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PETITIONER:

DENA BANK

Vs.

RESPONDENT:

BHIKHABHAI PRABHUDAS PAREKH & CO. & ORS.

DATE OF JUDGMENT: 25/04/2000

BENCH:

R.C.Lahoti, S.R.Babu

JUDGMENT:

R.C. Lahoti, J.

On 12.4.1972 Dena Bank (hereinafter the Bank for

short), who is appellant before us, filed a suit for

recovery of a sum of Rs.19,27,142.29 paise with future

interest and costs against a partnership firm namely, M/s

Bhikhabhai Prabhudas Parekh & Co. and its partners. The

suit was based inter alia on a mortgage by deposit of title

deeds made by the partnership firm and its partners on

24.4.1969. The suit sought for enforcement of the mortgage

security. During the pendency of the suit some of the

defendants expired and their legal representatives were

brought on record. Three tenants in the mortgage property

were also joined as parties to the suit so as to eliminate

the possibility of their causing any hindrance in the

enforcement of the charge created by the equitable mortgage

of the property in favour of the Bank. During the pendency

of the suit the State of Karnataka tried to attach and sell

the mortgaged properties for recovery of sales tax arrears

due and payable by the partnership firm, the first

defendant. The arrears of sales tax related to the

assessment years 1957-58, 1966-67 to 1969-70 under the State

Act and to the assessment years 1958-59 to 1964-65 and

1967-68 to 1969-70 under the Central Act. It appears that

there was a court receiver appointed who tried to resist the

States attempt to attach and sale the mortgaged property by

preferring objections but he was unsuccessful. It appears

(as is stated by the Trial Court in para 4 of its judgment)

the State of Karnataka itself purchased the property in

auction held on 30.4.1976. Upon a prayer made by the Bank

the State of Karnataka was impleaded as a defendant in the

suit. The Trial Court found all the material plaint

averments proved and the Bank entitled to a decree. The

charge created on suit properties by mortgage was also held

proved. The trial court also held that the State could not

have attached and sold the said properties belonging to

partners for recovery of sales tax dues against the firm.

However, the suit was directed to be dismissed as in the

opinion of the Trial Court, Shri R.K. Mehta the Chief

Manager and Power of Attorney holder of the Bank was not

proved to be a person duly authorised to sign and verify the

plaint and institute the suit.

The Bank preferred an appeal before the High Court.

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The High Court has held Shri R.K. Mehta to be a person duly

authorised to sign, verify and present the plaint. During

the course of hearing of the appeal, on 27.1.1992 a

compromise was entered into between the Bank and the

borrowers (firm and the partners). The settlement as

arrived at between the Bank and the borrowers provided for a

mode of payment of the decretal amount as agreed upon

between the parties. Clauses 7 and 8 of the Deed of

Compromise provide as under:-

(7) That the defendant-respondent Nos.1-4, 6, 8-12,

14 & 15 are at liberty to sell the plaint schedule property

either in portion or in one lot within a period of 2 years

from the date of the decree. The plaintiff-appellant shall

co-operate with the defendants-respondents in such sale or

sales and the price (sale proceeds) shall be credited by the

defendants-respondents to the account of the

plaintiff-appellant Bank and the plaintiff-appellant shall

thereafter give their consent and no objection to such sale

or sales.

(8) The plaintiff-appellant shall be entitled to

refund of the Court fee paid on the appeal memo and an

appropriate direction may be issued by the Honble Court.

As the State of Karnataka was not a party to the

compromise, the appeal had to be decided as contested

insofar as the rights of the State are concerned. On behalf

of the Bank, as also on behalf of the borrowers who

supported the Bank in this regard, two pleas were raised.

