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Sundaram Finance Ltd. Vs. Regional Transport Officer and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKerala High Court
Decided On
Case NumberO.P. No. 3842 of 1976-G
Judge
Reported in[1979]117ITR334(Ker)
ActsIncome Tax Act, 1961 - Sections 222
AppellantSundaram Finance Ltd.
RespondentRegional Transport Officer and ors.
Appellant Advocate V.R. Venkitakrishnan, Adv.
Respondent Advocate Government Pleader for respondent No. 1,; P.A. Francis and;
Cases ReferredGupta v. Chartered Bank
Excerpt:
.....- petitioner seized vehicle - petitioner applied to issue tax clearance certificate in respect of vehicle and registration of vehicle in his name - application rejected as respondent did not clear income tax arrears - petition challenging rejection of application - claim of petitioner prevailed over state due to terms of agreement - petitioner entitled to get clearance certificate - court directed authority to issue fresh registration certificate in name of petitioner. - - if the hirer failed to pay any of the instalments within the stipulated time whether legally demanded or not, becomes insolvent or attempts to pledge or seller otherwise alienate or transfer the vehicle, etc. venkitakrishnan, learned counsel for the, petitioner, points out that that feature is clearly there in..........an attachment can be effected only after a demand notice had been served on the defaulter under rule 2. rule 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 rule 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 tro, 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.....
Judgment:

Chandrasekhara Menon, J.

1. The third respondent got possession of a stage carriage vehicle, as per Ext. P-2 agreement, styled as a 'hire purchase agreement'. In accordance with Ext. P-2 agreement, the petitioner, who is carrying on business as financiers were to let, and the third respondent to take, on hire, the motor vehicle together with the equipment and accessories for a term of 24 calendar months from June 9, 1973, subject to determination as mentioned below : The hirer was to pay the owners (petitioner) by way of rent, the sum mentioned in the second schedule to the agreement on the dates therein mentioned. He was to keep the vehicle in sole custody. He could not sell, assign, pledge, charge, underlet, lend or otherwise part with the possession, custody or beneficial interest of, in the said vehicle without the previous written consent of the petitioner. If the hirer failed to pay any of the instalments within the stipulated time whether legally demanded or not, becomes insolvent or attempts to pledge or seller otherwise alienate or transfer the vehicle, etc., then the rights of the hirer shall forthwith be determined ipso facto without any notice to the hirer and all the instalments previously paid by the hirer shall be forfeited to the petitioner, who shall thereupon be entitled to seize, remove and retake possession of the vehicle with its accessories. Only upon the hirer paying the entire amount specified in the schedule, the said vehicle will become the sole and absolute property of the hirer. As per the agreement itself the petitioner had agreed to permit the hirer to have the registration of the vehicle in his name provided that he should transfer the registration in the name of the petitioner whenever required to do so by them and especially when the hirer commits breach of any of the conditions of the agreement and the petitioner was obliged to seize the vehicle.

2. What happened in this case was that the third respondent defaulted payment of the instalments in accordance with the agreement. The petitioner seized the vehicle. On that day, an amount of Rs. 19,375 was due from the third respondent to the petitioner by way of arrears of hire money besides other amounts by way of incidental charges, etc. After the seizure of the vehicle and taking possession of the same, the petitioner made an application to the Regional Transport Officer, the first respondent, requiring him to issue a tax clearance certificate in respect of the vehicle. Another application was also filed for cancellation of the original registration certificate issued in the name of the third respondent and for the issue of a fresh registration certificate in the name of the petitioner. This application was, in effect, rejected by the first respondent on the ground that the Tax Recovery Officer (Income-tax), the second respondent, had raised objection in regard to the transfer of the vehicle to anybody, as the registered owner, the third respondent, had not cleared the income-tax arrears due from him.

3. Therefore, the application for duplicate registration certificate of transfer of the ownership could not be considered.

4. In these circumstances, the petitioner has approached this court for quashing the proceedings of the first respondent, which denies the petitioner's request for fresh registration certificate and tax clearance certificate, and also for the issue of a writ of mandamus for commanding the first respondent to issue the tax clearance certificate in respect of Fargo bus bearing Registration No. KLF 1469 and to cancel the original registration certificate in respect of the above bus issued in the name of the third . respondent and further direct the first respondent to issue a fresh registration certificate in the name of the petitioner.

