Full Judgment Text
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PETITIONER:
BUILDERS SUPPLY CORPORATION
Vs.
RESPONDENT:
THE UNION OF INDIA REPRESENTED BY THE COMMISSIONER OF
DATE OF JUDGMENT:
30/11/1964
BENCH:
GAJENDRAGADKAR, P.B. (CJ)
BENCH:
GAJENDRAGADKAR, P.B. (CJ)
HIDAYATULLAH, M.
SHAH, J.C.
SIKRI, S.M.
BACHAWAT, R.S.
CITATION:
1965 AIR 1061 1965 SCR (1) 289
CITATOR INFO :
MV 1967 SC 997 (33,34,48)
R 1967 SC1581 (19)
R 1967 SC1831 (7)
RF 1973 SC 569 (43)
RF 1974 SC2009 (3)
ACT:
Doctrine of priority of Crown Debts under Common
Law--Whether applicable to India.
Income-tax arrears due to Union Government-Recovery
thereof--Whether has priority above claims of unsecured
creditors of common debtors-Doctrine of priority of Crown
Debts in relation to the tax dues--Whether a ’law in force ’
in India at commencement of Constitution --Constitution of
India Art. 372(1).
Indian Income Tax Act 1922, s. 46, and provision of Public
Demands Recovery Act whether displace doctrine of priority
of Government Debts.
HEADNOTE:
The appellant filed a suit against Respondent No. 2 and
secured a decree against him for Rs. 12,275-9-0. The
Judgment-debtor had a sum of Rs. 50,000 in deposit with the
Superintending Engineer, Calcutta, by way of security for
the due execution of a contact. The Executing Court at the
instance of the appellant attached a sum equivalent to the
decretal amount from the above security deposit, and the
Superintending Engineer transmitted the attached amount to
the court. At this stage the Union of India through the
Commissioner of Income-tax represented to the court that
income tax arrears of more than Rs. 5,000 were due from the
Judgment-debtor for which a certificate under s. 46(2) of
the Income-tax Act, 1922 bad been issued to the Collector
and proceedings under the Public Demands Recovery Act had
been commenced. The Union of India claimed that the tax
amount due to it from the Judgment-debtor had priority over
the judgment-debt due to the appellant from the same debtor
and so it was entitled to the whole amount under attachment
in partial satisfaction of the Income-tax dues. The
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Executing Court accepted this plea. The appellant filed a
revision before the High Court but failed to get relief.
Thereupon he appealed to the Supreme Court with a
certificate of fitness.
It was contended on behalf of the appellant
(1) The High Court had wrongly held that the Common Law
doctrine of the priority Crown debts on which the case of
the Union of India was based, applied in the present case :
(2) Even if the doctrine was applicable it was not a ’law in
force’ at the commencement of the Constitution within the
terms of Art. 372(1), and there was no scope for continuing
its operation after the Constitution came into force : (3)
The doctrine of the priority of Crown debts could not also
be enforced because it was specifically Provided for and
covered by the provisions of s. 44 of the Indian Income-tax
Act, 1922, and by the relevant provisions of the Recovery
Act.
HELD : (i) The Common Law doctrine of the priority of Crown
debts had a wide sweep but the question in the present
appeal was the narrow file one whether the Union of India
was entitled to claim that the recovery of the amount of
tax due to it from a citizen must take precedence and
priority over unsecured debts due from the said citizen to
his other private
290
creditors. The weight of authority in India was strongly in
support of the priority of tax dues. [300 D]
The Secretary of State in Council for India v. The Bombay
Landing & Shipping Co. (Limited), (1868-69) 5 Bom. H.C.R.
p. 23; Manickam Chettiar v. Income-tax Officer, Madura,
(1938), 6 I.T.R. 180, Ramachandra v. Pitchaikanni, (1884)
I.L.R. 7 Mad. 434; Bank of India v. John Bowman and Ors.,
A.I.R. 1955 Bom. 305, Beil v. The Municipal Commissioners
for the City of Madras, (1902) I.L.R. 25 Mad. 457....
discussed.
Kaka Mohammad Ghouse Sahib & Co. v. United Commercial
Syndicate and Others, (1963) 49 I.T.R. 824, disapproved.
(ii) The Common Law doctrine on which the Union of India
based its claim in the present proceedings had been applied
and upheld in that part of India which was known as
’British India’ prior to the Constitution. The rules of
Common Law relating to substantive rights which had been)
adopted by this country and enforced by judicial decisions,
amount to law in force’ in the territory of India at the
relevant time within the meaning of Art. 372(1). In that
view of the matter, the contention of the appellant that
after the Constitution was adopted the position of the Union
of India in regard to its claim for priority in the present
proceedings had been alerted could not be upheld. [302 B-C]
Director of Rationing and Distribution v. The Corporation of
Calcutta & Ors., [1961] 1 S.C.R. 156 relied on.
Quaere : Whether Art. 372(1) would assist the enforcement of
the said doctrine in the States where it was not accepted as
part of the law before the Constitution ? If this doctrine
is supposed to be an essential attribute of sovereignty
where does sovereignty reside after the Constitution ? Does
it reside in the Union as well as in the constituent States?
If yes, what would be the position if competing claims were
made by the States inter se, or by one of the States against
the Union ? [302 E-H]
(iii) The basic justification for the claim for priority
of Government debts rests on the well-recognised principle
that the State is entitled to raise money by taxation,
otherwise it will not be able to function as a sovereign
government at all. This consideration emphasizes the
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necessity and wisdom of conceding to the State the right to
claim priority in respect of its tax dues. [303 A-B]
Quaere : Whether the doctrine will be equally applicable in
respect of debts due to the State if they are contracted by
citizens in relation to commercial activities of the modem
State ? [303 C-D]
(iv) In making a provision for the recovery of arrears of
tax, it cannot be said that s. 46 deals with or provides for
the principle of priority of tax dues at all. [306 H]
The Recovery Act also is intended mainly to provide for the
procedure to recover public debts. This act is not directly
concerned with the right to recover arrears or with priority
of tax dues. Rule 22 can no doubt be invoked to recover
arrears of tax, but that is because the procedure prescribed
by the said rule applies to the recovery of public debts,
and tax arrears can be treated as public debts inasmuch as
by virtue of s. 46(2) Of the Income-tax Act they become
recoverable as arrears of land revenue. [308 F, H]
Neither the provisions of s. 46 of the Income-tax Act nor
those of the Recovery Act can thus be said to have displaced
the doctrine of priority of arrears of tax over private
debts.
