Dena Bank Vs. Bhikhabhai Prabhudas
Parekh & Co. & Ors [2000] INSC 252 (25 April 2000)
R.C.Lahoti, S.R.Babu
R.C. Lahoti, J.
On 12.4.1972 Dena Bank (hereinafter the Bank
for short), who is appellant before us, filed a suit for recovery of a sum of
Rs.19,27,142.29 paise with future interest and costs against a partnership firm
namely, M/s Bhikhabhai Prabhudas Parekh & Co. and its partners. The suit
was based inter alia on a mortgage by deposit of title deeds made by the
partnership firm and its partners on 24.4.1969. The suit sought for enforcement
of the mortgage security. During the pendency of the suit some of the
defendants expired and their legal representatives were brought on record.
Three tenants in the mortgage property were also joined as parties to the suit
so as to eliminate the possibility of their causing any hindrance in the
enforcement of the charge created by the equitable mortgage of the property in
favour of the Bank. During the pendency of the suit the State of Karnataka
tried to attach and sell the mortgaged properties for recovery of sales tax
arrears due and payable by the partnership firm, the first defendant. The
arrears of sales tax related to the assessment years 1957-58, 1966-67 to
1969-70 under the State Act and to the assessment years 1958-59 to 1964-65 and
1967-68 to 1969-70 under the Central Act. It appears that there was a court
receiver appointed who tried to resist the States attempt to attach and sale
the mortgaged property by preferring objections but he was unsuccessful. It appears
(as is stated by the Trial Court in para 4 of its judgment) the State of
Karnataka itself purchased the property in auction held on 30.4.1976. Upon a
prayer made by the Bank the State of Karnataka was impleaded as a defendant in
the suit. The Trial Court found all the material plaint averments proved and
the Bank entitled to a decree. The charge created on suit properties by
mortgage was also held proved. The trial court also held that the State could
not have attached and sold the said properties belonging to partners for
recovery of sales tax dues against the firm.
However, the suit was directed to be
dismissed as in the opinion of the Trial Court, Shri R.K. Mehta the Chief
Manager and Power of Attorney holder of the Bank was not proved to be a person
duly authorised to sign and verify the plaint and institute the suit.
The Bank preferred an appeal before the High
Court.
The High Court has held Shri R.K. Mehta to be
a person duly authorised to sign, verify and present the plaint. During the
course of hearing of the appeal, on 27.1.1992 a compromise was entered into
between the Bank and the borrowers (firm and the partners). The settlement as
arrived at between the Bank and the borrowers provided for a mode of payment of
the decretal amount as agreed upon between the parties. Clauses 7 and 8 of the
Deed of Compromise provide as under:- (7) That the defendant-respondent
Nos.1-4, 6, 8-12, 14 & 15 are at liberty to sell the plaint schedule
property either in portion or in one lot within a period of 2 years from the
date of the decree. The plaintiff-appellant shall co-operate with the
defendants-respondents in such sale or sales and the price (sale proceeds)
shall be credited by the defendants-respondents to the account of the
plaintiff-appellant Bank and the plaintiff-appellant shall thereafter give
their consent and no objection to such sale or sales.
(8) The plaintiff-appellant shall be entitled
to refund of the Court fee paid on the appeal memo and an appropriate direction
may be issued by the Honble Court.
As the State of Karnataka was not a party to
the compromise, the appeal had to be decided as contested insofar as the rights
of the State are concerned. On behalf of the Bank, as also on behalf of the
borrowers who supported the Bank in this regard, two pleas were raised.
Firstly, it was submitted that the right of
the State to realise its arrears of tax could not take precedence over the
right of the Bank to enforce its security, it being a secured creditor.
Secondly, it was submitted that the property mortgaged in favour of the Bank
was the property belonging to the partners while the arrears of sales-tax
related to the partnership firm which was assessed as a legal entity; the
arrears of tax could be recovered from the assets of the partnership firm and
not by proceeding against the property of the individual partners. Both the
contentions were repelled by the High Court. While recording the compromise and
passing a decree in terms thereof by its judgment dated 3.8.1992 the High Court
has excluded clauses (7) and (8) aforesaid being illegal and not enforceable
against the State. Accordingly the suit filed by the Bank has been decreed by
the High Court superseding the judgment and decree of the Trial Court. The
operative part of the decree passed by the High Court reads as under:- We have
already held that the sales tax arrears due to the State from the first
respondent- partnership, shall have preference over the plaintiffs claim.
