RAMAKRISHNAN J. - This appeal is filed by Messrs. Somansundaram Mills (Private) Limited, Coimbatore, the third defendant in O. S. No. 182 of 1961, on the file of the learned Subordinate Judge of Coimbatore. The plaintiff, the principal respondent in this appeal as the Union of India, represented by the Commissioner of Income-tax Madras. The first defendant is a partnership firm represented by its partners, Somasundaram Chettiar and Kalaraja Chettiar. One Arunachalam Chettiar is the second defendant. The point in issue in this appeal is the nature of the priority to be given to the claims of the State over the claims of other money creditors.
The facts necessary for the consideration of the present appeal can now be set down briefly. For recovery of arrears of income-tax due by the first and second defendants to the income-tax department seven certificates were issued under section 46 (2) of the Indian Income-tax Act, 1922, to the Collector of Coimbatore, by the authorities of the income-tax department for the purpose of recovery under the Revenue Recovery Act. The income-tax, assessees were the owners of shares in Kaleeswarar Mills Ltd., Coimbatore. On receiving the certificates the Collector of Coimbatore issued prohibitory orders on March 30, 1957 to Kaleeswarar Mills Ltd. against transferring the shares. The Collector also issued exhibit A-11 proceedings appointing the Tahsildar of Coimbatore as receiver of the shares in respect of which he had issued prohibitory orders to Kaleeswarar Mills. The Tahsildar was directed to take immediate steps to sell the attached shares of the defaulters in auctions and report the result in due course.
Unfortunately, the Tahsildar did not take action accordingly but, as the lower court has described, 'slept over the matter'. In the mean-time the third defendant, a creditor of defendants Nos. 1 and 2, who had obtained a simple money decree against them in O. S. No. 102 of 1957, attached the aforesaid shares of Kaleeswarar Mills and sold them in court auction subject to the first charge in favour of one Umayal Achi the wife of one of the partners of the first defendant. These shares which had been attached were divided into five lots and sold successively during several date in 1958. The third defendant, after adjusting the claim of the prior charge holder, received Rs. 20,245, out of the sale proceeds of the shares on December 23, 1958, and December 24, 1958. Some more shares, about fifty in number were sold on December 22, 1959, and the sale proceeds of Rs. 6,000 were deposited in the court. Before that amount had been paid out to the decree-holder, the Union of India, represented by the Income-tax Officer applied to the District Judge of Coimbatore, the executing court under exhibit B-4, referring to the attachment for income-tax arrears and the prohibitory order issued by the Collector on March 30, 1957. The application prayed for payment out of Rs. 6,000 to the income-tax department for adjustment against the arrears of tax due from Kalaraja Chettiar. This prayer was granted. The on June 21, 1961, a notice was sent by the advocate for the Union of Indian to the three defendants stating that the amount which the third defendant had realised from the sale proceeds of the shares on December 23, 1958, and December 24, 1958, namely Rs. 20,245, in law belonged to the income-tax department that it had been taken away by the third defendant, that the amount, by the right of priority of the Crown, belonged to the Government and that it should be paid over to the Government. This claim was denied and the present suit was filed for the recovery of the said amount.
The learned Subordinate Judge held that notwithstanding the fact that the suit amount had been paid to the decree-holder in execution and that only subsequently the Government made an application to the executing court for enforcing its priority the decree-holder was bound to return the money to the Government. A decree was passed accordingly in favour of the plaintiff with costs against the third defendant. It is against this decision that the present appeal is filed.
Learned counsel Sri, Vasantha Pai, for the appellant has referred to a series of decisions at the time of the hearing of the appeal which have a bearing on the question of the priority of Government dues over other dues to be recovered from a debtor. The main principles which can be culled from these decisions are the following. This right to priority is a common law right which was recognised in Indian before the Indian constitution and is preserved after the coming into force of the India constitution by reason of article 372. Before priority can be claimed when the assets are in the possession of the executing court the Crown (or the government) has to apply to the court for getting priority. The request may be made in a simple application; no special form is necessary. At the time of the application of the Crown (or the Government) the assets should be the property of the debtor and not of the decree-holder. If the assets have become the property of the decree-holder the claim for priority cannot be enforced. If the Crown (or the Government) had been negligent and had failed to apply before the amounts were paid over to the decree-holder, his rights would have supervened, and thereafter it is not open to the Crown (or the Government), in exercise of the claim for priority, to demand that the amounts paid over should be returned to them.