Governor-General in Council v. Shiromani Sugar Mills Ltd.
(In liquidation), [1946] F.C.R. 40 distinguished.
291
Province of Bombay v. Municipal Corporation of the City of
Bombay, (1946) L.R. 73 I.A. 271, Attorney-General v. De
Keyser’s Royal Hotel, Ltd., [1920] A.C. 508 at 526,
Purshottam Govindji Halai v. Shree B. M. Desai, Additional
Collector of Bombay & Others, [1955] 2 S.C.R. 887 referred
to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 824 of 1963.
Appeal from the judgment and order dated June 21, 1955 of
the Calcutta High Court in Civil Revision Case No. 231 of
1954.
S. C. Das Gupta and Sukumar Ghose, for the appellant.
S. V. Gupte, Solicitor-General, N. D. Karkhanis and R. N.
Sachthey, for respondent No. 1.
The Judgment of the Court was delivered by
Gajendragadkar, C.J. The short question of law which arises
in this appeal is whether respondent No. 1, the Union of
India, is entitled to claim that the tax due to it from
respondent No. 2, M/s. R. K. Das & Co., on account of the
assessment years 1946-47 and 1947-48 has priority and
precedence over the decretal amount due to the appellant,
M/s. Builders Supply Corporation, from respondent No. 2.
This question has been answered against the appellant by the
Calcutta High Court, and by its present appeal brought to
this Court with a certificate issued by the said High Court,
the appellant contends that the decision of the Calcutta
High Court is erroneous in law.
It appears that respondent No. 2 secured a building contract
from the Government in connection with the construction of
the Mint and in that behalf it had to make a deposit of Rs.
50,000 as security for the due execution of the contract.
In connection with the execution of the said, contract,
respondent No. 2 obtained a supply of building materials
from the appellant. The appellant was unable to secure
payment for the goods thus supplied by it, and so, it had to
sue respondent No. 2 for recovery of the dues. In that
suit, on the 18th April, 1949, the appellant obtained an
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order for attachment before judgment of Rs. 5,000 out of the
aforesaid security deposit of Rs. 50,000. This deposit was
lying with the Superintending Engineer, Calcutta Central
Circle No. 1. Subsequently, on the 16th June, 1950, the
appellant’s suit was decreed by the 5th Additional
Subordinate Judge, 24 Parganas, for a sum of Rs. 12,275-9-0.
This decree was put in execution by the appellant on the
14th February, 1952, in the court of the 7th Sub-Judge and
in consequence, Money Execution Case No. 9 of 1952 was
started. Four days thereafter, the Subordinate Judge issued
292
an order for the attachment of a further sum of Rs. 7,275-9-
0 out of the aforesaid security amount deposited by
respondent No. 2 Whilst writing to the Superintending
Engineer in that behalf, the Subordinate Judge asked him to
remit to the court the sum of Rs. 5,000 which had already
been attached before judgment. On receiving this
communication, the Superintending Engineer placed a further
sum of Rs. 7,275-9-0 under attachment, but did not comply
with the requisition of the court to remit Rs. 5,000 to it.
On the 30th April, 1952, the Executing Court wrote to the
Superintending Engineer and asked him to transmit the whole
of the amount of Rs. 12,275-9-0 which was under attachment
as a result of the two previous orders passed in that
behalf, but this requisition also was not complied with till
March 9, 1953.
Meanwhile, the Certificate Officer of 24 Parganas bad
addressed a letter to the Subordinate Judge on the 23rd
July, 1952, and requested him that if the Superintending
Engineer had transmitted any money to his court, its payment
to the appellant should be withheld in order to enable a cl
aim under 0.21 r. 52 of the Civil Procedure Code to be
preferred on behalf of the Government. Along with that
letter, the Certificate Officer sent a copy of another
letter which had been addressed by him to the Superintending
Engineer asking him not to make any payment out of the
amount deposited by respondent No. 2, but to retain it after
deducting the departmental dues. The Superintending
Engineer was informed by this letter that arrears of income-
tax due from respondent No. 2 exceeded Rs. 50,000 with the
result that the whole of the security deposit, less
departmental dues, was liable to be applied to the
satisfaction of the tax debt in respect of which Government
had priority over all unsecured creditors.
In spite of this letter, however, the Superintending
Engineer sent the whole of the amount attached at the
instance of the appellant to the Executing Court and it was
received in the Executing Court on the 9th March, 1953. On
the 21st March, 1953, the Executing Court addressed a letter
to the Certificate Officer in reply to the communication
received by it from him, requiring him to state why the
amount in question should not be paid to the appellant and
adding that in case no effective step was taken on or before
the 10th April, 1953, the said amount would be paid to the
appellant. At this stage, the Commissioner of Income-tax,
representing respondent No. 1, intervened and moved the
Executing Court for adjournment on several occasions. On
every such occasion, the Commissioner intimated to the
Executing Court that respondent No. 1 would show cause why
the amount in question
293
should not be paid to the appellant. During the course of
these proceedings, on the 17th June, 1953, the Certificate
Officer addressed a letter to the Executing Court under Rule
22 of Schedule 11 to the Public Demands Recovery Act
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(hereinafter called the ’Recovery Act’) and asked the court
to hold the amount subject to further intimation from him.
