SATHIADEV J.


The appeal is preferred against the order made by First Additional Sub judge, Pondicherry, in E.A. No. 5 of 1977 in E.P. No. 217 of 1974 on a petition filed under 0. 21, r. 90 and s. 151 of the CPC to set aside the sale held on December 16, 1976, on the ground of material irregularity.


The appellant herein is Union of India represented by the ITO, Pondicherry, who was the petitioner in the court below and the two respondents herein were the respondents therein. In the petition it was claimed that one Madam Garnier was doing business in automobiles and she died in September, 1967, bequeathing her property to the second respondent and three others. She was in arrears of income tax amounting to Rs. 10, 00, 000, and the only immovable property left behind is Door No. 4, St. Lawrence Street, Pondicherry. When the Department took steps to bring the property to sale, it filed O.P. No. 21 of 1975 in the same court against the second respondent and three others, who are legal representatives of deceased Madam Garnier, for permission to bring the property to sale and the court declared that the State had the first charge over the property, and permitted it to bring the property to sale, and this petition was ordered on October 24, 1975. While so, the first respondent herein had filed on July 1, 1974, E.P. No. 217 of 1974, claiming that he was the mortgagee under mortgage dated December 22, 1960, and, hence, he had right to bring the property to sale. The executing court, after granting permission to the first respondent to bid, auctioned the property on December 16, 1976, in which the decree holder/first respondent himself purchased the property for Rs. 44, 100 whereas the property is worth much more. Inspite of the legal representatives of the income tax defaulter having been served with notices and put on notice about the claim for arrears of income tax, the proceedings taken in execution by the first respondent, being contrary to the provisions of the I.T. Act, 1961, the sale conducted, would seriously affect the rights of the petitioner, and, therefore, it deserves to be set aside.


Second respondent remained absent and it was the first respondent who contended that under the mortgage dated December 22, 1960, a sum of Rs. 20, 000 was payable by Madam Garnier, and that under the French law, and as held in Smt. Susama Bala Sur v. Bibhuti Bhusan Mondal, 1973 AIR(Cal) 295 [FB], the mortgage deed itself was a decree, and it having the force of a decree, he had the right to directly file E.P. No. 217 of 1974, and, therefore, the court auction sale was held after due publication, and hence the petitioner had no right to challenge the sale nor to claim preference over the claim of a secured creditor, and more particularly when the I.T. Act had come into force only in 1961, whereas the mortgage was created as early as December 22, 1960. The court below placing reliance on Suraj Prasad Gupta v. Chartered Bank has come to the conclusion that the first respondent being the mortgagee and a secured creditor was entitled to a priority over the tax amount that may be claimed by the petitioner, and the decree obtained not being a "decree for the payment of money", the court auction sale need not be set aside. It also took note of the fact that long before Madam Garnier became an income tax assessee under the provisions of the I.T. Act, 1961, the first respondent having secured a mortgage, which in law was a mortgage decree, ranked as a secured creditor, and there being no irregularities made out in the auction sale, the sale held on December 16, 1976, deserved to be confirmed, and hence directed a sale certificate to be issued. Aggrieved with this order, this appeal is preferred by the petitioner, Union of India, represented by the Tax Officer, Pondicherry. Subsequent to the order, a sale certificate was issued on September 5, 1977, and this appeal was filed on November 15, 1977.


Mr. Rangaswamy, counsel for the appellant, contends that merely because there was a mortgage in favour of the first respondent on December 22, 1960, it does not mean that after a service of notice on Madam Garnier and thereafter on her legal representatives demanding arrears of tax, the executing court cannot proceed with the execution of the mortgage decree by virtue of the prescription in r. 16(1) of Sch. 11 to the Act. A mortgage decree is in essence only a money decree, and the rule as framed brings within its fold an execution taken pursuant to a mortgage decree to realise the amount in satisfaction of the mortgage claim. Even though the I.T. Act was made applicable to the territory of Pondicherry only in 1964 and the huge tax amount payable by her had accrued due subsequently, after notice had been served on the defaulters on certificate issued under s. 222 of the I.T. Act, the civil court is deprived of its jurisdiction to proceed in execution of a decree in which the defaulter is involved. When O.P. No. 21 of 1975 was allowed on October 24, 1975, the second respondent and the other three legal representatives being fully aware of the demand made on them for recovery of incometax, the property belonging to them, cannot be subject to any execution proceedings, and, therefore, petitioner/appellant herein has the jurisdiction to maintain an application under s. 151 and under O. 21, r. 90 of the CPC, and seek the necessary relief. The petition was filed in January, 1977, and, therefore, even though auction might have been held on December 16, 1976, the execution court has no jurisdiction to confirm the sale, Rather he would contend that when a notice is issued under rule 2 of Sch. II, under r. 51, it dates back and becomes effective from the date of service, and thereafter whatever be the order of an executing court, they will be only invalid.


Mr. Masilamani, counsel for the respondent, contends that nowhere in the I.T. Act there is any provision made that the tax demanded from defaulter will supersede the claim of a mortgagee and the priority to which a secured creditor is entitled, cannot be destroyed by relying upon rules found in Sch. II to the Act. Mortgage under the French law does not contemplate the filing of a suit for a mortgage decree to be obtained, and even on the day when the mortgage deed was executed, it becomes an executable decree, and what was further required to be done by the mortgagee was to file an execution petition and at that stage, the I.T. Dept. cannot interdict the process taken by the executing court. The contention that a mortgage decree is a money decree is a negation of the established concept, that mortgage decree is in essence a right to proceed against security and as secured creditor the right of the mortgagee ranks higher than the claim of the State for recovery of taxes.


Mr. Masilamani in support of his contention refers to s. 48 of the Transfer of Property Act, wherein it is provided that the rights of persons acquired earlier cannot be superseded by rights subsequently created and whatever had been done subsequently will be subject to the rights previously created. It is not disputable, according to him, that on December 22, 1960, a mortgage was created in favour of the first respondent by Madam Garnier for Rs. 20, 000. It is now alleged that the amount due to the first respondent is Rs. 1, 20, 000. To substantiate his contention that the State can have no precedence over the claim of a secured creditor he refers to the passage in Mulla's T. P. Act, Vth Edn., at p. 230, which is as follows:


"(5) Government debt. Apart from statutory provisions to the contrary, a debt owed to the Government or any local authority is no exception to the rule of priority and is not entitled to precedence over a prior secured debt. It is only with regard to payment of unsecured debts that such debts have priority." *


Therefore, he claims that it is only as against unsecured creditor, the claim of the Crown State can hive precedence, but when the claim is of secured creditor, a claim for recovery of tax cannot have any precedence. To show that even in the I.T. Act this concept has been recognised, he resorts to s. 178 which deals with a company in liquidation and the proviso to sub cl. (3) is to the effect that nothing in the said sub section shall debar the liquidator

"for making any payment to secured creditors whose debts are entitled under law to priority of payment over debts due to Government on the date of liquidation" *


. Equally, he relies upon the following passage at p. 870 of the VI Edn. (Vol. 1) of Kanga's Law and Practice on the Income Tax, which is to the following effect :


"Until the liquidator has set aside an amount to meet the tax liability, he should not part with any of the assets except for paying secured creditors entitled to priority over Government dues. However, this section does not confer on the Government any higher priority than that enjoyed under the company law." *


To show that the right to claim tax is subject to the rights of secured creditor. Merely because rules have since been made under the I.T. Act, 1961, in Sch. II, of the procedure that will have to be followed for recovery of tax by the TRO, they cannot override established law or even what is found in the Act itself.


