TMI Blog1981 (9) TMI 46X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to a mortgage decree to realise the amount in satisfaction of the mortgage claim. Even though the I.T. Act was made applicable to the territory of Pondicherry only in 1964 and the huge tax amount payable by her had accrued due subsequently, after notice had been served on the defaulters on certificate issued under s. 222 of the I.T. Act, the civil court is deprived of its jurisdiction to proceed in execution of a decree in which the defaulter is involved. When O.P. No. 21 of 1975 was allowed on October 24, 1975, the second respondent and the other three legal representatives being fully aware of the demand made on them for recovery of incometax, the property belonging to them, cannot be subject to any execution proceedings, and, therefore, petitioner/appellant herein has the jurisdiction to maintain an application under s. 151 and under O. 21, r. 90 of the CPC, and seek the necessary relief. The petition was filed in January, 1977, and, therefore, even though auction might have been held on December 16, 1976, the execution court has no jurisdiction to confirm the sale, Rather he would contend that when a notice is issued under rule 2 of Sch. II, under r. 51, it dates back and be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the I.T. Act this concept has been recognised, he resorts to s. 178 which deals with a company in liquidation and the proviso to sub-cl. (3) is to the effect that nothing in the said sub-section shall debar the liquidator " for making any payment to secured creditors whose debts are entitled under law to priority of payment over debts due to Government on the date of liquidation ". Equally, he relies upon the following passage at p. 870 of the VI Edn. (Vol. 1) of Kanga's Law and Practice on the Income Tax, which is to the following effect : " Until the liquidator has set aside an amount to meet the tax liability, he should not part with any of the assets except for paying secured creditors entitled to priority over Government dues. However, this section does not confer on the Government any higher priority than that enjoyed under the company law. " 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 [1938] 6 ITR 180, 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 [1969] 74 ITR 668, 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, AIR 1973 Cal 295, wherein a Full Bench of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it will be open to the first respondent herein to seek his reliefs, as provided under the Rules. On the claim that when a decree is obtained under a mortgage, the decree-holder is a secured creditor and, therefore, the arrears of tax cannot be claimed by invoking r. 16(1) of Sch. II is basically incorrect, because a Full Bench of this court has held that mortgage decree is a money decree. It will be useful first to take up the point as to what is contemplated under r. 16(1) of Sch. II to the Act, which is as follows: " Where a notice has been served on a defaulter under rule 2, the defaulter or his representative in interest shall not be competent to mortgage, charge, lease or otherwise deal with any property belonging to him except with the permission of the Tax Recovery Officer, nor shall any civil court issue any process against such property in execution of a decree for the payment of money." Mr. Masilamani claims that the words " for the payment of money can be referable only to a simple money decree and a mortgage decree is outside its scope. Mr. Rangaswamy, counsel for the appellant, contends that even a mortgage decree will come within the expression above referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayment of money ". This rule cannot be invoked in cases where the relief is for a partition, or possession, or for a mandatory injunction to be carried out or for specific performance of a contract or in a suit for redemption and the like. Even in a mortgage claim, the decree is put into execution to bring the security to sale for the realisation of money due and payable to the mortgagee. It would, therefore, be not inappropriate to hold that even in the case of a mortgage decree, r. 16(1) of Sch. 11 can be invoked. What is sought to be recovered in the execution proceeding is the money payable by the defaulter, on whom a notice had been already served under r. 2 of the Rules. In this case in fact, 0. P. No. 21 of 1975 had been filed by the petitioner, Department, and an order had been passed on October 24, 1975, in favour of the petitioner and it is only thereafter the court auction had taken place on December 16, 1976, though the execution petition was filed on July 1, 1974. Further, much earlier, notices for the recovery of arrears had been served on the defaulter and her legal representatives. Mr. Masilamani has contended for the first respondent, that the execution of the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be set aside because the proceedings that have followed subsequent to the service of notice under r. 2, are not valid. Though it is contended that what are provided under Sch. II are only procedural in nature and there is no provision made in the Act for moving the civil court, it will be seen that s. 226(4) authorises the ITO to apply to the court in whose custody there is money belonging to the assessee for payment to the Department of the entire amount of such money, or, if it is more than the tax due, an amount