This letter was received by the Executing Court on the 24th
June, 1953, and in consequence, the Executing Court passed
an order withholding payment to the appellant until further
orders. Finally, on the 15th July, 1953, respondent No. 1
made an application to the Executing Court in which it
claimed that the tax amount due to it from respondent No. 2
had a priority over the judgment debt due to the appellant
from the same debtor, and so, the whole of the amount under
attachment ought to be paid to it towards partial satisfac-
tion of the said income-tax dues. A similar application was
made on the 11th September, 1953, and this application gave
material details in respect of the income-tax demand against
respondent No. 2. In both these applications, it was alleged
that a certificate tinder s. 46(2) of the Income-tax Act,
1922 (No. 11 of 1922) bad been duly forwarded to the
Collector, 24 Parganas. and thus proceedings under the
recovery Act had already been commenced in that behalf.
The Executing Court set down these applications for hearing
and elaborate arguments were urged before it by the
appellant and respondent No. 1 in support of their
respective contentions. In the result, the Executive Court
upheld respondent No. 1’s plea that the tax amount due to it
from respondent No. 2 had a priority over the decretal
amount due to the appellant from the same debtor and in
consequence, it issued a direction that the amount of Rs.
12,275-9-0 lying in its custody under attachment should be
paid to respondent No. 1.
This order was challenged by the appellant before the
Calcutta High Court by a revision application under S. 115
of the Code. The proceedings taken before the Executing
Court were initiated by the two applications made by
respondent No. 1 under s. 151 of the Code. Apparently, the
Executing Court passed its order in favour of respondent No.
1, purporting to exercise its jurisdiction under the said
section. It was urged before the High Court as a
prelimaniry point that the Executing Court was in error in
allowing its jurisdiction under s. 151 of the Code to be
invoked in the present proceedings. The High Court has held
that it was unnecessary to consider whether s. 151 was
properly invoked or not, because in its opinion, the claim
made by respondent No. 1
294
could be sustained under Rule 22 of the Statutory Rules
framed under the Recovery Act. This rule corresponds to
0.21 r. 52 of the Code and the High Court thought that the
Executing Court had jurisdiction to deal with the claim of
respondent No. 1 under r. 22 read with 0.21 r. 52 of the
Code. It is unnecessary to deal with this part of the
controversy between the parties, because the finding of the
High Court on this point has not been challenged before us.
The High Court then examined the merits of the dispute. It
held that it had been accepted by all the High Courts in
India that the tax amount due from an assessee to respondent
No. 1 has priority "vis-a-vis and over claims of other
creditors, though only unsecured creditors". The High Court
rejected the appellant’s contention that the relevant
provisions of the Recovery Act prevented a claim for
priority made by respondent No. 1 in the present case. The
appellant had also urged before the High Court that the
claim for priority made by respondent No. 1 could no longer
be sustained, having regard to the fact that it was
inconsistent with the provisions of the Constitution of
India. This claim, it was urged, was based on the common
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law doctrine of the Crown prerogative and it could not be
claimed by respondent No. 1 inasmuch as it did not fall
within the scope of Art. 372(1) of the Constitution. This
contention has been rejected by the High Court, and the High
Court has also held that the said claim cannot be said to be
covered by any of the provisions of the Recovery Act and as
such can be legitimately enforced by respondent No. 1. As a
result of the findings, the High Court has discharged the
rule which was issued at the instance of the appellant in
the revision application preferred by it before the High
Court under S. 115 of the Code. The appellant then applied
for and obtained a certificate from the High Court and it is
with this certificate that the matter has been brought
before us in appeal.
The first point which falls for our decision in the present
appeal is whether the High Court was right in holding that
the common law doctrine about the priority of Crown debts on
which the claim of respondent No. 1 was based, applied in
the present case. This common law doctrine has no doubt
been evolved by the special attributes associated with the
Crown in England in early days. It is the part of the Crown
prerogative. AS Halsbury has observed "the royal
prerogative may be defined as being that pre-eminence which
the Sovereign enjoys over, and above all other persons by
virtue of the common law, but out of its ordinary course, in
right of her regal dignity, and comprehends all the special
dignities,
295
liberties, privileges, powers and royalties allowed by the
common law to the Crown of England"(1). This doctrine as
originally evolved by common law in England, had a very wide
sweep and it purported to take within its scope many
privileges and powers. Considered in the light of its wide
sweep, some of these privileges may sound archaic and
feudal, but it is not necessary for our purpose to examine
the said doctrine in all its width; in the present appeal we
are concerned with the narrow question as to whether
respondent No. 1 is entitled to claim that the recovery of
the amount of tax due to it from a citizen must take
precedence and priority over unsecured debts due from the
said citizen to his other private creditors. The
competition in the present case is between respondent No.
1’s claim to recover its tax dues and the appellant’s claim
to recover its decretal dues from the same debtor,
respondent No. 2. The appellant is an unsecured creditor,
though undoubtedly at its instance, the amount in question
has been attached partly before judgment and partly in
execution proceedings after the judgment was pronounced.
The question about the applicability of this part of the
Crown prerogative in India was considered by the Bombay High
Court as early as 1868. In The Secretary of State in
Council for India v. The Bombay Landing & Shipping Co.
(Limited),(2) Westropp, J. has elaborately examined this
problem. The learned Judge held that a judgment debt due to
the Crown was in Bombay entitled to the same precedence in
execution as a like judgment debt in England, if there be no
special legislative provision affecting that right in the
particular case. Similarly, it was held that a judgment
debt due to the Secretary of State in Council for India was
in Bombay entitled to the like precedence for the reason
that such debt is vested in the Crown, and when realised,
falls into the State Treasury. Tracing the origin of this
doctrine, the learned Judge referred to the Commentary of
Lord Coke on Littleton, where Lord Coke has put the matter
in these words; "The King, by his prerogative, regularly is
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to be preferred, in payment of his duty or debt, before any
subject although the King’s debt or duty be the latter" (p.
48). The learned Judge then referred to some English
decisions bearing on this point and concluded that "in
England the right of the Crown to precedence does not arise
out of any peculiar quality in the writ of extent. The
reasoning of Lord Coke and Chief Baron Parker rests on a
broader foundation, namely, that the destination of the
debt, when recovered, is the State Treasury" (p. 50).
(1) Halsbury’s Laws of England, 3rd Edn. Vol. 7, p. 221,
para 463.