Therefore, we accept the compromise except Clauses 7 and 8 and other terms which
affect the preferential claim of the State to recover Sales Tax arrears by sale
of the suit properties, and decree the suit of the plaintiff in terms of the
compromise subject to exemption as stated above, and subject to the condition
that the sales tax arrears including the penalty, if any, due under the Sales
Tax Act from the 1st respondent and its partners shall have preference over the
plaintiffs claim, and the plaintiff shall have to first pay the amount
recovered during the course of execution to the State towards the sales tax
arrears and the other amount due under the Sales Tax Act from the 1st
respondent and its partners and thereafter the plaintiff is entitled to adjust
the remaining amount towards the amount due under the decree.
On the basis of the submission made by Sri
K.R.D. Karanth and the learned Advocate General, we further direct that though
the State has a preferential claim, the right to recover the amount is assigned
to the plaintiff on condition that the amount recovered shall first be paid
towards the arrears of sales tax plus penalty, if any, under the Sales Tax Act
and then adjust the balance amount if any towards the amount due under the
decree.
The appeal is allowed. The judgment and
decree of the trial Court are set aside. The suit of the plaintiff is decreed
for a sum of Rs.25 lakhs as per the terms of the compromise subject to
exceptions and conditions specified above. The amount deposited by the receiver
into the Court upto this date shall be paid over to the plaintiff. The period
of six months from today is fixed for redemption. If the contesting respondents
fail to discharge the decretal amount, the plaintiff shall bring the property
for sale immediately on the expiry of six months and complete the execution
within a period of one year from today. In the event the contesting respondents
pay the decretal amount within the aforesaid stipulated period, the State will
be at liberty to recover its sales tax arrears with penalty, if any, under the
Act, by sale of the suit schedule properties.
As far as the plaintiff and the contesting
respondents are concerned, they have compromised and in the compromise they
have agreed to bear the respective costs through out. As far as the State is
concerned, it is one of the defendants in the suit and it is one of the
respondents in this appeal.
The trial court also has directed the parties
to bear their own costs. Further, the State is benefited by getting its right
of preference adjudicated in a suit filed by the Bank.
Under these circumstances, we order no costs
in this appeal as far as the State is concerned.
The Bank has come up in appeal by special
leave to this Court feeling aggrieved by the decree of the High Court to the
extent to which it recognises the right of the State to proceed against the
suit property and that too in preference to the Banks right to proceed against
the mortgaged property for realisation of its dues.
We have heard the learned counsel for the
Bank and the learned counsel for the partnership firm and its partners, i.e.,
the borrowers. There has been no appearance on behalf of the State of Karnataka
though served.
Two questions arise for consideration.
Firstly, whether the recovery of sales tax dues (amounting to crown debt) shall
have precedence over the right of the Bank to proceed against the property of
the borrowers mortgaged in favour of the Bank. Secondly, whether property
belonging to the partners can be proceeded against for recovery of dues on
account of sales-tax assessed against the partnership firm under the provisions
of the Kartanaka Sales Tax Act, 1957.
What is common law doctrine of priority or
precedence of crown debts? Halsbury, dealing with general rights of the crown
in relation to property, states where the Crowns right and that of a subject
meet at one and the same time, that of the Crown is in general preferred, the
rule being detur digniori (Laws of England, Fourth Edition Vol.8 para 1076 at
page 666). Herbert Brown states Quando jus domini regis et subditi concurrunt
jus regis praeferri debet - Where the title of the king and the title of a
subject concur, the kings title must be preferred. In this case detur digniori
is the rulewhere the titles of the king and of a subject concur, the king takes
the whole.where the kings title and that of a subject concur, or are in
conflict, the kings title is to be preferred (Legal Maxims 10th edition,
pp.35-36). This common law doctrine of priority of States debts has been
recognised by the High Courts of India as applicable in British India before
1950 and hence the doctrine has been treated as law in force within the meaning
of Article 372 (1) of Constituiton. An illuminating discussion of the subject
made by Chagla C.J. is to be found in Bank of India to Full Bench decision of
Madras High Court in Manickam as also to two Judicial Commissioners Court
decisions in State for India AIR 1935 Sind 232 and Vassanbai Topandas Without
multiplying the authorities we would straightaway come to the Constitution
Bench decision in M/s Builders The principle of priority of Government debts is
founded on the rule of necessity and of public policy. The basic justification
for the claim for priority of state debts rests on the well recognised
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. (See M/s. Builders Supply Corporation, Supra). In the same case the
Constitution Bench has noticed a consensus of judicial opinion that the arrears
of tax due to the State can claim priority over private debts and that this
rule of common law amounts to law in force in the territory of British India at
the relevant time within the meaning of article 372 (1) of the Constitution of
India and therefore continues to be in force thereafter. On the very principle
on which the rule is founded, the priority would be available only to such
debts as are incurred by the subjects of the Crown by reference to the States
sovereign power of compulsory exaction and would not extend to charges for
commercial services or obligation incurred by the subjects to the State
pursuant to commercial transactions. Having reviewed the available judicial
pronouncements Their Lordships have summed up the law as under :-
1. There is a consensus of judicial opinion
that the arrears of tax due to the State can claim priority over private debts.