sufficient to discharge the tax. Hence, when the Act had authorised the Department to move the civil court for collection of arrears of tax which is in court and payable by the defaulting assessee, and for recovering the amount, Rules had been made under Schedule II, the point taken that the proceedings are taken only under the Rules and not under the main provisions of the Act, necessarily fails. One other aspect that requires to be considered before a conclusion can be drawn is regarding the scope of r. 16(1). In the latter part it is provided " nor shall any civil court issue any process against such property and, what is meant by " process ", would also be relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the result of the suit, the order of the TRO shall be conclusive, Hence, even a mortgage-decree-holder whose execution proceedings in civil court had been interdicted by the TRO, can make a claim before him to substantiate his right to priority adjustment of his claim before any amount could be adjusted towards realisation of arrears of tax. When such a remedy or recourse is available to a mortgagee-decree-holder to canvass his priority claim on the ground that he is a secured creditor, which will have to be necessarily considered by the TRO under r. 11(6), there could be no prejudice caused by the civil court being interdicted by virtue of r. 16(1) from proceeding with the execution proceedings initiated by the mortgagee and the property being sold by the I.T. Dept. in a case where the property of a tax defaulter on whom a notice under r. 2 had been served, and whose property is brought to sale to realise the arrears of tax. Regarding the existence of the mortgage and the amount actually due, there is an area of dispute between the parties. But presently in this proceeding, it cannot be decided otherwise, there being no material to hold that there was no mortgage created on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the civil court cannot issue any process for realisation of the decree amount after the petition had been filed by the petitioner. (5) First respondent is no doubt a secured creditor, but still his claim based on a mortgage, is " a decree for money ", within the meaning of r. 16(1). (6) It is open to the first respondent to file his claim before the TRO under r. 11(6) when he brings the property to sale, claiming that he is secured creditor and out of the realisation, before the amounts are appropriated towards arrears of tax, he should be paid first, and such a claim will have to be decided by the TRO. (7) The court auction held on December 16, 1976, is, therefore, an invalid one since whatever execution proceedings had been taken subsequent to service of r. 2 notice, is invalid. (8) First respondent having a legal right to make his claim before the TRO under r. 11(6) of Sch. 11, it is for him to establish that he being secured creditor, under law, he is entitled to priority over tax arrears recoverable by the State, failing which he may institute a suit to sustain his claim. Since the present application is taken out for setting aside the sale held on December 16, 1976, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the properties ordered to be sold in Application No. 403 of 1975, for realising the tax arrears due from T. D. Murthy, whose legal representatives are the defendants in the suit and for directing the defendants to deposit the entire proceeds on sale of the properties in this court so as to enable it to get a payment out. This claim was made on the ground that a huge amount of over Rs. 44,00,000 was due as arrears of income-tax and wealth-tax from late T.D. Murthy, who was the owner of the properties and who had mortgaged the same with the plaintiff for securing loans given by the plaintiff. It was contended that a notice of demand had been served on May 23, 1968, May 7,1969, and November 30, 1969, on the defaulter, T.D. Murthy, and the other defendants in the suit, under r. 2 of Sch. 11 to the I.T. Act, 1961 (hereinafter called " the Act "), demanding payment of tax arrears, that the properties were attached on February 19, 1972, that by reason of r. 51 of Sch. 11 to the Act the attachment related back and took effect from the date on which the r. 2-notice was served on the defaulters and that by reason of r. 16, the mortgage executed in favour of the plaintiff on December 22, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Act, 1961, on 23-5-1968, 7-5-69, and 30-11-69, and without the concurrence of the Tax Recovery Officer it is, ab initio void and, therefore, inoperative. The property is sold free of the above encumbrance. " When the advocate, Commissioner and the third party purchaser of premises No. 6, Patnool Sandoosah Street, Madras, applied for permission to sell and purchase the property for Rs. 51,000 and for permitting the amount to be deposited to the credit of C.S. No. 84 of 1973, notice was given to the Revenue. After hearing the parties, the sale was confirmed and after deducting a sum of Rs. 2,000 towards the Commissioner's fee, the balance of Rs. 49,000 was directed to be deposited and this court made the following further direction : " The Department had no objection for depositing the money and releasing this property from all liabilities towards income-tax provided the inter se dispute between the bank and the Income-tax Department is settled before payment out is ordered. Since the Income-tax Department also claims a