Crown debts - Principle of priority 1960 KLT 716 Mr. Justice M.S. Menon & Mr. Justice S.

Velu Pillai
Respondents I to 3 obtained simple money decrees against Respondent No. 4. Respondent No. 1 executed his decree by attaching and selling movables belonging to the debtor. Respondents 2 and 3 claimed ratable distribution. The State has to get Rs. 1225-3-11 from Respondent No. 4 as sales tax under 3 assessments made by the Sales tax Officer, Trivandrum. Before the amounts were disbursed the State made an application objecting to the payment of the amount to respondents 1 to 3 and claiming preferential payment to the State towards the sales tax due from the debtor. The learned District Munsiff dismissed the petition stating that the States claim was not tenable. This petition is to revise the said order. Crown debts - Principle of priority - Unsecured debts - Arrears of sales tax due from debtor against whom money decree obtained by others - State entitled to priority - Not incompatible with Article 14 of Constitution. It is an incontrovertible rule of law, that where the Kings and the, subjects title concur, the Kings shall be preferred. It cannot be denied that the Crown had the right of priority in payment of debts due to it. It is a right which has always existed and has been repeated by recognised in India. This was the law in force in India immediately before the commencement of the Constitution and it must continue in force until altered or repealed or amended by a competent Legislature or other competent authority. The Common Law with regard to priority of debts due to the State is not in any way, inconsistent with the fundamental rights embodied in Part III of the Constitution. Prerogative should be considered as an essential attribute of the State, as part of general jurisprudence and it should be enforced as such. [Paras. 3, 4 & 5] AIR. 1955 Cal. 423 [F.B.]; 1907 AC 179; AIR. 1938 Mad. 360. [F. B.]; AIR. 1956 Cal. 26; AIR. 1955 Bom. 305. Referred to

In A.1.R. 1955 Bombay 305, the Court said: In our opinion, whatever may have been the historical origin of the principle which gives priority to the debts due to the Crown, when the English Courts came to consider this question the principle had become a part of the Common Law of England, and if this principle formed part of the Common Law of England, then that law has been preserved under Art. 372 (1) of the Constitution. This was the law in force in India immediately before the commencement of the Constitution and it must continue in force until altered or repealed or amended by a competent Legislature or other competent authority. Now, it is not true to say that the State is denying equality before the law to any person by claiming this special privilege. Art. 14 would only be offended against if the State made discrimination between one creditor and another or between one class of creditors and another. The principle of Common Law is that the State has priority over all competing creditors if the debts are of the same quality. Mr. Seervai says that the competition here is between two creditors and one creditor cannot be preferred to another, and if that was done, there would not be equality before the law under Art. 14. The answer to that submission is that the State here is not claiming as a creditor. It may be a creditor, but the right which it

claims is in its capacity as the State and its contention is that as it is the custodian of public welfare, as moneys which it is claiming belong to the coffers of the State and are to be used in public interest, it should be given precedence over private creditors who have not to discharge the duties or responsibilities of the State. In our opinion, therefore the Common Law with regard to priority of debts due to the State is not in any way inconsistent with the fundamental rights embodied in Part III of the Constitution. In A. I. R. 1955 Calcutta 423 P.B. Mukharji, J., dealt with the origin of the right as follows: The origin in jurisprudence recognising priority of debts owing to the State must be sought in the fact of the conception of a State. This claim for priority arose in connection with the revenue claims of the State. A State in order to function had to collect revenue for the purpose of its administration. If the collection of such revenue was to be defeated by private claims as between subjects then it will be embarrassing for the Public Exchequer and will complicate, harass and impede the basic functions of the State. That is the juristic reason based on common sense for the growth of the constitutional doctrine that the revenue claims of the State must have precedence over all other private claims. The peculiar evolution of English law gave it the character of a prerogative, of the Crown to collect revenue and therefore Crown debt was given the priority on the basis of the law of prerogative. But the main justification for preserving the revenue claims priority must remain in every State whether it is under a Crown or under the people or any other forms of Government. Notwithstanding the prerogative ideas of State in the modern age, the State still remains and has to remain by the very nature of its functions a tax collector. The jurisprudence and the law of public finance has, therefore, recognised the necessity of the priority for revenue claims. That is the reason why the republican character of the Constitution of India does not and cannot do away with the necessity of this Constitutional doctrine of priority for State debts. It is a law of necessity and good sense. 1978 KLT 668 T. Chandrasekhara Menon, J.
SUNDARAM FINANCE LTD. v. REGIONAL TRANSPORT OFFICER

