Tax Recovery Officer Xvi, New ... vs Punjab & Sind Bank And Others
1986 Latest Caselaw 128 Del

JUDGMENT

M.K. Chawla, J.

1. Punjab & Sind Bank is the plaintiff in a suit for recovery of Rs. 22,76,091.85 against defendant No. 1, M/S. Gold Field Manufacturing Company, and its two partners defendants, Nos. 2. and 3. The suit is under the provision of Order xxxvII of the Code of Civil Procedure. As per the averments, the defendants were allowed the availment of cash credit hypothecation limited to the extent of Rs. 7,50,000 and a bill purchase/discounting limit to the extent of Rs. 3,75,000 on their furnishing and executing the loan documents consisting of demand promissory note, Form No. 106 agreeing that the facility would continue according to the bank's pleasure, Form No. 56 agreeing that the promissory note shall remain as a security with the bank for the repayment of the entire balance amount, Form No. 216 stating that the amounts would not be utilised for any purpose connected with or incidental to that of agriculture, Form No. 219 agreeing to pay interest at 2.05% per annum in addition to the nominal rate, executing the deed of hypothecation agreeing that the borrower's present and future plant and machinery, stock-in-trade lying at the business premises shall remain hypothecated. Defendants Nos. 2 and 3 also created an equitable mortgage by deposit of title deeds of the immovable property known as J-12, Green Park, New Delhi, in favor of the bank as security for repayment of all the loans advanced to the defendant. During the course of business transaction, the defendants failed and neglected to comply with the terms of the advance as a result of which the plaintiff had to file the present suit.

2. Along with the suit, the plaintiff also filed an application I.A. No. 2974 of 1985 under Order 40, rule 1 read with Order 39, rules 1 and 2 of the Code of Civil Procedure. The plaintiff was granted ad interim temporary injunction restraining defendants Nos. 1 to 3 from alienating in any manner or parting with the possession or creating any charge on the property No. J-12, Green Park, New Delhi, as also the hypothecated plant and machinery, etc. In spite of the service of the summons of the suit and the injunction order, the defendants have not filed the written statement so far, even though sufficient time was allowed to them.

3. During the pendency of the present proceedings, the plaintiff moved the present application I.A. No. 2833 of 1985 under section 151 of the Code of Civil Procedure. The plaintiff has alleged that as a security for the due repayment of the entire loan advanced to the defendants, defendants Nos. 2 and 3 mortgaged the immovable property No. J-12, Green Park, New Delhi, unto the plaintiff bank. The plaintiff has now come to know that by public notice published in the Indian Express of March 24, 1984, the said immovable property was sought to be auctioned by the auctioneer, M/s. J. R. Bishesharnath, on behalf of the income-tax authorities, for realisation of the income-tax/wealth-tax due from Shri R. K. Bhalla, defendant No. 2, in the instant case. The said auction has not yet taken place but the income-tax authorities are threatening to sell the said property on any day in the near future. It is also alleged that in the Income-tax Act there is no substantive provision for superseding or overriding claims or rights of a secured creditor as the assessed. The dues of the crown cannot take Precedence over the mortgage or secured creditor. The plaintiff, in these circumstances, cannot be deprived of the corpus of the mortgaged property till its dues are satisfied as it has a charge on the same. Their rights can also not be jeopardised in any manner by any person by enforcing the recovery of its dues against the said immovable property mortgaged unto the plaintiff. It was prayed that in case the hands of the income-tax authorities are not stayed, the plaintiff bank will suffer irreparable loss which could not be compensated in terms of money.

4. The ad interim injunction as prayed for in the application was granted by order dated May 28, 1985.

5. The income-tax authorities have contested the application and have preferred to rely upon the affidavit of Shri D. L. Bhatia, Tax Recovery Officer, New Delhi. A number of preliminary objections have been raised to the maintainability of the present application. Some of them are :

(a) That the Income-tax Act, 1961, is a complete code in itself and provides adequate machinery for redressal of all the grievances and the application filed by the petitioner is, therefore, not maintainable.

(b) That the answering deponent is not a party to the litigation and is discharging his functions statutorily enjoyed under the Income-tax Act and this court is debarred from entertaining such like application.

(c) That pursuant to the attachment effected under the Income-tax Act, the petitioner filed objections against the sale of the attached property which were duly dealt with by the answering deponent. The plaintiff, therefore, could avail of the statutory remedies rather than file the present application.

6. On merits, almost the same objections were repeated except by further alleging that the income-tax dues have a priority over the property alleged to have been mortgaged which in this case was one subsequent to the accrual of rights to the Income-tax Department. The answering deponent is required under the law to realise the Government dues and as such is bound to enforce by way of sale of the immovable property of the defendants. The plaintiff, in these circumstances, has no prima facie case nor the balance of convenience lies in favor of the plaintiff and, as such, the application which is misconceived merits dismissal.

