1981 (9) TMI 46 - HC - Income Tax

Summary

Issues Involved:
1. Validity of the mortgage decree.
2. Priority of tax arrears over secured creditors.
3. Jurisdiction of the civil court post-notice under Rule 2 of Schedule II of the Income Tax Act, 1961.
4. Validity of court auction sale.
5. Constitutional validity of Rule 51 of Schedule II of the Income Tax Act, 1961.
6. Maintainability of application by the Tax Recovery Officer (TRO).

Detailed Analysis:

1. Validity of the Mortgage Decree:
The court acknowledged that under French law, a mortgage deed executed and registered has the force of a decree and can be executed without filing a suit. The mortgage dated December 22, 1960, was thus considered valid for execution. The court noted that there was no material evidence to dispute the existence of the mortgage.

2. Priority of Tax Arrears Over Secured Creditors:
The court held that a mortgage decree is essentially a decree for the payment of money. Therefore, Rule 16(1) of Schedule II of the Income Tax Act, 1961, applies, barring the civil court from proceeding with execution after a notice under Rule 2 has been served. The court emphasized that the mortgagee, as a secured creditor, could claim priority before the Tax Recovery Officer (TRO) under Rule 11(6) of Schedule II.

3. Jurisdiction of the Civil Court Post-Notice Under Rule 2:
The court ruled that once a notice under Rule 2 is served, the civil court loses jurisdiction to proceed with the execution of a decree for the payment of money. This includes mortgage decrees, as they are essentially for the recovery of money. The TRO can then move the executing court to halt further proceedings.

4. Validity of Court Auction Sale:
The court declared the auction sale held on December 16, 1976, invalid because it was conducted after the service of notice under Rule 2. Any execution proceedings taken post-notice were deemed invalid.

5. Constitutional Validity of Rule 51 of Schedule II:
The Division Bench addressed the constitutional validity of Rule 51, which provides that attachment of immovable property relates back to the date of notice under Rule 2. The court found that Rule 51 is intended to prevent tax evasion and does not amount to unreasonable restriction under Article 19(1)(f) and (g) of the Constitution. The rule was held to be within the legislative competence of Parliament.

6. Maintainability of Application by the TRO:
The court confirmed that the application by the TRO for payment out of monies towards tax arrears was maintainable. The TRO, representing the Union of India, could apply to the court for payment out of monies in custody under Section 226(4) of the Income Tax Act, 1961. The court also noted that the inherent power under Section 151 of the CPC allows the court to make such orders.

Separate Judgments:
The judgment of the single judge was delivered by SATHIADEV J., who allowed the appeal, setting aside the court auction sale and directing that the first respondent could file a claim before the TRO. The Division Bench, comprising V. RAMASWAMI J., upheld the constitutional validity of Rule 51 and allowed the Letters Patent Appeal, restoring the order of sale made by the trial court. The Division Bench granted leave to appeal to the Supreme Court on two substantial questions of law regarding the validity of Rule 51 and Rule 16(1) of Schedule II.