Al Wakeelo
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Your Digital Lawyer, Always on Duty
Initializing Secure Chambers
Petitioner: COLLECTOR OF TIRUCHIRAPALLI VS Respondent: TRINITY BANK LTD.Honorable Justice JAGADISANR. Gopalaswami Iyengar,K. S. Champakesa Iyengar
1963 P T D 68
1963 P T D 68
[Madras India]
Before Rajagopalan, Jagadisan and Srinivasan, JJ
COLLECTOR OF TIRUCHIRAPALLI
versus
TRINITY BANK LTD.
Appeal against Order No. 120 of 1957 ; C. R. P. No. 512 of 1957 ; Appeal against Order No. 103 of 1957 ; and C. R. P. No. 443 of 1957, decided on 3rd March 1961.
Income‑tax Act (XI of 1922)----
---- S. 46(2)‑Recovery of tax Arrears of tax‑Priority‑Amount collected and deposited into Court by receiver appointed in suit by mortgagee against assessee‑ Right of Collector or Income‑tax Officer to require Court to pay up amount deposited in Court.
In a suit by a mortgagee against the mortgagor, the mort gagee obtained a preliminary decree and on his application the Court appointed a receiver to collect the rents and profits from the mortgaged property. The Collector to whom a certificate of arrears was forwarded in regard to income‑tax assessed on and due from the mortgagor, applied to the Court for payment of the arrears out of the amounts collected by the receiver and deposited to the credit of the suit. The assignee of the decree opposed the Collector's application
Held, that the decree‑holder had no preferential right over the amounts collected by the receiver and the Collector was entitled to be paid the arrears of tax out of the amounts collected by the receiver.
A compromise decree was passed in a suit in terms of a razi nama entered into between the parties to the suit, whereby the judgment‑debtor had to pay certain amounts to the decree- holders. In the course of the execution proceedings of the decree a receiver was appointed on the application of the decree‑holders to realise the rents and profits from the property charged for payment of the decretal amounts. The receiver collected the sum of Rs. 3,100 and deposited it in Court. The judgment- debtor was assessed to tax and a sum of Rs. 30,000 was due from him by way of arrears of tax. The Income‑tax Officer applied to the Court for payment of the sum deposited in Court towards the tax liability of the judgment‑debtor. The decree‑holders objected :
Held, that the Income‑tax Officer was entitled to be paid the amounts deposited in Court by the receiver.
The order of appointment of a receiver in an action of a simple mortgagee or an equitable mortgagee to recover the mortgage amount with a direction to him to bring in the rents and profits from hypotheca to the credit of the suit without an order of appropriation or allocation in favour of the mortgagee does not amount to a charging order in favour of the mortgagee. Independently of the order appointing a receiver a simple mortgagee or an equitable mortgagee or a charge‑holder in respect of an immovable property has no security over the rents and profits accruing from that property. Whatever disabilities the mortgagor may suffer by the receiver taking possession of the hypotheca as the hand of the Court, no special rights are conferred in favour of the mortgagee by reason only of such appointment.
The judgment‑creditor can have no rights in the receiver's collections unless and until there is an order of appropriation towards the mortgage debt by the Court. Till then the fund in Court is in medio. It is not correct to view all money in the hands of the receiver as necessarily appropriated towards the satisfaction of the decree. The Court has the power to give directions to him in respect of the disbursement of the moneys and in proper circumstances such directions may also be for the benefit of the judgment‑debtor. Depositing the money collected by the receiver to the credit of the suit cannot have the effect of appropriation or allocation of the amount towards the discharge of the decree in the suit.
In re Potts (1893) 1 Q B 648 ; In re Pearce (1919) 1 K B 354 (C A) and Soniram Rameshwar v. Mary Pinto (1934) 2 I T R 58 (Rang.) fol.
Maharaja of Pithapuram v. Gokuldas Goverdhandas (1931) I L R 54 Mad. 565, Arunachalam Chettiar v. Ramanathan Chettiar (1935) 41 L W 495 and Mohideen v. Nagu Bai (1939) I L R (1939) Mad. 496 overruled.