5. The TRO has filed a counter-affidavit in the matter. Therein it is stated that an amount of Rs. 8,137 plus interest is due from the third respondent as per revenue recovery certificates received from the ITO, Ernakulam. The details for arrears, with the date of service of demand notice, issued under Rule 2 of Sch. II of the I.T. Act, 1961, is given hereunder:

SI. No.

Asst.year

Amountcertified

Date ofservice of ITCP-1 under rule 2 (demand notice served by the TRO)

1.

1963-64

3,623

24-4-1967

2.

1969-70

1,062

24-11-1971

3.

1970-71

1,171

8-1-1972

4.

1971-72

2,281

21-6-1973

8,137

6. According to the TRO, the defaulter, to all intents and purposes, even under the terms of the agreement, is the owner, under the hire 'purchase agreement, Ext. P-2. The transaction evidenced by Ext. P-2 is indeed one of loan to be repaid in twenty-four regular instalments spread over a period of twenty-four months and the agreement really amounted only to giving of security of the bus for the loan advanced by the petitioner. He points out that the possessor of the vehicle under the hire purchase agreement, the third respondent, is the owner.

7. Mr. V. R. Venkitakrishnan, learned counsel for the petitioner, placing reliance on the decision of the Supreme Court in K. L. Johar & Co. v. Dy. CTO [1965] 16 STC 213, contended that the petitioner is the real owner of the vehicle. It was a case of a financing firm having its main business to advance money to persons who intended to purchase mptor vehicles but were themselves not in a position to find ready money to pay the price.

8. The firm entered into hire purchase agreement with the purchaser. The Supreme Court pointed out in that case that the agreement therein showed that the financier was the owner of the vehicle and the intending purchaser was merely a hirer thereunder. The clauses in the agreement gave power to the financier, as in this case, to retake possession of the vehicle and determine the agreement. The Supreme Court pointed out in that case that, if the property in the vehicle had passed to the intending purchaser at the time of the hire-purchase agreement, it would not have been open to the financing company to take possession of the vehicle or to insist on payment of arrears or to become entitled to everything that had been paid up to that day. Under the law all that the financing company would have been entitled to was to realise the loan he had given by filing a suit and then attaching and selling the vehicle. The two clauses which allow the company to seize the vehicle and retake possession were clear indication of the fact that there was no sale by the dealer to the person who wanted to purchase the vehicle at the time of the hire-purchase agreement, and that at the time the sale was by the dealer to the financing company. In that case also some of the clauses in the agreement therein gave an option to the person who wanted to purchase the vehicle to do so by exercising his option under the condition mentioned therein. The Supreme Court pointed out that, if the intending purchaser had already become the owner when the agreement had been entered into as such, the clauses would not have been included in the agreement.

9. In the present case, Clause 4 of the agreement states that, on default by the hirer, the owner can seize, remove and retake possession of the vehicle and sue for all the instalments due and for damages for breach of the agreement and for all the costs of retaking of possession of the said vehicle and all costs occasioned by the hirer's default. Clause 6 would show that, only upon the hirer paying the entire amounts due under the agreement, the said vehicle shall become the sole and absolute property of the hirer. In regard to the registration of the vehicle, though it is in the hirer's name, Clause 8 of the agreement states that the owners--meaning the financing company--agree to permit the hirer to have the registration of the vehicle in his name provided that the hirer shall transfer the registration in the name of the owners whenever required to do so by them and especially when the hirer commits breach of any of the conditions of the agreement. In the case that I referred to above, the Supreme Court had also indicated that the distinguishing feature of a typical hire-purchase agreement is that the property does not pass when the agreement is made but only passes when the option is finally exercised after complying with all the terms of the agreement. Mr. V. R. Venkitakrishnan, learned counsel for the, petitioner, points out that that feature is clearly there in Ext. P-2 agreement.

