RAMAMURTI J. - The appellant herein filed an application, Application No. 453 of 1959 in C. S. Nos. 101 and 420 of 1950, on the original side of this court for payment out of a sum of Rs. 33,500 from out of the sale proceeds of certain items of properties in respect of which a security bond had been executed in I. P. Nos. 75 of 1951 and 79 of 1952, High Court, Madras. That application was dismissed by Ramachandra Iyer J. (as he then was) on the objections raised on behalf of the Tahsildar of Gudiyattam who claimed that the sale proceeds in deposit in court should be paid over to him in preference to the applicant on the ground that large arrears of income-tax are due to the Government from kaka Mohammed Ismail Sahib, the owner of the properties aforesaid.
The relevant facts relating to the controversy may be briefly stated. Kaka Mohamed Ismail Sahib, Jalal Mohamed Ibrahim Sahib and Roshan Abdul Ahmed, who were the partners of Roshan N. H. A. Karim Ommer and Co., were sought to be adjudged insolvents in I. P. Nos. 75 of 1951 and 79 of 1952. The debtors and thus avoid the insolvency. They were able to settle with some of the creditors individually and they also offered to give security of immovable properties for a sum of Rs. 5 lakhs for the benefit of the general body of the rest of the creditors. But there was opposition to this proposal on the part of some of the creditors. Ultimately, Ramaswami Goundar J., by his order dated April 1, 1954, accepted the proposal of the debtors in a modified form, and allowed the insolvency petitions to be withdrawn which were accordingly dismissed. In that connection, the creditors were classified under three schedules, schedules A, B and C, and as some other provision had been made for the creditors mentioned in the A and B schedules, the learned judge passed the order that the security offered by the debtors for Rs. 5 lakhs should ensure to the benefit of the creditors other than those mentioned in schedules A and B. While emphasising that the security would not ensure for the benefit of the creditors mentioned in schedules A and B the learned judge stated in his order that it will enure for the benefit of all the creditors specified in the C schedule. In accordance with this order, a security bond was executed by Kaka Mohamed Ismail Sahib, along with a third party surety, one Kaka Haji Mohamed Ishaque. The security bond comprised several items of properties in which the debtor, Kaka Mohamed Ismail Sahib, owned a half share, while the stranger surety owned the other half.
One of the creditors, the United Commercial Syndicate, who had obtained decrees against the debtors in O. S. Nos. 101, 109 and 420 of 1950, did not accept the order of Ramaswami Gounder J. and filed an appeal, O. S. A. No. 31 of 1954. In the appeal the appellate court declared that the half share of Kaka Haji Mohamed Ishaque (the surety) in items 1 to 3 and 5 to 10 in the security bond and the whole of item 4 belonging to Kaka Mohamed Ismail Sahib shall be an exclusive security for that creditor. Even though the surety was not a party to the appeal, O. S. A. No. 31 of 1954, it appears that he was present in court and accepted the order passed by the appellate court with the result that one half of some of the secured properties covered by the security bond which belonged to Haji Mohamed Ishaque, the surety, i.e., the half share in items 1 to 3 and 5 to 10 and the whole of item 4, belonging to Mohamed Ismail Sahib were duly charged for the decree debt of the United Commercial Syndicate, and the rest of the properties alone remained as security for the creditors in the C schedule. At this stage it must be noticed that there is nothing on record to show that the C schedule creditors ever accepted the security bond or that any enquiry or investigation was made as to who the creditors were who would constitute the C schedule for whom the security for the sum of Rs. 5 lakhs should be regarded as a separate provision. The resultant position, therefore, was that the security bond aforesaid was executed for the benefit of C schedule creditors intending and meaning thereby creditors other than those mentioned in the A and B scheduled.