2. The common law doctrine about priority of
crown debts which was recognised by Indian High Courts prior to 1950
constitutes law in force within the meaning of Article 372 (1) and continues to
be in force.
3. The basic justification for the claim for
priority of State debts is the rule of necessity and the wisdom of conceding to
the State the right to claim priority in respect of its tax dues.
4. The doctrine may not apply in respect of
debts due to the State if they are contracted by citizens in relation to
commercial activities which may be undertaken by the State for achieving
socio-economic good. In other words, where welfare State enters into commercial
fields which cannot be regarded as an essential and integral part of the basic
government functions of the State and seeks to recover debts from its debtors
arising out of such commercial activities the applicability of the doctrine of
priority shall be open for consideration.
The Constitution Bench decision has been
followed by Bank of India AIR 1967 SC 1831. However, the Crowns preferential
right to recovery of debts over other creditors is confined to ordinary or
unsecured creditors. The Common Law of England or the principles of equity and
good conscience (as applicable to India) do not accord the Crown a preferential
right for recovery of its debts over a mortgagee or pledgee of goods or a
secured creditor. It is only in cases where the Crowns right and that of the
subject meet at one and the same time that the Crown is in general preferred.
Where the right of the subject is complete and perfect before that of the King
commences, the rule does not apply, for there is no point of time at which the
two rights are at conflict, nor can there be a question which of the two ought
to prevail in a case where one, that of the subject, has prevailed already. In
Giles v. Grover 1832 131 ER 563 it has been held that the Crown has no
precedence over a pledgee of goods. In Bank of Bihar v. State of Bihar &
Ors. AIR 1971 SC 1210, the principle has been recognised by this Court holding
that the rights of the pawnee who has parted with money in favour of the pawnor
on the security of the goods cannot be extinguished even by lawful seizure of
goods by making money available to other creditors of the pawnor without the
claim of the pawnee being first fully satisfied. Rashbehary Ghose states in Law
of Mortgage (T.L.L., Seventh Edition, p.386) It seems a Government debt in
India is not entitled to precedence over a prior secured debt. The abovesaid
being the position of law, the High Court has however proceeded to rely on
certain provisions contained in Chapter XVI of Karnataka Land Revenue Act, 1964
as also the provisions contained in Sections 13 and 15 of Kartanaka Sales Tax
Act, 1957 for holding that the arrears of sales-tax would be entitled to a
preference even over the debt secured by mortgage in favour of the appellant
Bank. We would notice the relevant legal provisions.
Chapter XVI of Kartanaka Land Revenue Act,
1964 is titled as Realisation of Land Revenue And Other Public Demand. Sections
158, 190 and 2 (relevant parts thereof) are extracted and reproduced
hereunder:- 158. Claim of State Government to have precedence over all others.
(1) Claim of the State Government to any moneys recoverable under the
provisions of this Chapter shall have precedence over any other debt, demand or
claim whatsoever whether in respect of mortgage, judgment-decree, execution or
attachment, or otherwise howsoever, against any land or the holder thereof.
(2) In all casees, the land revenue for the
current revenue year, of land for agricultural purposes, if not otherwise
discharged, shall be recoverable in preference to all other claims, from the
crop of such land.
(2) Definitions In this Act, unless the
context otherwise requires, - xxx xxx xxx (14) land includes benefits to arise
out of land, and things attached to the earth, or permanently fastened to
anything attached to the earth, and also shares in, or charges on, the revenue
or rent of villages or other defined areas;
190. Recovery of other public demands.- The
following moneys may be recovered under this Act in the same manner as an
arrear of land revenue, namely :- (a) xxx xxx xxx (b) xxx xxx xxx (c) all sums
declared by this Act or any other law for the time being in force to be
recoverable as an arrear of land revenue.