He refers to the decision rendered in Builders Supply Corporation v. Union of India which dealt with the scope of s. 46(2) of the Indian I.T. Act, 1922, wherein it was held that (headnote) :


"The Government of India is entitled to claim priority for arrears of income tax due to it from a citizen over debts from him to unsecured creditors" *


, and that s. 46 does not in terms displace the application of the doctrine of tax dues. The Supreme Court, in the said decision, referred to the Full Bench decision of this court in Manickam Chettiar v. ITO , wherein it was held that s. 46 of the Indian I.T. Act, 1922, is not exhaustive of the remedies of the Crown, and it does not preclude an application being filed under s. 151 of the CPC by the Department for recovery of tax arrears in a matter that was pending before the court. It was, therefore, held that as against claims of unsecured creditors, the State will be entitled to priority for recovery of arrears of tax which, according to Mr. Masilamani, would necessarily mean that the priority claim of the secured creditor has thus been recognised.


He then relies upon a Full Bench decision of this court relating to the scope of s. 46(2) of the Indian I.T. Act, 1922, wherein, in a case arising under a mortgage, it was held that when a receiver is appointed, the amounts recovered by him, till appropriated by orders of court towards the mortgage debt, it is only a fund in court in medio, and the court has the power to give directions about the disbursement of the collections made by the receiver pending the suit and hence the State has a right to move the court for collection of the arrears of tax due and payable by the mortgagor. Relying upon the reasoning adopted therein, he contends that the right of the mortgagee is preserved over the security against the claim of the State for recovery of arrears of tax payable by the mortgagor.


He then lays considerable reliance on the decision in Suraj Prasad Gupta v. Chartered Bank of the Allahabad High Court wherein it has been held that a bar on a civil court issuing process against assessee's property, does not apply to a decree for sale of mortgaged property. It was held therein that there being no substantive provision in the I.T. Act for superseding or overriding the claims of secured creditor, and Sch. II being confined only to procedure, the expression "decree for the payment of money" in r. 16(1) has to be given only a restricted meaning confining it to a simple money decree, and it cannot include a decree for sale in enforcement of a mortgage decree passed under 0. 34, r. 5 of the CPC. In this decision, neither the Full Bench decision of this court in Manickam Chettiar's case nor any other decision, is referred to.


Regarding the claim of priority by the I.T. Dept. for realisation of arrears of amount, a Division Bench of this court in Somasundaram Mills Private Ltd. v. Union of India in a case that arose under the Indian I.T. Act, 1922, held that the priority can be claimed only when the assets are in the possession of the executing court and that it should belong to the judgment debtor. But, if the property had become the property of the decree holder, the claim of priority cannot be enforced. According to Mr. Masilamani, even when mortgage has executed on December 22, 1960, there was a mortgage decree in his favour, and for this purpose he relies upon the decision in Smt. Susama Bala Sur v. Bibhuti Bhusan Mondal, 1973 AIR(Cal) 295, wherein a Full Bench of the court held that grosses copy of a notarial mortgage bond executed under this French law has the force of a decree. In a recent decision of this court reported in Mahalakshmi v. P. S. Rajeswari 1979 (2) MLJ 192, it has been held that when a mortgage was created, at a time when the French law was in force, it straightaway became an executable decree and such a substantive right can be enforced by moving the executing court for a recovery of the amounts.


Hence, the contention of Mr. Masilamani is that, the first respondent as mortgagee/decree holder/court auction purchaser, has a priority claim over tax arrears of the judgment debtor and her legal representative, and, therefore, the execution proceedings taken in E.P. No. 217 of 1974 culminating in a sale certificate being issued cannot be challenged in these proceedings, even though it may be claimed that under the I.T. Act of 1961, which had come into force in Pondicherry territory only in 1964, notices have been served under r. 2 on the defaulting assessee mortgagor, even prior to the first respondent filing the E.P. on July 1, 1974.


Mr. Rangaswamy, counsel for the appellant, contends that the reliance placed on decisions rendered under s. 46(2) of the Indian I.T. Act, 1922, can have no application subsequent to what has been provided under s. 222 of the I.T. Act, 1961. The ITO has the power to issue a certificate to the TRO specifying the amount of arrears of tax due from the assessee and, thereafter, the TRO has the power to adopt any one or, more modes mentioned therein like attachment and sale of assessee's movable or immovable properties, arrest the assessee and detain him in prison or of appointing a receiver to manage the properties of the assessee. The TRO has the power to issue a notice under r. 2 of Sch. II, and on service being effected, it will be deemed to be effective from the date of service on the defaulting assessee, as provided under r. 51, and, therefore, in this case after notice had been served, the civil court has no jurisdiction to proceed with the execution proceedings initiated in E. P. No. 217 of 1974, which was filed only on July 1, 1974. When the present petition was filed both under 0. 21, r. 90 and s. 151, CPC, in January, 1977, there is no jurisdiction in the executing court to confirm the sale. Thereafter, it is only for the TRO to bring the property to sale, in which it will be open to the first respondent herein to seek his reliefs, as provided under the Rules. On the claim that when a decree is obtained under a mortgage, the decree holder is a secured creditor and, therefore, the arrears of tax cannot be claimed by invoking r. 16(1) of Sch. II is basically incorrect, because a Full Bench of this court has held that mortgage decree is a money decree.


It will be useful first to take up the point as to what is contemplated under r. 16(1) of Sch. II to the Act, which is as follows:


"Where a notice has been served on a defaulter under rule 2, the defaulter or his representative in interest shall not be competent to mortgage, charge, lease or otherwise deal with any property belonging to him except with the permission of the Tax Recovery Officer, nor shall any civil court issue any process against such property in execution of a decree for the payment of money."


Mr. Masilamani claims that the words" for the payment of money can be referable only to a simple money decree and a mortgage decree is outside its scope. Mr. Rangaswamy, counsel for the appellant, contends that even a mortgage decree will come within the expression above referred to, because essentially a mortgage decree is for recovery of money, and to realise the amount borrowed on furnishing security, the mortgagee is enabled to bring the same security to sale in court auction, and, ultimately, what he realises is the amount due under the mortgage. In this view, even in the case of a mortgage decree it will be only "a decree for payment of money" and to substantiate this contention he relies upon the following four decisions: in Hart v. Tara Prasanna Mukherji, ILR I I Cal 718, in dealing with a mortgage decree, when the State came for rateable distribution of sale proceeds under s. 295 of the CPC, 1882, it was held that when mortgagee seeks to realise the amount from the mortgaged property and from the mortgagor personally, it is "a decree for money" within the meaning of the term used in s. 295. A Full Bench of this court dealing with ss. 230, 258 and 295 of the (PC, 1882, held that" *


a mortgage decree even when the remedy otherwise does not exist or has become barred by limitation, would be a money decree within the meaning of s. 230 and, therefore, of ss. 258 and 295 also of the CPC, 1882.

"The contention was that a mortgage decree under s. 88 of the Transfer of Property Act cannot be termed as a money decree. But this claim was repelled on the ground that so far as the realisation of the debt from the mortgaged property goes, the process undergone is to realise the money through court and hence it is a money decree. In Krishnan (Minor) by next friend, Pathma Parvathi Ammal v. Venkatapathy Chetty, ILR 29 Mad 318, a Division Bench following the said Full Bench decision, held that a decree directing recovery of the decree amount by sale of properties but not directing payment by the defendant is essentially a decree for money. Relying upon these binding decisions wherein it was held that a mortgage decree is essentially a decree for the payment of money, quite rightly Mr. Rangaswamy contends that the decision rendered in Suraj Prasad Gupta v. Chartered Bank wherein no precedents have been referred to, cannot be of any assistance in understanding the scope of r. 16(1).


