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TMI Blog1974 (10) TMI 8X X X X Extracts X X X X X X X X Extracts X X X X ..... h the plaintiff claimed to have a right of hypothecation, but which were admittedly in the possession of the hypothecator, namely, the third defendant. In the course of such an inventory prepared by the Commissioner, it was discovered that a camera, which is the subject-matter of the present action and which the plaintiff claimed was also included in the hypothecation bond as above, was missing. During the pendency of the above suit, the third defendant, as owner of the hypothecated goods and as an assessee, was subject to penalty and assessment proceedings under the provisions of the Indian Income-tax Act. For a period prior to the assessment year 1958-59, penalty proceedings as also assessment proceedings were initiated under exhibits B-1 to B-6 for the recovery of various sums due by him as asessee under the Act. Under exhibits B-7 and B-8 distraint proceedings were also issued directing the distraint of certain articles including the said camera. It is common ground that under exhibit B-8 the camera was attached by the second defendant pursuant to the usual orders of the tax recovery officers functioning under the Indian Income-tax Act, and it is also common ground that on Febr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r hypothecation with him was taken away by the Tahsildar, Salem, for income-tax arrears alleged to be due from the third defendant. Under these circumstances, he prayed in the said claim petition that his claim might be enquired into, that the attachment for the income-tax arrears at the instance of the first appellant of the camera might be released and that the camera might be handed back to him so that he could take necessary steps to preserve the same for the realisation of his dues under the hypothecation bond. This claim petition was enquired into by the Collector, and under exhibit B-16, it was rejected. Consequent upon the rejection of his claim petition, the present action has been filed. In this suit the plaintiff seeks for the declaration that the plaint schedule camera is not liable to be attached by defendants 1 and 2 for the recovery of arrears of income-tax and that the plaintiff has a prior mortgage over it and incidentally he seeks to set aside the claim order made by the second defendant in which his application for recognition of his prior claim to seek possession of the camera was not entertained by the second defendant. The plaintiff traced the facts above st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tention is that, as between the State and the plaintiff, the debt due to the former, it being a public debt, prevails over the debt payable to the latter as a private debt and that, in the absence of any secured rights which the plaintiff could project in a manner known to law by virtue of exhibit A-1, the ordinary rule of priority applies and hence the claim of the first and second defendants in the matter of the attachment and sale of the camera pursuant thereto is unassailable and their rights of priority should be recognised in the circumstances of the case. The learned counsel for the plaintiff (first respondent), on the other hand, would submit that this is a case of mortgage of movables and that, in any event, the first and second defendants could not be characterised as bona fide transferees without notice of the earlier hypothecation. Alternatively it is pleaded that in the instant case the State cannot claim any rights of priority in the matter of the sale of the camera and the appropriation of the resultant sale proceeds. The contentions, therefore, lead us on to the appraisal of the content and legal effect of exhibit A-1, the hypothecation deed. The nomenclature ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es specified in exhibit A-1 in realisation of the decree. Hypothecation of goods is a concept which is not expressly provided for in the law of contracts, but is accepted in the law merchant by long usage and practice. Hypothecation is not a pledge and there is no transfer of interest or property in the goods by the hypothecator to the hypothecatee. It only creates a notional and an equitable charge in favour of the hypothecatee and the right of the hypothecatee, as already stated, is only to sue on the debt and proceed in execution against the hypothecated goods, if they are available. As delivery of possession is not a sine qua non for the creation of a notional charge under a deed of hypothecation and as possession of the hypothecated goods is always with the hypothecator, a wide door is open to the owner to deal with the goods without reference to the hypothecatee. If, however, the hypothecator, contrary to the stipulation under the hypothecation bond, deals with the property, the breach on his part would certainly be noticed by the hypothecatee and he would be dealt with independently by him. It is in this context that the rights of a bona fide transferee for value of such g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh the learned counsel for the plaintiff referred to this decision he was not able to satisfy us that under exhibit A-1 there was any transfer of such interest or title of the hypothecator in the goods in favour of the hypothecatee. Excepting for the bare assertion that the plaintiff as hypothecatee could seek for possession of the goods in case of default of the hypothecator no further right is thought of or claimed in and by the recitals in exhibit A-1. It is, therefore, clear that there was no transfer of interest in movable property under exhibit A- 1 so as to sustain the contention of the learned counsel for the plaintiff that the case under consideration involves a mortgage of movable property. As we said, the best that can be claimed by the plaintiff in this action is an equitable charge. He could work out the equitable charge only after obtaining a decree on the private debt. After obtaining the decree he should seek execution as against the goods secured under the hypothecation deed, if available with the hypothecator at or about the time when he seeks execution. Under these circumstances, we are unable to accept the contention that this is a case of mortgage of movable pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Income-tax Officer [1938] 6 ITR 180 (Mad), a Full Bench of this court has held that an income-tax debt has priority over private debts and that the court has inherent power to make an order on the application for payment of moneys due to the Crown. In that case, Leach C. J. went to the extreme extent of laying down the proposition that there need not be a decree in favour of the State, that there need not be an attachment pursuant to the decree obtained by the State so as to enable the State to claim such a priority, that the State could intervene by a bare application and claim such rights of priority. This decision was cited with approval by the Supreme Court in Builders Supply Corporation v. Union of India [I965] 56 ITR 91. Though the Supreme Court did not think it necessary to consider the question whether a bare intervention on the part of the State, with a decree in its favour or a process in attachment having been undertaken, would enable the State to claim such rights of priority, yet they approved the dictum of Varadachariar J., who had observed--See [1965] 56 ITR 91, 99 (SC) : " The weight of authority in favour of the recognition of the priority in question even in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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