7. After hearing the learned counsel for the parties at length, I am inclined to confirm the order dated May 28, 1985, restraining the Income-tax Department from taking any steps in the sale of the property in dispute. The reasons are not far to seek. It may be that the Income-tax Department is not a party to the present suit nor are they aware of the fact of the creation of a mortgage of the property in dispute by the defendants in favor of the plaintiff at the time of the securing of the loans, but the fact remains that the title deeds of the property in a suit have since been deposited with the plaintiff bank and an equitable mortgage has been created to secure the repayment of the loans advanced to them. Learned counsel for the defendant has laid much stress on the procedure as laid down in Schedule II to the Income-tax Act, 1961, for the recovery of tax due to the Department, in case they are not being paid in the ordinary course of business by the assessed. Much stress is laid on rule 16 which reads as under :

"(1) Where a notice has been served on a defaulter under rule 2, the defaulter or his representative-in-interest shall not be competent to mortgage, charge, lease or otherwise deal with any property belonging to him except with the permission of the Tax Recovery Officer, nor shall any Civil Court issue any process against such property in execution of a decree for the payment of money.

(2) Where an attachment has been made under this Schedule, any private transfer or delivery of the property attached or of any interest therein and any payment to the defaulter of any debt, dividend or other moneys contrary to such attachment, shall be void as against all claims enforceable under the attachment."

8. On the basis of this rule, the submission is that once a notice for the recovery of the dues has been served on the assessed, the objection, if any, has to be decided by the Income-tax Officer concerned of the Department. The civil court, according to the learned counsel, will not come into play or stay the recovery. In support of this contention, the learned counsel placed reliance on a judgment reported as Sriniwas Pandit v. Jagjeet Singh Sawhney [1976] 104 ITR 20. The relevant observation on this aspect are reproduced below (headnote) :

"(i) That the application under section 151 of the Code was competent, though the Commissioner was not a party to the proceedings; and even assuming that it was not competent, the application could be treated as an information of the existence of facts which would make it obligatory on the court to cease further execution of the decree;

(ii) that the effect of rule 16 of Schedule II to the Income-tax Act, 1961, is that as soon as it was brought to the notice of the court that a notice had been issued by the Tax Recovery Officer under rule 2 of the Schedule in relation to the property, it became the duty of the court to desist from any further process for Realizing the money sought to be realised in execution of the decree for the payment of money;

(iii) that, in view of the express provisions of rule 16 of Schedule II, it was not open to the court to adopt the alternative course suggested by the Commissioner viz, to order sale of the property and utilise the sale proceeds firstly for paying the arrears of tax due from the judgment-debtors and then for meeting the liability under the decree."

9. There is no quarrel with the proposition of law laid down in the above-cited authority but it is distinguishable from the facts of the present case. The judgment referred to above did not take into consideration the case where the assessed has already mortgaged his property to a third party at the time of securing loans, etc. It is no doubt true that the Crown or the Sovereign authority has priority over creditors of equal degree, to payment out of the assets of a debtor, but this rule of priority in favor 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 favor of one or the other of such creditors. The priority of the Crown cannot rank as against the secured creditor so as to deprive him of his security or to affect or injure his rights as such secured creditor. Useful reliance can be placed on the observations of the judgment reported as Suraj Prasad Gupta v. Chartered Bank . The following observations are very material and in fact will dispose of the objections of the Income-tax Department :

"In the Income-tax Act itself there is no substantive provision for superseding or overriding the claim or rights of a secured creditor of the assessed. Schedule II mentioned in section 222 contains statutory rules in accordance with which the modes of recovery mentioned in the section have to be exercised. Schedule II clearly, therefore, relates to procedure only and does not deal with substantive rights. It is true that arrears of income-tax can be realised from the person and property of the assessed by following any of the modes mentioned in section 222 of the Act. The provision for recovery of tax by any of the modes specified cannot, in the absence of any specific statutory provision, take away the rights of any third party in whose favor a mortgage security had already been created. When a mortgage is created, a definite right accrues to the mortgagee and he acquires an interest in the very property itself which has been mortgaged to him. This interest cannot be denied to him unless a valid law is made in that behalf and, needless to say, such a law, if made, must not contravene article 31 of the Constitution. I am, therefore, of the opinion that nothing can be read in rule 16 of Schedule II of the Income-tax Act which may have the effect of denying the legal right of a mortgagee or a mortgagee in whose favor a decree for sale under Order XXXIV, rule 5 of the Code, has been passed and that rule 16 must be strictly construed and no extended or wide meaning can be given to the language of rule 16(1). Rule 16 and in particular sub-rule (I) and the expression 'in execution of a decree for the payment of money' occurring therein must be given a restricted meaning. This expression is to be found in various provisions of the Code itself. On an examination of the same, viz-a-vis, certain other relevant provisions of the Code, it will, to my mind, be clear that the expression 'decree for the payment of money' does not include a decree passed under Order XXXIV, rule 5, for sale of a mortgage security."