Income Tax Act 1961 S.222 - Motor vehicle taken on hire-purchase by defaulter from petitioners - Whether for income tax due from him the vehicle can be proceeded against - Crown debt - Scope of Admittedly, it is as per hire purchase deed that the third respondent gets possession of the vehicle and, according to the Tax Recovery Officer; he becomes the owner of the vehicle. But then by that agreement itself, at least a security is created over the vehicle in favour of the petitioner in respect of the amounts advanced by him if the transaction is taken to be a purchase in favour of the third respondent. If that be so, then the revenue cannot have a superior right over the claim of the petitioner in regard to the vehicle. It is only whenever the right of the crown and the right of a subject with respect to the payment of a debt of equal

degree come into competition, the crown's right prevails. The principle postulates that, when the claims of the State and of the subject are equal in degree the former should prevail. In the Income Tax Act itself there is no substantive provision for superseding or overriding the claims or rights of a secured creditor of the assessee. It is Schedule II mentioned in S.222 that contains statutory rules, in accordance with which the modes of recovery mentioned in that section have to be exercised. This relates to procedure only, and does not deal with substantive rights. The provision for recovery of tax by any of the modes specified under S.222, and which is provided in detail in Schedule II, cannot, in the absence of any specific statutory provision, takeaway the rights of any party in whose favour the security has already been created. In the light of the agreement the claims of the petitioner, under which the third respondent got the vehicle, shall prevail over the State, and, the petitioner is entitled to get the registration certificate transferred in its name and also to get clearance certificate from the Regional Transport Authority.

AIR 1965 SC 1082

In the decision of the Madras High Court reported in AIR. 1940 Madras 703 Justice Wadsworth had said:
"The preferential claim of the mortgagee to the profits in the hands of the receiver is not based on any substantive rights to those profits which the terms of the mortgage do not warrant, but is merely granted by way of an equitable relief to the mortgagee against the consequences of the delay in enforcing his legal remedy. If it is conceded that a mortgagee has no charge over the rents in the hands of the receiver, it is difficult to see how he can have a preferential claim as against the Crown. His preferential claim as against simple creditors has been recognised, but not, so far as I am aware, on any other grounds than as an equity which is recognised in his favour as a diligent creditor trying to enforce his legal remedy. As against all the unsecured creditors the claim of the crown is paramount." The statement which I have underlined that, 'as against all the unsecured creditors the claim of the Crown is paramount'. Justice M. S. Menon points out, is apparently not a precise statement of the rule concerned. The rule only postulates that when the claims of the State and of the subject are equal in degree the former should prevail.

Therefore, if, in a case where a person has got a prior secured right over the property, the State's claim will not prevail.

9 It might be noted that, under S.222 of the Indian Income Tax Act, 1961, provision is made for recovery of tax by proceedings taken by the Tax Recovery Officer. That section reads: "222. Certificate to Tax Recovery Officer. - (1) When an assessee is in default or is deemed to be in default in making a payment of tax, the Income Tax Officer may forward to the Tax Recovery Officer a certificate under his signature specifying the amount of arrears due from the assessee and the Tax Recovery Officer on receipt of such certificate, shall proceed to recover from such assessee the amounts specified therein by one or more of the modes mentioned below, in accordance with the rules laid down in the Second Schedule: (a) attachment and sale of the assessee's movable property; (b) attachment and sale of the assessee's immovable property; (c) arrest of the assessee and his detention in prison; (d) appointing a receiver for the management of the assessee's movable and immovable properties. (Explanation omitted) (2) The Income Tax Officer may issue a certificate under sub-section (1) notwithstanding that, proceedings for recovery of the arrear by any other mode have been taken." In the Income Tax Act itself there is no substantive provision for superseding or overriding the claims or rights of a secured creditor of the assessee. It is Schedule II mentioned in S.222 that contains statutory rules, in accordance with which the modes of recovery mentioned in that section have to be exercised. This relates to procedure only, and, does not deal with substantive rights. Schedule II, R.16, under the heading 'private alienation to be void in certain cases" provides as follows: "16. Private alienation to be void in certain cases. - (1) Where a notice has been served on a defaulter under R.2, the defaulter or his representative in interest shall not be competent to mortgage, charge, lease or otherwise deal with any property belonging to him except with the permission of the Tax Recovery Officer, nor shall any civil court issue any process against such property in execution of a decree for the payment of money. (2) Where an attachment has been made under this schedule any private transfer or delivery of the property attached or of any interest therein and any payment to the defaulter of any debt, dividend or other moneys contrary to such attachment shall be void as against all claims enforceable under the attachment.