Sambasiva Chettiar v. Secretary of State for India in Council (1940) 1 M L J 429 and Income‑tax Officer, Salem v. Indian Insurance and Banking Corporation Ltd. (1953) 24 I T R 334 (Mad.) approved.
Ma Joo Tean v. Collector of Rangoon (1934) I L R 12 Rang. 437, Aga C. Ally Ramzan Yezdi v. Balthazar & Son Ltd. (1936) I L R. 14 Rang. 282 ; Adikesavalu v. State of Madras 1957 I L R 1957 A P 505 and Paramasiva Pillai v. Ramasivami Chettiar (1933) I L R 56 Mad. 915 dissented from.
Rameshwar Singh v. Chunnilal Shaha (1920) 1 L R 47 Cal. 418 distinguished.
Adikesavalu v. State of Madras (1957) 1 L R 1957 A P 505 ; Aga G. Ally Ramzan Yezdi v. Balthazar & Son Ltd. (1936) I L R 14 Rang. 292 ; Arunachalam Chettiar v. Ramanathan Chettiar (1935) 41 L W 495 ; Gayanoda Bala Dassee v. Butto Kristo Bairagee (1906) I L R 33 Cal. 1040 ; In re : Henley & Co., (1878) 9 Ch. D 469 ; Income‑tax Officer, Salem v. Indian Insurance and Bonking Corporation Ltd. (1953) 24 I T R 334 ; Jagannatha Rao v. Maharaja of Pittapur (1935) 69 M L J 534 ; Kaluram 4garwalla v. Shayam Sundar Singh (1948) I L R 27 Pat. 876 ; Krishnaswamy Mudaliar v. Official Assignee, Madras (1903) I L R 26 Mad. 643 ; Maharaja of Pithapuram v. Gokuldas Goverdhandass (1931) I L R 54 Mad. 565 ; Ma Joo Tean v. Collector of Rangoon 1934 1 L R 12 Rang. 437 ; Manickam Chettiar v. Income‑tax Officer, Madura (1938) 6 I T R 180 ; Mohideen v. Nagu Bai (1939) I L R 1939 Mad. 496 ; Orr v. Muthia Chetti (1894) 1 L R 17 Mad. 501 ; Penny v. Todd (1878) 26 W R 502 ; Paramasivan Pillai v. Ramasamy Chettiar A I R 1933 Mad. 570; In re : Pearce, (1919) 1 K B 354 ; Ponnu Chettiar v. Sambasiva Aiyar (1933) 1 L R 56 Mad. 546 ; In re: Potts, Ex parte Taylor (1893) 1 Q B 648 ; Prudential Assurance Co. Ltd. v. Calstaum I L R (1940) 1 Cal. 197 ; Sri Raja Papamma Rao v. Sri Vira Pratapa H. V. Ramachandra Razu (1896) I L R 19 Mad. 249 P C ; Rameshwar Singh v. Chunnilal Shaha (1920) I L R 47 Cal. 418 ; Ram Kinkar v. Satya Charan (1939) L R 66 I A 50 ; Ramiah Aiyar v. Gopalier (1918) I L R 41 Mad. 1053 ; Rex v. Curtis (1749) 145 E R 724 ; Rex v. Wells 16 East. 278 : Sambasiva Chettiar v. Secretary of State for India in Council (1940) 1 M L J 429 ; Sir William Herbert's case (3 Rep. 12 b.) ; Soniram Rameshwar v. Mary Pinto (1934) 2 I T R 58 ; Vibhuda Priya v. Lakshmindra (1927) 1 L R 50 Mad. 497 P C and Wilkinson v. Gangadhar (1871) 6 Beng. L R 486 ref.
V. K. Thiruvenkatachari (Advocate‑General), C. S. Rama Rao Sahib and S. Ranganathan for Appellant (in A. A. O. No. 120 of 1957).
R. Gopalaswami Iyengar, K. S. Desikan and K. Raman for Appellant (in A. A. O. No. 103 of 1957).
K. S. Champakesa Iyengar, R. Ramamurthi Iyer, P. S. Srisailam and V. S. Ramakrishnan for Respondent (in A. A. O. No. 120 of 1957).