charge over the property as well as the bank, the amount will be permitted to be deposited in this court and the inter se dispute will be decided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... created on December 22, 1969, in view of the proviso to s. 281 of the Act, the mortgage in favour of the bank will not be affected by the notice under r. 2 or the attachment under r. 48 read with r. 51 of the Rules. They also relied on the preliminary decree of this court directing realisation of the decree by sale of the properties and contended that the decree cannot be questioned. In this application they did not question the constitutional validity of any of the provisions of the Act or the Rules but had made a reservation to put forward any contention as to the validity of the same at a later stage. While filing counter in Application No. 3832 of 1978, filed by the TRO, the plaintiff-bank raised the constitutional validity of s. 281 and rr. 2, 16 and 51 of Sch. II to the Act and the procedure by way of an application for payment out instead of a regular suit by the TRO. The bank also filed an independent application in Application No. 952 of 1979 raising the same constitutional questions. It was claimed that rr. 2, 16 and 51 are ultra vires and void as repugnant to the bank's fundamental right to carry on business and to hold the property guaranteed under art. 19(1)(f) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r permission to bring the property to sale. The court declared, that the Department has a first charge over the property and permitted it to bring the property to sale and this petition was ordered on October 24, 1975. Under the French law, a deed of mortgage executed and registered is considered to be a decree by itself and having the force of a decree. Accordingly, when the mortgagor, Madame Garnier, defaulted in payment of the mortgage money, the mortgagee filed on July 1, 1974, E.P. No. 217 of 1974 on the file of the First Additional Subordinate judge, Pondicherry, for sale of the mortgaged property for realisation of the money due thereunder. The executing court, after giving permission to the mortgagee to bid and set off, auctioned the property on December 16, 1976 and it was purchased by the mortgagee himself for a sum of Rs. 44,100. In these execution proceedings, there was no notice to the Department and the Department came to know of it only after the auction was held. When they came to know of this sale, the Department filed E.A. No. 5 of 1977 claiming that for realisation of the income-tax arrears, the Government have got a claim for priority of payment and that the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erely filing an application without obtaining a decree against the assessee, is not avail able in a certificate proceeding to the TRO. According to the learned counsel, the procedure or method of recovering the tax under s. 226(1) and the certificate proceedings under s. 222 are separate and distinct, each with its own rules. The rules applicable to one proceeding do not apply to the other proceeding. The provision in s. 226(1) is available only for an ITO and not available to a TRO. The TRO can proceed to recover from the assessee the amount of arrears of tax in accordance with the rules laid down in the Second Schedule only. Neither the ITO, while invoking his powers under s. 226(4), could rely on any of the rules in the Second Schedule or any order of the TRO, nor the TRO could invoke the provisions of s. 226(4). So the argument ran. Section 220 of the Act provides that any tax other than advance tax, interest, penalty, fine or any other sum specified in the notice under s. 156 should be paid within 35 days or such shorter period as specified in the notice, from the date of service of notice. An assessee shall be deemed to be in default, if he does not pay the amount within th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n judicial recognition in India prior to 1950 in regard to the recovery of tax dues in priority to other private debts of the taxpayers is a " law in-force " in the territory of India and, by virtue of art. 372(1) of the Constitution of India, it continues to be in force in India until it is validly altered, repealed or amended and the Govt. of India is thus entitled to claim priority for arrears of income-tax due to it from a citizen over other debts of unsecured creditors. The Supreme Court further held that the application of the doctrine of priority of arrears of tax over private debts is not displaced by any of the provisions of the Public Dues Recovery Act, 1913, or the provisions in s. 46(2) of the Indian I.T. Act, 1922, which provides for the recovery of the tax as if it were an arrear of land revenue. This principle has been reaffirmed by the Supreme Court in later judgments and it is now well settled. This court had further held in Collector of Tiruchirapalli v. Trinity Bank Ltd. [1962] 44 ITR 189 (Mad) [FB], that a decree holder had no preferential right over the amounts collected by a receiver, though the receiver was appointed to collect rents and profits from mortgage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ITO and any other person, not being the defaulter, claiming to be interested in such property, shall be determined by such court. In the two proceedings now under consideration, the courts concerned were informed of the tax arrears and the attachment and were called upon to decide the priority