Builders Supply Corporation Vs. The
Union of India Represented by the Commissioner of  INSC 278 (30 November
30/11/1964 GAJENDRAGADKAR, P.B. (CJ)
GAJENDRAGADKAR, P.B. (CJ) HIDAYATULLAH, M.
CITATION: 1965 AIR 1061 1965 SCR (1) 289
MV 1967 SC 997 (33,34,48) R 1967 SC1581 (19)
R 1967 SC1831 (7) RF 1973 SC 569 (43) RF 1974 SC2009 (3)
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.
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 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....
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.,  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 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),  F.C.R. 40
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.,  A.C. 508 at 526, Purshottam Govindji
Halai v. Shree B. M. Desai, Additional Collector of Bombay & Others, 
2 S.C.R. 887 referred to.
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
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 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. 7,275-90 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 incometax
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 (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 satisfaction 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 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 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 subsection 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 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 Income tax 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)  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
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 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)  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 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
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)  49 I.T.R. 824.
(2)  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 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)  I.L.R. 25 Mad. 457.
(2)  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
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) 1 S.C.R.
(2)  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 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 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)  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,
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 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 GovernorGeneral
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)  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 Incometax 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)  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).
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 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
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
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.
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
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.