C. S. Rama Rao Sahib for Respondent (in A. A. O. No. 103 of 1957).
JUDGMENT
JAGADISAN, J.‑O. S. No. 268 of 1953 on the file of the Sub- Court, Tiruchirapalli, was a suit on a mortgage dated October 30, 1946, in which a preliminary decree was passed‑ on December 9, 1954. The decree‑holder applied for the appointment of a receiver in I. A. No. 12 of 1955 in respect of the mortgaged property to collect the rents and profits therefrom. By order of Court dated February 8, 1955, a receiver was appointed. The judgment‑debtor in that suit was assessed to income‑tax for the year 1955‑56. On February 13, 1956, the First Additional Income‑tax Officer, Tiruchi, issued a certificate under section 46 (2) of the Indian Income‑tax Act for the amount of tax due from the assessee and forwarded. it to the Collector of Tiruchi. In I. A. No. 245 of 1956 the Collector applied to the Sub‑Court of Tiruchi for payment of the sum of Rs. 235‑10‑0, by the issue of a cheque in favour of the First Additional Income‑tax Officer, Tiruchi, from and out of the receiver's collections deposited to the credit of the suit. This application was opposed by the assignee decree‑holder who bad by then come upon the scene on the ground that the income from the hypotheca collected by the receiver formed accretions to the hypotheca, and that such income was liable to be proceeded against in case the corpus was insufficient to satisfy the mortgage decree in full. The Collector of Tiruchi contended that the amount due to the Government by way of income‑tax levied on the judgment‑debtor was a "Crown" debt, the payment of which can be enforced with a right of priority over other unsecured debts which may be owing by the assessee to others. The learned Subordinate Judge of Tiruchirapalli, following the decision reported in Paramasivan Pillai v. Ramasamy Chettiar ((1933) I L R 56 Mad. 915), held that, though the mortgagee decree‑holder can proceed against the income realised by the receiver only after exhausting his remedies against the hypotheca, the Government will have no right to proceed against such income at the present moment as the mortgage debt still remains undischarged. The learned Subordinate Judge was of the opinion that the Govern ment can proceed only against the surplus that may be left in Court after the mortgage decree was fully satisfied. C. M. A. No. 120 of 1957 has been preferred by the Collector of Tiruchira palli against the said order of the learned Subordinate Judge.
The Collector has also preferred alternatively C. R. P. No. 512 of 1957 against the same order by way of abundant caution, lest it should be held that the order of the Court below is not appealable. C. M. A. No. 120 of 1957 and C. R. P. No. 512 of 1956 therefore go together raising the question, whether the Collector of Tiruchirapalli is entitled to payment of the sum of Rs. 235‑10‑0 from and out of the receiver's deposit to the credit of the suit, O. S. No. 268 of 1953, Sub‑Court, Tiruchira palli.
In O. S. No. 76 of 1948 on the file of the Sub‑Court, Tirunelveli, a decree in terms of a razi nama entered into between the parties to the suit was passed on April 18, 1952. The third defendant in that suit was Rao Bahadur P. Muthuswami Reddiar. It is not necessary to refer to the nature of the suit or the reliefs prayed for therein, or to all the terms of the compromise between the parties. It is sufficient to refer to the following clauses in the compromise decree :
"(ii) That the third defendant do pay first plaintiff Rs. 1,00,000 (Rs. one lakh) with interest at 3J per cent. per annum from this date by October 17, 1952, besides the sum of Rs. 50,000 paid this day April 18, 1952.
(iii) That the third defendant do pay second plaintiff Rs. 1,00,000 (Rs. one lakh) with interest at 3J per cent. per annum from this date by October 17, 1952, besides the sum of Rs. 50,000 paid this day April 18, 1952 . . .
