1. The short question of law which arises in this appeal is whetherrespondent No. 1, the Union of India, is entitled to claim that the tax due toit from respondent No. 2, M/s. R. K. Das and Co., on account of the assessmentyears 1946-47 and 1947-48 has priority and precedence over the decretal amountdue to the appellant M/s. Builders Supply Corporation, from respondent No. 2.This question has been answered against the appellant by the Calcutta HighCourt, and by its present appeal brought to this Court with a certificateissued by the said High Court, the appellant contends that the decision of theCalcutta High Court is erroneous in law.
2. It appears that respondent No. 2 secured a building contract from theGovernment in connection with the construction of the Mint and in that behalfit had to make a deposit of Rs. 50,000 as security for the due execution of thecontract. In connection with the execution of the said contract, respondent No.2 obtained a supply of building materials from the appellant. The appellant wasunable to secure payment for the goods thus supplied by it, and so, it had tosue respondent No. 2 for recovery of the dues. In that suit, on the 18th April,1949, the appellant obtained an order for attachment before judgment of Rs. 5,000out of the aforesaid security deposit of Rs. 50,000. This deposit was lyingwith the Superintending Engineer, Calcutta, Central Circle No. 1. Subsequently,on the 16th June, 1950, the appellant's suit was decreed by the 5th AdditionalSubordinate Judge, 24 Parganas, for a sum of Rs. 12,275-9-0. This decree wasput in execution by the appellant on the 14th February, 1952, in the court ofthe 7th Sub-Judge and in consequence, Money Execution Case No. 9 of 1952 wasstarted. Four days thereafter, the Subordinate Judge issued an order for theattachment of a further sum of Rs. 7,275-9-0 out of the aforesaid securityamount deposited by respondent No. 2. Whilst writing to the SuperintendingEngineer in that behalf, the Subordinate Judge asked him to remit to the courtthe sum of Rs. 5,000 which had already been attached before judgment. Onreceiving this communication, the Superintending Engineer placed a further sumof Rs. 7,275-9-0 under attachment, but did not comply with the requisition ofthe court to remit Rs. 5,000 to it. On the 30th April, 1952, the ExecutingCourt wrote to the Superintending Engineer and asked him to transmit the wholeof the amount of Rs. 12,275-9-0 which was under attachment as a result of thetwo previous orders passed in that behalf, but this requisition also was notcomplied with till March 9, 1953.
3. Meanwhile, the Certificate Officer of 24 Parganas had addressed a letterto the Subordinate Judge on the 23rd July, 1952, and requested him that if theSuperintending Engineer had transmitted any money to his court, its payment tothe appellant should be withheld in order to enable a claim under O. 21, r. 52of the Civil Procedure Code to be preferred on behalf of the Government. Alongwith that letter, the Certificate Officer sent a copy of another letter whichhad been addressed by him to the Superintending Engineer asking him not to makeany payment out of the amount deposited by respondent No. 2, but to retain itafter deducting the department dues. The Superintending Engineer was informedby this letter that arrears of income-tax due from respondent No. 2 exceed Rs.50,000 with the result that the whole of the security deposit, lessdepartmental dues, was liable to be applied to the satisfaction of the tax debtin respect of which Government had priority over all unsecured creditors.
4. In spite of this letter, however, the Superintending Engineer sent thewhole of the amount attached at the instance of the appellant to the ExecutingCourt and it was received in the Execution Court on the 9th March, 1953. On21st March, 1953, the Executing Court addressed a letter to the CertificateOfficer in reply to the communication received by it from him, requiring him tostate why the amount it question should not be paid to the appellant and addingthat in case no effective step was taken on or before 10th April, 1953, thesaid amount would be paid to the appellant. At this stage, the Commissioner ofIncome-tax, representing respondent No. 1, intervened and moved the ExecutingCourt for adjournment on several occasions. On every such occasion, theCommissioner intimated to the Executing Court that respondent No. 1 would showcause why the amount in question should not be paid to the appellant. Duringthe course of these proceedings, on the 17th June, 1953, the CertificateOfficer addressed a letter to the Executing Court under Rule 22 of Schedule IIto the Public Demands Recovery Act (hereinafter called the 'Recovery Act') andasked the court to hold the amount subject to further intimation from him. Thisletter was received by the Executing Court on 24th June, 1953, and inconsequence, the Executing Court passed an order withholding payment to theappellant until further orders. Finally, on 15th July, 1953, respondent No. 1made an application to the Executing Court in which it claimed that the taxamount due to it from respondent No. 2 had a priority over the judgment debtdue to the appellant from the same debtor, and so, the whole of the amountunder attachment ought to be paid to it towards partial satisfaction of thesaid income-tax dues. A similar application was made on the 11th September,1953, and this application gave material details in respect of the income-taxdemand against respondent No. 2. In both these applications, it was allegedthat a certificate under section 46(2) of the Income-tax Act, 1922 (No. 11 of1922) had been duly forwarded to the Collector, 24 Parganas, and thusproceedings under the Recovery Act had already been commenced in that behalf.