At the instance of the United Commercial Syndicate, two advocates of this court were appointed Commissioners to sell the charged properties and items 5 to 9 were first sold by the Commissioners, and half the sale proceeds pertaining to the suretys share was paid over to the United Commercial Syndicate while the other half was paid over to some of the creditors in C schedule. Items 1 to 3 were next sold for about Rs. 1,34,000 and before the confirmation of the sale, the Tahsildar of Gudiyattam intervened on behalf of the Union of India on the ground that for recovery of large arrears of income-tax due from the debtor proceedings under section 46(2) of the Income-tax Act had been taken and those properties had already been attached. As those properties had in any event to be sold, either for the realisation of the income-tax due in pursuance of the attachment proceedings, or by the Advocate Commissioners in execution of the decrees aforesaid, the Tahsildar intimated that he had no objection to the sale being confirmed; but at the same time he reserved his right to apply for the payment of the sale proceeds.
The appellant, who had obtained a decree in C. S. No. 173 of 1950 and is one of the C schedule creditors, applied for payment out of Rs. 33,500 as the rateable amount payable to him out of the sale proceeds of Rs. 1,34,000. Ramachandra Iyer J. (as he then was) dismissed the application, taking the view that the security bond ensure for the benefit of all the creditors, except those that are mentioned in schedules A and B, whether or not the name or names of any creditor or creditors had been specified in the C Schedule, and that the security bond will ensure for the benefit of the Government as well, but that as between the creditors of the same rank, i.e., the applicant and the Government, the latter would undoubtedly have priority.
Learned counsel for the appellant has raised the same points which were urged before the learned judge. His main contention is that according to the order of Ramaswami Gounder J., dated March 1, 1954, the security bond would enure for the benefit of only the creditors whose names had been mentioned in the C Schedule, and that the Government who is not one of such creditors is not entitled to claim any portion of the sale proceeds. He urges that the benefit of the security bond is specifically confined and restricted to the creditors mentioned in the C schedule and to them only and to no other. The learned counsel also advances a further argument that according to Board Standing Order, Order No. 48, if any immovable property is sold in execution of a decree of a civil court, no steps should be taken by the Government to recover the arrears of land revenue from and out of such sale proceeds, and that the remedy of the Government is only to proceed against the property in the hands of the purchaser on the ground that the purchaser purchases the property subject to the charge in favour of the Government.
On behalf of the Government Mr. S. Ranganathan contended that, taking all the circumstances of the case and the setting in which the order was passed by Ramaswami Gounder J., the security bond would ensure for the benefit of all creditors other than those mentioned in schedules A and B, and that the list of creditors mentioned in schedule C was not intended, nor meant, to be exhaustive at all. His contention is that it was never the intention of either the debtors, or the creditors or the court to restrict and confine the scope of the security bond, thereby ignoring the rights of creditors whose names have not been specified in the schedule C. He also contended that Board Standing Order 48 will not apply to the present case, and that it will apply only to cases of arrears of land revenue which, by force of the statute, constitute a charge or an encumbrance over the very property sold. Lastly, he urged that as the properties have been attached in pursuance of proceedings under section 46(2) of the Income-tax Act and as the attachment was subsisting all throughout, any charge or security created by the debtor subsequent to such attachment would not affect the rights of the Government, in view of the opinion that all the points urged by the learned counsel for the respondent are well-founded, and that the applicant is not entitled to payment out of any portion of the sale proceeds.
The various proceedings which ultimately led up to the execution of the security bond for Rs. 5 lakhs culminating in the order of the High Court in O. S. A. No. 31 of 1954, had been fully set out in the order of the learned judge under appeal and we think it is unnecessary to state them here.
