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Issues involved: Priority of State over other creditors in recovery of tax arrears under Income Tax Act.
Summary: The Union of India appealed regarding the recovery of Income Tax due from Respondent Nos. 1 and 2. The Collector issued prohibitory orders against the transfer of shares owned by the defaulting assessees, but no action was taken by the Tehsildar. A creditor of Respondent Nos. 1 & 2 obtained a money decree, attached their shares, and sold them. The Union of India filed a suit to recover the amount taken by the third Respondent from the sale proceeds. The High Court dismissed the suit, stating that the Government could not claim priority as the amount had already been taken. The Supreme Court held that debts due to the State are entitled to priority over other debts. If the State had already attached the property before its sale, it can recover the sale proceeds from the decree holder. The Court set aside the High Court's judgment and restored that of the Trial Court, allowing the appeal with no costs.
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