What is contemplated under r. 16(1) is to desist the civil court from issuing any process against a property belonging to a defaulter on whom notice has been issued under r. 2 being further proceeded with in execution of a "decree for payment of money". This rule cannot be invoked in cases where the relief is for a partition, or possession, or for a mandatory injunction to be carried out or for specific performance of a contract or in a suit for redemption and the like. Even in a mortgage claim, the decree is put into execution to bring the security to sale for the realisation of money due and payable to the mortgagee. It would, therefore, be not inappropriate to hold that even in the case of a mortgage decree, r. 16(1) of Sch. 11 can be invoked. What is sought to be recovered in the execution proceeding is the money payable by the defaulter, on whom a notice had been already served under r. 2 of the Rules. In this case in fact, 0. P. No. 21 of 1975 had been filed by the petitioner, Department, and an order had been passed on October 24, 1975, in favour of the petitioner and it is only thereafter the court auction had taken place on December 16, 1976, though the execution petition was filed on July 1, 1974. Further, much earlier, notices for the recovery of arrears had been served on the defaulter and her legal representatives.


Mr. Masilamani has contended for the first respondent, that the execution of the decree bad come to the stage of confirmation, and in fact subsequent to the filing of the present petition, a sale certificate had been issued and, therefore, no relief can be secured in the present petition. What had transpired subsequent to January, 1977, i.e., after the filing of the present petition is irrelevant and cannot stand in the way of the petitioner, if it can be established by the petitioner that subsequent to the service of notice under r. 2 of the Rules, the executing court has no jurisdiction to further proceed with the matter.


Counsel for the Department relies upon the decision in N. B. Films v. Daya Shankar wherein it was held that no process could be issued by the executing court pursuant to the decree against any property of the judgment debtor who had been served with a notice under r. 2, because of the bar imposed under r. 16(1). It was held therein (at p. 680):


The English doctrine of precedence of Crown debts over private debts applied to India so that, in the absence of any provision in any statute to the contrary, all revenue recoveries or State debts would get the precedence over the private debts and the only exception to this rule is to be found in the case of a secured creditor who has the prior right to recover the debt by proceeding against such property. In this view of the matter, once a notice of demand is issued and has the effect of restraining the defaulter to deal with the property, any further process in respect of such property from any executing court would lead to conflict of jurisdictions and unnecessary multiplicity of proceedings"


In Sriniwas Pandit v. S. Jagjeet Singh Sawhney it is held that the effect of r. 16 of Sch. 11 is that as soon as it was brought to the notice of the court that a notice had been issued by the TRO it becomes the duty of the court to desist from any further process for realising the money sought to be realised in execution of a decree for the payment of money. To the same effect are the two decisions rendered by this court in Tax Recovery Officer v. V. A. Ramaswamy and Union of India v. S. Ganesh Lal Bajaj. In the earlier decision, execution proceedings had come to the stage of issue of cheque. But when the TRO moved for relief, it was held that the sale already confirmed has to be set aside because the proceedings that have followed subsequent to the service of notice under r. 2, are not valid.


Though it is contended that what are provided under Sch. II are only procedural in nature and there is no provision made in the Act for moving the civil court, it will be seen that s. 226(4) authorises the ITO to apply to the court in whose custody there is money belonging to the assessee for payment to the Department of the entire amount of such money, or, if it is more than the tax due, an amount sufficient to discharge the tax. Hence, when the Act had authorised the Department to move the civil court for collection of arrears of tax which is in court and payable by the defaulting assessee, and for recovering the amount, Rules had been made under Schedule II, the point taken that the proceedings are taken only under the Rules and not under the main provisions of the Act, necessarily fails.


One other aspect that requires to be considered before a conclusion can be drawn is regarding the scope of r. 16(1). In the latter part it is provided" *


nor shall any civil court issue any process against such property and, what is meant by "process", would also be relevant. The meaning of the word "process" is stated in Stroud's Dictionary, Vol. 111, 3rd Edn., p. 2315, as follows :


"'Process' is the doing of something in a proceeding in a civil or criminal court and that which may be done without the aid of a court is not a 'Process'."


At p. 2316, it is stated


" All the steps taken in an execution the seizure and the sale are, in the natural meaning of the word, comprehended in the term 'process'." *


In Jowitt's Dictionary of English Law, 1959 Edn., at p. 1417, it is stated Process the proceedings in any action or prosecution, real or personal, civil or criminal from the beginning to the end.


Therefore, when there is an interdiction against a civil court from issuing any process in execution of the decree, it means that whatever be the stage of the proceeding, till full satisfaction is recorded, the TRO can move the executing court and thereafter it will be for the TRO to take the necessary steps, as provided under the Act. Whether he moved the court at the earliest stage or when the auction was to be conducted or even at the stage of confirmation as pointed out in TRO v. V. A. Ramaswamy even at the stage when the cheque is to be issued, the executing court can be called upon to stop further proceedings, and the sale held can be set aside. Therefore, the fact that the first respondent has secured a mortgage decree under the French law, which was in force at that time, would make no difference, when he moved the civil court for executing the decree by filing on July 1, 1974, E.P. No. 217 of 1974, and brings the property to sale for realisation of the payment of money. The TRO can then move the executing court to stay its "hands, because, mortgage decree having been held to be a money decree" by a Full Bench of this court, the expression used in r. 16(1) "in execution of a decree for the payment of money" will bring within its fold such a mortgage decree also.


As to what is to follow thereafter, I will presently deal with. Under Sch. II provision has been made enabling the TRO to bring the property to sale, and he is authorised to investigate the claims of persons in respect of the property for which a certificate has been issued. In the event of the TRO refusing to accept any claim or objection preferred under r, 11(6), it is open to the aggrieved party to file a suit, and subject to the result of the suit, the order of the TRO shall be conclusive,


Hence, even a mortgage decree holder whose execution proceedings in civil court had been interdicted by the TRO, can make a claim before him to substantiate his right to priority adjustment of his claim before any amount could be adjusted towards realisation of arrears of tax. When such a remedy or recourse is available to a mortgagee decree holder to canvass his priority claim on the ground that he is a secured creditor, which will have to be necessarily considered by the TRO under r. 11(6), there could be no prejudice caused by the civil court being interdicted by virtue of r. 16(1) from proceeding with the execution proceedings initiated by the mortgagee and the property being sold by the I.T. Dept. in a case where the property of a tax defaulter on whom a notice under r. 2 had been served, and whose property is brought to sale to realise the arrears of tax.


Regarding the existence of the mortgage and the amount actually due, there is an area of dispute between the parties. But presently in this proceeding, it cannot be decided otherwise, there being no material to hold that there was no mortgage created on December 22, 1960, for a recovery of the amount mentioned therein. Even on the aspect as to whether the present application is maintainable, there can be no doubt about its maintainability, in view of the Full Bench decision of this court in Manickam Chettiar v. ITO arising under Indian I.T. Act, 1922, in which it was held that when" *


the Crown goes to the court and says 'here is a debt which is due to me about which there can be no dispute'. I consider that under these circumstances, the court can rightly invoke its power under s. 15 1, CPC, in making the payment to the person entitled to it

". This is precisely the view that was taken in Sriniwas Pandit v. Jagjeet Singh; Sawhney wherein also a petition was filed under s. 151 of the CPC and it was held that on such a petition, relief can be granted relying upon the said Full Bench decision and also the decision of the Supreme Court in Builders Supply Corporation v. Union of India.


For the foregoing reasons I hold that :


(1) the mortgage dated December 22, 1960, is a decree which can put into execution straightaway without any need for filing a suit to enforce it in view of the decisions rendered in Smt. Susama Bala Sur v. Bibhuti Mondal, 1973 AIR(Cal) 295 and Mahalakshmi v. P. S. Rajeswari 1979 (2) MLJ 192 (Mad). In the event of the petitioner seeking to establish that there was no mortgage at all, it may in appropriate proceedings do so and for the purpose of the present proceedings, the claim of the first respondent of such a mortgage is not rebutted by any acceptable evidence.