10. Though there is much force in what Mr. Venkitakrishnan contends, I do not think, I need go as far as that, for allowing this original petition. Admittedly, it is as per Ext. P-2 that the third respondent gets possession of the vehicle and, according to the TRO, 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. See the decision in State of Madras v. Chaldian Syrian Bank Ltd. [1960] KLJ 853. In this decision, Justice M. S. Menon, as he then was, pointed out that, if a mortgagee has a lien over the funds collected by a receiver appointed at his instance, then, it will not be possible to say that the rights of the mortgagee and of the State in the funds in question are equal in degree. The existence of a lien in favour of the mortgagee will militate against the equality of the rival claims and thus negative the right of the State to a preferential payment.

11. There, his Lordship pointed out to a decision of the Madras High Court in Sambasiva Chettiar v. Secretary of State, AIR 1940 Mad 703, wherein Justice Wadsworth had said (p. 704):

'.....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 the 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.'

12. 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. In that connection, the learned judge referred to a decision of the Andhra Pradesh High Court in Adikesavalu v. State of Madras, ILR [1957] AP 505, where Chief Justice Subba Rao, as he then was, said:

'An appointment of a receiver in a mortgage action to collect rents of the mortgaged property and deposit the same to the credit of the suit is one of the equitable modes of proceeding against the mortgaged property itself. On the making of that order, the mortgagor is deprived of his right to possession and to collect the rents. Thereafter, neither the mortgagor nor persons claiming under him such as a purchaser or a mortgagee of the equity of redemption can have a higher right than the mortgagor himself. So too, none of the creditors who have no prior mortgage or security over the property, can claim to have a right to the amounts realised in so far as the said amounts were necessary to discharge the mortgage debts for, in the case of unsecured creditors, they can only claim that amount in the shoes of the mortgagor and when the mortgagor himself has no right, a fortiori they will have none. Whatever privileged position the Crown occupies, in a competition inter se among unsecured creditors, it is settled law that the Crown is not a secured creditor and, therefore, it can only claim just like any other unsecured creditor and as the mortgagor lost the right to possession and to collect the rent, to the extent indicated above, the State also cannot claim any priority in the sums collected by the receiver.'

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

14. It might be noted that, under Section 222 of the I.T. Act, 1961, provision is made for recovery of tax by proceedings, taken by the TRO. 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 amount 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 arrears by any other mode have been taken.'

15. In the I.T. Act itself there is no substantive provision for superseding or overriding the claims or rights of a secured creditor of the assessee. It is Sch. II mentioned in Section 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, Rule 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 rule 2, the defaulter or his represen-tative-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 monies contrary to such attachment, shall be void as against all claims enforceable under the attachment.'

16. The provision for recovery of tax by any of the modes specified under Section 222, and which is provided in detail in Sch. II, cannot, in the absence of any specific statutory provision, take away the rights of any party in whose favour the security has already be'en created. This is so held by the Allahabad High Court in Suraj Prasa'd Gupta v. Chartered Bank : [1972]83ITR494(All) . That case was originally heard by a Division Bench consisting of S. N. Dwivedi and Hari Swarup JJ. and, on difference of opinion between them, the question was referred to the opinion of a third judge, Justice Kirty. Justice Kirty, agreeing with Justice Dwivedi, held that nothing can be read in Rule 16 of Sch. II of the I.T. 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, Rule 5, of the Code, has been passed and that Rule 16 must be strictly construed and no extended or wide meaning can be given to the language of Rule 16(1).

17. It might be noted that an attachment can be effected only after a demand notice had been served on the defaulter under Rule 2. Rule 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 Rule 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 TRO, 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 under which the third respondent got the vehicle, the claims of the petitioner, 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. Therefore, I quash Ext. P-1 and direct the first respondent to issue tax clearance certificate in respect of the Fargo bus bearing Registration No. KLF 1469 and to cancel the original registration certificate in respect of the above bus issued in the name of the third respondent. I further direct the first respondent to issue a fresh registration certificate in the name of the petitioner.

18. The original petition is disposed of as above. There will be no order as to costs.

19. A carbon copy of this judgment will be issued to the counsel for the petitioner on payment of requisite charges.


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