Firstly, it was submitted that the right of the State to

realise its arrears of tax could not take precedence over

the right of the Bank to enforce its security, it being a

secured creditor. Secondly, it was submitted that the

property mortgaged in favour of the Bank was the property

belonging to the partners while the arrears of sales-tax

related to the partnership firm which was assessed as a

legal entity; the arrears of tax could be recovered from

the assets of the partnership firm and not by proceeding

against the property of the individual partners. Both the

contentions were repelled by the High Court. While

recording the compromise and passing a decree in terms

thereof by its judgment dated 3.8.1992 the High Court has

excluded clauses (7) and (8) aforesaid being illegal and not

enforceable against the State. Accordingly the suit filed

by the Bank has been decreed by the High Court superseding

the judgment and decree of the Trial Court. The operative

part of the decree passed by the High Court reads as under:-

We have already held that the sales tax arrears due

to the State from the first respondent- partnership, shall

have preference over the plaintiffs claim. Therefore, we

accept the compromise except Clauses 7 and 8 and other terms

which affect the preferential claim of the State to recover

Sales Tax arrears by sale of the suit properties, and decree

the suit of the plaintiff in terms of the compromise subject

to exemption as stated above, and subject to the condition

that the sales tax arrears including the penalty, if any,

due under the Sales Tax Act from the 1st respondent and its

partners shall have preference over the plaintiffs claim,

and the plaintiff shall have to first pay the amount

recovered during the course of execution to the State

towards the sales tax arrears and the other amount due under

the Sales Tax Act from the 1st respondent and its partners

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and thereafter the plaintiff is entitled to adjust the

remaining amount towards the amount due under the decree.

On the basis of the submission made by Sri K.R.D.

Karanth and the learned Advocate General, we further direct

that though the State has a preferential claim, the right to

recover the amount is assigned to the plaintiff on condition

that the amount recovered shall first be paid towards the

arrears of sales tax plus penalty, if any, under the Sales

Tax Act and then adjust the balance amount if any towards

the amount due under the decree.

The appeal is allowed. The judgment and decree of the

trial Court are set aside. The suit of the plaintiff is

decreed for a sum of Rs.25 lakhs as per the terms of the

compromise subject to exceptions and conditions specified

above. The amount deposited by the receiver into the Court

upto this date shall be paid over to the plaintiff. The

period of six months from today is fixed for redemption. If

the contesting respondents fail to discharge the decretal

amount, the plaintiff shall bring the property for sale

immediately on the expiry of six months and complete the

execution within a period of one year from today. In the

event the contesting respondents pay the decretal amount

within the aforesaid stipulated period, the State will be at

liberty to recover its sales tax arrears with penalty, if

any, under the Act, by sale of the suit schedule properties.

As far as the plaintiff and the contesting respondents are

concerned, they have compromised and in the compromise they

have agreed to bear the respective costs through out. As

far as the State is concerned, it is one of the defendants

in the suit and it is one of the respondents in this appeal.

The trial court also has directed the parties to bear their

own costs. Further, the State is benefited by getting its

right of preference adjudicated in a suit filed by the Bank.

Under these circumstances, we order no costs in this appeal

as far as the State is concerned.

The Bank has come up in appeal by special leave to

this Court feeling aggrieved by the decree of the High Court

to the extent to which it recognises the right of the State

to proceed against the suit property and that too in

preference to the Banks right to proceed against the

mortgaged property for realisation of its dues.

We have heard the learned counsel for the Bank and the

learned counsel for the partnership firm and its partners,

i.e., the borrowers. There has been no appearance on behalf

of the State of Karnataka though served.

Two questions arise for consideration. Firstly,

whether the recovery of sales tax dues (amounting to crown

debt) shall have precedence over the right of the Bank to

proceed against the property of the borrowers mortgaged in

favour of the Bank. Secondly, whether property belonging to

the partners can be proceeded against for recovery of dues

on account of sales-tax assessed against the partnership

firm under the provisions of the Kartanaka Sales Tax Act,

1957.