We shall briefly refer to the decisions cited in this connection. Builders Supply Corporation v. Union of India lays stress upon the fact that this right of priority is a common law right accepted in India and preserved under article 372 (1) of the Constitution.
The decision in Manickam Chettiar v. Income-tax Officer lays down that the Crows priority can be enforced by invoking the inherent power of the court under section 151 of the Civil Procedure Code by an application for the payment of the debt due to the Government without having to file a suit. It was pleaded that the executing decree-holder having attached the properties, his priority as a secured creditor should be recognised. It was held that such a right was not given to him by the attachment, and that the Crowns right should be given priority in pursuance of its application made before there was any payment of the debts to the decree-holder, having attached the properties his priority as a secured creditor should be recognised. It was held that such a right was not given to him by the attachment and that the Crowns right should be given priority in pursuance of its application made before there was any payment of the debts to the decree-holder.
Collector of Tiruchirappalli v. Trinity Bank was a Full Bench decision which covers a variety of topics with which we are not now concerned here. At page 401 the earlier decision in Manickam Chettiar v. Income-tax Officer was referred to for the view that the Crown was entitled to prior payment should not be entitled to apply to the court for an order directing its debt to be paid out of moneys in court belonging to the debtor without having to file a suit. It is clear, therefore, from the above observations that the Crown has got a duty to apply to the executing court for an order granting its priority and that the relief to be granted is in respect of amount in court belonging to the debtor.
The decision in Pichu Vadhiar v. Secretary of State for India lays down that the surplus of sale proceeds in the hands of a mortgagee was held by him in trust for the mortgagor-debtor and, therefore, the Crown could enforce its claim against that amount, by way of priority.
The decision in Deputy Commissioner of Police v. Vedantham also lays down that the surplus of sale proceeds in the hands of a mortgage was held by him in truest for the mortgagee-debtor and therefore, the Crown could enforce its claim against that amount by way of priority.
Basanata Kumar v. Panchu Gopal is a Bench decision where it was held :
'Where the executing court allows a claim for rateable distribution by a decree-holder and all that remains to be done is the ascertainment of the exact amount which each decree-holder is entitled to and payment of the same the money in the hands of the court can no longer be considered in law to be the judgment-debtor money. If therefore, subsequent to such order a letter of attachment in respect of a public demand due from the judgment-debtor is received by the executing court, the latter cannot take any action on such letter on the basis that it is still the judgment-debtors money.
The executing court having once declared that it is decree-holders money would be clearly wrong in complying with the letter of request of the certificate office to remit the sale proceeds to him. In such a case the question of priority of States claim does not arise.'
This decision as well as the earlier decision of Mukharji J. in Murli Tahilram v. Asoomal & Co. draw a dividing line, even at an earlier stage before the actual payment to the decree-holder. If the court had passed an order for payment to the decree-holder before the application by the Government for claim to priority had been received even at that stage according to the Calcutta decision, the money ceases to belong to the judgment-debtor, and must be deemed to belong to the decree-holder; therefore the Crowns claim for priority could not be granted if it was made after the passing of the order. But in the present case such a situation does not need to be visualised; not merely has the court made a direction for payment of the money toe the decree-holder but it has also been paid to the decree-holder the Governments application was made to the executing court.
The aforesaid principles are referred to by Mulla in his Commentary on the Code of Civil Procedure, volume 1, thirteenth edition under section 73 at page 355 where the following observations are found :
'But this priority exists only so long as the assets remain the property of the judgment-debtor. When an order for rateable distribution is made, the title of the judgment-debtor to the fund in court is extinguished and with that the right of the Government to proceed against it must cease, there being no question thereafter of priority. It was accordingly held that where an order for retable distribution had been made, a claim made thereafter by the certificate officer under the Public Debts Recovery Act for payment out of the fund in court was not maintainable.'
It will be noticed that the principle referred to by Mulla in the above extract is derived from the several decision to which we have just now referred in particular the decision in Basantha Kumar v. Panchu Gopal.
