in the local Act, base text amended up to the Finance Act, 2025), with the publisher's footnote apparatus and amendment-marker brackets removed; three asterisks (***) denote words or a provision omitted by amendment and retained only to mark the omission. The Finance Act, 2026 amends no section of Chapter XV of the Income-tax Act, 1961 (its Part-A amendments touch ss.92CA, 139, 140B, 144B, 144C, 147A, 148, 150, 153, 153B, 220, 222, 234, 245, 245MA, 254 and 270A-276 only). Citations are stated as reported; orders of the Tribunal and High Courts are flagged as such. Where a section has not been judicially construed, that is stated candidly and the nearest governing authority is given. This material is for professional reference and is not legal advice.
CHAPTER XV — LIABILITY IN SPECIAL CASES
Section 178 — Company in Liquidation
Case Laws & Commentary · Income-tax Act, 1961 (as amended by the Finance Act, 2026) · bharattax.co Treatise
Provision: Live. Part O of Chapter XV (Company in liquidation).
Subject: A liquidator of a company in winding-up must, within 30 days of appointment, give notice to the Assessing Officer, who notifies the amount to be set aside to meet tax liabilities; the liquidator must set aside that amount and may not part with the company's assets in priority over it; and a liquidator who fails to give notice or parts with assets in contravention is personally liable for the tax to the notified extent.
Finance Act, 2026: No change. Chapter XV is untouched by the Finance Act, 2026; the section stands as amended up to the Finance Act, 2025.
A. SECTION COMMENTARY
1. Protecting the revenue in a winding-up
Section 178 protects the revenue when a company goes into liquidation. The liquidator must give notice of his appointment to the Assessing Officer within thirty days; the officer then notifies, within three months, the amount which in his opinion would be sufficient to provide for the company's tax liabilities (assessed or likely). The liquidator must set that amount aside and may not part with the company's assets in a manner that defeats it; a liquidator who fails to give notice, or who parts with assets in contravention of the section, is made personally liable for the tax to the extent of the notified (or, where no amount is notified, the assessable) sum. The personal liability is the section's teeth.
2. Assessment without leave of the winding-up court
The interface with the Companies Act winding-up jurisdiction was settled in S.V. Kondaskar: the Income-tax Officer does not require the leave of the company (winding-up) court under the Companies Act to commence or continue assessment or reassessment proceedings against a company in liquidation, because the Income-tax Act is a complete code and the officer, in assessing, does not act as a court within the leave provision. The boundary the Court drew is between quantification (assessment), for which no leave is needed, and realisation/recovery, which is subject to the winding-up court's control and the statutory priority regime.
3. The 'set aside' duty and the Revenue's priority
The operative effect of the set-aside duty was explained in Imperial Chit Funds: the words requiring the liquidator to 'set aside' the notified amount mean to keep it separate and appropriate it for the special purpose of meeting the tax, so that the amount stands outside the ordinary winding-up distribution and the Department is, to that extent, in the position of a secured/preferential creditor. Section 178 thus gives the notified tax a protected status in the liquidation that it would not otherwise enjoy under the general scheme of preferential payments.
B. STATUTORY POSITION (verbatim text)
The text of the section, as it stands in the Act (FA-2025 base), is set out below.
178. (1) Every person—
(a) who is the liquidator of any company which is being wound up, whether under the orders of a court or otherwise; or
(b) who has been appointed the receiver of any assets of a company, (hereinafter referred to as the liquidator) shall, within thirty days after he has become such liquidator, give notice of his appointment as such to the Assessing Officer who is entitled to assess the income of the company.
(2) The Assessing Officer shall, after making such inquiries or calling for such information as he may deem fit, notify to the liquidator within three months from the date on which he receives notice of the appointment of the liquidator the amount which, in the opinion of the Assessing Officer, would be sufficient to provide for any tax which is then, or is likely thereafter to become, payable by the company.