5. The Executing Court set down these application for hearing and elaboratearguments were urged before it by the appellant and respondent No. 1 in supportof their respective contentions. In the result, the Executing Court upheldrespondent No. 1's plea that the tax amount due to it from respondent No. 2 hada priority over the decretal amount due to the appellant from the same debtorand, in consequence, it issued a direction that the amount of Rs. 12,275-9-0lying in its custody under attachment should be paid to respondent No. 1.
6. This order was challenged by the appellant before the Calcutta High Courtby a revision application under section 115 of the Code. The proceedings takenbefore the Executing Court were initiated by the two applications made byrespondent No. 1 under section 151 of the Code. Apparently, the Executing Courtpassed its order in favour of respondent No. 1, purporting to exercise itsjurisdiction under the said section. It was urged before the High Court as apreliminary point that the Executing Court was in error in allowing itsjurisdiction under section 151 of the Code to be invoked in the presentproceedings. The High Court has held that it was unnecessary to considerwhether section 151 was property invoked or not, because, in its opinion, theclaim made by respondent No. 1 could be sustained under Rule 22 of thestatutory Rules framed under the Recovery Act. This rule corresponds to Order21, rule 52 of the Code and the High Court thought that the Executing Court hadjurisdiction to deal with the claim of respondent No. 1 under rule 22 read withOrder 21, rule 52 of the Code. It is unnecessary to deal with this part of thecontroversy between the parties, because the finding of the High Court on thispoint has not been challenged before us.
7. The High Court then examined the merits of the dispute. It held that ithad been accepted by all the High Courts in India that the tax amount due froman assessee to respondent No. 1 has priority 'vis-a-vis and over claims ofother creditors, though only unsecured creditors'. The High Court rejectedthe appellant's contention that the relevant provisions of the Recovery Actprevented a claim for priority made by respondent No. 1 in the present case.The appellant had also urged before the High Court that the claim for prioritymade by respondent No. 1 could no longer be sustained, having regard to thefact that it was inconsistent with the provisions of the Constitution of India.This claim, it was urged, was based on the common law doctrine of the Crownprerogative and it could not be claimed by respondent No. 1 inasmuch as it didnot fall within the scope of Art. 372(1) of the Constitution. This contentionhas been rejected by the High Court, and the High Court also held that the saidclaim cannot be said to be covered by any of the provisions of the Recovery Actand as such can be legitimately enforced by respondent No. 1. As a result ofthe findings, the High Court has discharged the rule which was issued at theinstance of the appellant in the revision application preferred by it beforethe High Court under section 115 of the Code. The appellant then applied forand obtained a certificate from the High Court and it is with this certificatethat the matter has been brought before us in appeal.
8. The first point which falls for our decision in the present appeal iswhether the High Court was right in holding that the common law doctrine aboutthe priority of Crown debts on which the claim of respondent No. 1 was based,applied in the present case. This common law doctrine has no doubt been evolvedby the special attributes associated with the Crown in England in early days.It is the part of the Crown prerogative. As Halsbury has observed 'theroyal prerogative may be defined as being that pre-eminence which the Sovereignenjoys over and above all other persons by virtue of the common law, but out ofits ordinary course, in right of her regal dignity, and comprehends all thespecial dignities, liberties, privileges, powers and royalties allowed bycommon law to the Crown of England' (Halsbury's Laws of England, 3rd Edn.Vol. 7, p. 221, para 463.). This doctrine as originally evolved by common lawin England, had a very wide sweep and it purported to take within its scopemany privileges and powers. Considered in the light of its wide sweep, some ofthese privileges may sound archaic and feudal, but it is not necessary for ourpurpose to examine the said doctrine in all its width; in the present appeal weare connected with the narrow question as to whether respondent No. 1 isentitled to claim that the recovery of the amount of tax due to it from acitizen must take precedence and priority over unsecured debts due from thesaid citizen to his other private creditors. The competition in the presentcase is between respondent No. 1's claim to recover its tax dues and theappellant's claim to recover its decretal dues from the same debtor, respondentNo. 2. The appellant is an unsecured creditor, though undoubtedly at itsinstance, the amount in question has been attached partly before judgment andpartly in execution proceedings after the judgment was pronounced.
9. The question about the applicability of this part of the Crownprerogative in India was considered by the Bombay High Court as early as 1868.In Secretary of State in Council for India v. The Bombay Landing & ShippingCo. (Limited)  5 Bom. H.C.R. 23., Westropp, J. has elaboratelyexamined this problem. The learned judge held that a judgment debt due to theCrown was in Bombay entitled to the same precedence in execution as a likejudgment debt in England, if there be no special legislative provisionaffecting that right in the particular case. Similarly, it was held that ajudgment debt due to the Secretary of State in Council for India was in Bombayentitled to the like precedence for the reason that such debt is vested in theCrown, and when realised, falls into the State Treasury. Tracing the origin ofthis doctrine, the learned judge referred to the Commentary of Lord Coke onLittleton, where Lord Coke has put the matter in these words; 'The King,by his prerogative, regularly is to be preferred, in payment of his duty ordebt, before any subject although the king's debt or duty be the latter'(p. 48). The learned Judge then referred to some English decisions bearing onthis point and concluded that 'in England the right of the Crown toprecedence does not arise out of any peculiar quality in the writ of extent.The reasoning of Lord Coke and Chief Baron Parker rests on a broaderfoundation, namely, that the destination of the debt, when recovered, is theState Treasury' (p. 50).