(2) Hence, E.P. No. 217 of 1974, filed by the first respondent on July 1, 1974, was an execution proceeding instituted by the first respondent to enforce his mortgage decree.


(3) Even though there was a court auction on December 16, 1976, it is not a valid one because, much earlier to it, the mortgagor defaulter assessee and the legal representatives had been served with notices of demand of arrears of tax, and having participated in the proceedings in O.P. No. 21 of 1975, knowledge being attributable, of the execution of the decree for payment of money, will not be binding on the I.T. Dept.


(4) Execution taken for realisation of mortgage claim is a "decree for money" and hence in this case it will come within the ambit of r. 16(1) and, therefore, the civil court cannot issue any process for realisation of the decree amount after the petition had been filed by the petitioner.


(5) First respondent is no doubt a secured creditor, but still his claim based on a mortgage, is "a decree for money", within the meaning of r. 16(1).


(6) It is open to the first respondent to file his claim before the TRO under r. 11(6) when he brings the property to sale, claiming that he is secured creditor and out of the realisation, before the amounts are appropriated towards arrears of tax, he should be paid first, and such a claim will have to be decided by the TRO.


(7) The court auction held on December 16, 1976, is, therefore, an invalid one since whatever execution proceedings had been taken subsequent to service of r. 2 notice, is invalid.


(8) First respondent having a legal right to make his claim before the TRO under r. 11(6) of Sch. 11, it is for him to establish that he being secured creditor, under law, he is entitled to priority over tax arrears recoverable by the State, failing which he may institute a suit to sustain his claim.


Since the present application is taken out for setting aside the sale held on December 16, 1976, on the ground that the civil court cannot further issue any process in execution of the decree involved in E.P. No. 217 of 1974, now that I have held that the mortgage decree relied upon by the first respondent is one "for the payment of money", the aspect whether the first respondent will be entitled to priority of claim as a secured creditor over and above the claims of the I.T. Dept. is an aspect which would necessarily be considered by the TRO, after the TRO brings the property to sale, and before whom the first respondent will have the right to file his claim statement on this aspect. Hence, this appeal is allowed. No costs.


JUDGMENT OF DIVISION BENCH


The judgment of the court was delivered by


V. RAMASWAMI J. The constitutional validity of r. 51 of Sch. 11 to the I.T. Act of 1961 and the procedure enabling the Revenue to file an application for payment out instead of a regular suit by the TRO is raised in these applications and the Letters Patent Appeal.


The facts relevant may now be noticed. The South Indian Bank Ltd. (hereinafter referred to as "the plaintiff"), filed on December 1, 1972, C.S. No. 84 of 1973 on the file of this court praying for a mortgage decree against M/s. T.D. Murthy & Co., a registered firm of partnership and its partners (hereinafter called the "defendants"), for a sum of Rs. 3, 02, 421.38 due under an equitable mortgage dated December 22, 1969, executed by the defendants. There were five items of properties covered by this mortgage. During the pendency of the suit, the defendants filed Application No. 403 of 1975 in C.S. No. 84 of 1973, praying to release two of the properties, namely, No. 6, Patnool Sandoosah Street, Madras-3 and No.. 64, Gangadhareswar Koil Street, Purasawalkam, Madras-7, from the mortgage in favour of the plaintiff and for permission to effect private sales of these two items for a sum, of Rs. 51, 000 and Rs. 35, 000, respectively, in favour of certain third parties. This application was ordered on February 10, 1975, with a direction that the intending purchasers shall deposit to the credit of the suit the entire sale proceeds within a week from the date of the sale. At this stage, coming to know of the proceedings in court, the Union of India, represented by the TRO, Madras, filed Application No. 3338 of 1975 in C.S. No. 84 of 1973, praying for a recognition of the prior claims of the Revenue over the properties ordered to be sold in Application No. 403 of 1975, for realising the tax arrears due from T. D. Murthy, whose legal representatives are the defendants in the suit and for directing the defendants to deposit the entire proceeds on sale of the properties in this court so as to enable it to get a payment out. This claim was made on the ground that a huge amount of over Rs. 44, 00, 000 was due as arrears of income tax and wealth tax from late T.D. Murthy, who was the owner of the properties and who had mortgaged the same with the plaintiff for securing loans given by the plaintiff. It was contended that a notice of demand had been served on May 23, 1968, May 7, 1969, and November 30, 1969, on the defaulter, T.D. Murthy, and the other defendants in the suit, under r. 2 of Sch. 11 to the I.T. Act, 1961 (hereinafter called "the Act"), demanding payment of tax arrears, that the properties were attached on February 19, 1972, that by reason of r. 51 of Sch. 11 to the Act the attachment related back and took effect from the date on which the r. 2 notice was served on the defaulters and that by reason of r. 16, the mortgage executed in favour of the plaintiff on December 22, 1969, was void and inoperative as against the claim of the Revenue for recovery of the tax arrears by sale or other proceeding against the properties. When this application was pending the plaintiff and the defendants entered into a compromise and a compromise preliminary decree was passed by the trial judge on March 5, 1976. The preliminary decree provided that the defendants should pay a sum of Rs. 3, 19, 968.15 with further interest at the rate of 6% per annum on the principal sum of Rs. 2, 05, 355 from the date of decree till the date of sale of the respective mortgaged properties and realisation of the money. As per the decree, a Commissioner was to be appointed to sell the mortgaged properties, one after the other, and the sale proceeds shall be deposited into court towards the amount decreed and that, on such deposit of the sale proceeds, interest to the extent of the amount so deposited towards the decree shall cease to accrue. On the same date, namely, March 5, 1976, the learned judge made an order in Application No. 3338 of 1975 rescinding the earlier order made in Application No. 403 of 1975 in view of the preliminary decree directing the Commissioner to sell the properties. While dismissing this application in form, the learned judge made the following observation.


The question whether the mortgage in favour of the plaintiff is valid as against the applicant herein cannot be gone into in this proceeding and need not be gone into for the purpose of adjudicating upon the dispute between the plaintiff and the defendants in the suit. This question may be agitated in separate proceedings by the applicant if so advised.


The Commissioner appointed as per the decree sold the premises No. 6, Patnool Sandoosah Street, Madras-3, by public auction for a sum of Rs. 5 1, 000. In the meanwhile, the TRO, Madras, issued five proclamations of sale on March 22, 1977, under rr. 38 and 52(2) of Sch. II to the Act for the recovery of the tax arrears from late T.D. Murthy and his legal representatives, fixing 9th May, 1977, as the date for the sale. In each one of these proclamations, the TRO had stated:


It has been claimed by the South Indian Bank Ltd. that they have a charge over the property as a mortgage, secured by deposit of title deeds on 22-12-1969. As this transaction has been entered into after the service of notices under rule 2 of the Second Schedule to the Income tax Act, 1961, on 23-5-1968, 7-5-69, and 30-11-69, and without the concurrence of the Tax Recovery Officer it is, ab initio void and, therefore, inoperative. The property is sold free of the above encumbrance."


When the advocate, Commissioner and the third party purchaser of premises No. 6, Patnool Sandoosah Street, Madras, applied for permission to sell and purchase the property for Rs. 51, 000 and for permitting the amount to be deposited to the credit of C.S. No. 84 of 1973, notice was given to the Revenue. After hearing the parties, the sale was confirmed and after deducting a sum of Rs. 2, 000 towards the Commissioner's fee, the balance of Rs. 49, 000 was directed to be deposited and this court made the following further direction :



The Department had no objection for depositing the money and releasing this property from all liabilities towards income tax provided the inter se dispute between the bank and the Income tax Department is settled before payment out is ordered. Since the Income tax Department also claims a charge over the property as well as the bank, the amount will be permitted to be deposited in this court and the inter se dispute will be decided when any one of the parties files an application for payment out.