The provision for recovery of tax by any of the modes specified under S.222, and which is provided in detail in Schedule II, cannot, in the absence of any specific statutory provision, take away the rights of any party in whose favour the security has already been created. This is so held by the Allahabad High Court in Suraj Prasad Gupta v Chartered Bank 83 I T R.494. That case was originally heard by a Division Bench consisted of S N. Dwivedi and

Hari Swarup JJ., and, on difference of opinion by a third Judge, Justice Kirty. Justice Kirty, agreeing with Justice Dwivedi, held that, nothing can be read in R.16 of Schedule II of the Income Tax Act which may have the effect of denying the legal right of a mortgagee or a mortgagee in whose favour a decree for sale under Order XXXIV, R.5, of the Code, has been passed and that R.16 must be strictly construed and no extended or wide meaning can be given to the language of R.16 (1). 10 It might be noted that, an attachment can be effected only after a demand notice

had been served on the defaulter under R.2. R.16 (2) says that, where an attachment has been made any private transfer or delivery of the property attached or of any interest therein etc., shall be void as against all claims enforceable under the attachment. If that be so, it could well be contended that, the provision in R.16 (1), which says that, after receipt of a notice, the defaulter shall not be competent to mortgage, charge, lease etc., except with the permission of the Tax Recovery Officer, will not make such transfer void as against the claims of the revenue as such. Otherwise there was no purpose for a specific provision in sub-rule (2). It may be that in cases where no attachment has been made and private transfer has been made to a bona fide transferee for value, he would be protected. I do not think, I need give a final opinion on this question because, in any view of the case, as a person who has got prior security over the vehicle, the petitioners' seizure and retaking possession of the vehicle, could not in any way, be questioned by the revenue. In the light of the agreement the claims of the petitioner, under which the third respondent got the vehicle, shall prevail over the State, and, the petitioner is entitled to get the registration certificate transferred in its name and also to get clearance certificate from the Regional Transport Authority. 1997 (1) KLT SC SN 35 (C.No.46) K. Ramaswamy & S.P. Kurdukar, JJ. Janaki S. Menon v. Krishnan

Income Tax Act 1961, S. 222 & Schedule H - Arrears of tax - Partition suit pending between parties - Income tax and other dues are a first charge on the properties Proceedings to recover the tax from the estate before partition of properties - Need to proceed under S. 222 was obviated - Civil Court has power to proceed with the recovery of tax due and to pay over the same to the State. S. 222 and Schedule II are relatable to the procedure to be adopted by the Tax Recovery Officer for recovery of arrears of tax from the assessee or the estate of the assessee. In this case, the Tax Recovery Officer had not proceeded under the Act It is seen that when an attempt was made by the State, as stated earlier, to proceed against the estate, by consensus and consent of the parties, the property was directed to be sold to liquidate the arrears due to the State. Income tax and other dues are first charge on the estate of the deceased. Therefore, they had rightly proceeded to recover the arrears of the tax from the estate before

partition of the properties. Resultantly, the Income Tax Officer had not invoked the provisions of S. 222 and Schedule II of the Act to recover the same. Therefore, the need to proceed under the Act was obviated. The executing Court was well within its power to proceed with the recovery of the tax due and to pay over the same to the State.