10. It is significant that Westropp, J. considered the question from alarger juristic point of view and observed that the common law doctrine was'no novelty in India' and he referred to the rule enunciated byYajnavalkya in that behalf. Says Yajnavalkya, 'A debtor shall be forced topay his creditors in the order in which the debts were contracted, after firstdischarging those of a priest or the King' (Yaj. II, 41.). On this topic,Katyayana says, 'if there be many debts at once, that which was firstcontracted shall be first paid, after those of a King or of a priest learned inthe Veda' (Kat. 514.). The reference to the priority of a debt due topriests learned in Vedas is obviously obsolete and can have no relevance at thepresent time. But the point that Westropp, J. has made is that the common lawdoctrine cannot be said to be a novelty to Hindu jurisprudence. He has alsoadded that 'Muhammadan sovereigns were not prone to waive or abandon suchroyal prerogative as they found existing in India' (p. 49). We havereferred to this aspect of the matter, because if the larger question aboutvalidity of the Crown prerogative in respect of claims other than tax claims fallsto be considered in future, it may become necessary to enquire whether asimilar doctrine was recognised by Hindu Jurisprudence or not. That enquiry is,however, foreign to the scope of the controversy in the present appeal. So faras respondent No. 1's claim in the present appeal is concerned, there is nodoubt that this claim has been consistently recognised by all the Indian HighCourts.
11. Before referring to these decisions, however, it will be convenient toread the relevant provisions of the Indian Income-tax Act as it stood at therelevant time (Act No. 11 of 1922). Section 46(2) of this Act provides that theIncome-tax Officer may forward to the Collector a certificate under hissignature specifying the amount of arrears due from an assessee, and theCollector, on receipt of such a certificate, shall proceed to recover from suchan assessee the amount specified therein as if it were an arrear of landrevenue. There is a proviso to this sub-section which lays down that withoutprejudice to any other powers of the Collector in this behalf, he shall, forthe purpose of recovering the said amount, have the powers which under Code ofCivil Procedure, 1908 a Civil Court has for the purpose of the recovery of anamount due under a decree. Section 46(3) lays down that in any area withrespect to which the commissioner has directed that any arrears may berecovered by any process enforceable for the recovery of an arrear of anymunicipal tax or local rate imposed under any enactment for the time being inforce in any part of the State, the Income-tax Officer may proceed to recoverthe amount due by such process. This provision prescribes an alternativeprocedure for the recovery of the debts in regard to cases falling under it.Section 46(5) provides yet another alternative remedy; it lays down that if anyarrears is in respect of any income chargeable under the head'salaries' the Income-tax Officer may require any person paying thesame to deduct from any payment subsequent to the date of such requisition any arrearsdue from such an assessee; and it requires that such requisitions shall becomplied with. The Explanation to section 46 provides that it shall be lawfulfor the Income-tax Officer, if for any special reasons to be recorded he sothinks fit, to have recourse to any such mode of recovery notwithstanding thatthe tax due is being recovered from an assessee by any other mode. Theseprovisions indicate the several remedies open to the Income-tax Officer toadopt in order to recover arrears of income-tax due from any assessee.
12. In construing the relevant provisions of section 46, the High Courts inIndia have had frequent occasions to consider whether the Government of Indiais entitled to claim priority for arrears of income-tax due to it from assesseesover the private debts due from them to their creditors, and this claim hasbeen consistently upheld. In Manickam Chettiar v. Income-tax Officer, Madura : 6ITR180(Mad) , a Full Bench of the Madras High Court has held that theincome-tax debt has priority over private debts and that the Court had inherentpower to make an order on the application for payment of moneys due to theCrown. In that connection, the Court held that section 46 of the Income-tax Actis not exhaustive of the remedies of the Crown to cover arrears of income-taxand does not preclude an application of this nature. The Court further heldthat it was also not necessary for the Crown to obtain a decree against theassessee or to effect an attachment before making such an application. Theapplication in question had been made under section 151 of the Code. Leach,C.J., who delivered the principal judgment of the Full Bench, referred to thefact that the argument which had been urged before the Court was that there wasnothing in the Code which placed the Crown in a different position from that ofa private person, and so, no application could be made by the Crown to recoverits tax dues unless a decree had been obtained in that behalf; and observedthat the argument ignored the special position of the Crown, the specialcircumstances and the Court's inherent powers. The learned Chief Justicesstated that it could not be denied that the Crown had the right of a priorityin payment of debts due to it; it is a right which has always existed and hasbeen repeatedly recognised in India. In the case before the Court, the debtrepresented money due to the Crown under the Indian Income-tax Act and thedemand of the Income-tax Officer was not open to questions. We ought to addthat Varadachariar, J. who had referred this matter to the Full Bench,apparently entertained some doubt about the correctness of the procedureadopted by the Income-tax Department in seeking to recover the arrears inquestion. With that aspect of the matter we are not concerned in the presentappeal. It is, however, noteworthy that Varadachariar, J. recognised the factthat there was overwhelming weight of authority in favour of the recognition ofthe Crown debts over the private debts due from the same debtor. His attentionwas drawn to a note of dissent on this point which had been struck down by anearlier decision of the Madras High Court in Ramachandra v. Pitchaikanni I.L.R. 7 Mad. 434., but he did not attach any importance to theopinion there expressed, because in his opinion, 'the weight of authorityin favour of the recognition of the priority in question even in this countryis so strong that this expression of doubt cannot help the petitioner to anymaterial degree'.