The learned counsel appearing for the respondent (income-tax department), Sri Balasubrahmanyan, urged that in the present case there has been attachment by the Collector of the entire shares in 1957 itself and therefore it was sufficient to give the Government priority. We are not inclined to accept this argument. The decision above referred to clearly lay down the necessity for an application to be made to the executing court which has the assets in its custody. An attachment by the Collector in independent proceedings for the recovery of arrears permitted under section 46 of the Income-tax Act would not suffice for the purpose of enforcing the priority before the executing court. It is necessary that the executing court should be specifically moved by the Government while the assets are in its custody, as the property of the judgment-debtor for granting the priority. In any event according to the decision of the Calcutta High Court the application should be made even before order for rateable distribution is made. But we are not expressing any opinion on that part of the decision because it does not arise for consideration in this case. Here we have an a fortiori case where payment has also been made to the decree-holder before the application was made by the department to the executing court.
It was next urged by the learned counsel for the department that it would suffice to give the right of priority to the government if their application is made before the entire assets attached in execution are realised and distributed. It is urged that in the present case the application has been made before the entire set of lost of shares had been given even as against the proceeds of the lots sold earlier and the decree-holder should be asked to refund the amounts. With this contention also we are unable to agree. It is well-known that in the course of execution the lots attached by the decree-holder need not be sold all together that they could be sold piecemeal and that the sale could be stopped when a sufficient number of lost has been sold to meet the decree-holders claim. The sale in such a case of each lot is viewed independently and the proceeds as and when the lot is sold, are adjusted towards the decree and paid over to the decree-holder without waiting for the sale of the entire lots for satisfying the decree-holder claim. Therefore when relief is sought by the Government for enforcing its right of priority against any part of the sale proceeds in the custody of the court the Government must apply to the executing court before the particular sale proceeds are distributed to the decree-holder after the sale of those particular lots. It would not be open to the Government to apply after the particular lots are sold and the proceeds had been distributed and urge that the entire execution is not complete and therefore what has taken place before the application following the sale of particular lots should be reopened for the purpose of enforcing the claim of priority. Our attention was drawn to an earlier decision of this court of a single judge in Ramanathan Chettiar v. Subramania Sastrigal where a different view has been taken as regards the sale of lots in execution. But in that case the learned judged has expressed his view that the authorities on the point are not uniform and that the position is not free from doubt. Even in that case the sale proceeds remained in court and had not been paid over to the decree-holder, which in not the case here. But later decisions appear to be in consonance with the view we have expressed above : vide Mulls Commentary on the Code of Civil Producer, volume I, thirteenth edition page 343.
For the aforesaid reasons we are of the opinion that this is a case where the Governments claim for priority cannot be enforced against the amount which has been realised in execution by sale of lots, and paid over to the attaching decree-holder, long before the application was made by the Governments department to the executing court for the relief.
The learned subordinate judge has referred in the course of his judgment to wrongly receipt of the money by the decree-holder from the district court and made the comment that the third defendant had suppressed the fact of the prior attachment even while bringing the shares to sale. But there is no plea and no evidence to find any conduct on the part of the third defendant indicative of fraud or a wrongful course of conduct. Even assuming that he was aware that the Government had directed the Collector to attach the shares under section 46 of the Income-tax Act, in view of the long in action of the Tahsildar, it is quite possible that the third defendant might have been under the impression that the Government was not agree to press their claim for priority in the executing court. It is not for the third defendant to remind the executing court in such a case of the attachment by the Collector of the shares which had been effected long previously. It was for the authorities of the income-tax department and particularly the Collector and the Tahsildar, who had been entrusted with the duty of recovering the arrears, to be vigilant and take steps, whether under the Revenue Recovery Act or under the Income-tax Act, to realise expeditiously the Government dues. After having failed to do so, it is not open to them to filed a separate suit seeking for direction to the decree-holder to refund the money which had been paid to him in due course of execution by court according to law.
The appeal, therefore, success and the plaintiffs suit is dismissed. The appellant will get his costs throughout.
Pending the appeal the appellant has given a bank guarantee as security for the amount decreed. It will be cancelled and delivered to the appellant.