(vi) That in case of default in payment of the amounts due by the third defendant by October 17, 1952, the plaintiffs shall execute this decree and realise from the third defendant the respective amounts so due with subsequent interest thereon at six per cent. per annum, i.e., from October 17, 1962, the date of payment, and that the properties in Alanganeri (Schedules I to IXB) belonging to the third defendant shall be a charge for the realisation of the said amounts and the plaintiffs Nos. I to 3 shall recover the same by enforcing the charge in this suit."
In the course of execution proceedings of this decree the decree‑holder applied in E. A. No. 73 of 1955 for the appoint ment of a receiver to take possession of the charged properties and to collect the rents and profits therefrom. The receiver realised from the charged property a sum of Rs. 3,100 and deposited it in Court. The third defendant in the suit was assessed to income‑tax, and a sum of Rs. 30,000 was due from him by way of arrears of income‑tax levied. The Income‑tax Officer, Tirunelveli, applied in E. A. No. 423 of 1956 to the Sub -Court, Tirunelveli, for the payment out of this sum of Rs. 3,100 in Court deposit towards the adjustment of the tax liability of the third defendant. Plaintiffs Nos. 1 to 3, the decree‑holders, objected to this payment out and resisted the application. Plaintiffs Nos. I and 2 themselves filed E. A. No. 350 of 1955 on October 18, 1955, for the issue of a cheque for the sum of Rs. 3,100 in their favour on the ground, that the receiver's collections should enure in their favour. This application was opposed by the Income‑tax Officer, Tirunelveli, who, as stated already, claimed the amount of Rs. 3,100 in Court deposit as due and payable to the Government which had a priority right in respect of the said amount. These two applications were heard together by the learned Subordinate Judge of Tirunelveli, who, following the decisions of this Court in Sambasiva Chettiar v. Secretary of State for India in Council ((1940) 1 M L J 429), and Income‑tax Officer, Salem v. Indian Insurance and Banking Corporation Ltd. ((1953) 24 I T R 334 (Mad.)), held that the Income‑tax Officer was entitled to the payment out as prayed for by him. He accordingly allowed E. A. No. 423 of 1956 and dismissed E. A. No. 350 of 1955. The Petitioners in E. A. No. 350 of 1955 have preferred C. M. A. No. 103 of 1957 in this Court, challenging the correctness of the decision of the learned Subordinate Judge in dismissing their application. They have also filed C. R. P. No. 443 of 1957 against the order in E. A. No. 423 of 1956 issuing a cheque in favour of the Income- tax Officer, Tirunelveli. C. M. A. No. 103 of 1957 and C. R. P. No. 443 of 1957 therefore raise the question, whether the Income‑tax Officer, Tirunelveli, is entitled to priority in the matter of payment out of the sum of Rs. 3,100 lying in Court deposit from and out of the realisations by the receiver appointed in execution of the charge decree in O. S. No. 76 of 1948, Sub -Court, Tirunelveli.
The two civil miscellaneous appeals and the two civil revision petitions referred to above came on for hearing at the first instance before Basheer Ahmed Sayeed, J., who passed the following order on February 12, 1959
"These civil miscellaneous appeals raise the question as to whether the rents and other profits collected by a receiver in a mortgage action could be claimed by the income‑tax authorities as against the mortgagee. It is represented that there is no settled opinion about this and that there is actual conflict of decisions on the point as to who exactly will be entitled to the collections made by a receiver in such a mortgage action. The latest decision in Adikesavalu v. Sate of Madras I L R 1957 A P 505 seems to be in conflict with earlier decisions of two single Judges of this Court. There is no Bench decision of this Court on the point involved. The learned counsel on both sides request that this matter may be referred to a Bench 5o that the position may be once for all resolved and the conflict set at rest. These matters will, therefore, be placed before his Lordship the Chief Justice for necessary orders as to posting."
Thereafter the appeals and the revisions were posted before a Division Bench consisting of the learned Chief Justice and Veeraswami, J. and their Lordships directed the posting of the cases before a Full Bench by their order dated April 28, 1960.