(Emphasis supplied) Section 13 of the
Karnataka Sales Tax Act, 1957 is also relevant. Sub-sections (1) and (3) (to
the extent relevant) are extracted and reproduced hereunder :- Sec.13. Payment
and Recovery of Tax. [(1) The Tax [or any other amount due] under this Act
shall be paid in such manner [in such instalments, subject to such conditions,
on payment of such interest] and within such time, as may be prescribed.] xxx
xxx xxx xxx xxx xxx (3) Any tax assessed, or any other amount due under this
Act from a dealer or any other person may without prejudice to any other mode
of collection be recovered xxx xxx xxx xxx xxx xxx (a) as if it were an arrear
of land revenue, or xxx xxx xxx xxx xxx xxx (emphasis supplied) The Act had
come into force on 1.10.1957. With effect from 18.11.1983 the following
sub-section (2-A) was inserted into the body of Section 15 of the Kartanaka
Sales Tax Act, 1957 by Amending Act No.23 of 1983 and came into force on the
same day:- (2-A) Where any firm is liable to pay any tax or penalty or any
other amount under this Act, the firm and each of the partners of the firm
shall be jointly and severally liable for such payment.
We have seen that the common law doctrine of
priority of crown debts would not extend to providing preference to crown debts
over secured private debts. It was submitted by the learned counsel for the
appellant that under the Karnataka Land Revenue Act as also under the Karnataka
Sales Tax Act the arrears of sales tax do not become arrears of land revenue;
they have been declared merely to be recoverable as arrears of land revenue.
Relying on the observations of this Court in Builders Supply Corporation case
(supra), vide para 28, the learned counsel for the appellant submitted that the
appellant being a secured creditor the arrears of sales tax could not have
preference over the rights of the appellant. It is true that the Constitution
Bench has in Builders Supply Corporation case (supra) observed by reference to
Section 46(2) of the Income-tax Act, 1922 that that provision 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 which provision cannot be said to convert arrears of tax into arrears
of land revenue either. The submission so made by the learned counsel omits to
take into consideration the impact of Section 158(1) of the Karnataka Land
Revenue Act which specifically provides that the claim of the State Government
to any moneys recoverable under the provisions of Chapter XVI shall have
precedence over any other debt, demand or claim whatsoever including in respect
of mortgage.
Section 158 of the Karnataka Land Revenue Act
not only gives a statutory recognition to the doctrine of States priority for
recovery of debts but also extends its applicability over private debts forming
subject matter of mortgage, judgment-decree, execution or attachment and the
like. In the provisions of Hyderabad Land Revenue Act and Hyderabad General Sales
Tax Act had come up for consideration of this Court. This Court had refused to
grant primacy to the dues on account of sales tax over secured debt in favour
of the Bank. A perusal of the relevant statutory provisions quoted in the
judgment goes to show that any provision pari materia with the one contained in
Section 158 of Karnataka Land Revenue Act was not to be found in any of the
local acts under consideration of this Court in Collector of Aurangabad make
the procedure for recovery of arrears of land revenue applicable for recovery
of sales tax arrears. The effect of Section 158 is to accord a primacy to all
the moneys recoverable under Chapter XVI, which will include sales tax arrears.
The learned counsel for the appellant
submitted that sub-section (2-A) of Section 15 of Karnataka Sales Tax Act could
not be given a retrospective operation. This submission is misconceived. A
legislation may be made to commence from a back date, i.e. from a date previous
to the date of its enactment. To make a law governing a past period on a
subject is retrospectivity. A legislature is competent to enact such a law. The
ordinary rule is that a legislative enactment comes into operation only on its
enactment. Retrospectivity is not to be inferred unless expressed or necessarily
implied in the legislation, specially those dealing with substantive rights and
obligations. It is a misnomer to say that sub-section (2A) of Section 15 of the
Karnataka Sales Tax Act is being given retrospective operation. Determining the
obligation of the partners to pay the tax assessed against the firm by making
them personally liable is not the same thing as giving the amendment a
retrospective operation. In Principles of Statutory Interpretation (by Justice
G.P. Singh, Seventh Edition, 1999, at page 369) it is stated :- The rule
against retrospective construction is not applicable to a statute merely
because a part of the requisites for its action is drawn from a time antecedent
to its passing. If that were not so, every statute will be presumed to apply
only to persons born and things come into existence after its operation and the
rule may well result in virtual nullification of most of the statutes. An
amending Act is, therefore, not retrospective merely because it applies also to
those to whom pre-amended Act was applicable if the amended Act has operation
from the date of its amendment and not from an anterior date.