If the order of Ramaswami Gounder J. dated March 1, 1954, is read divorced from its real context ignoring the antecedent facts and the attendant circumstances, it may, on doubt, at the first blush, appear that the security bond will be available only for the creditors whose names have been specified in the C schedule. But if due regard is had to all the aspects of the matter, and the correct perspective in which the order came to be passed, it is perfectly clear that the security bond is available for the benefit of all the creditors other than those mentioned in A and B schedules. It must not be forgotten that no investigation was at all made as to who are all the creditors of Kaka Mohamed Ismail Sahib whose names should be included in the C schedule, and that the parties and the court were mainly concerned with declaring that the security bond will not be available for creditors mentioned in schedules A and B. Further if the insolvency court had been told that the bond would ensure only for the limited class of creditors mentioned in the C schedule, the court would never have approved the proposals and the insolvency petitions would never have been allowed to be withdrawn. In this connection it should also be mentioned that even the so-called C schedule creditors never accepted the security bond. As mentioned already, the security bond at its inception was offered by the debtor and the surety for the benefit of all the creditors in general, and the court ultimately passed an order excluding the creditors in A and B scheduled, thereby clearly emphasising that it ensures only for the benefit of the rest of the creditors, and not merely to those mentioned in C schedule. We have therefore no hesitation in accepting the learned judges view of the scope and operation of the security bond, that the Government and the creditors other than those mentioned in schedules A and B are entitled to the benefits of the bond. But as between the creditors of the same rank, the Government will have priority. It is settled law that where the Crowns right and that of a subject meet at one and the same time that of the Crown is in general preferred, the rule being 'detur digniori'. Where a bond is made to the Crown and a subject, the Crown takes the whole, for it cannot be a partner or a joint owner with a subject : vide 7 Halsbury, section 701, Simonds Edition.
In Manickam Chettiar v. Income-tax Officer, Madurai, the question came up directly for consideration. In that case the properties of one Govinda Rao, an income-tax assessee, had been attached and sold in execution of a money decree against him, and the sale proceeds were in court. The Income-tax Officer who had taken proceedings under section 46 of the Income-tax Act applied for the payment of the entire amount of sale proceeds. It was held that the special right of priority of the Crown has been repeatedly recognized in India, and that the attachment effected by the decreeholder did not confer on him any superior title, and that there was no need for the Crown to file a suit and obtain a decree. It was further held that under its inherent powers under section 151 the court had ample jurisdiction to direct the payment of the entire sale proceeds to the Income-tax Officer. The learned judges of the Full Bench took the view that the right to the payment of the arrears of income-tax being indisputable both justice and convenience demanded that the court should exercise its inherent power in that manner, i.e., the payment of the entire sale proceeds to the Income-tax Officer.
After the advent of the Indian Constitution this common law right of priority of the State debts came up for discussion in Bank of India v. John Bowman Chagla C.J., delivering the judgment of the Bench, has reviewed the entire case law and the legal position on the subject and has held that this principle does not contravene article 14 of the Constitution. There also the State had taken proceedings to recover certain loan advanced by it, which was recoverable as arrears of land revenue, and the properties of the judgment debtor were in the meantime sold in execution. It was held that the State was entitled to a preferential right of payment of the proceeds. At page 313, Chagla C.J. observed as follows :
'Mr. Seervai says that to uphold the kings prerogative in India after 1950 would be to go counter to the basic structure of our Constitution. It is true that our Constitution sets up a democratic socialist republic and we would be loath to give effect to any principle of law which was inconsistent with the democratic or socialistic principles which we have accepted in our Constitution. But it would be an exaggeration even to suggest that the England of today is not democratic or socialistic, and if the English courts have upheld this principle, they could not have done so, if they had realised that it was no longer consistent with the modern trends of constitutional theory prevailing in England today.
Even in a democracy and even under socialism the State must have certain rights and privileges. The State has to govern, the State has to find money to be used for socialistic principles, and the courts have always given every facility to the State to realise moneys which are not collected for any private purpose but are intended for the public coffer and which are ultimately intended for the public need. This principle which has been enunciated in the English courts and which has been accepted by our courts is not a principle which is peculiar to British jurisprudence.
It has then been urged by Mr. Seervai that this part of the common law is incompatible with article 14 of the Constitution and by reason of article 13 as it is inconsistent with the provisions of Part III it must be declared to be void.