The TRO filed Application No. 3832 of 1978, praying for a recognition of the prior claim of the Department over the property sold and for payment out of the sum of Rs. 49, 000 in deposit. As in the earlier application, the Revenue relied on the notice served under r. 2 on May 23, 1968, May 7, 1969, and November 30, 1969, and the attachment effected on February 19, 1972, and the retrospective effect of attachment from the date of service of notice under r. 2 as forbidding the defaulter from executing the mortgage dated December 22, 1969, and resting their claim that the mortgage was not valid and binding so far as the claim for tax arrears was concerned. The plaintiff bank also filed an application for payment out in Application No. 3833 of 1978, raising the following contentions. Though the suit was filed for recovery of the money due under the mortgage dated December 22, 1969, factually that was only a renewal of earlier mortgages, the first of which was executed on August 2, 1965. The documents of title relating to the properties was handed over to the bank, mortgaging the same as an equitable mortgage for all the dues to the bank, on August 2, 1965. When the bank agreed to increase the limits of various loan facilities to the defendants, a fresh document was taken on February 10, 1967. When the borrowers again wanted certain changes in the limits granted earlier, the bank granted the same on their executing a fresh equitable mortgage on January 20, 1968. When further facilities and changes were needed by the defendants, again another equitable mortgage deed was executed by the defendants on December 22, 1969, but all along the documents continued to remain in the possession of the bank ever since August 2, 1965, when they were originally deposited with them as security by way of equitable mortgage. Thus, the fresh documents executed on February 10, 1967, January 20, 1968 and December 22, 1969, were only in continuation of the original mortgage deed dated August 2, 1965, and, therefore, the mortgage shall be deemed to have come into existence on August 2, 1965, long prior to r. 2 notice. It was further contended that the bank was a bona fide transferee for value without notice of the dues to the Department or the notice under r. 2 and that, therefore, even if the mortgage is to be taken as created on December 22, 1969, in view of the proviso to s. 281 of the Act, the mortgage in favour of the bank will not be affected by the notice under r. 2 or the attachment under r. 48 read with r. 51 of the Rules. They also relied on the preliminary decree of this court directing realisation of the decree by sale of the properties and contended that the decree cannot be questioned. In this application they did not question the constitutional validity of any of the provisions of the Act or the Rules but had made a reservation to put forward any contention as to the validity of the same at a later stage.


While filing counter in Application No. 3832 of 1978, filed by the TRO, the plaintiff bank raised the constitutional validity of s. 281 and rr. 2, 16 and 51 of Sch. II to the Act and the procedure by way of an application for payment out instead of a regular suit by the TRO. The bank also filed an independent application in Application No. 952 of 1979 raising the same constitutional questions. It was claimed that rr. 2, 16 and 51 are ultra vires and void as repugnant to the bank's fundamental right to carry on business and to hold the property guaranteed under art. 19(1)(f) and (g) of the Constitution of India and also as violative of art. 31(1). It was also claimed that the provisions are repugnant to art. 14. The procedure by way of an application for payment out was claimed to be unconstitutional on the ground that it deprives the bank of a decision in a civil suit filed by the Department in which there will be an opportunity for oral and documentary evidence to be adduced with appeal up to the Supreme Court. Section 281 is claimed to be void and ultra vires on the ground that it invalidates innocent transfers on the mere bare ground of pendency of proceedings, which is a permanent condition for an incometax assessee. It is also claimed that there was an arbitrary delegation of power in this section to validate or invalidate a transfer without any guidelines and, therefore, void. The plaintiff bank have also questioned the legislative competence of Parliament in enacting s. 281 and rr. 16 and 51. The TRO has filed a counter affidavit controverting all these allegations on constitutional validity and contending that they are quite legal and valid.


All these applications have been posted before us as a similar question has been raised in L. P. A. No. 77 of 1980, which was before us for hearing.


In L. P. A. No. 77 of 1980, the facts, shortly stated, are these : One Madame Garnier executed a mortgage over her property in favour of one Raghavan alias Selvaraj, who is the appellant in L. P. A. No. 77 of 1980, for a sum of Rs. 20, 000 on December 22, 1960. The property is situate in Pondicherry which was at that time a French territory. On the de jure transfer of Pondicherry on August 16, 1962, the I.T. Act was extended to Pondicherry, with effect from April 1, 1963. The Code of Civil Procedure was also extended with effect from May 25, 1968. This Madame Garnier was in arrear of income tax amounting to Rs. 10, 00, 000, and she died in September, 1967. The only immovable property left behind, by her was door No. 4, St. Lawrence Street, Pondicherry, which was the subject matter of the mortgage in favour of Selvaraj, the respondent herein. A notice under r. 2 of the Sch. II of the Act was served on August 5, 1971, on the legal representatives demanding payment. The Department filed O.P. No. 21 of 1975, on the file of the First Additional Subordinate judge, Pondicherry, against the legal representatives of the deceased, Madame Garnier, for permission to bring the property to sale. The court declared, that the Department has a first charge over the property and permitted it to bring the property to sale and this petition was ordered on October 24, 1975.


Under the French law, a deed of mortgage executed and registered is considered to be a decree by itself and having the force of a decree. Accordingly, when the mortgagor, Madame Garnier, defaulted in payment of the mortgage money, the mortgagee filed on July 1, 1974, E.P. No. 217 of 1974 on the file of the First Additional Subordinate judge, Pondicherry, for sale of the mortgaged property for realisation of the money due thereunder. The executing court, after giving permission to the mortgagee to bid and set off, auctioned the property on December 16, 1976 and it was purchased by the mortgagee himself for a sum of Rs. 44, 100. In these execution proceedings, there was no notice to the Department and the Department came to know of it only after the auction was held. When they came to know of this sale, the Department filed E.A. No. 5 of 1977 claiming that for realisation of the income tax arrears, the Government have got a claim for priority of payment and that the sale surreptitiously brought about by the mortgagee was liable to be set aside. This application was filed under 0. 21, r. 90 and s. 151, CPC. By an order dated 26th July, 1977, the executing court held that under the French law, a mortgage has the force of a decree and could be executed straightaway without filing suit praying for a decree for sale, that the words "decree for payment of money" in r. 16(1) must be given a restricted meaning confining it to a simple money decree and cannot include a decree for sale in enforcement of a mortgage decree and that the Government have no priority of payment as against a secured creditor. . The ITO, Pondicherry preferred an appeal to this court in C.M.A. No. 708 of 1977. The learned single judge who heard this appeal held that the mortgage dated December 22, 1960, is a decree which can be put into execution straightaway in view of the French law and the decisions given therein, that, therefore, E.A. No. 217 of 1974 filed by the mortgagee for executing the decree was in order, that the court auction held on December 16, 1976, in the execution proceedings was not valid, since much earlier to it, the mortgagor defaulter and the legal representatives had been served with notices, of demand of arrears of tax, that in fact a petition in O.P. No. 21 of 1975 had been filed against them for bringing the property to sale and that the execution of the decree for payment and the sale held at the instance of the mortgagee was not binding on the I.T. Dept. The learned judge also held that a mortgage decree is a decree for money within the meaning of r. 16(1) and that since the court auction was held on December 16, 1976, subsequent to the service of notice under r. 2, the sale was hit by r. 16. In that view the learned judge set aside the order of the executing court. It is against this order, the mortgagee has filed L.P.A. No. 77 of 1980.


Though the appellant had not raised the question of constitutional validity of any of the provisions of the I.T. Act before the learned single judge, he had raised a ground in this Letters Patent Appeal that, rr. 2, 16 and 51 of Sch. If and s. 281 of the I.T. Act, 1961, are ultra vires and void.