10. The law laid down in the above cited authority fairly and squarely applies to the facts of the present case. Learned counsel for the Department has not been able to distinguish this authority or to cite any contra authority.

11. No other argument has been urged nor requires going into. I see no force in the objections. As already observed earlier, the order dated May 28, 1985, is hereby confirmed.

JUDGMENT OF DIVISION BENCH

D.K. Kapur, C.J.

12. We are hearing this appeal after a show-cause notice was issued. The interesting question is whether the plaintiff bank could seek an injunction restraining defendants Nos. 1 to 3 from alienating the property in any manner and at the same time get relief against the income-tax authorities which were trying to sell the very same property which was involved in the suit. The plaintiff bank claims to be a secured creditor, whereas the income-tax authorities were trying to sell the same property for realisation of the income-tax dues. Learned court trying the suit granted the injunction while referring to, in his judgment, Sriniwas Pandit v. Jagjeet Singh Sawhney [1976] 104 ITR 20 (Delhi) and Suraj Prasad Gupta v. Chartered Bank .

13. The court held that an injunction could be granted but the Tax Recovery Officer appealed to this court claiming that injunction could not have been granted by the learned single judge. In a sense, it is an unusual case. No doubt, the bank was proceeding to recover its dues against the mortgaged property and had instituted the suit for this purpose. In the normal course of trial of such a suit, the parties to the mortgage and any other person claiming interest in the property had to be joined under Order 34, rule 1, Civil Procedure Code. The bank, a secured creditor, could join any other person having interest in the property but it could not join the income-tax authority who was claiming to recovery income-tax dues from the owner of the property. As the property belonged in the first instance to the secured creditor, the unsecured creditor has to come later on. We cannot see how the income-tax authority could sell the property before the mortgage debt has been realised. The priority to the State dues arises only if there are two unsecured creditors, i.e., if there is a claim by an unsecured creditor and a claim by the State, then the State comes first. This was held by the Supreme Court in Builders Supply Corporation v. Union of India [1965] 56 ITR 91, wherein the court laid down the rule regarding priority which continues to apply even after the Constitution being an existing law. Therefore, if there were two unsecured creditors and one of them was the State, the State would have priority. However, when there is a secured creditor and the State is merely seeking to recover its dues, then the secured creditor has the priority on the principle that the secured creditor takes priority. The reason for this is that a person who mortgages the property passes it to the mortgagee who has rights in the property which cannot be touched by the unsecured creditor. Faced with this situation, the bank was compelled to move an application to injunct anybody else from interfering with its security. This was why the application was moved for relief against the Income-tax Department who were not parties to the suit.

14. As the security was in jeopardy, we feel that the law has to be construed in such a manner as to enable the court to safeguard the same. We are, therefore, of the view that, in these circumstances, section 151, Civil Procedure Code, has to be invoked in favor of the plaintiff even against the person who is not a party to the suit. Taking the reverse case, in the case decided by the Supreme Court in Builders Supply Corporation v. Union of India [1965] 56 ITR 91, the Union of India had appeared in the execution proceedings where the money was attached by the civil court in an execution case where the Union of India was not a party. The Union of India, in those proceedings, made an application under section 151, Civil Procedure Code, to claim that it has priority. The Union of India was the third party in that case and it had claimed that income-tax dues took priority in execution. This claim was successful up to the Supreme Court. Similarly, in the judgment in Sriniwas Pandit v. Jagjeet Singh Sawhney [1976] 104 ITR 20 (Delhi), this point was discussed. That case also involved an application under section 151 of the Code of Civil Procedure which was invoked in a proceeding in which the Commissioner of Income-tax was not a party. The court held that either section 151 applied or even otherwise the court could be informed that the property existed in favor of the Commissioner of Income-tax. It appears to us that in the present circumstances, on a parity of reasoning, section 151 has to be invoked, otherwise the property vesting in the plaintiff would be in jeopardy and the bank will be denied justice. It is thus in these circumstances that section 151 has to be invoked. We hold that this provision can be invoked even against a third party. We accordingly dismiss the appeal in liming but after show-cause notice has been issued.