13. In the Bank of India v. John Bowman and Ors. : AIR1955Bom305 ,the Bombay High Court had occasion to consider the same point. In dealing withthe question, Chagla, C.J., observed that the priority given to the Crown isnot on the basis of its debt being a judgment-debt or a debt arising out ofstatute, but the principal is that it the debts are of equal degree and theCrown and the subject are equal, the Crown's right will prevail over that ofthe subject. It was urged before the High Court that the democratic set-upwhich had been ushered in this country by the Constitution was inconsistentwith the doctrine of Crown priority, but the learned Chief Justice rejectedthis argument and observed that whatever may have been the historical origin ofthe principal which gives priority to the debts due to the Crown, when theEngland Courts came to consider this question, the principal had become a partof the Common law of England. It is not so much because the Crown has anyspecial privileges in England that this principal has upheld, but it is becausethe State in England has taken the place of the Crown and the English Courtshave continued the privilege which was once the privilege of the king and haveafforded the same privilege to the State because they have realised that theState has certain rights and privileges which cannot be overlooked.
14. In Kaka Mohamed Ghouse Sahib & Co. v. United Commercial Syndicateand Others : 49ITR824(Mad) , the Madras High Court has held that it is asettled principal of constitutional law that as between creditors of the samerank the Government is entitled to priority, and the Republic character of theConstitution of India has not abrogated this general doctrine of priority ofState debts. In dealing with this question, Ramamurti, J. has referred to therelevant decisions in relating to the arrears of income-tax due to theGovernment and has pointed out that there is a consensus of judicial opinion onthe question that the arrears of tax due to the State can claim priority overprivate debts. This opinion has not been seriously disputed before us, and so,it is unnecessary to refer to other decisions which deal with this problem.
15. As we have already indicated, there is one decision in which a note ofdissent was struck by the Madras High Court, and that is the decision in thecase of Ramachandra  I.L.R. 7 Mad. 434.. In that case, certain land hadbeen sold under the provisions of section 10 of the Madras Abkari Act, 1864,for arrears due by an Abkari renter. It was held that the purchaser at the saledid not take the land free of all encumbrances as in the case of a sale forarrears of land revenue under the provisions of the Revenue Recovery Act(Madras Act II of 1864). With the actual decision in the case, we are notconcerned in the present appeal; but it appears that the learned judges in thatcase made a reference to the question as to whether Crown debts have priority,and they expressed the opinion that the said doctrine would not be universallyapplicable and three reasons were cited in support of this view. The firstreason was that the East India Company was only a corporation with limitedpowers of sovereignty delegated to it, and in the Courts it was treated as asubject; the second reason was that the right of Government to priority to amortgage was not recognised in the mufassil which was evident by the expresslanguage of the Act which declared the land revenue to be a first charge on theland; and according to the Court, such a provision would have been unnecessary,if by common law every debt due to the Crown was a first charge on the land.The third reason given by the Court was that the Court hesitated to import intoplaces outside the Presidency towns the doctrine of the Common law of Englandwhich would cause inconveniences to purchasers. Having set out these reasons,the Court, however, took the precaution of adding that it was not necessary forthe purpose of the appeal before it whether debts due to Government in thiscountry have the same preference over private debts as Crown debts in England.This observation was made, because in the case with which the Court wasconcerned, the hypothecation was in 1874, and the Abkari revenue fell intoarrear in a subsequent year, and it was held that even in England the lien of theCrown attached only from the time when the owner of the land because a debtorto the Crown, and since 1839 the common law has been greatly modified inEngland by statute for the protection of purchasers. It would thus be seen thatthe observations in question are obiter observations and it does not appearthat the matter was elaborately argued before the Court; and considerationsrelevant for the purpose of deciding the point as to priority of tax dues havenot been fully examined. Besides, this view has been dissented from by BhashyamAyyangar, J. of the Madras High Court in Bell v. The Municipal Commissionersfor the City of Madras  I.L.R. 25 Mad. 457., and as we have alreadyindicated, in the words of Varadachariar, J. in Manickam Chettiar : 6ITR180(Mad) , the weight of authority in support of the applicability of thecommon law doctrine in regard to tax dues in this country is so strong that nosignificance can be attached to these obiter observations.