There is, therefore no question of
sub-section (2-A) of Section 15 of the Karnataka Sales Tax Act being given a
retrospective operation. It is prospective. However, it does not make any
difference for the facts of the present case.
The High Court has relied on Section 25 of
the Partnership Act, 1932 for the purpose of holding the partners as
individuals liable to meet the tax liability of the firm. Section 25 provides
that every partner is liable, jointly with all the other partners and also
severally for all acts of the firm done while he is a partner. A firm is not a
legal entity. It is only a collective or compendious name for all the partners.
In other words, a firm does not have any existence away from its partners. A
decree in favour of or against a firm in the name of the firm has the same
effect as a decree in favour of or against the partners. While the firm is
incurring a liability it can be assumed that all the partners were incurring
that liability and so the partners remain liable jointly and severally for all
the acts of the firm. This principle cannot be stretched and extended to such
situations in which the firm is deemed to be a person and hence a legal entity
for certain purpose. The Karnataka Sales Tax Act, with which we are concerned,
also gives the firm a legal status by treating it as a dealer and hence a
person for the limited purpose of assessing under the Sales Tax Act. It was,
therefore, held by a three-judges Bench in Commissioner of Sales Tax, M.P.
& Ors. v. Radhakrishan & Ors. AIR 1979 SC 1588:- ..a firm in a
partnership and a Hindu undivided family are recognised as legal entities and
as such proceedings can only be taken against the firm or undivided family as
the case may be. Neither the partners of the firm nor the members of the Hindu
undivided family will be liable for the tax assessed against the firm or the
undivided Hindu family.
However, this principle would have no
applicability if there be a statutory provision to the contrary. In the case of
Radhakrishan & Ors. (supra), vide para 7 itself, this Court observed :- It
may be noted that S. 276 (d) of the Income-tax Act specifically includes all
partners within the definition of the word firm and a company includes
directors. In Bombay Sales Tax Act, 1959, under Section 18 it is specifically
provided that where any firm is liable to pay tax under the Act, the firm and
each of the partners of the firm shall be jointly and severally liable for such
payment. In the absence of a specific provision as found in Section 18 of the
Bombay Act the partners of the firm cannot be held liable for the tax assessed
on the firm.
A provision similar to the one included in
Section 18 of the Bombay Sales Tax Act has been incorporated in the Karnataka
Sales Tax Act as referred to hereinabove and that is why the partners of the
borrower firm in the case before us cannot take shelter behind the law laid
down by this court in Radhakrishan & Ors. (supra). Here we may also refer
to a two-judge Bench decision of this Court in Third 220 ITR 232 SC in which
provisions of S.188 A Income-tax Act, 1971 have been noticed. S.188 A declares
a partner and his legal representatives jointly and severally liable along with
the firm to pay any tax, penalty or sum payable for the year in which he was a
partner. It was observed that S.188 A explicitly provides what was implicit
hitherto. In the case at hand the partners are being held liable by reason of
Sec.15(2A) of the Karnataka Sales Tax Act, 1957.
The learned counsel for the appellant is
right in submitting that on the day on which the State of Karnataka proceeded
to attach and sell the property of the partners of the firm mortgaged with the Bank,
it could not have appropriated the sale proceeds to sales tax arrears payable
by the firm and defeating the Banks security in view of the law as laid down by
this Court in Commissioner of Sales Tax, the facts and circumstances of the
case, the appellant Bank cannot be allowed any relief. Section 15 (2A) of
Kartanaka Sales Tax Act had come into force on 18.12.1983 while the decree in
favour of the Bank was passed on 3.8.1992 and is yet to be executed. The claim
of the appellant Bank is still outstanding. Even if we were to set aside the
sale held by the State, it will merely revive the arrears outstanding on
account of sales tax to which further interest and penalty shall have to be
added. The amended Section 15 (2-A) of the Karnataka Sales Tax Act shall apply.
The State shall have a preferential right to
recover its dues over the rights of the appellant Bank and the property of the
partners shall also be liable to be proceeded against. No useful purpose would,
therefore, be served by allowing the appeal which will only further complicate
the controversy.
For the foregoing reasons, the appeal is
dismissed though without any order as to the costs in the facts and
circumstances of the case.
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