In both these cases the claim of the government is one for recovery of the amount of income‑tax levied and due and payable by the assessee who is the judgment‑debtor in civil actions instituted against him by his other creditors. Such tax liability is undoubtedly a debt due to the government by the subject on whom the tax has been imposed, and such a debt often goes by the name of a "Crown debt". A debt due to the sovereign government of the land carries with it a paramount preferential right to recover and realise the debt from the person liable to pay, the claim of the other creditors being postponed till after the sovereign authority obtains payment in full. It is now settled law that the Crown or the sovereign authority over the territory has priority, over creditors of equal degree, to payment out of the assets of a debtor which are distributed by a receiver or an administrator.
"It is an incontrovertible rule of law that where the King's and the subject's title concur the King's shall be preferred"
In re : Henley & Co. ((1878) L R 9 Ch. D 469, 481) and Rex v. Wells (16 East 278, 282).
This rule may be said to be the outcome of the maxim salus populi suprema lex (regard for the public welfare is the highest law). It is but natural that a debt due to the Crown, as repre senting the public at large, should be preferred to the debt of a single creditor. But this rule of priority in favour of the Crown for the realisation of its dues can only prevail and be enforceable as between unsecured creditors of equal degree, there being no question of any lien, charge or mortgage in favour of one or other of such creditors. The priority of the Crown cannot rank as against a secured creditor so as to deprive him of his security or to affect or injure his rights as such secured creditor.
In Soniram Rameshwar v. Mary Pinto ((1934) 2 I T R 58 (Rang.).) Leach, J., as he then was, held that where there are funds in Court belonging to the debtor the Court can order payment of a Crown debt due by the debtor on the application of the Crown. In that case the suit was one for recovery of an amount due on a mortgage. A receiver was appointed to take charge of the mortgaged premises and to collect the rents therefrom. The defendant was indebted to the Crown to the extent of Rs. 29‑5‑0 due under the Indian Income‑tax Act. The receiver who collected the rents of the mortgaged premises had sufficient monies in his hand to pay the amount of income‑tax due by the defendant. The Commissioner of Income‑tax applied for an order directing the receiver to pay him the sum of Rs. 29‑5‑0. The learned Judge quoted the following observation of Parker C. B. in Rex v. Curtis ((1749) 145 E R, 724) ;
"By the common law the King has a prerogative of prefer ence in payment to all his subjects, and to be first satisfied ; the reason of it is given in Sir William Herbert's case (3 Rep. 12 b) ; Quia thesaurus Regis est pacis vinculum et bellorum nervi.
"This preference, which the King had by the Common Law, was the foundation of Magna Charta, c. 18, which was only declaratory of the Common Law."
At page 59 the learned Judge observed :
"The right to priority has received recognition in India, as far as unsecured creditors are concerned."
In Manickant Chettiar v. Income‑tax Officer, Madura South ((1938) 6 I T R 180 (Mad.)), a Full Bench of this Court, consisting of Leach, C. J., Varadachariar and Mockett, JJ., held that the Crown is entitled to prior payment over all unsecured creditors and that there was no reason why the Crown should not be entitled to apply to the Court for an order directing its debt to be paid out of monies in Court belonging to the debtor without having to file a suit. In that case one Manickam Chettiar obtained a money decree against one Govinda Rao, and in execution thereof attached and brought to sale some movable properties belong ing to the judgment‑debtor. The judgment‑debtor was in arrears in the matter of payment of income‑tax levied upon him and the Income‑tax Officer applied to the executing Court under section 151 of the Code of Civil Procedure, for an order directing the payment out to him from the sale proceeds, after the sale had taken place, of the amount due by the judgment‑debtor for arrears of income‑tax. The Full Bench held that the Crown was entitled to priority in respect of arrears of income‑tax due to it, and the demand of the Income- tax Officer was not open to question. It was contended before the Full Bench on behalf of Manickam Chettiar, the decree‑holder, who was pitted against the claim of the Income‑tax Officer, that the attachment effected on the property brought to sale in execution of the decree placed him in the position of a secured creditor. This contention was negatived in view of a decision of a Full Bench of this Court in Krishnaswami Mudaliar v. Official Assignee, Madras ((1903) I L R 26 Mad. 643), Leach, C. J., specifically referred to his decision in the Rangoon High Court reported in Soniram Rameshwar v. Mary Pinto and observed thus (1938) 6 I T R 180, 184 (Mad.)