(3) The liquidator—
(a) shall not, without the leave of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, part with any of the assets of the company or the properties in his hands until he has been notified by the Assessing Officer under sub-section (2) ; and
(b) on being so notified, shall set aside an amount, equal to the amount notified and, until he so sets aside such amount, shall not part with any of the assets of the company or the properties in his hands :
Provided that nothing contained in this sub-section shall debar the liquidator from parting with such assets or properties for the purpose of the payment of the tax payable by the company or for making any payment to secured creditors whose debts are entitled under law to priority of payment over debts due to Government on the date of liquidation or for meeting such costs and expenses of the winding up of the company as are in the opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner reasonable.
(4) If the liquidator fails to give the notice in accordance with sub-section (1) or fails to set aside the amount as required by sub-section (3) or parts with any of the assets of the company or the properties in his hands in contravention of the provisions of that sub-section, he shall be personally liable for the payment of the tax which the company would be liable to pay :
Provided that if the amount of any tax payable by the company is notified under sub-section (2), the personal liability of the liquidator under this sub-section shall be to the extent of such amount.
(5) Where there are more liquidators than one, the obligations and liabilities attached to the liquidator under this section shall attach to all the liquidators jointly and severally.
(6) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force except the provisions of the Insolvency and Bankruptcy Code, 2016 (31 of 2016).
C. AUTHORITIES
Section 178 rests on two Supreme Court authorities — one on the assessment/leave interface, one on the set-aside duty and priority. Both are web-verified. The generic lead 'ITO v. Official Liquidator' could not be pinned to a verifiable section 178 citation and has been omitted.
Cluster A — Leave of the winding-up court / power to assess a company in liquidation
S.V. Kondaskar, Official Liquidator v. V.M. Deshpande, ITO
Citation: (1972) 83 ITR 685 (SC)
Facts: A liquidator contended that the Income-tax Officer required the leave of the winding-up court under section 446(2) of the Companies Act, 1956 before reopening the company's assessments.
Held: The officer need not obtain the leave of the winding-up court to commence or continue assessment/reassessment; the Income-tax Act is a complete code, assessment is not a 'suit or legal proceeding' before the company court, and the officer does not act as a court. Leave is required only at the stage of recovery/realisation, not assessment.
Relevance: Foundational on the section 178 / Companies Act interface — fixes the boundary between quantification (no leave) and recovery (leave/priority regime).
Cluster B — The set-aside duty and the Department as preferential/secured creditor
Imperial Chit Funds (P) Ltd. v. ITO, Ernakulam
Citation: (1996) 219 ITR 498 (SC)
Facts: Whether amounts notified by the officer and set aside by the liquidator under section 178 enjoy priority, or merely rank for distribution under the Companies Act preferential-payment scheme.
Held: The words requiring the liquidator to 'set aside' the notified amount mean to keep it separate and appropriate it for a special purpose; that amount stands outside the winding-up distribution, and the Income-tax Department is, to that extent, to be treated as a secured creditor.
Relevance: The leading authority on the operative effect of section 178(2)–(4) — gives the set-aside amount priority and quasi-secured status.
Compiled for the bharattax.co Treatise on the Income-tax Act, 1961 (as amended by the Finance Act, 2026). Statutory text is reproduced from the Income-tax Act, 1961 (text as printed in the local Act, base text amended up to the Finance Act, 2025), with the publisher's footnote apparatus and amendment-marker brackets removed; three asterisks (***) denote words or a provision omitted by amendment and retained only to mark the omission. The Finance Act, 2026 amends no section of Chapter XV of the Income-tax Act, 1961 (its Part-A amendments touch ss.92CA, 139, 140B, 144B, 144C, 147A, 148, 150, 153, 153B, 220, 222, 234, 245, 245MA, 254 and 270A-276 only). Citations are stated as reported; orders of the Tribunal and High Courts are flagged as such. Where a section has not been judicially construed, that is stated candidly and the nearest governing authority is given. This material is for professional reference and is not legal advice.