(2) [1868-69] 5 Bom. H.C.R. p. 23.
up.165-3
296
It is significant that Westropp, J. considered the question
from -a larger juristic point of view and observed that the
common law ,doctrine was "no novelty in India" and he
referred to the rule enunciated by Yajnavalkya in that
behalf. Says Yajnavalkya, "A debtor shall be forced to pay
his creditors in the order in which the debts were
contracted, after first discharging those of a priest or the
King". (1) On this topic, Katyayana says, "if there be many
,debts at once, that which was first contracted shall be
first paid, ,after those of a King or of a priest learned in
the Veda".(2) The reference to the priority of a debt due to
priests learned in Vedas is obviously obsolete and can have
no relevance at the present time. But the point that
Westropp, J. has made is that the common law doctrine cannot
be said to be a novelty to Hindu Jurisprudence. He has also
added that "Muhammadan sovereigns were not prone to waive or
abandon such royal prerogative as they found existing ,in
India" (p. 49). We have referred to this aspect of the
matter, because if the larger question about the validity of
the Crown prerogative in respect of claims other than tax
claims falls to be considered in future, it may become
necessary to enquire whether a .similar doctrine was
recognised by Hindu Jurisprudence or not. That enquiry is,
however, foreign to the scope of the controversy in the
present appeal. So far as respondent No. 1’s claim in the
present appeal is concerned, there is no doubt that this
claim has been consistently recognised by all the Indian
High Courts.
Before referring to these decisions, however, it will be
convenient to read the relevant provisions of the Indian
Income-tax Act as it stood at the relevant time (Act No. 1 1
of 1922). Section 46 (2) of this Act provides that the
Income-tax Officer may forward to the Collector a
certificate under his signature specifying the amount of
arrears due from an assessee, and the Collector, on receipt
of such a certificate, shall proceed to recover from such an
assessee the amount specified therein as if it were an
arrear of land revenue. There is a proviso to this sub-
section which lays down that without prejudice to any other
powers of the Collector in this behalf, he shall, for the
purposes of recovering the said amount, have the powers
which under the Code of Civil Procedure, 1908 a ,-Civil
Court has for the purpose of the recovery of an amount due
under a decree. Section 46(3) lays down that in any area
with respect to which the Commissioner has directed that any
arrears may be recovered by any process enforceable for the
recovery of .an arrear of any Municipal tax or local rate
imposed under any
(1) Yaj. 11, 41. (2) Kat. 514. (Vide also Kane, History of
Dharamsastra, p. 441)
297
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enactment for the time being in force in any part of the,
State, the Income-tax Officer may proceed to recover the
amount due by such process. This provision prescribes an
alternative procedure for the recovery of the debts in
regard to cases filling under it. Section 46(5) provides
yet another alternative remedy; it lays down that if any
arrear is in respect of any income chargeable under the head
" salaries" the Income-tax Officer may require any person
paying the same to deduct from any payment subsequent to the
date of such requisition any arrears due from such an
assessee; and it requires that such requisition shall be
complied with. The Explanation to s. 46 provides that it
shall be lawful for the Income-tax Officer, if for any
special reasons to be recorded he so thinks fit, to have
recourse to any such mode of recovery notwithstanding that
the tax due is being recovered from an assessee by any other
mode. These provisions indicate the several remedies open
to the Incometax Officer to adopt in order to recover
arrears of income-tax due from any assessee.
In construing the relevant provisions of S. 46, the High
Courts in India have had frequent occasions to consider
whether the Government of India is entitled to claim
priority for arrears of income-tax due to it from assessees
over the private debts due from them to their creditors, and
this claim has been consistently upheld. In Manickam
Chettiar v. Income-tax Officer Madura, (1) a Full Bench of
the Madras High Court has held that the income-tax debt has
priority over private debts and that the Court had inherent
power to make an order on the application for payment of
moneys due to the Crown. In that connection, the Court held
that S. 46 of the Income-tax Act is not exhaustive of the
remedies of the Crown to cover arrears of income-tax and
does not preclude an application of this nature. The Court
further held that it was also not necessary for the Crown to
obtain a decree against the assessee or to effect an
attachment before making such an application. The
application in question had been made under S. 151 of the
Code. Leach, C.J., who delivered the-principal judgment of
the Full Bench, referred to the fact that the argument which
had been urged before the Court was that there was nothing
in the Code which placed the Crown in a different position
from that of a private person, and so, no application could
be made by the Crown to recover its tax dues unless a decree
had been obtained in that behalf; and observed that the
argument ignored the special position of the Crown, the
special circumstances and the Court’s inherent powers. The
learned Chief Justice stated that it could not be
(1) [1938] 6 I.T.R. 180.
298
denied that the Crown had the right of priority in payment
of debts due to it; it is a right which has always existed
and has been repeatedly recognised in India. In the case
before the Court, the debt represented money due to the
Crown under the Indian Incometax Act and the demand of the
Income-tax Officer was not open to questions. We ought to
add that Varadachariar, J. who had referred this matter to
the Full Bench, apparently entertained some doubt about the
correctness of the procedure adopted by the Income-tax
Department in seeking to recover the arrears in question.
With that aspect of the matter we are not concerned in the
present appeal. It is, however, noteworthy that
Varadachariar, J. recognised the fact that there was
overwhelming weight of authority in favour of the
recognition of the priority of the Crown debts over the
private debts due from the same debtor. His attention was
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drawn to a note of dissent on this point which had been
struck down by an earlier decision of the Madras High Court
in Ramachandra v. Pitchaikanni,(1) but he did not attach any
importance to the opinion there expressed, because in his
opinion, "the weight of authority in favour of the
recognition of the priority in question even in this country
is so strong that this expression of doubt cannot help the
petitioner to any material degree".
