UNION OF INDIA Vs. SHENTILANATHAN CT

JUDGEMENT

(1.) THE first and the second defendants, the former being the Union of India, represented by the Finance Department dealing with income-tax matters, and the latter being the District Collector of Salem, who were unsuccessful in O.S. No. 146 of 1965 on the file of the Subordinate Judge's Court, Salem, are the appellants. Certain relevant facts which led to the present litigation may be traced. THE plaintiff in the action appealed against, on the foot of a hypothecation bond dated August 31, 1960 (exhibit A-1), filed O.S. No. 106 of 1964 on the file of the Subordinate Judge's Court, Salem, for the recovery of a sum of Rs. 69,778.99 with interest and costs by directing the sale of the hypothecated properties mentioned in the plaint and for the passing of the usual charge decree. In the above suit a Commissioner was appointed to take an inventory of the goods over which the plaintiff claimed to have a right of hypothecation, but which were admittedly in the possession of the hypothecator, namely, the third defendant. In the course of such an inventory prepared by the Commissioner, it was discovered that a camera, which is the subject-matter of the present action and which the plaintiff claimed was also included in the hypothecation bond as above, was missing. During the pendency of the above suit, the third defendant, as owner of the hypothecated goods and as an assessee, was subject to penalty and assessment proceedings under the provisions of the Indian Income-tax Act. For a period prior to the assessment year 1958-59, penalty proceedings as also assessment proceedings were initiated under exhibits B-1 to B-6 for the recovery of various sums due by him as assessee under the Act. Under exhibits B-7 and B-8 distraint proceedings were also issued directing the distraint of certain articles including the said camera. It is common ground that under exhibit B-8 the camera was attached by the second defendant pursuant to the usual orders of the tax recovery officers functioning under the Indian Income-tax Act, and it is also common ground that on February 22, 1963, the camera was attached pursuant to the tax recovery certificate issued by the authorised officer under the Act and it was brought under the possession of the second defendant. After the attachment was effected, which, as we said, was during the pendency of O.S. No. 106 of 1964, on the file of the Subordinate Judge's Court, Salem, the plaintiff had to file a claim petition for the release of the said camera. Before we trace the necessary details connected with the claim petition and the orders passed thereon subsequently, it is necessary at this stage to notice the course which the attachment proceedings took and which were undertaken by the statutory officers functioning under the Indian Income-tax Act. As we said, the third defendant was in arrears of income-tax for a period prior to the assessment year 1958-59 and for the said assessment year as well. Under exhibit A-19 dated September 17, 1963, consequent upon the payment of the amounts due by the assessee for the period earlier to the assessment year 1958-59, the attachment of the camera and other materials which were distrained earlier was raised on that date. But it is common ground that under exhibit B-10 a fresh warrant of attachment was issued for the attachment of the said camera in respect of arrears due for the assessment year 1958-59. Pursuant to the said order of attachment issued under exhibit B-10, the Tahsildar of the District issued a notice calling upon the third defendant to pay the amount by then due by him as defaulter under the Income-tax Act, 1961, within a period named by him in exhibit B-11. THE third defendant having committed default; under exhibit B-13 a sale notice was issued whereunder it was proclaimed, inter alia, that the said camera would be the subject-matter of a public sale on the date named in exhibit B-13. Coming to know of such a sale which was duly announced by the statutory authorities, the plaintiff filed what is ordinarily known as a claim petition under exhibit B-15. After tracing the history of this litigation, which we have already briefly set out, the plaintiff referred to the fact that the Commissioner who was appointed in the earlier proceedings in O. S. No. 106 of 1964, on the file of the Subordinate Judge's Court, Salem, could not trace the camera and that it was only thereafter that the plaintiff came to know that the camera which was under hypothecation with him was taken away by the Tahsildar, Salem, for income-tax arrears alleged to be due from the third defendant. Under these circumstances, he prayed in the said claim petition that his claim might be enquired into, that the attachment for the income-tax arrears at the instance of the first appellant of the camera might be released and that the camera might be handed back to him so that he could take necessary steps to preserve the same for the realisation of his dues under the hypothecation bond. This claim petition was enquired into by the Collector, and under exhibit B-16, it was rejected. Consequent upon the rejection of his claim petition, the present action has been filed.

(2.) IN this suit the plaintiff seeks for the declaration that the plaint schedule camera is not liable to be attached by defendants 1 and 2 for the recovery of arrears of income-tax and that the plaintiff has a prior mort gage over it and incidentally he seeks to set aside the claim order made by the second defendant in which his application for recognition of his prior claim to seek possession of the camera was not entertained by the second defendant. The plaintiff traced the facts above stated and sought for the reliefs as above.

(3.) THE learned counsel for the plaintiff (first respondent), on the other hand, would submit that this is a case of mortgage of movables and that, in any event, the first and second defendants could not be characterised as bona fide transferees without notice of the earlier hypothecation. Alternatively it is pleaded that in the instant case the State cannot claim any rights of priority in the matter of the sale of the camera and the appropriation of the resultant sale proceeds.