Now it is not true to say that the State is denying equality before the law to any person by claiming this special privilege. Article 14 would only be offended against if the State made a 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 article 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 the priority of debts due to the State is not in any way inconsistent with the fundamental rights embodied in Part III of the Constitution.'
The same view was taken by a Bench of the Kerala High Court in State of Kerala v. E. P. Mathew. Their Lordships have followed the judgment of the Bombay High Court, above cited, and have held that 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. Reference may also be made to a recent decision of the Punjab High Court in Excise and Taxation Officer v. Gowri Mal Butail Trust, which contains an interesting and useful discussion of the law on the subject. In that case also it was held that after the coming into force of the Constitution the situation has not undergone any change as to the priority enjoyed by the State for the debts due to it, on the ground that whatever may be the form of the Government, whether based on democratic or a socialistic pattern, the State has to govern and has to find funds for its socialistic programme and the facilities which it is necessary for the State to have for collection of the tax in order to meet its obligations.
In a recent decision of a Full Bench of this court in Collector of Tiruchirapalli v. Trinity Bank, the right of priority of the Government in respect of arrears of income-tax was upheld in respect of rents collected by a receiver appointed at the instance of a simple mortgagee in an action on the mortgage.
It was next contended by the learned counsel for the appellant that under the Board Standing Order 48 when a property has been sold in execution of civil courts decree no steps should be taken to recover the arrears of revenue from the proceeds of the land sold under the decree of the civil court. Standing Order 48 runs as follows :
'Recovery of arrears of revenue on land sold by civil courts. - No steps should be taken to recover arrears of revenue from the proceeds of land sold under the decree of a civil court. Process can issue under the revenue law for the recovery of Government dues, current and arrears, against the land itself and without reference to changes of ownership. The purchaser at a court sale takes the land with its encumbrances, and as proclaimed in the notification on the subject issued in all districts he can ascertain by application to the Tahsildar what these encumbrances are so far as Government arrears are concerned.'
We are of opinion that this restriction or prohibition contained in the Board Standing Order cannot obviously apply to the present case, as no charge had been created over the land in respect of arrears of income-tax. In the case of arrears of land revenue the moment arrears fall in they become a charge fastened upon the property which is not the case in the case of arrears of income-tax. The principle underlying Board Standing Order 48 is that when the Governments right to a charge on the land in respect of the arrears of land revenue is preserved and property can never be sold free from that charge, there was no justification for the State coming in for a share in the sale proceeds when the property is sold in execution of a simple money claim. The Governments rights as a chargeholder are never prejudiced in such a case. This principle does not apply in the case of arrears of income-tax which do not constitute a charge upon the property with the result that if the property is sold the property in the hands of the purchaser will not be subject to any such charge and the Government can never recover the arrears of income-tax at all. As this necessary condition of the Board Standing Order 48 is lacking in this case we are unable to accept this argument.
It only remains to deal with the last contention urged on behalf of the income-tax department, that by reason of the attachment effected by them the security bond executed on May 25, 1953, cannot affect the rights of the income-tax department. Even if the security bond by its own terms ensures for the benefit of the creditors whose names only were mentioned in the C schedule, it cannot prevail as against the right of the income-tax department as under section 64, Civil Procedure Code, the charge created by Mohamed Ismail Sahib cannot affect the rights which have accrued to the income-tax department by reason of the attachment. Learned counsel for the appellant while accepting this position contended that there is no proof of any attachment having been effected by the income-tax department or that such an attachment was actually subsisting. The counter-affidavit filed on behalf of the Tahsildar of Gudiyattam on April 7, 1953, and the supplemental counter-affidavit on behalf of the Tahsildar of Gudiyattam on April 22, 1959, clearly prove that an attachment had been validly effected in 1959, and that it was subsisting in 1954. In view of this we are of opinion that the right of priority of the Government would attach to the sale proceeds and the applicant is not entitled to any portion of the sale proceeds.
The appeal therefore fails and is dismissed with costs.