In the Bank of India v. John Bowman and Ors., (2) the Bombay
High Court had occasion to consider the same point. In
dealing with the question, Chagla, C.J., observed that the
priority given to the Crown is not on the basis of its debt
being a judgment debt or a debt arising out of statute, but
the principle is that if the debts are of equal degree and
the Crown and the subject are equal, the Crown’s right will
prevail over that of the subject. It was urged before the
High Court that the democratic set-up which had been ushered
in this country by the Constitution was inconsistent with
the doctrine of Crown priority, but the learned Chief
Justice rejected this argument and observed that whatever
may have been the historical origin of the principle which
gives priority to the debts due to the Crown, when the
English Courts came to consider this question, the principle
had become a part of the Common law of England. It is not
so much because the Crown has any special privileges in
England that this principle has been upheld, but it is
because the State in England has taken the place of the
Crown and the English Courts have continued the privilege
which was once the privilege of the King and have afforded
the same privilege to the State because they have realised
that the State has certain rights and privileges which
cannot be overlooked.
(1) [1886] I.L.R. 7 Mad. 434. (2) A.I.R.
1955 Bom. 305.
299
In Kaka Mohamed Ghouse Sahib & Co. v. United Commercial
Syndicate and Others,(1) the Madras High Court has held that
it is a settled principle of constitutional law that as
between creditors of the same rank the Government is
entitled to priority, and the Republican character of the
Constitution of India has not abrogated this general
doctrine of priority of State debts. In dealing with this
question, Ramamurti, J. has referred to the relevant
decisions in relation to the arrears of income-tax due to
the Government and has pointed out that there is a consensus
of judicial opinion on the question that the arrears of tax
due to the State can claim priority over private debts.
This position has not been seriously disputed before us, and
so, it is unnecessary to refer to other decisions which deal
with this problem.
As we have already indicated, there is one decision in which
a note of dissent was struck by the Madras High Court, and
that is the decision in the case of Ramachandra(2). In that
case, certain land had been sold under the provisions of s.
10 of the Madras Abkari Act, 1864, for arrears due by an
abkari renter. It was held that the purchaser at the sale
did not take the land free of all encumbrances as in the
case of a sale for arrears of land revenue under the
provisions of the Revenue Recovery Act (Madras Act II of
1864). With the actual decision in the case, we are not
concerned in the present appeal; but it appears that the
learned Judges in that case made a reference to the question
as to whether Crown debts have priority, and they expressed
the opinion that the said doctrine would not be universally
applicable and three reasons were cited in support of this
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view. The first reason was that the East India Company was
only a corporation with limited powers of sovereignty
delegated to it, and in the Courts it was treated as a
subject; the second reason was that the right of Government
to priority to a mortgage was not recognised in the mufassil
which was evident by the express language of the Act which
declared the land revenue to be a first charge on the land;
and according to the Court, such a provision would have been
unnecessary, if by Common law every debt due to the Crown
was a first charge on the land. The third reason given by
the Court was that the Court hesitated to import into places
outside the Presidency towns the doctrine of the Common law
of England which would cause inconveniences to purchasers.
Having set out these reasons, the Court, however, took the
precaution of adding that it was not necessary for the
purpose of the appeal before it whether debts due to
Government in this country have the same preference over
(1) [1963] 49 I.T.R. 824.
(2) [1884] I.L.R. 7 mad. 434.
300
private debts as Crown debts in England. This observation
was made, because in the case with which the Court was
concerned, the hypothecation was in 1874, and the abkari
revenue fell into arrear in a subsequent year, and it was
held that even in England the lien of the Crown attached
only from the time when the owner of the land became a
debtor to the Crown, and since 1839 the common law has been
greatly modified in England by statute for the protection of
purchasers. It would thus be seen that the observations in
question are obiter observations and it does not appear that
the matter was elaborately argued before the Court; and
considerations relevant for the purpose of deciding the
point as to priority of tax dues have not been fully
examined. Besides, this view has been dissented from by
Bhashyam Ayyangar, J. of the Madras High Court in Bell v.
The Municipal Commissioner v. for the City of Madras,(’-)
and as we have already indicated, in the words of
Varadachariar, J. in Manickam Chettiar(2), the weight of
authority in support of the applicability of the common law
doctrine in regard to tax dues in this country is so strong
that no significance can be attached to these obiter
observations.
That takes us to the second argument urged before us by Mr.
Das Gupta for the appellant. He contends that though this
doctrine of the priority of tax dues might have been
recognised by judicial decisions in India prior to 1950,
there is no scope for continuing its operation after the
Constitution came into force. This argument naturally
proceeds on the assumption that the judicial recognition of
the relevant Common law doctrine cannot claim the protection
of Art. 372(1). It will be recalled that Art. 372(1)
provides, inter alia, for the continuance in force of
existing laws. It lays down that notwithstanding the repeal
by this Constitution of the enactments referred to in Art.
395 but subject to the other provisions of this
Constitution, all the laws in force in the territory of
India immediately before the commencement of this
Constitution shall continue in force therein until altered
or repealed or amended by a competent Legislature or other
competent authority. The question which arises is whether
this doctrine of priority which is based on common law and
which was recognised by our High Courts prior to 1950, can
be said to constitute "law in force" in the territory of
India at the relevant time. In other words, is this
doctrine of common law which was introduced in this country
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and followed, law in force within the meaning of Art. 372(1)
? If it is, then by virtue of Art. 372(1) itself, the same
law would continue to be in force until it is validly
altered, repealed or amended.
(1) [1902] I.L.R. 25 Mad. 457.
(2) [1938] 6 I.T.R. 180.
301
This question can no longer be in doubt because of the
decision of this Court in the Director of Rationing and
Distribution v. The Corporation of Calcutta & Ors.(1). In
that case, this Court was called upon to consider the
question as to whether the decision of the Privy Council in
Province of Bombay v. Municipal Corporation of the City of
Bombay(2) which had laid down a certain rule of
interpretation could be said to be ’law in force’ within the
meaning of Art. 372(1). The majority judgment indicates
that the rule of interpretation of statutes enunciated by
the Privy Council amounted to law in force and as such, it
continued to be in force even after the Constitution was
adopted, with the result that according to the majority
opinion, the rule of interpretation of statutes that the
State is not bound by a statute unless it is so provided in
express terms or by necessary implication, is still good
law.