The first argument of the learned counsel for the bank is that s. 226(4) which enabled the ITO to apply to the court in whose custody there is money, for payment out towards the arrears of tax by merely filing an application without obtaining a decree against the assessee, is not avail able in a certificate proceeding to the TRO. According to the learned counsel, the procedure or method of recovering the tax under s. 226(1) and the certificate proceedings under s. 222 are separate and distinct, each with its own rules. The rules applicable to one proceeding do not apply to the other proceeding. The provision in s. 226(1) is available only for an ITO and not available to a TRO. The TRO can proceed to recover from the assessee the amount of arrears of tax in accordance with the rules laid down in the Second Schedule only. Neither the ITO, while invoking his powers under s. 226(4), could rely on any of the rules in the Second Schedule or any order of the TRO, nor the TRO could invoke the provisions of s. 226(4). So the argument ran.


Section 220 of the Act provides that any tax other than advance tax, interest, penalty, fine or any other sum specified in the notice under s. 156 should be paid within 35 days or such shorter period as specified in the notice, from the date of service of notice. An assessee shall be deemed to be in default, if he does not pay the amount within the time limited under the notice of demand or within such period as extended by the ITO. Sections 222 to 232 specify several methods of recovering incometax. Under s. 222, when an assessee is in default or is deemed to be in default in making the payment of tax, the ITO may forward to the TRO, a certificate specifying the amount of arrears due from the assessee and on receipt of such certificate, the TRO shall proceed to recover from such assessee the amounts specified therein by one or more of the methods mentioned in that section in accordance with the rules laid down in the Second Schedule to the Act. This method of recovery is referred to in this judgment as "certificate proceeding". Section 226 of the Act enables the ITO to recover the tax by some other methods like getting deductions from salaries, issuing garnishee orders and applying to any court in whose custody there is money belonging to the assessee for payment to the ITO of the entire amount of such money or, if it is more than the tax due, an amount sufficient to discharge the tax liability. There are certain other modes of recovery like recovery of tax through the State Government and recovery of tax in pursuance of agreements with foreign countries. A reading of the provisions of s. 222 to s. 228A further makes it clear that the various modes of recovery set out in these sections are not mutually exclusive but may be pursued concurrently. Section 232 further provides that the several modes of recovery specified in that chapter shall not in any way affect any other law for the time being in force relating to recovery of debts due to the Government or the right of the Government to institute a suit for the recovery of the arrears due from the assessee and that it shall be lawful for the ITO or the Government to have recourse to any such law or suit notwithstanding that the tax due is being recovered from the assessee by any modes specified in that chapter. Thus, the methods of recovery provided under ss. 222 to 228A are also not exhaustive and the tax could be recovered under any other law for the time being in force relating to recovery of debts due to the Government or by instituting a suit for the recovery of the same.


In Builders Supply Corporation v. Union of India the Supreme Court held that the English common law doctrine of priority of Crown debts which has been given judicial recognition in India prior to 1950 in regard to the recovery of tax dues in priority to other private debts of the taxpayers is a "law in force" in the territory of India and, by virtue of art. 372(1) of the Constitution of India, it continues to be in force in India until it is validly altered, repealed or amended and the Govt. of India is thus entitled to claim priority for arrears of income tax due to it from a citizen over other debts of unsecured creditors. The Supreme Court further held that the application of the doctrine of priority of arrears of tax over private debts is not displaced by any of the provisions of the Public Dues Recovery Act, 1913, or the provisions in s. 46(2) of the Indian I.T. Act, 1922, which provides for the recovery of the tax as if it were an arrear of land revenue. This principle has been reaffirmed by the Supreme Court in later judgments and it is now well settled. This court had further held in Collector of Tiruchirapalli v. Trinity Bank Ltd. that a decree holder had no preferential right over the amounts collected by a receiver, though the receiver was appointed to collect rents and profits from mortgaged property, and that the Collector was entitled to be paid the arrears of income tax out of the amounts collected by the receiver. In these decisions and in a Full Bench decision in Manickam Chettiar v. ITO it has been held that while enforcing priority, it is not necessary for the Government to obtain a decree against the assessee or to effect an attachment for enabling it to file an application to the court for an order, directing payment out of any money belonging to the assessee lying in the court. These principles were judicially recognised, although there was no express provision similar to s. 226(4) in the Indian I.T. Act, 1922. Section 226(4) now specifically enables an ITO to apply to the court in whose custody there is money belonging to the assessee for payment to him of the money or such amount as is sufficient to discharge the tax arrears. But on that ground we cannot hold that s. 226(4) was intended either to alter, repeal or amend the Crown priority which was continued as a "law in force". On the other hand, s. 232 specifically provides that the several modes of recovery specified in Chap. 17 of the I.T. Act shall not affect in any way," *


any other law for the time being in force relating to the recovery of debts due to the Government

". The right to priority of payment being the law in force in the territory of India prior to 1950, continued to be in force in India subsequently thereafter by virtue of art. 372(1) of the Constitution.


A TRO, on receipt of the certificate referred to in s. 222, shall proceed to recover from the assessee the amounts specified therein by one or more of the modes mentioned in that section in accordance with the rules laid down in the Second Schedule. Rule 31 of the Second Schedule which forms part of Pt. II relating to attachment and sale of movable property deals with attachment of property in the custody of a court which will include amounts standing to the credit of a defaulter in a suit. That rule provides that where the property to be attached is in the custody of any court, the attachment shall be made by a notice to such court, requesting that such property and any interest payable thereon may be held subject to further orders of the TRO by whom the notice is issued. The proviso further states that where such property is in the custody of a court, any question of priority between the ITO and any other person, not being the defaulter, claiming to be interested in such property, shall be determined by such court. In the two proceedings now under consideration, the courts concerned were informed of the tax arrears and the attachment and were called upon to decide the priority in payment. The applications were, therefore, properly made by the TRO to determine the priority between the ITO and the bank or creditor and direct payment out to him, as in the case of attachment and sale of any other movable property in which the TRO has a right to pay the sale proceeds to the ITO in satisfaction of the income tax arrears. The application was, therefore, in order and maintainable.


It may also be pointed out that the applicant is, in fact, the. Union of India represented by the TRO and, therefore, no question of maintainability can arise.


We might also consider the question with reference to the court's jurisdiction to order payment out. It has been held by the Full Bench of this court in Manickam Chettiar v. ITO, that the court had an inherent power under s. 151 of the CPC to make an order on the application for payment out of monies towards arrears of income tax due to the Government. In regard to the maintainability of the application by the TRO on behalf of the Union of India, it makes no difference whether the respondent decree holder is a secured creditor or an unsecured creditor. We are, therefore, unable to accept the contention of the learned counsel for the bank that the payment out application filed by the Union of India represented by the TRO was not maintainable.