in payment. The applications were, therefore, properly made by the TRO to determine the priority between the ITO and the bank or creditor and direct payment out to him, as in the case of attachment and sale of any other movable property in which the TRO has a right to pay the sale proceeds to the ITO in satisfaction of the income-tax arrears. The application was, therefore, in order and maintainable. It may also be pointed out that the applicant is, in fact, the. Union of India represented by the TRO and, therefore, no question of maintainability can arise. We might also consider the question with reference to the court's jurisdiction to order payment out. It has been held by the Full Bench of this court in Manickam Chettiar v. ITO [1938] 6 ITR 180, that the court had an inherent power under s. 151 of the CPC to make an order on the application for payment out of monies towards arrea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he suit C.S. No 84 of 1973 when the suit was filed for enforcing the mortgage dated December 22, 1969. Accordingly, it was claimed that the original mortgage in favour of the bank was on August 2, 1965, and the subsequent mortgages on February 10, 1967, January 20, 1968, and December 22, 1969, were only for modifying the facilities granted or increasing the limits granted. In the circumstances, even if the attachment were to date back under r. 51 of the Second Schedule to the I.T. Act, 1961, it cannot affect the defendants liability in the suit to the bank. The Revenue filed a counter to these allegations and contended that the mortgages dated August 2, 1965, February 2, 1967, and January 20, 1968, referred to by the plaintiff were no longer subsisting mortgages and by virtue of the equitable mortgage created on December 22, 1969, the earlier mortgages have been discharged and no debts under those mortgages were subsisting in law. The only subsisting mortgage was the one dated December 22, 1969, and it is to recover the amount due under it that the suit was filed. In the circumstances, therefore, the claim of the plaintiff bank that the mortgage was anterior to the attachment is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction. The question of bona fides or notice of the pendency of the proceedings is relevant only for the applicability of s. 281. But in this case, the Revenue relies, in support of its contention that the transfer is void, on rr. 2, 16, 48 and 51 of the Second Schedule. These rules are applicable to the stage where an assessee had become a defaulter or shall be deemed to be a defaulter within the meaning of ss. 220 and 222 of the Act. Rule 16 provides that where notice has been served on a defaulter under r. 2, the defaulter or his representative in interest shall not be competent to mortgage, charge, lease or otherwise deal with any property belonging to him; and cl. (2) of that rule further stated that where an attachment has been made under the Second Schedule, any private transfer or delivery of the property attached or of any interest therein, shall be void as against all claims enforceable under that attachment. This rule is absolute in terms and, irrespective of the bona fides or otherwise of the transfer, the transaction is void as against claims enforceable under an attachment. This contention of the plaintiff that the transaction was bona fide and that it was witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equent to the attachment made, the question of bona fides or otherwise does not arise. On behalf of the appellant in L.P.A. No.77 of 1980, it was contended that the priority, if any, for recovery of tax to be given to the Government was only in respect of the claims of unsecured creditors and that the claim for priority over secured creditors has not been recognised. We have already noticed that the Supreme Court in the decision in Builders Supply Corporation v. Union of India [1965] 56 ITR 91, had held that the Govt. of India is entitled to claim priority for arrears of income-tax over other debts of unsecured creditors. It was argued that this restriction of the claim for priority over unsecured creditors would necessarily imply that either the State Govt. have no priority claim over secured creditors or that the secured creditors have a priority claim over other unsecured creditors including that of the Government. There could be no doubt and in fact it was not disputed on behalf of the Revenue that if the mortgage is earlier than r. 2-notice, the Revenue has no right to claim priority either under common law or under the provisions of the I.T. Act and the 'Rules. In the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned counsel for the appellant is that the words for the payment of money " is referable only to a simple money decree and a mortgage decree is outside its scope. In one of the earliest judgments in Hart v. Tara Prasanna Mukherji [1885] ILR 11 Cal 718, decided under the provisions of the Code of Civil Procedure, 1882, it was held that a decree upon a mortgage which enables the mortgagee to realise the amount of mortgage debt from the mortgaged properties and from the defendants personally was held to be a decree for the payment of money. The court observed (pp. 729-30) : ".... every decree, by virtue of which money is payable, is to that extent a 'decree for money' within the meaning of the section, even though other relief may be granted by the decree (example, sale of the mortgaged property); and that the holder of such a decree is entitled to claim rateable distribution with holders of decrees for money only." Following this judgment, this court in Kommachi Kather v. Pakker [1896] ILR 20 Mad 107, held that where a decree upon a mortgage directs the mortgagor to pay the mortgage debt is a mortgage within the period fixed by the court and provides that in default the mortgaged pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. 