On this part of the decision, there was some difference of
opinion. Sarkar, J. held that the rule that the Crown is
not bound by the provisions of any statute unless it is
directly or by necessary implication referred to, is really
a rule of construction of statutes and is not dependent on
royal prerogatives. There was, therefore, no reason,
according to the learned Judge, why it should not be applied
to the interpretation of statutes after the Constitution.
Wanchoo, J., however, took a different view. He held that
the rule in question was based on the royal prerogative as
known to the common law of England and it could not be
applied to India when there was no Crown in India and when
the Common law of England was not applicable. According to
him, the proper rule of construction which should be applied
now is that the State is bound by a statute unless it is
exempted expressly or by -necessary implication.
It is, however, clear that there was no difference of
opinion on the question that Common law was included within
the expression "law in force" used by Art. 372(1). The
majority judgment expressly states that the relevant
expression "law in force" includes not only statutory law,
but also custom or usage having the force of law and as
such, it must be interpreted as including the Common law of
England which was adopted as the law of this country before
the Constitution came into force (p. 173). Wanchoo, J. has
also agreed with this view, because he has expressly
observed that "the royal prerogative where it deals with
substantive rights of the Crown as against its subjects, as,
for example, the priority of Crown debts over debts of the
same nature owing to the subject, stands on a different
footing from the royal prerogative put forward
(1) [1961]1 S.C.R. 158.
(2) [1946] L.R. 73 I.A. 271.
302
in the present case, which is really no more than a rule of
construction of statutes passed by Parliament. Where, for
example, a royal prerogative dealing with a substantive
right has been accepted by the Courts in India as applicable
here also, it becomes a law in force which will continue in
force under Art. 372(1) of the Constitution" (p. 188).
Therefore, this decision clearly shows that the rules of
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Common Law relating to substantive rights which had been
adopted by this country and enforced by judicial decisions,
amount to ’law in force’ in the territory of India at the
relevant time within the meaning of Art. 3 72 ( 1 ). In that
view of the matter, the contention of Mr. Das Gupta that
after the Constitution was adopted, respondent No. 1’s
position in regard to its claim for priority in the present
proceedings has been altered, cannot be upheld.
At this stage, we ought to make it clear that in the present
appeal we are dealing with a very narrow point, and that
relates to respondent No. 1’s claim that arrears of tax due
to it have precedence or priority over money debts due to a
private creditor from the same debtor. We think it
necessary to emphasise this aspect of the matter, because
the basic doctrine of Crown privileges as originally evolved
by Common law in England may lead to different categories of
claims made in different circumstances and by different
States in India; and we want to make it clear that our
present decision should be confined only to the narrow point
with which we are directly concerned. Questions may arise
as to whether the relevant Common law doctrine was accepted
in some Indian States. If it is shown that it was not, it
may have to be considered whether Art. 372(1) would assist
the enforcement of the said doctrine in such States. One
thing is clear that if the said doctrine was accepted as a
part of the law in any part of the country, it will not
cease to be operative, because it is included in the
expression "law in force" under Art. 372(1); but the
position would be different in respect of such parts of the
territory of India where the said doctrine was not
recognised or applied prior to 1950. Then again, if this
doctrine is supposed to be an essential attribute of
sovereignty, where does sovereignty reside after the
Constitution’.? Does it reside in the Union as well as all
the constituent States ? If yes, what would be the position
if competing claims were made by the States inter se, or by
one of the States against the Union ? That is another
aspect of the matter which may need careful examination in
future.
Similarly, the basic justification for the claim for
priority made by respondent No. 1 in the present case rests
on the well-recognised
303
principle that the State is entitled to raise money by
taxation, because unless adequate revenue is received by the
State, it would not be able to function as a sovereign
Government at all. It is essential that as a Sovereign, the
State should be able to discharge its primary governmental
functions and in order to be able to discharge such
functions efficiently, it must be in possession of necessary
funds, and this consideration emphasises the necessity and
the wisdom of conceding to the State the right to claim
priority in respect of its tax dues.
But the same principle may not equally be applicable in
respect of debts due to the State if they are contracted by
citizens in relation to commercial activities which, no
doubt, may be undertaken by the State for achieving
socioeconomic good. It is well-known that a Welfare St ate
often enters commercial fields which cannot be regarded as
an essential and integral part of the basic governmental
functions of the State, and-if the State seeks to recover
debts from its debtors arising out of such commercial
activities, it may become necessary to consider whether the
doctrine of priority can be extended to such transactions.
We are referring to some of the difficult problems which may
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arise in future in regard to the application of this
doctrine, because we want to make it clear that our decision
in the present appeal should not be taken to deal with any
of them. Our conclusion, therefore, is that the claim for
priority made by respondent No. 1 in the present proceedings
has to be sustained, because it is based on a Common law
doctrine which had been applied and upheld in that part of
India which was known ’British India’ prior to the
Constitution.
The next contention which Mr. Das Gupta has raised is that
the doctrine of the priority of Crown debts cannot be
enforced because it is specifically provided for and covered
by the provisions of s. 46 of the Income-tax Act and by the
relevant provisions of the Recovery Act. He argues that if
it is shown that the particular doctrine has become the
subject-matter of legislative provision, it is the
legislative provision which will prevail, and during the
operation of the said legislative provision, the doctrine
will remain in abeyance and cannot be enforced. In support
of this argument, lie has relied on the decision of the
House of Lords in Attorney General v. De Keyser’s Royal
Hotel, Ltd.(). In that case, it was held that the Crown was
not entitled as of right, either by virtue of its
prerogative or under any statute, to take possession of the
land or buildings of a subject for administrative purposes
in connection with the defence of the realm without paying
compensation
(1) [1920] A.C. 508, 526.