It was then contended on behalf of the plaintiff bank that the mortgage, in its favour, was and shall be deemed to be long prior to May 23, 1968, when the attachment shall be deemed to have taken effect and that, therefore, the Revenue is not entitled to claim priority of payment. The allegations on this part of the case were as follows. In 1965, when the firm, T. D. Murthy and Co., started dealings with the bank, it had three partners, namely, T. D. Murthy, T. D. Chandrasekaran and T. D. Sundararaj. The said firm had been, given various facilities by the bank such as overdraft, fully secured loan, key loan, cash credit key loan, open loan, bill purchased, cheques discounting facility and some other facilities. For this purpose deposit of title deeds with a list of documents deposited were made out by way of security for mortgage by deposit of title deeds. The first of such mortgages was on August 2, 1965, under which T. D. Murthy and Co., and its partners as also Smt. Neelambal Ammal delivered to the bank the documents of title to the various immovable properties which belonged to them with intent to create security therefor in favour of the bank. AU the documents of title relating to the properties have been in the possession and custody of the bank from that date, namely, August 2, 1965, and have never been returned to the parties concerned. When T, D. Murthy and Co. desired to have an increase in the limits of various loan facilities as well as other facilities, fresh documents were taken on February 10, 1967, and a new letter for the fresh documents deposited was also taken. Again, as the party desired certain changes in the limits and further wanted other facilities, fresh documents evidencing mortgage by deposit of title deeds were got executed on January 20, 1968. Then again, for the same reasons, fresh documents were taken on December 22, 1969. The originals of these documents taken on December 22, 1969, were filed in the suit C.S. No 84 of 1973 when the suit was filed for enforcing the mortgage dated December 22, 1969. Accordingly, it was claimed that the original mortgage in favour of the bank was on August 2, 1965, and the subsequent mortgages on February 10, 1967, January 20, 1968, and December 22, 1969, were only for modifying the facilities granted or increasing the limits granted. In the circumstances, even if the attachment were to date back under r. 51 of the Second Schedule to the I.T. Act, 1961, it cannot affect the defendants liability in the suit to the bank.


The Revenue filed a counter to these allegations and contended that the mortgages dated August 2, 1965, February 2, 1967, and January 20, 1968, referred to by the plaintiff were no longer subsisting mortgages and by virtue of the equitable mortgage created on December 22, 1969, the earlier mortgages have been discharged and no debts under those mortgages were subsisting in law. The only subsisting mortgage was the one dated December 22, 1969, and it is to recover the amount due under it that the suit was filed. In the circumstances, therefore, the claim of the plaintiff bank that the mortgage was anterior to the attachment is not correct. We think the Revenue is absolutely correct in this submission. No evidence has been produced to show that the earlier mortgages were subsisting. In fact, the suit, C. S. No. 84 of 1973, was not for recovery of any of the moneys due under the earlier mortgages in the plaint. The cause of action was stated to have arisen on December 22, 1969, when the defendants executed the promissory notes and the overdraft and hypothecation agreements. The claim thus was that the amount was due under the mortgages earlier to it. No oral or further evidence also was produced in this case in support of the claim that the earlier mortgages were subsisting or that the bank is entitled to claim the money as referable to the earlier mortgages. It is, therefore, not open to the bank now to contend that it is seeking to enforce only the mortgage of the year 1965 and this contention of the bank cannot be accepted.


It was then contended that the bank was not aware of any attachment or notice by the I.T. Dept. and that any attachment under r. 48 will be binding only on any person having notice thereof and the bank was bona fide transferee for value without notice even when the documents of title were taken on December 22, 1969. It was also contended that since it cannot be stated or even suggested that the mortgage in favour of the bank was with the intention to defraud the Revenue, the transfer cannot be held to have become void. It is true that s. 281 of the Act, as it originally stood before it was substituted by the Taxation Laws (Amendment) Act, 1975 (Central Act 41 of 1975), with effect from October 1, 1975, spoke of charges or mortgages executed by an assessee with intention to defraud the Revenue. It might have been possible to argue that, if s. 281 stood in its original form, the onus is on the Department to prove that the transaction was void on the ground that the charge or mortgage by the assessee was with the intention to defraud the Revenue. After the deletion of the words "with the intention to defraud the Revenue" in the provision and providing that such charge or transfer shall not be void if it is made for adequate consideration and without notice of the pendency of such proceeding or, as the case may be, without notice of such tax or other sum payable by the assessee, the onus to prove good faith and want of notice is now rested on the parties to the transaction. The question of bona fides or notice of the pendency of the proceedings is relevant only for the applicability of s. 281. But in this case, the Revenue relies, in support of its contention that the transfer is void, on rr. 2, 16, 48 and 51 of the Second Schedule. These rules are applicable to the stage where an assessee had become a defaulter or shall be deemed to be a defaulter within the meaning of ss. 220 and 222 of the Act. Rule 16 provides that where notice has been served on a defaulter under r. 2, the defaulter or his representative in interest shall not be competent to mortgage, charge, lease or otherwise deal with any property belonging to him; and cl. (2) of that rule further stated that where an attachment has been made under the Second Schedule, any private transfer or delivery of the property attached or of any interest therein, shall be void as against all claims enforceable under that attachment. This rule is absolute in terms and, irrespective of the bona fides or otherwise of the transfer, the transaction is void as against claims enforceable under an attachment. This contention of the plaintiff that the transaction was bona fide and that it was without notice of the pendency of any proceeding against the assessee, does not in any way affect the right of the Revenue to treat the transaction as void under the rules.


In fact a similar question came up for consideration in the decision TRO v. V. Radhakrishna Eradi. In that case the demand notice under r. 2 was served on the defaulter between March 24, 1967, and March 12, 1969. On the 15th March, 1969, the defaulter had executed an equitable mortgage by deposit of title deeds. The mortgagee claimed that the mortgage was a bona fide transaction and that there is protection in favour of a bona fide transfer for valuable consideration under the proviso to s. 281 which shall be available even to a case where r. 16 is invoked. A Division Bench of the Kerala High Court held (pp. 872-73):


The two operate in different spheres and deal with quite different and distinct matters. The section deals with the subject of fraudulent transfer provided for, for instance, by s. 53 of the Transfer of Property Act. The rule, on the other hand, operates on a different sphere altogether, and deals with private transfers made after an attachment of property has been effected in the course of recovery proceedings for realising the arrears of tax. The provision corresponds to what is enacted by s. 64 of the CPC. It is not possible to equate the one with the other, or to read the provisions of the one into the other or to draw a similarity between the two. In the circumstances, the learned judge was wrong in holding that the protection in favour of a bona fide transferee for valuable consideration indicated by the proviso to s. 281 of the Act, must get incorporated, or be implied, into r. 16 of the Second Schedule as well. There is neither reason nor logic in doing so and we are unable to accept this process of reasoning of the learned judge.


This decision was followed by the Bombay High Court in Inayat Hussain v. Union of India where it was also held that a transfer subsequent to the attachment as provided in r. 51 would be of no avail and would be void as against the Department and no question of bona fides of the transfer for value or any other question or an intention to defraud the Revenue would arise at all in considering r. 16. We are, therefore, of the view that since in this case the mortgage in favour of the bank was subsequent to the attachment made, the question of bona fides or otherwise does not arise.


On behalf of the appellant in L.P.A. No.77 of 1980, it was contended that the priority, if any, for recovery of tax to be given to the Government was only in respect of the claims of unsecured creditors and that the claim for priority over secured creditors has not been recognised. We have already noticed that the Supreme Court in the decision in Builders Supply Corporation v. Union of India had held that the Govt. of India is entitled to claim priority for arrears of income tax over other debts of unsecured creditors. It was argued that this restriction of the claim for priority over unsecured creditors would necessarily imply that either the State Govt. have no priority claim over secured creditors or that the secured creditors have a priority claim over other unsecured creditors including that of the Government. There could be no doubt and in fact it was not disputed on behalf of the Revenue that if the mortgage is earlier than r. 2 notice, the Revenue has no right to claim priority either under common law or under the provisions of the I.T. Act and the 'Rules.