What is common law doctrine of priority or precedence

of crown debts? Halsbury, dealing with general rights of

the crown in relation to property, states where the Crowns

right and that of a subject meet at one and the same time,

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that of the Crown is in general preferred, the rule being

detur digniori (Laws of England, Fourth Edition Vol.8 para

1076 at page 666). Herbert Brown states Quando jus

domini regis et subditi concurrunt jus regis praeferri debet

- Where the title of the king and the title of a subject

concur, the kings title must be preferred. In this case

detur digniori is the rulewhere the titles of the

king and of a subject concur, the king takes the

whole.where the kings title and that of a subject

concur, or are in conflict, the kings title is to be

preferred (Legal Maxims 10th edition, pp.35-36). This

common law doctrine of priority of States debts has been

recognised by the High Courts of India as applicable in

British India before 1950 and hence the doctrine has been

treated as law in force within the meaning of Article 372

(1) of Constituiton. An illuminating discussion of the

subject made by Chagla C.J. is to be found in Bank of India

Vs. John Bowman AIR 1955 Bombay 305. We may also refer

to Full Bench decision of Madras High Court in Manickam

Chettiar Vs. Income Tax Officer, Madura AIR 1938 Mad. 360

as also to two Judicial Commissioners Court decisions in

Peoples Bank of Northern India Ltd. Vs. Secretary of

State for India AIR 1935 Sind 232 and Vassanbai Topandas

Vs. Radhabai Tirathdas and ors. AIR 1933 Sind 368.

Without multiplying the authorities we would straightaway

come to the Constitution Bench decision in M/s Builders

Supply Corporation Vs. Union of India AIR 1965 SC 1061.

The principle of priority of Government debts is

founded on the rule of necessity and of public policy. The

basic justification for the claim for priority of state

debts rests on the well recognised principle that the State

is entitled to raise money by taxation because unless

adequate revenue is received by the State, it would not be

able to function as a sovereign government at all. It is

essential that as a sovereign, the State should be able to

discharge its primary governmental functions and in order to

be able to discharge such functions efficiently, it must be

in possession of necessary funds and this consideration

emphasises the necessity and the wisdom of conceding to the

State, the right to claim priority in respect of its tax

dues. (See M/s. Builders Supply Corporation, Supra). In

the same case the Constitution Bench has noticed a consensus

of judicial opinion that the arrears of tax due to the State

can claim priority over private debts and that this rule of

common law amounts to law in force in the territory of

British India at the relevant time within the meaning of

article 372 (1) of the Constitution of India and therefore

continues to be in force thereafter. On the very principle

on which the rule is founded, the priority would be

available only to such debts as are incurred by the subjects

of the Crown by reference to the States sovereign power of

compulsory exaction and would not extend to charges for

commercial services or obligation incurred by the subjects

to the State pursuant to commercial transactions. Having

reviewed the available judicial pronouncements Their

Lordships have summed up the law as under :-

1. There is a consensus of judicial opinion that the

arrears of tax due to the State can claim priority over

private debts.

2. The common law doctrine about priority of crown

debts which was recognised by Indian High Courts prior to

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1950 constitutes law in force within the meaning of

Article 372 (1) and continues to be in force.

3. The basic justification for the claim for priority

of State debts is the rule of necessity and the wisdom of

conceding to the State the right to claim priority in

respect of its tax dues.

4. The doctrine may not apply in respect of debts due

to the State if they are contracted by citizens in relation

to commercial activities which may be undertaken by the

State for achieving socio-economic good. In other words,

where welfare State enters into commercial fields which

cannot be regarded as an essential and integral part of the

basic government functions of the State and seeks to recover

debts from its debtors arising out of such commercial

activities the applicability of the doctrine of priority

shall be open for consideration.

The Constitution Bench decision has been followed by

three- judges Bench in Collector of Aurangabad Vs. Central

Bank of India AIR 1967 SC 1831. However, the Crowns

preferential right to recovery of debts over other creditors

is confined to ordinary or unsecured creditors. The Common

Law of England or the principles of equity and good

conscience (as applicable to India) do not accord the Crown

a preferential right for recovery of its debts over a

mortgagee or pledgee of goods or a secured creditor. It is

only in cases where the Crowns right and that of the

subject meet at one and the same time that the Crown is in

general preferred. Where the right of the subject is

complete and perfect before that of the King commences, the

rule does not apply, for there is no point of time at which

the two rights are at conflict, nor can there be a question

which of the two ought to prevail in a case where one, that

of the subject, has prevailed already. In Giles v. Grover

1832 131 ER 563 it has been held that the Crown has no

precedence over a pledgee of goods. In Bank of Bihar v.

