1975 (3) TMI 12 - HC - Income Tax

Summary

Issues Involved:
1. Competency of the application under section 151 of the Code of Civil Procedure by a non-party.
2. Effect of the notice issued under rule 2 of Schedule II of the Income-tax Act, 1961, on pending execution proceedings.
3. Priority of State dues over private dues.
4. Validity of the provisions of Schedule II of the Income-tax Act, 1961, under the Constitution.
5. Procedure for protecting the decree-holder's interest in light of the statutory obligations of the Tax Recovery Officer.

Issue-wise Detailed Analysis:

1. Competency of the Application under Section 151 of the Code of Civil Procedure by a Non-Party:
The application was moved by the Union of India through the Commissioner of Income-tax, despite them not being a party to the original suit. The court held that such an application is maintainable under section 151 of the Code of Civil Procedure. The rationale was that it is essential for the court to be informed about the issuance of a notice under rule 2 of Schedule II of the Income-tax Act, 1961, to prevent further execution against the defaulter's property. The court referenced cases like Manickam Chettiar v. Income-tax Officer and Builders Supply Corporation v. Union of India to support this stance, asserting that the principle of priority of State dues allows such applications.

2. Effect of the Notice Issued under Rule 2 of Schedule II of the Income-tax Act, 1961, on Pending Execution Proceedings:
The court examined the implications of rule 16 of Schedule II, which states, "Nor shall any civil court issue any process against such property in execution of a decree for the payment of money." The court concluded that once a notice under rule 2 is issued, it becomes the duty of the court to stop any further execution proceedings against the defaulter's property. The court emphasized that the notice effectively prevents the court from issuing any further process for realizing money through execution of a decree.

3. Priority of State Dues over Private Dues:
The court reaffirmed the principle that the State has priority in the realization of its dues over private creditors. This principle was supported by the Builders Supply Corporation case, where it was held that public dues take precedence over private debts. The court noted that even if the sale was conducted through the court, the State would still have priority in the distribution of the sale proceeds.

4. Validity of the Provisions of Schedule II of the Income-tax Act, 1961, under the Constitution:
The decree-holder argued that the provisions of rule 16 and Schedule II of the Income-tax Act, 1961, were ultra vires of the Constitution, particularly articles 19(1)(f) and (g). The court did not entertain this argument fully as it was not raised in the pleadings and found the provisions reasonable and in line with the principle that the State has priority in recovering its dues.

5. Procedure for Protecting the Decree-holder's Interest:
The court addressed the concern of protecting the decree-holder's interest by noting that the amount realized from the sale by the Tax Recovery Officer would first be used to pay the tax dues as per rule 8 of Schedule II. Any remaining balance would be paid to the defaulters. To protect the decree-holder, the court issued an attachment order under Order 21, rule 46 of the Code of Civil Procedure, prohibiting the payment of any balance to the judgment-debtors and directing that such balance be paid into the court for satisfaction of the decree.

Conclusion:
The court concluded that it could no longer execute the decree by selling the property due to the notice issued by the Tax Recovery Officer. The property would be sold by the Tax Recovery Officer to recover income-tax dues. The court ensured the decree-holder's interest by attaching any balance remaining after the tax dues were satisfied. Thus, the application of the Union of India was accepted, and an attachment order was issued to protect the decree-holder's claim. No order as to costs was made in the circumstances of the case.