"I had occasion to consider this question in the case of Soniram Rameshwar v. Mary Pinto (1934) 2 I T R 58 (Rang.) when sitting as a Judge of the Rangoon High Court, and, following the decision of Sale, J., in Gayanoda Bala Dassee v. Butto Kristo Bairagee (1906) I L R 33 Cal. 1040 held that inasmuch as the Crown has priority over unsecured creditors in the payment of debts the Court can, on application and without a formal attachment being issued, order the payment of a Crown debt due by the debtor where there are funds in Court belonging to the debtor. The District Munsif referred to this decision in his order. The order which I passed in that case was passed by consent, and the only arguments were those addressed to the Court on behalf of the Crown, but the question has been fully argued before us today, and I see no reason for changing the opinion there expressed."
There can thus be no doubt that the Income‑tax Officers in both the cases will be entitled to be paid out the amounts of tax due from the respective debtors from whose properties the respective receivers have collected the rents and profits and deposited them into Court, if the fund in the Court is not already burdened with any lien or charge or mortgage in favour of the decree‑holders or not earmarked or appropriated for the benefit of the decree‑holders at whose instance the receivers were appointed. What is the character of the money realised by the receiver in the perception of rents and profits of the hypotheca from the charged property in his possession in a case where he is appointed in a suit commenced by the mortgagee or the charge‑holder for the recovery of the amounts due to him ? The answer to this question will afford a complete solution of the problem now before us. If the appointment of a receiver in an action to enforce a mortgage or a charge cannot and does not enlarge the rights of the creditor by augmenting his security or by conferring further rights in his favour than what was created by the parties themselves under the terms of their contract or what enures in his favour by the operation of the substantive law governing the contract, the creditor cannot put forward any special right in preference to other simple money creditors of his debtor. In this view of the matter any debt due by the debtor to the Crown will of course have priority over the claims of all the other creditors of the debtor inclusive of the creditor who made the properties custodia legis by the appointment of a receiver in enforcement of a mortgage or charge over the corpus of the properties. But if it were to be held that a receiver appointed at the instance of a mortgagee or charge‑holder in the course of his realisation of any amount due under a mortgage or charge functions only for the benefit of the mortgagee or charge‑holder and that the rents and profits emanating from the hypotheca and the charged property are also stamped with security in favour of the creditor he alone will be entitled to appropriate and adjust them towards his dues even in preference to a Crown debt, as the Crown has no priority over the secured claim against the debtor.
We shall first refer to the decisions cited at the Bar before dealing with the question of the legal effect of the appointment of a receiver in an action to enforce a mortgage or a charge. In Ma Joo Tean v. Collector of Rangoon ((1934) I L R 12 Rang. 437) a mortgagee obtained a charge mortgage decree against his mortgagors. During the pendency of the suit a receiver was appointed by the Court at the instance of the mortgagee. The receiver had in his hands monies representing rents collected by him. The Collector of Rangoon claimed a sum of Rs. 1,029, being the amount of forfeiture imposed under section 19‑G of the Court Fees Act, from the defendants and applied to the Court for payment of the sum out of the rents. A Division Bench of the Rangoon High Court, Sir Arthur Page, C. J. and Ba U. J., held that the rents and profits arising out of mortgaged land in the hands of a receiver prima facie are not sums payable to the mortgagor, but form part of the mortgaged property upon which the debt due to the mortgagee was secured, and that the Crown is not entitled to be paid such rents and profits in respect of a debt due by the mortgagor to Government in priority to the party entitled to it, viz., the mortgagee decree- holder. The mortgage in the Rangoon case was in form an English mortgage, under the terms whereof the rents and profits arising out of the hypotheca formed part of the property hypothecated. The learned Chief Justice at page 442 referring to the form of the mortgage observed thus
"In my opinion…
Read the unabridged text and precedent citation network on Al Wakeelo Legal Research Platform.