State of Bihar & Ors. AIR 1971 SC 1210, the principle has

been recognised by this Court holding that the rights of the

pawnee who has parted with money in favour of the pawnor on

the security of the goods cannot be extinguished even by

lawful seizure of goods by making money available to other

creditors of the pawnor without the claim of the pawnee

being first fully satisfied. Rashbehary Ghose states in Law

of Mortgage (T.L.L., Seventh Edition, p.386) It seems a

Government debt in India is not entitled to precedence over

a prior secured debt. The abovesaid being the position of

law, the High Court has however proceeded to rely on certain

provisions contained in Chapter XVI of Karnataka Land

Revenue Act, 1964 as also the provisions contained in

Sections 13 and 15 of Kartanaka Sales Tax Act, 1957 for

holding that the arrears of sales-tax would be entitled to a

preference even over the debt secured by mortgage in favour

of the appellant Bank. We would notice the relevant legal

provisions.

Chapter XVI of Kartanaka Land Revenue Act, 1964 is

titled as Realisation Of Land Revenue And Other Public

Demand. Sections 158, 190 and 2 (relevant parts thereof)

are extracted and reproduced hereunder:-

158. Claim of State Government to have precedence

over all others. (1) Claim of the State Government to any

moneys recoverable under the provisions of this Chapter

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shall have precedence over any other debt, demand or claim

whatsoever whether in respect of mortgage, judgment-decree,

execution or attachment, or otherwise howsoever, against any

land or the holder thereof.

(2) In all casees, the land revenue for the current

revenue year, of land for agricultural purposes, if not

otherwise discharged, shall be recoverable in preference to

all other claims, from the crop of such land.

(2) Definitions In this Act, unless the context

otherwise requires, -

xxx xxx xxx

(14) land includes benefits to arise out of land,

and things attached to the earth, or permanently fastened to

anything attached to the earth, and also shares in, or

charges on, the revenue or rent of villages or other defined

areas;

190. Recovery of other public demands.- The following

moneys may be recovered under this Act in the same manner as

an arrear of land revenue, namely :-

(a) xxx xxx xxx

(b) xxx xxx xxx

(c) all sums declared by this Act or any other law for

the time being in force to be recoverable as an arrear of

land revenue.

(Emphasis supplied)

Section 13 of the Karnataka Sales Tax Act, 1957 is

also relevant. Sub-sections (1) and (3) (to the extent

relevant) are extracted and reproduced hereunder :-

Sec.13. Payment and Recovery of Tax. [(1) The Tax

[or any other amount due] under this Act shall be paid in

such manner [in such instalments, subject to such

conditions, on payment of such interest] and within such

time, as may be prescribed.]

xxx xxx xxx

xxx xxx xxx

(3) Any tax assessed, or any other amount due under

this Act from a dealer or any other person may without

prejudice to any other mode of collection be recovered

xxx xxx xxx

xxx xxx xxx

(a) as if it were an arrear of land revenue, or

xxx xxx xxx

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xxx xxx xxx

(emphasis supplied)

The Act had come into force on 1.10.1957. With effect

from 18.11.1983 the following sub-section (2-A) was inserted

into the body of Section 15 of the Kartanaka Sales Tax Act,

1957 by Amending Act No.23 of 1983 and came into force on

the same day:-

(2-A) Where any firm is liable to pay any tax or

penalty or any other amount under this Act, the firm and

each of the partners of the firm shall be jointly and

severally liable for such payment.