16. That takes us to the second argument urged before us by Mr. Das Guptafor the appellant. He contends that though this doctrine of the priority of taxdues might have been recognised by judicial decisions in India prior to 1950,there is no scope for continuing its operation after the Constitution came intoforce. This argument naturally proceeds on the assumption that the judicialrecognition of the relevant Common law doctrine cannot claim the protection ofArt. 372(1). It will be recalled that Art. 372(1) provides, inter alia, for thecontinuance in force of existing laws. It lays down the notwithstanding therepeal by this Constitution of the enactments referred to in Art. 395 butsubject to the other provisions of this Constitution, all the law in force inthe territory of India immediately before the commencement of this Constitutionshall continue in force therein until altered or repealed or amended by acompetent Legislature or other competent authority. The question which arisesis whether this doctrine of priority which is based on common law and which wasrecognised by our High Courts prior to 1950, can be said to constitute'law in force' in the territory of India at the relevant time. Inother words, is this doctrine of common law which was introduced in this countryand followed, law in force within the meaning of article 372(1) If it is,then by virtue of Art. 372(1) itself, the same law would continue to be inforce until it is validly altered, repealed or amended.
17. This question can no longer be in doubt because of the decision of thisCourt in the Director of Rationing and Distribution v. The Corporation ofCalcutta and Ors. : 1960CriLJ1684 . In that case, this Court was calledupon to consider the question as to whether the decision of the Privy Councilin Province of Bombay v. Municipal Corporation of the City of Bombay L.R. 73 IndAp 271. which had laid down a certain rule of interpretation couldbe said to be 'law in force' within the meaning of Art. 372(1). The majorityjudgment indicated that the rule of interpretation of statutes enunciated bythe Privy Council amounted to law in force and as such, it continued to be inforce even after the Constitution was adopted, with the result that accordingto the majority opinion, the rule of interpretation of statutes that the Stateis not bound by a statute unless it is so provided in express terms or bynecessary implication, is still good law.
18. On this part of the decision, there was some difference of opinion.Sarkar, J. held that the rule that the Crown is not bound by the provisions ofany statute unless it is directly or by necessary implication referred to, isreally a rule of construction of statues and is not dependent on royalprerogatives. There was, therefore, no reason, according to the learned Judge,why it should not be applied to the interpretation of statutes after theConstitution.
19. however, took a different view. He held that the rule in question wasbased on the royal prerogative as known to the common law of England and itcould not be applied to India when there was no Crown in India and when theCommon law of England was not applicable. According to him, the proper rule ofconstruction which should be applied now is that the State is bound by astatute unless it is exempted expressly or be necessary implication.
20. It is, however, clear that there was no difference of opinion on thequestion that Common law was included within the expression 'law inforce' used by Art. 372(1). The majority judgment expressly states thatthe relevant expression 'law in force' includes not only statutorylaw, but also custom or usage having the force of law and as such, it must beinterpreted as including the Common law of England which was adopted as the lawof this country before the Constitution came into force (p. 173). Wanchoo, J.has also agreed with this view, because he has expressly observed that'the royal prerogative where it deals with substantive rights of the Crownas against it subjects, as, for example, the priority of Crown debts over debtsof the same nature owing to the subject, stands on a different footing from theroyal prerogative put forward in the present case, which is really no more thana rule of construction of statutes passed by Parliament. Where, for example, aroyal prerogative dealing with a substantive right has been accepted by theCourts in India as applicable here also, it becomes a law in force which willcontinue in force under Art. 372(1) of the Constitution' (p. 188).Therefore, this decision clearly shows that the rules of Common Law relating tosubstantive rights which had been adopted by this country and enforce byjudicial decisions, amount to 'law in force' in the territory of India at therelevant time within the meaning of article 372(1). In that view of the matter,the contention of Mr. Das Gupta that after the Constitution was adopted,respondent No. 1's position in regard to its claim for priority in the presentproceedings has been altered, cannot be upheld.
