1964 (11) TMI 8 - SC - Income Tax

Whether respondent No. 1, the Union of India, is entitled to claim that the tax due to it from respondent No. 2, M/s. R. K. Das and Co., on account of the assessment years 1946-47 and 1947-48 has priority and precedence over the decretal amount due to the appellant, M/s. Builders Supply Corporation, from respondent No. 2? Held that - It is difficult to accept the argument that the application of the doctrine of priority of arrears of tax over private debts can be said to be displaced by any of the provisions of the Recovery Act. The High Court was right in coming to the conclusion that respondent No. 1 was entitled to claim priorty in the matter of arrears of tax due from respondent No. 2 over the decretal debt due to the appellant from the same debtor. Appeal dismissed.

Issues Involved:
1. Priority of tax dues over decretal amounts.
2. Applicability of common law doctrine in India.
3. Interpretation of relevant statutes (Indian Income-tax Act, Recovery Act).
4. Continuation of pre-Constitution laws under Article 372(1) of the Constitution.

Detailed Analysis:

1. Priority of Tax Dues Over Decretal Amounts:
The core issue was whether the Union of India (respondent No. 1) could claim priority for tax dues from M/s. R. K. Das and Co. (respondent No. 2) over the decretal amount owed to M/s. Builders Supply Corporation (the appellant). The Supreme Court upheld the Calcutta High Court's decision that the tax dues had priority over the decretal amount. The Court noted that the doctrine of priority of Crown debts, which includes tax dues, has been consistently recognized by Indian High Courts.

2. Applicability of Common Law Doctrine in India:
The Court examined whether the common law doctrine about the priority of Crown debts applied in India. It referred to historical judgments and legal principles, noting that the doctrine was not novel to Indian jurisprudence. The Court cited the Bombay High Court's 1868 decision in Secretary of State in Council for India v. Bombay Landing & Shipping Co. Limited, which held that a judgment debt due to the Crown had precedence in execution over other debts. The Court also mentioned that this principle was recognized in Hindu jurisprudence and had been consistently upheld by Indian High Courts.

3. Interpretation of Relevant Statutes:
The Court analyzed Section 46 of the Indian Income-tax Act and the Recovery Act. It concluded that Section 46, which provides for the recovery of tax arrears as if they were arrears of land revenue, does not displace the common law doctrine of priority of tax dues. The Court also examined the Recovery Act, which outlines the procedure for recovering public demands, including tax arrears, and found that it does not specifically address the priority of tax dues over other debts. Therefore, the common law doctrine of priority remained applicable.

4. Continuation of Pre-Constitution Laws Under Article 372(1):
The Court addressed whether the common law doctrine of priority of Crown debts continued to apply after the Constitution came into force. Article 372(1) of the Constitution provides for the continuation of existing laws unless altered or repealed. The Court referred to its earlier decision in Director of Rationing and Distribution v. Corporation of Calcutta, which held that common law rules, including those relating to substantive rights, continue to be "law in force" under Article 372(1). Thus, the doctrine of priority of tax dues continued to be valid post-Constitution.

Conclusion:
The Supreme Court concluded that the Union of India was entitled to claim priority for its tax dues over the decretal amount owed to the appellant. The Court dismissed the appeal, affirming the Calcutta High Court's decision, and held that the common law doctrine of the priority of Crown debts, including tax dues, remained applicable in India and was not displaced by statutory provisions. The appeal was dismissed with costs.

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