We have seen that the common law doctrine of priority

of crown debts would not extend to providing preference to

crown debts over secured private debts. It was submitted by

the learned counsel for the appellant that under the

Karnataka Land Revenue Act as also under the Karnataka Sales

Tax Act the arrears of sales tax do not become arrears of

land revenue; they have been declared merely to be

recoverable as arrears of land revenue. Relying on the

observations of this Court in Builders Supply Corporation

case (supra), vide para 28, the learned counsel for the

appellant submitted that the appellant being a secured

creditor the arrears of sales tax could not have preference

over the rights of the appellant. It is true that the

Constitution Bench has in Builders Supply Corporation case

(supra) observed by reference to Section 46(2) of the

Income-tax Act, 1922 that that provision does not deal with

the doctrine of the priority of crown debts at all; it

merely provides for the recovery of the arrears of tax due

from an assessee as if it were an arrear of land revenue

which provision cannot be said to convert arrears of tax

into arrears of land revenue either. The submission so made

by the learned counsel omits to take into consideration the

impact of Section 158(1) of the Karnataka Land Revenue Act

which specifically provides that the claim of the State

Government to any moneys recoverable under the provisions of

Chapter XVI shall have precedence over any other debt,

demand or claim whatsoever including in respect of mortgage.

Section 158 of the Karnataka Land Revenue Act not only gives

a statutory recognition to the doctrine of States priority

for recovery of debts but also extends its applicability

over private debts forming subject matter of mortgage,

judgment-decree, execution or attachment and the like. In

Collector of Aurangabad Vs. Central Bank of India (Supra),

the provisions of Hyderabad Land Revenue Act and Hyderabad

General Sales Tax Act had come up for consideration of this

Court. This Court had refused to grant primacy to the dues

on account of sales tax over secured debt in favour of the

Bank. A perusal of the relevant statutory provisions quoted

in the judgment goes to show that any provision pari materia

with the one contained in Section 158 of Karnataka Land

Revenue Act was not to be found in any of the local acts

under consideration of this Court in Collector of Aurangabad

Vs. Central Bank of India. The effect of Section 190 is to

make the procedure for recovery of arrears of land revenue

applicable for recovery of sales tax arrears. The effect of

Section 158 is to accord a primacy to all the moneys

recoverable under Chapter XVI, which will include sales tax

arrears.

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The learned counsel for the appellant submitted that

sub-section (2-A) of Section 15 of Karnataka Sales Tax Act

could not be given a retrospective operation. This

submission is misconceived. A legislation may be made to

commence from a back date, i.e. from a date previous to the

date of its enactment. To make a law governing a past

period on a subject is retrospectivity. A legislature is

competent to enact such a law. The ordinary rule is that a

legislative enactment comes into operation only on its

enactment. Retrospectivity is not to be inferred unless

expressed or necessarily implied in the legislation,

specially those dealing with substantive rights and

obligations. It is a misnomer to say that sub-section (2A)

of Section 15 of the Karnataka Sales Tax Act is being given

retrospective operation. Determining the obligation of the

partners to pay the tax assessed against the firm by making

them personally liable is not the same thing as giving the

amendment a retrospective operation. In Principles of

Statutory Interpretation (by Justice G.P. Singh, Seventh

Edition, 1999, at page 369) it is stated :- The rule

against retrospective construction is not applicable to a

statute merely because a part of the requisites for its

action is drawn from a time antecedent to its passing. If

that were not so, every statute will be presumed to apply

only to persons born and things come into existence after

its operation and the rule may well result in virtual

nullification of most of the statutes. An amending Act is,

therefore, not retrospective merely because it applies also

to those to whom pre-amended Act was applicable if the

amended Act has operation from the date of its amendment and

not from an anterior date.

There is, therefore no question of sub-section (2-A)

of Section 15 of the Karnataka Sales Tax Act being given a

retrospective operation. It is prospective. However, it

does not make any difference for the facts of the present

case.