21. At this stage, we ought to make it clear that in the present appeal weare dealing with a very narrow point, and that relates to respondent No. 1'sclaim that arrears of tax due to it have precedence or priority over moneydebts due to a private creditor from the same debtor. We think it necessary toemphasise this aspect of the matter, because the basic doctrine of Crownprivileges as originally evolved by Common law in England may lead to differentcategories of claims made in different circumstances and by different States inIndia; and we want to make it clear that our present decision should beconfined only to the narrow point with which we are directly concerned.Question may arise as to whether the relevant common law doctrine was acceptedin some Indian States. If it is shown that it was not, it may have to beconsidered whether Art. 372(1) would assist the enforcement of the said doctrinein such States. One thing is clear that if the said doctrine was accepted as apart of the law in any part of the country, it will not cease to operative,because it is included in the expression 'law in force' under Art.372(1); but the position would be different in respect of such parts of theterritory of India where the said doctrine was not recognised or applied priorto 1950. Then again, if this doctrine is supposed to be an essential attributeof sovereignty, where does sovereignty reside after the Constitution Does itreside in the Union as well as all the constituent States If yes, what wouldbe the position of competing claims were made by the States inter se, or by oneof the States against the Union That is another aspect of the matter whichmay need careful examination in future.
22. Similarly, the basic justification for the claim for priority made byrespondent No. 1 in the present case rest on the well-recognised principal thatthe State is entitled to raise money by taxation, because unless adequaterevenue is received by the State, if would not be able to function as asovereign Government at all. It is essential that as a Sovereign, the Stateshould be able to discharge its primary governmental functions and in order tobe able to discharge such functions efficiently, it must be in possession ofnecessary funds, and this consideration emphasises the necessity and the wisdomof conceding to the State the right to claim priority in respect of its taxdues.
23. But the same principle may not equally be applicable in respect of debtsdue to the State if they are contracted by citizens in relation to commercialactivities which, no doubt, may be undertaken by the State for achievingsocio-economic good. It is well-known that a Welfare State often enterscommercial fields which cannot be regarded as an essential and integral part ofthe basic governmental functions of the State, and if the State seeks torecover debts from its debtors arising out of such commercial activities, itmay become necessary to consider whether the doctrine of priority can beextended to such transactions. We are referring to some of the difficultproblems which may arise in future in regard to the application of thisdoctrine, because we want to make it clear that our decision in the presentappeal should not be taken to deal with any of them. Our conclusion, therefore,is that the claim for priority made by respondent No. 1 in the presentproceedings has to be sustained, because it is based on a common law doctrinewhich had been applied and upheld in that part of India which was known as'British India' prior to the Constitution.
24. The next contention which Mr. Das Gupta has raised is that the doctrineof the priority of Crown debts cannot be enforced because it is specificallyprovided for and covered by the provisions of section 46 of the Income-tax Actand by the relevant provisions of the Recovery Act. He argues that if it isshown that the particular doctrine has become the subject-matter of legislativeprovision, it is the legislative provision which will prevail, and during theoperation of the said legislative provision, the doctrine will remain inabeyance and cannot be enforced. In support of this argument, he has relied onthe decision of the House of Lords in Attorney-General v. De Keyser's RoyalHotel Ltd.  A.C. 508 In that case, it was held that the Crown wasnot entitled as of right, either by virtue of its prerogative or under anystatute, to take possession of the land or building of a subject for aadministrative purposes in connection with the defence of the realm with outpaying compensation for their use and occupation. One of the points which arosefor decision in that case was, what was the effect of Regulation 2 of the Defenceof the Realm Regulations issued under the Defence of the Realm ConsolidationAct, 1914, when read with sub-section 2 of section 1 of the Act, on theprerogative of the Crown to take possession of the property of a subject foradministrative proposes in connection with the defence of the realm In thatconnection, the provisions of the Defence Act, 1842 (5 & 6 Vict. c. 94)authorising taking possession of land also had to be considered. In dealingwith this question, Lord Dunedin observed that the prerogative as defined bylearned constitutional writers was 'the residue of discretionary orarbitrary authority which at any given time is legally left in the hands of theCrown', and he added that inasmuch as the Crown is a party to every Act ofParliament, it is logical enough to consider that when the Act deals withsomething which before the Act could be effected by the prerogative, andspecially empowers the Crown to do the same thing, but subject to conditions,the Crown assents to that, and by that Act, to the prerogative being curtailed.It is in the light of this principal that the provisions of the Regulation readwith the relevant section of the Act were examined, and it was held that theCrown could not claim to take possession of the property of a subject withoutbeing liable to pay compensation in the manner provided for by the Defence Act,1842.
25. In that case, Lord Atkinson deal with this matter thus : 'It wassuggested', said Lord Atkinson, 'that when a statute is passedempowering the Crown to do a certain thing which it might theretofore have doneby virtue of its prerogative, the prerogative is merged in the statute. Iconfess I do not think the word 'merged' is happily chosen. I should prefer tosay that when such a statute, expressing the will and intention of the King andof the three estates of the realm, is passed, it abridges the Royal Prerogativewhile it is in force to this extent : that the Crown can only do the particularthing under and in accordance with the statutory provisions, and that itsprerogative power to do that thing is in abeyance' (p. 559-40).