304
for their use and occupation. One of the points which arose
for decision in that case was, what was the effect of
Regulation 2 of the Defence of the Realm Regulations issued
under the Defence of the Realm Consolidation Act, 1914, when
read with sub-s. 2 of s. 1 of the Act, on the prerogative of
the Crown to take possession of the property of a subject
for administrative purposes in connection with the defence
of the realm ? In that connection, the provisions of the
Defence Act , 1842 (5 & 6 Vict. c. 94) authorising taking
possession of land also had to be considered. In dealing
with this question, Lord Dunedin observed that the
prerogative as defined by learned constitutional writers was
"the residue of discretionary or arbitrary authority which
at any given time is legally left in the hands of the
Crown", and he added that inasmuch as the Crown is a party
to every Act of Parliament, it is logical enough to consider
that when the Act deals with something which before the Act
could be effected by the prerogative, and specially empowers
the Crown to do the same thing, but subject to conditions,
the Crown assents to that, and by that Act, to the
prerogative being curtailed. It is in the light of this
principle that the provisions of the Regulation read with
the relevant section of the Act were examined, and it was
held that the Crown could not claim to take possession of
the property of a subject without being liable to pay
compensation in the manner provided for by the Defence Act,
1842.
In that case, Lord Atkinson dealt with this matter thus :
"It was suggested", said Lord Atkinson, "that when a statute
is passed empowering the Crown to do a certain thing which
it might theretofore have done by virtue of its prerogative,
the prerogative is merged in the statute. I confess I do
not think the word "merged" is happily chosen. I should
prefer to say that when such a statute, expressing the will
and intention of the King and of the three estates of the
realm, is passed, it abridges the Royal Prerogative while it
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is in force to this extent : that the Crown can only do the
particular thing under and in accordance with the statutory
provisions, and that its prerogative power to do that thing
is in abeyance" (p. 559-40).
In support of the same contention, Mr. Das Gupta has also
relied on a decision of the Federal Court in the Governor-
General in Council v. Shromani Sugar Mills Ltd. (In
Liquidation) (1). In that case, the Federal Court was
examining the provisions of s. 230 of the Indian Companies
Act (No. VII of 1913). Section 230 prescribes the order in
which preferential payments should be made in winding up
proceedings. Clauses (a) to (f) of S. 230(1) lay down
(1) [1946] F.C.R. 40.
305
the order of preference in which the payments should be
made; cl. (a) gives the highest priority in that order to
all revenues, taxes, cesses and rates, whether payable to
the Government or to a local authority, due from the company
at the date hereinafter mentioned and having become due and
payable within the twelve months next before that date.
Reading this section along with s. 232(2) which provides
that nothing in S. 232 applies to proceedings by the
Government, the Federal Court held that it was difficult to
think of any reason for qualifying the priority in respect
of the Crown debts specified in s. 230(1) (a), if it was
intended that other debts due to the Crown should enjoy
unqualified priority. Spens, C.J., who spoke for the Court,
contrasted the provision contained in s. 230(1) (a) with the
provisions of s. 49 of the Presidency Towns Insolvency Act
(No. III of 1909), and s. 61 of the Provincial Insolvency
Act (No. V of 1920), and held that priority could be
claimed by the Crown in winding up proceedings only as
prescribed by s. 230(1) (a) and within the limits specified
therein. It would be noticed that this conclusion
postulates the applicability of the doctrine of priority of
the debts due to the Crown and holds that as a result of the
specific provision contained in s. 230 ( 1 )(a) the said
doctrine must be worked in the manner prescribed by the said
section and not outside it. Basing himself on these two
decisions, Mr. Das Gupta contends that s. 46 of the Income-
tax Act and the relevant provisions of the Recovery Act
displace the application of the doctrine of Crown priority
on which respondent No. 1 relies in the present case.
Let us first consider this argument in relation to s. 46 of
the Income-tax Act. In dealing with this section, we may
incidentally refer to the decision of this Court in
Purshottam Govindji Halai v. Shree B. M. Desai, Additional
Collector of Bombay & Others(1). In that case, the validity
of s. 46(2) was impeached, inter alia, on the ground that it
contravened Art. 14 of the Constitution. One of the grounds
on which the validity of s. 46(2) was challenged, was based
on the fact that the recovery of arrears of income-tax is
authorised to be made by S. 46(2) in different modes and
manners in the different States of India. It would be
recalled that s. 46(2) enables the Income-tax Officer to
forward to the Collector a certificate specifying the amount
of arrears due from an assessee, and requires the Collector,
on receipt of such certificate, to proceed to recover from
the assessee in question the amount specified as if it were
an arrear of land revenue. Now, the procedure prescribed
(1) [1955] 2 S.C.R. 887.
306
for recovering arrears of land revenue differs in different
States. In the City of Bombay it is recovered under s. 13
of the Bombay City Land Revenue Act (Bombay Act 2 of 1876).
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In the rest of the Bombay State it is recovered under s. 157
of the Bombay Land Revenue Code, 1879 (Bombay Act 5 of
1879). In Madras, the relevant provision is S. 48 of the
Madras Revenue Recovery Act, 1864 (Madras Act 2 of 1864).
In West Bengal, the relevant provision has been prescribed
by the Recovery Act. In Punjab, it is s. 69 of the Punjab
Land Revenue Act, 1887 (Punjab Act 27 of 1887), and in Uttar
Pradesh, it is s. 148 of the U.P. Land Revenue Act, 1901
(U.P. Act III of 1901). The argument based on the diversity
of the procedures prescribed by these different Acts was
repelled, because it was held that though the procedure
prescribed by the different Acts prevailing in different
States was not uniform or even similar, the classification
on which the application of the different statutes rested
was justified inasmuch as the grouping of the income-tax
defaulters into separate categories or classes State wise
was certainly a territorial classification which is based on
an intelligible differentia and the subjection, for the
purposes of the recovery of the certified demand, of each of
such classes of defaulters to the same coercive process
devised by their own State, on a consideration of local
needs, for the recovery of their own public demands, cannot
be regarded as benefit of a reasonable nexus or correlation
between the basis of classification and the object sought to
be achieved by the Indian Income-tax Act any more than it
can be so regarded with respect to the respective State laws
(p. 900).
