TMI Blog1963 (3) TMI 51X X X X Extracts X X X X X X X X Extracts X X X X ..... of 1951 and 79 of 1952. The debtors, the aforesaid persons, made several attempts to settle with the creditors 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April 1, 1954, accepted the proposal of the debtors in a modified form, and allowed the insolvency petitions to be withdrawn which were accordingly dismissed.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 enure to the benefit of the creditors other than those mentioned in schedules A and B. While emphasising that the security would not enure for the benefit of the creditors mentioned in schedules A and B the learned judge stated in his order that it will enu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 enured for the benefit of all the creditors, except those that are mentioned in schedul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 provisions of section 64 of the Civil Procedure Code. We are clearly 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, no 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 recognised 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 (AIR. 1955 Bom. 305). 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 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (A. I. R. 1961 Ker. 18). 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is not the case in the case of arrears of income-tax. The principle underlying Board Standing Order 48 is that when the Government's 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 Government's 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. Eve ..... X X X X Extracts X X X X X X X X Extracts X X X X
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