26. In support of the same contention, Mr. Das Gupta has also relied on adecisions of the Federal Court in Governor-General in Council v. Shromani SugarMills Ltd. (In Liquidation)  S.C.R. 40.. In that case, the FederalCourt was examining the provisions of section 230 of the Indian Companies Act(No. VII of 1913). Section 230 prescribes the order in which preferentialpayments should be made in winding up proceedings. Clauses (a) to (f) ofsection 230(1) lay down the order of preference in which the payments should bemade; clause (a) gives the highest priority in that order to all revenues,taxes, cesses and rates, whether payable to the Government or to a local authority,due from the company at the date hereinafter mentioned and having become dueand payable within the twelve months next before that date. Reading thissection along with section 232(2) which provided that nothing in section 232applies to proceedings by the Government, the Federal Court held that it wasdifficult to think of any reason for qualifying the priority in respect of theCrown debts specified in section 230(1)(a), if it was intended that other debtsdue to the Crown should enjoy unqualified priority. Spens, C.J., who spoke forthe Court, contrasted the provision contained in section 230(1)(a) with theprovisions of section 49 of the Presidency Towns Insolvency Act (No. III of1909), and section 61 of the Provincial Insolvency Act (No. V of 1920), andheld that priority could be claimed by the Crown in winding up proceedings onlyas prescribed by section 230(1)(a) and within the limits specified therein. Itwould be noticed that this conclusion postulates the applicability of thedoctrine of priority of the debts due to the Crown and holds that as a resultof the specific provision contained in section 230(1)(a) the said doctrine mustbe worked in manner prescribed by the said section and not outside it. Basinghimself on these two decisions, Mr. Das Gupta contends that section 46 of theIncome-tax Act and the relevant provisions of the Recovery Act displace theapplication of the doctrine of Crown priority on which respondent No. 1 reliesin the present case.
27. Let us first consider this argument in relation to section 46 of theIncome-tax Act. In dealing with this section, we may incidentally refer to thedecision of this Court in Purshottam Govindji Halai v. B. M. Desai, AdditionalCollector of Bombay & Others : 1956CriLJ129 . In that case, thevalidity of section 46(2) was impeached, inter alia, on the ground that itcontravened Art. 14 of the Constitution. One of the grounds on which thevalidity of section 46(2) was challenged was based on the fact that therecovery of arrears of income-tax is authorised to be made by section 46(2) indifferent modes and manners in the different States of India. It would berecalled that section 46(2) enables the Income-tax Officer to forward to theCollector a certificate specifying the amount of arrears due from an assessee,and required the Collector, on receipt of such certificate, to proceed torecover from the assessee in question the amount specified as if it were anarrear of land revenue. Now, the procedure prescribed for recovering arrears ofland revenue differs in different States. In the City of Bombay it is recoveredunder section 13 of the Bombay City Land Revenue Act (Bombay Act 2 of 1876). Inthe rest of the Bombay State it is recovered under section 157 of the BombayLand Revenue Code, 1879 (Bombay Act 5 of 1879). In Madras, the relevantprovision is section 48 of the Madras Revenue Recovery Act, 1864 (Madras Act 2of 1864). In West Bengal, the relevant provision has been prescribed by theRecovery Act. In Punjab, it is section 69 of the Punjab Land Revenue Act, 1887(Punjab Act 27 of 1887), and in Uttar Pradesh, it is section 148 of the U.P.Land Revenue Act, 1901 (U.P. Act III of 1901). The argument based on thediversity of the procedures prescribed by these different Acts was repelled,because it was held that though the procedure prescribed by the different Actsprevailing in different States was not uniform or even similar, theclassification on which the application of the different statutes rested wasjustified inasmuch as the grouping of the income-tax defaulters into separatecategories or classes Statewise was certainly a territorial classificationwhich is based on an intelligible differentia and the subjection, for thepurposes of the recovery of the certified demand, of each of such classes ofdefaulters to the same coercive process devised by their own State, on aconsideration of local needs, for the recovery of their own public demands,cannot be regarded as benefit of a reasonable nexus or correlation between thebasis of classification and the object sought to be achieved by the IndianIncome-tax Act any more than it can be so regarded with respect to therespective State laws (p. 900).
28. We have referred to this decision, because it brings out emphaticallythe real character of the provisions prescribed by section 46(2). Section 46(2)does not deal with the doctrine of the priority of Crown debts at all; itmerely provides for the recovery of the arrears of tax due from an assessee asit were an arrear of land revenue. This provision cannot be said to convertarrears of tax into arrears of land revenue either; all that it purports to dois to indicate that after receiving the certificate from the Income-taxOfficer, the Collector has to proceed to recover the arrears in question as ifthe said arrears were arrears of land revenue. We have already seen that otheralternative remedies for the recovery of arrears of land revenue are prescribedby sub-section (3) and (5) of section 46. In making a provision for recovery ofarrears of tax, it cannot be said that section 46 deals with or provides forthe principal of priority of tax dues at all; and so, it is impossible toaccede to the argument that section 46 in terms displaces the application ofthe said doctrine in the present proceedings.