20 or that the validity of the decision of the Full Bench in Vaidhinadasamy Ayyar v. Somasundram Pillai [1905] ILR 28 Mad 473, is in any way affected. We, therefore, agree with the learned single judge who has accepted the contention of the respondent that essentially a mortgage decree is for recovery of money and though the mortgagee is enabled to bring the security to sale in court auction, what he realises ultimately is the amount due under the mortgage. In this view, even mortgage decrees are decrees for payment of money. Thus the embargo on the civil court's power to proceed against the property of the defaulter in execution of decree for payment of money, will also apply to the mortgage decree and to this extent the mortgagee's right to execute the decree is affected. But this does not mean that the priority claim of the mortgagee against the dues of the Government is in any way affected. If the mortgage was created at a time when there were no proceedings pending against the mortgagor under the Act or it was created during the pendency of any proceedings or after the completion thereof but before the service of notice under r. 2 of the Sch. II and the proviso to s. 281 ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e mortgaged property. If the court comes to the conclusion that the mortgage was brought about at a time when there were no proceedings pending against the mortgagor or that it was created during the pendency of any proceeding or after the completion thereof, but before the service of notice, and r. 2 of Sch. II and the proviso to s. 281 have been complied with, then it will proceed with the execution. If, on the other hand, it comes to the conclusion that the mortgage was executed subsequent to r. 2-notice or the proviso to s. 281 has not been complied with, the court will refuse to issue any process against such property since the embargo on the execution court will apply under the latter clause. The question, therefore, will have to be considered by the executing court and the provisions of the I.T. Act cannot be interpreted as in any way directing such an issue to be decided only by the TRO and not by the court. We hold that the two limbs of r. 16(1) of the Second Schedule must be construed together as part of an integrated provision. The first part of the rule forbids any mortgage, charge, lease, or other dealing by the defaulter of the property, except with the TRO's permis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rials to hold that there was no mortgage created on December 22, 1960. Hence, the learned judge was not justified in directing the appellant to apply to the TRO under r. II of the Second Schedule and establish the validity of his claim as a secured creditor on the basis of the mortgage dated December 22, 1960., We accordingly set aside the decree of the learned judge and restore the order of sale made by the trial court. That leads us to the question of the constitutional validity of the provisions challenged. Though in the affidavit filed in support of the application the vires of rr. 2, 16 and 51 of Sch. II and s. 281 of the Act were raised, the learned counsel did not advance any argument on the validity of rr. 2 and 16 and s. 281 and, therefore, we proceed on the assumption that those provisions are valid. Rule 16(2) of the Second Schedule provides that where an attachment has been made under this Schedule, any private transfer or delivery of the property attached or of any interest therein and any payment to the defaulter of any debt, dividend or other monies contrary to such attachment, shall be void as against all claims enforceable under the attachment. In other words, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the tax imposed being evaded. Even if it were to be held that the impugned rule would not come under entry 82, Parliament would have authority under entry 97 of List I. That confers residuary powers of legislation on Parliament to enact legislation on all matters not enumerated in Lists II and III. Article 248 also provides that where a subject of legislation is not enumerated, it must belong to Parliament. Therefore, the question of legislative competency of Parliament to enact r. 51 could not arise. We are, therefore, unable to accept the contention of the learned counsel that r. 51 either impinges any of the appellant's fundamental rights or that it is in excess and, therefore, not within the ancillary power to provide for effective collection. Since even during the pendency of the suit, C.S. No. 84 of 1973, the question of priority of payment has arisen and the decree of the High Court is not attacked in any collateral proceedings, we do not think that any question relating to the validity of the decree of the High Court or the High Court Decrees Validation Act could arise in this case. In the result, L.P.A. No. 77 of 1980 is allowed with costs. Application No. 3832 of 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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