UNION OF INDIA Vs. SOUTH INDIAN BANK LIMITED

JUDGEMENT

(1.) THE appeal is preferred against the order made by First additional Sub judge, Pondicherry, in E. A. No. 5 of 1977 in E. P. No. 217 of 1974 on a petition filed under 0. 21, r. 90 and s. 151 of the CPC to set aside the sale held on December 16, 1976, on the ground of material irregularity.

(2.) THE appellant herein is Union of India represented by the ito, Pondicherry, who was the petitioner in the court below and the two respondents herein were the respondents therein. In the petition it was claimed that one Madam Garnier was doing business in automobiles and she died in September, 1967, bequeathing her property to the second respondent and three others. She was in arrears of income tax amounting to Rs. 10, 00, 000, and the only immovable property left behind is Door No. 4, St. Lawrence Street , Pondicherry . When the Department took steps to bring the property to sale, it filed O. P. No. 21 of 1975 in the same court against the second respondent and three others, who are legal representatives of deceased Madam Garnier, for permission to bring the property to sale and the court declared that the State had the first charge over the property, and permitted it to bring the property to sale, and this petition was ordered on October 24, 1975. While so, the first respondent herein had filed on July 1, 1974, E. P. No. 217 of 1974, claiming that he was the mortgagee under mortgage dated December 22, 1960, and, hence, he had right to bring the property to sale. THE executing court, after granting permission to the first respondent to bid, auctioned the property on December 16, 1976, in which the decree holder/first respondent himself purchased the property for Rs. 44, 100 whereas the property is worth much more. Inspite of the legal representatives of the income tax defaulter having been served with notices and put on notice about the claim for arrears of income tax, the proceedings taken in execution by the first respondent, being contrary to the provisions of the i. T. Act, 1961, the sale conducted, would seriously affect the rights of the petitioner, and, therefore, it deserves to be set aside.

(3.) TO show that the right to claim tax is subject to the rights of secured creditor. Merely because rules have since been made under the i. T. Act, 1961, in Sch. II, of the procedure that will have to be followed for recovery of tax by the TRO, they cannot override established law or even what is found in the Act itself. He refers to the decision rendered in Builders Supply corporation v. Union of India which dealt with the scope of s. 46 (2) of the indian I. T. Act, 1922, wherein it was held that (headnote) : "the Government of India is entitled to claim priority for arrears of income tax due to it from a citizen over debts from him to unsecured creditors" * , and that s. 46 does not in terms displace the application of the doctrine of tax dues. The Supreme Court, in the said decision, referred to the Full Bench decision of this court in Manickam chettiar v. ITO , wherein it was held that s. 46 of the Indian I. T. Act, 1922, is not exhaustive of the remedies of the Crown, and it does not preclude an application being filed under s. 151 of the CPC by the Department for recovery of tax arrears in a matter that was pending before the court. It was, therefore, held that as against claims of unsecured creditors, the State will be entitled to priority for recovery of arrears of tax which, according to Mr. Masilamani, would necessarily mean that the priority claim of the secured creditor has thus been recognised. He then relies upon a Full Bench decision of this court relating to the scope of s. 46 (2) of the Indian I. T. Act, 1922, wherein, in a case arising under a mortgage, it was held that when a receiver is appointed, the amounts recovered by him, till appropriated by orders of court towards the mortgage debt, it is only a fund in court in medio, and the court has the power to give directions about the disbursement of the collections made by the receiver pending the suit and hence the State has a right to move the court for collection of the arrears of tax due and payable by the mortgagor. Relying upon the reasoning adopted therein, he contends that the right of the mortgagee is preserved over the security against the claim of the State for recovery of arrears of tax payable by the mortgagor. He then lays considerable reliance on the decision in suraj Prasad Gupta v. Chartered Bank of the Allahabad High Court wherein it has been held that a bar on a civil court issuing process against assessee's property, does not apply to a decree for sale of mortgaged property. It was held therein that there being no substantive provision in the I. T. Act for superseding or overriding the claims of secured creditor, and Sch. II being confined only to procedure, the expression "decree for the payment of money" in r. 16 (1) has to be given only a restricted meaning confining it to a simple money decree, and it cannot include a decree for sale in enforcement of a mortgage decree passed under 0. 34, r. 5 of the CPC. In this decision, neither the Full Bench decision of this court in Manickam Chettiar's case nor any other decision, is referred to. Regarding the claim of priority by the I. T. Dept. for realisation of arrears of amount, a Division Bench of this court in somasundaram Mills Private Ltd. v. Union of India in a case that arose under the Indian I. T. Act, 1922, held that the priority can be claimed only when the assets are in the possession of the executing court and that it should belong to the judgment debtor. But, if the property had become the property of the decree holder, the claim of priority cannot be enforced. According to Mr. Masilamani, even when mortgage has executed on December 22, 1960, there was a mortgage decree in his favour, and for this purpose he relies upon the decision in Smt. Susama Bala Sur v. Bibhuti Bhusan Mondal, 1973 AIR (Cal) 295, wherein a full Bench of the court held that grosses copy of a notarial mortgage bond executed under this French law has the force of a decree. In a recent decision of this court reported in Mahalakshmi v. P. S. Rajeswari 1979 (2) MLJ 192, it has been held that when a mortgage was created, at a time when the French law was in force, it straightaway became an executable decree and such a substantive right can be enforced by moving the executing court for a recovery of the amounts.