The High Court has relied on Section 25 of the

Partnership Act, 1932 for the purpose of holding the

partners as individuals liable to meet the tax liability of

the firm. Section 25 provides that every partner is liable,

jointly with all the other partners and also severally for

all acts of the firm done while he is a partner. A firm is

not a legal entity. It is only a collective or compendious

name for all the partners. In other words, a firm does not

have any existence away from its partners. A decree in

favour of or against a firm in the name of the firm has the

same effect as a decree in favour of or against the

partners. While the firm is incurring a liability it can be

assumed that all the partners were incurring that liability

and so the partners remain liable jointly and severally for

all the acts of the firm. This principle cannot be

stretched and extended to such situations in which the firm

is deemed to be a person and hence a legal entity for

certain purpose. The Karnataka Sales Tax Act, with which we

are concerned, also gives the firm a legal status by

treating it as a dealer and hence a person for the limited

purpose of assessing under the Sales Tax Act. It was,

therefore, held by a three-judges Bench in Commissioner of

Sales Tax, M.P. & Ors. v. Radhakrishan & Ors. AIR 1979

SC 1588:- ..a firm in a partnership and a Hindu

undivided family are recognised as legal entities and as

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such proceedings can only be taken against the firm or

undivided family as the case may be. Neither the partners

of the firm nor the members of the Hindu undivided family

will be liable for the tax assessed against the firm or the

undivided Hindu family.

However, this principle would have no applicability if

there be a statutory provision to the contrary. In the case

of Radhakrishan & Ors. (supra), vide para 7 itself, this

Court observed :- It may be noted that S. 276 (d) of the

Income-tax Act specifically includes all partners within the

definition of the word firm and a company includes

directors. In Bombay Sales Tax Act, 1959, under Section 18

it is specifically provided that where any firm is liable to

pay tax under the Act, the firm and each of the partners of

the firm shall be jointly and severally liable for such

payment. In the absence of a specific provision as found in

Section 18 of the Bombay Act the partners of the firm cannot

be held liable for the tax assessed on the firm.

A provision similar to the one included in Section 18

of the Bombay Sales Tax Act has been incorporated in the

Karnataka Sales Tax Act as referred to hereinabove and that

is why the partners of the borrower firm in the case before

us cannot take shelter behind the law laid down by this

court in Radhakrishan & Ors. (supra). Here we may also

refer to a two-judge Bench decision of this Court in Third

Income- tax Officer & Anr. Vs. Arunagiri Chettiar (1996)

220 ITR 232 SC in which provisions of S.188 A Income-tax

Act, 1971 have been noticed. S.188 A declares a partner and

his legal representatives jointly and severally liable along

with the firm to pay any tax, penalty or sum payable for the

year in which he was a partner. It was observed that S.188

A explicitly provides what was implicit hitherto. In the

case at hand the partners are being held liable by reason of

Sec.15(2A) of the Karnataka Sales Tax Act, 1957.

The learned counsel for the appellant is right in

submitting that on the day on which the State of Karnataka

proceeded to attach and sell the property of the partners of

the firm mortgaged with the Bank, it could not have

appropriated the sale proceeds to sales tax arrears payable

by the firm and defeating the Banks security in view of the

law as laid down by this Court in Commissioner of Sales Tax,

M.P. Vs. Radhakrishan & Ors. (supra). However, still in

the facts and circumstances of the case, the appellant Bank

cannot be allowed any relief. Section 15 (2A) of Kartanaka

Sales Tax Act had come into force on 18.12.1983 while the

decree in favour of the Bank was passed on 3.8.1992 and is

yet to be executed. The claim of the appellant Bank is

still outstanding. Even if we were to set aside the sale

held by the State, it will merely revive the arrears

outstanding on account of sales tax to which further

interest and penalty shall have to be added. The amended

Section 15 (2-A) of the Karnataka Sales Tax Act shall apply.

The State shall have a preferential right to recover its

dues over the rights of the appellant Bank and the property

of the partners shall also be liable to be proceeded

against. No useful purpose would, therefore, be served by

allowing the appeal which will only further complicate the

controversy.

For the foregoing reasons, the appeal is dismissed

though without any order as to the costs in the facts and

circumstances of the case.

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