We have referred to this decision, because it brings out
emphatically the real character of the provisions prescribed
by s. 46(2). Section 46(2) does not deal with the doctrine
of the priority of Crown debts at all; it merely provides
for the recovery of the arrears of tax due from an assessee
as if it were an arrear of land revenue. This provision
cannot be said to convert arrears of tax into arrears of
land revenue either; all that it purports to do is to
indicate that after receiving the certificate from the
Income-tax Officer, the Collector has to proceed to recover
the arrears in question as if the said arrears were arrears
of land revenue. We have already seen that other
alternative remedies for the recovery of arrears of land
revenue are prescribed by sub-sections (3) and (5) of s. 46.
In making a provision for the recovery of arrears of tax, it
cannot be said that s. 46 deals with or provides for the
principle of priority of tax dues at all; and so, it is
impossible to accede to the argument that s. 46 in terms
displaces the application of the said doctrine in the
present proceedings.
307
That takes us to the provisions of the Recovery Act on which
the same argument has been based. The Recovery Act has been
passed, because it was thought expedient to consolidate and
amend the law relating to the recovery of public demands in
Bengal. A public demand is defined by s. 3 (6) of this Act
as meaning, inter alia, any arrear or money mentioned or
referred-to in Schedule 1; and clause 3 of Sch. I deals,
inter alia, with any money which is declared by any law for
the time being in force to be recoverable or realizable as
an arrear of revenue or land revenue. rliat is how the
arrears of tax in respect of which a certificate has been
issued by the Income-tax Officer attract the provisions of
the Recovery Act. A "Certificate Officer" means under s. 3
(3) a Collector and other officers mentioned in it. A
"certificate-holder" under s. 3 (2) means the Government or
person in whose favour a certificate has been filed under
this Act, and "certificate-debtor" under s. 3 (1 ) means a
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person named as debtor in a certificate filed under this
Act. The effect of the provisions contained in ss. 4 to 10
in Part II of the Recovery Act, appears to be that when a
Certificate Officer is satisfied that any public demand
payable to the Collector is due, he proceeds to sign a
certificate in the prescribed form. This certificate is a
certificate properly so-called for the purpose of this Act.
The certificate issued under s. 46(2) of the Income-tax Act
is in a sense a public demand, but S. 5 of the Recovery Act
seems to require that when any requisition is received by
the Certificate Officer, he has to examine whether the
demand in question is recoverable and whether the recovery
by suit is not barred by law. On this prima facie
examination, if he is satisfied that further action is
justified, he proceeds to sign a certificate stating that
the demand is due; that is the effect of s. 6. A certificate
so issued is then served on the certificate-debtor under S.
7, and S. 8 prohibits private transfer of the immovable
property of the certificate-debtor after the service of
notice of any certificate has been effected on him under s.
7. It is at that stage that the certificate-debtor is
empowered to file a petition denying his liability under s.
9; and his objections are heard under s. 10. That, in
brief, is the scheme of Part 11 with which we are concerned.
There is one more provision of the Recovery Act to which we
ought to refer, and that is s. 26. This section deals with
the disposal of proceeds in execution, and subsection (1) of
this section provides that where assets are realized, by
sale or otherwise in execution of a certificate, they shall
be disposed of in the manner indicated by its clauses (a) to
(d). Section 38 provides that statutory rules included in
Sch. 11 shall have effect as if enacted in the body of this
Act, until altered or annulled in accordance
308
with the provisions of Part V. Statutory Rule 22 which is
relevant for our purpose deals with cases of attachment of
property in custody of Court or public officer; it reads
thus :-
"Where the property to be attached is in the
custody of any Court or public officer, the
attachment shall be made by a notice to such
Court or officer, requesting that such
property, and any interest or dividend
becoming payable thereon, may be held subject
to the further orders of the Certificate-
Officer by whom the notice is issued :
Provided that, where such property is in the
custody a Court, any question of title or
priority arising between the certificate-
bolder and any other person, not being the
certificate-debtor, claiming to be interested
in such property by virtue of any assignment,
attachment or 0otherwise, shall be determined
by such Court".
Having thus considered the broad features of the Recovery
Act, the question which we have to decide is whether these
provisions can be said to amount to a statutory provision in
respect of the doctrine of priority of arrears of income-tax
due to respondent No. 1 over private debts due from the same
debtor. We have already examined the two decisions on which
Mr. Das Gupta’s -contention rests. Take, for instance, s.
230 of the Indian Companies Act. Can we say that any
provisions of the Recovery Act can be compared to the
provisions of s. 230 of the Companies Act ? In our opinion,
the answer to this question has to be in the negative.
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Broadly stated, the Recovery Act is intended mainly to
provide for the procedure to recover public debts. This Act
is not directly concerned with the right to recover arrears,
or with priority, of tax dues. Arrears of tax fall within
the scope of the proceedings contemplated by it, because
they attract the provisions -of clause 3 of Sch. 1. Even a
superficial glance at the fourteen clauses of Sch. 1 to the
Recovery Act would indicate that this Act is concerned with
public demands of various kinds, and it would not be
reasonable to suggest that any of its provisions are
intended to deal directly or even indirectly with the
principle of law with which we are concerned. These
provisions merely indicate the manner in which and the
procedure according to which public debts should be
recovered. There is no positive provision in respect -of
respondent No. 1’s claim to recover arrears of tax. Rule 22
to which we have referred which corresponds to 0.21 r. 52 of
the -Code of Civil Procedure, can no doubt be invoked to
recover ,.arrears of tax; but that is because the procedure
prescribed by the
309
said Rule applies to the recovery of public debts and tax
arrears can be treated as public debts inasmuch as by virtue
of S. 46(2) of the Income-tax Act they become recoverable as
arrears of land revenue. In our opinion, it is difficult to
accept the argument that the application of the doctrine of
priority of arrears of tax over private debts can be said to
be displaced by any of the provisions of the Recovery Act.
That being so, we must hold that the High Court was right in
coming to the conclusion that respondent No. 1 was entitled
to claim priority in the matter of arrears of tax due from
respondent No. 2 over the decretal debt due to the appellant
from the same debtor.
The result is, the appeal fails and is dismissed with costs.
Appeal dismissed.
310