29. That takes us to the provisions of the Recovery Act on which the sameargument has been based. The Recovery Act has been passed, because it wasthought expedient to consolidate and amend the law relating to the recovery ofpublic demands in Bengal. A public demand is defined by section 3(6) of thisAct as meaning, inter alia, any arrear or money mentioned or referred to inschedule I; and clause 3 of Sch. I deals, inter alia, with any money which isdeclared by any law for the time being in force to be recovery or realizable asan arrear of revenue or land revenue. That is how the arrears of tax in respectof which a certificate has been issued by the Income-tax Officer attract theprovisions of the Recovery Act. A 'Certificate Officer' means undersection 3(3) a Collector and other officers mentioned in it. A'certificate-holder' under section 3(2) means the Government orperson in whose favour a certificate has been filed under this Act, and'certificate-debtor' under section 3(1) means a person named asdebtor in a certificate filed under this Act. The effect of the provisionscontained in sections 4 to 10 in Part II of the Recovery Act, appears to bethat when a Certificate Officer is satisfied that any public demand payable tothe Collector is due, he proceeds to sign a certificate in the prescribed form.This certificate is a certificate properly so-called for the purpose of thisAct. The certificate issued under section 46(2) of the Income-tax Act is in asense a public demand, but section 5 of the Recovery Act seems to require thatwhen any requisition is received by the Certificate Officer, he has to examinewhether the demand in question is recoverable and whether the recovery by suitis not barred by law. On this prima facie examination, if he is satisfied thatfurther action is justified, he proceeds to sign a certificate stating that thedemand is due; that is the effect of section 6. A certificate so issued is thenserved on the certificate-debtor under section 7, and section 8 prohibitsprivate transfer of the immovable property of the certificate-debtor after theservice of notice of any certificate has been effected on him under section 7.It is that stage that the certificate-debtor is empowered to file a petitiondenying his liability under section 9; and his objections are heard undersection 10. That, in brief, is the scheme of part III with which we areconcerned.
30. There is one more provision of the Recovery Act to which we ought torefer, and that is section 26. This section deals with the disposal of proceedsin execution, and sub-section (1) of this section provides that where assetsare realized, by sale or otherwise in execution of a certificate, they shall bedisposed of in the manner indicated by its clauses (a) to (d). Section 38provides that statutory rules included in Sch. II shall have effect as ifenacted in the body of this Act, until altered or annulled in accordance withthe provisions of Part V. Statutory Rule 22 which is relevant for our purposedeals with cases of attachment of property in custody of Court or publicofficer; it reads thus :-
'Where the property to beattached is in the custody of any Court or public officer, the attachment shallbe made by a notice to such Court or officer, requesting that such property,and any interest or dividend becoming payable thereon, may be held subject tothe further orders of the Certificate-Officer by whom the notice is issued :
Provided that, where suchproperty is in the custody of a court, any question of title or priorityarising between the certificate-holder and any other person, not being thecertificate-debtor, claiming to be interested in such property by virtue of anyassignment, attachment or otherwise, shall be determined by such Court'.
31. Having thus considered the broad features of the Recovery Act, thequestion which we have to decide is whether these provisions can be said toamount to a statutory provision in respect of the doctrine of priority ofarrears of income-tax due to respondent No. 1 over private debts due from thesame debtor. We have already examined the two decisions on which Mr. DasGupta's contention rests. Take, for instance, section 230 of the IndianCompanies Act. Can we say that any provisions of the Recovery Act can be comparedto the provisions of section 230 of Companies Act In our opinion, the answerto this question has to be in the negative. Broadly stated, the Recovery Act isintended mainly to provide for the procedure to recover public debts. This Actis not directly concerned with the right to recovery arrears, or with priority,of tax dues. Arrears of tax fall within the scope of the proceedingscontemplated by it, because they attract the provisions of clause 3 of Sch. I.Even a superficial glance at the fourteen clauses of Schedule. I to RecoveryAct would indicate that this Act is concerned with public demands of variouskinds, and it would not be reasonable to suggest that any of its provisions areintended to deal directly or even indirectly with the principal of law withwhich we are concerned. These provisions merely indicate the manner in whichand the procedure according to which public debts should be recovered. There isno positive provision in respect of respondent No. 1's claim to recover arrearsof tax. Rule 22 to which we have referred to which corresponds to O. 21 r. 52of the Code of Civil Procedure, can no doubt be invoked to recover arrears oftax; but that is because the procedure prescribed by the said Rule applies tothe recovery of public debts and tax arrears can be treated as public debtsinasmuch as by virtue of section 46(2) of the Income-tax Act they becomerecoverable as arrears of land revenue. In our opinion, it is difficult toaccept the argument that the application of the doctrine of priority of arrearsof tax over private debts can be said to be displaced by any of the provisionsof the Recovery Act. That being so, we must hold that the High Court was rightin coming to conclusion that respondent No. 1 was entitled to claim priority inthe matter of arrears of tax due from respondent No. 2 over the decretal debtdue to the appellant from the same debtor.
32. The result is, the appeal fails and is dismissed with costs.
33. Appeal dismissed.