In the decision of the Supreme Court, the Supreme Court had held that the claim of priority recognised in English common law prior to the coming into force of the Constitution was a law in force in the territory of India within the meaning of art. 372(1) of the Constitution and it continued to be in force until it is validly altered, repealed or amended. The question for consideration is whether r. 16(1) is a statutory provision recognising such priority over a secured creditor even if the mortgage was prior to the date of r. 2 notice. Relying on the decision in Suraj Prasad Gupta v. Chartered Bank it was argued that the provision cannot be construed as conferring any such right. In that case it was held that there was no substantive provision in the I.T. Act for superseding or overriding the claims or rights of a secured creditor of the assessee and that Sch. II to the Act relates to the procedure only and does not deal with substantive rights. Therefore, the expression "decree for payment of money" in r. 16(1) must be given a restricted meaning confining it to a simple money decree and cannot include a decree for sale in enforcement of a mortgage decree passed under 0. 34, r. 5 of the CPC. It is not disputed that under the French law applicable to the mortgage in question, a mortgage bond executed had the force of a decree and could be executed at any time as if it were a decree without filing a suit on the mortgage. But the decree had not been executed and the mortgaged property still belonged to the judgment debtor. Before the civil court could execute the decree, bring the property to sale, realise the sale proceeds and pay it to the mortgagee, r. 2 notice had been served on the defaulting assessee and attachment also had been effected. Even so, the learned counsel contended that a mortgage decree cannot be held to be a decree for the payment of money and that, therefore, r. 16(1) is not applicable. Rule 16(1) reads as follows:


Where a notice has been served on a defaulter under rule 2, the defaulter or his representative in interest shall not be competent to mortgage, charge, lease or otherwise deal with any property belonging to him except with the permission of the Tax Recovery Officer, nor shall any civil court issue any process against such property in execution of a decree for the payment of money.


The argument of the learned counsel for the appellant is that the words for the payment of money" *


is referable only to a simple money decree and a mortgage decree is outside its scope. In one of the earliest judgments in Hart v. Tara Prasanna Mukherji 1885 (11) ILR(Cal) 718, decided under the provisions of the Code of Civil Procedure, 1882, it was held that a decree upon a mortgage which enables the mortgagee to realise the amount of mortgage debt from the mortgaged properties and from the defendants personally was held to be a decree for the payment of money. The court observed (pp. 729-30) :

".... every decree, by virtue of which money is payable, is to that extent a 'decree for money' within the meaning of the section, even though other relief may be granted by the decree (example, sale of the mortgaged property); and that the holder of such a decree is entitled to claim rateable distribution with holders of decrees for money only." *


Following this judgment, this court in Kommachi Kather v. Pakker 1896 (20) ILR(Mad) 107, held that where a decree upon a mortgage directs the mortgagor to pay the mortgage debt is a mortgage within the period fixed by the court and provides that in default the mortgaged property should be sold and the balance, if any, should be recovered from the mortgagor, the decree was one for payment of money within the meaning of the old section. In a subsequent case, however, the Calcutta High Court pointed out that the ground on which the decree in Hart v. Tara Prasanna Mukherji 1885 (11) ILR(Cal) 718 was held to be a decree for payment of money was, that it contained a distinct order upon a mortgagor personally to pay the amount of the mortgage debt, that unless the decree contains such similar terms, the mortgage decree could not be considered to be a decree for payment of money and dissented from the Madras High Court's view on the ground that in the case, Kommachi Kather v. Pakker 1896 (20) ILR(Mad) 107, the decree did not contain any direction on the mortgagor to pay personally. However, in a later Full Bench judgment of this court in Vaidhinadasamy Ayyar v. Somasundram Pillai 1905 (28) ILR(Mad) 473, this court held that a decree directing the sale of mortgaged properties in default of payment of money is a decree for money whether there is a direction to pay personally or not and whether the remedy against the property is exhausted or not. The learned counsel for the appellant, however, argued that those decisions were rendered, under the Code of 18 82, and, relying on a passage from Mulla on the Code of Civil Procedure, Vol. I, 13th Edn., p. 351, contended that these decisions cannot be sustained under the Code of 1908. That passage relied on by the learned counsel reads as follows:


"There is little doubt that if these High Courts were called upon to decide whether a decree of the character in the Madras case was a 'decree for the payment of money' within the meaning of this section, they would hold that it was not. In any event the Madras decision cannot be sustained under this Code: See 0. 21, r. 20." *


Order 21, r.20, referred to above, reads as follows :


The provisions contained in rules 18 and 19 shall apply to decrees for sale in enforcement of a mortgage or charge.


Rules 18 and 19 deal with execution in case of cross decrees. To our mind it appears to be that this rule was inserted to make it abundantly clear that the provisions as to cross decrees or cross claims apply equally to mortgage decrees. We are, therefore, unable to agree with the learned counsel that either the law has changed by the insertion of 0. 21, r. 20 or that the validity of the decision of the Full Bench in Vaidhinadasamy Ayyar v. Somasundram Pillai 1905 (28) ILR(Mad) 473, is in any way affected. We, therefore, agree with the learned single judge who has accepted the contention of the respondent that essentially a mortgage decree is for recovery of money and though the mortgagee is enabled to bring the security to sale in court auction, what he realises ultimately is the amount due under the mortgage. In this view, even mortgage decrees are decrees for payment of money. Thus the embargo on the civil court's power to proceed against the property of the defaulter in execution of decree for payment of money, will also apply to the mortgage decree and to this extent the mortgagee's right to execute the decree is affected. But this does not mean that the priority claim of the mortgagee against the dues of the Government is in any way affected. If the mortgage was created at a time when there were no proceedings pending against the mortgagor under the Act or it was created during the pendency of any proceedings or after the completion thereof but before the service of notice under r. 2 of the Sch. II and the proviso to s. 281 are complied with, then the mortgagee will be entitled to priority of payment.


The learned judge in his order in C.M.A. No. 708 of 1977 has found that notice under r. 2 was served on August 5, 1972 and that the Department also filed 0. P. No. 21 of 1975 for permission to bring the property of the defaulter to sale and this petition was ordered on October 24, 1975, and it is only thereafter the sale in execution petition filed by the appellant was held on December 16, 1976, though the execution petition was filed on July 1, 1974. In the circumstances, the learned judge held that r. 16 would apply. We are unable to agree with this finding of the learned judge. As we have seen already, the decisions are uniform that the priority claim of the Government is not available against secured creditors unless there is a specific statutory provision to that effect. In this case, the mortgage itself was executed as noticed in the beginning of this judgment, as early as on December 22, 1960, when the provision of I.T. Act was not even extended to Pondicherry. Rule 2 or r. 16, therefore, could not have applied to that mortgage. The learned judge himself has noticed, in an earlier part of his judgment, that if the mortgage had been executed prior to the claim of the Government, the mortgage could not be affected. However, he held ultimately that since a mortgage decree is also a decree for money, the embargo on execution against the property under r. 16(1) would apply irrespective of the date of the mortgage. The learned judge further held that in such a situation it was open to the appellant to file his claim before the TRO under r. 11(6) when he brings the property to sale claiming that he is a secured creditor and out of the realisation before the amounts are appropriated towards arrears of tax the secured creditor should be paid first and such claim will have to be decided by the TRO. We are unable to agree with this part of the judgment of the learned judge. Though, as we have already stated, a mortgage decree is also a decree for payment of money, if claim is made by the Revenue during the execution proceedings or if it comes to the notice of the court that there is an income tax claim against the mortgagor or that a notice has been served on the mortgagor, then the court will have to decide whether it has to proceed with the execution or refuse any process against the mortgaged property. If the court comes to the conclusion that the mortgage was brought about at a time when there were no proceedings pending against the mortgagor or that it was created during the pendency of any proceeding or after the completion thereof, but before the service of notice, and r. 2 of Sch. II and the proviso to s. 281 have been complied with, then it will proceed with the execution. If, on the other hand, it comes to the conclusion that the mortgage was executed subsequent to r. 2 notice or the proviso to s. 281 has not been complied with, the court will refuse to issue any process against such property since the embargo on the execution court will apply under the latter clause. The question, therefore, will have to be considered by the executing court and the provisions of the I.T. Act cannot be interpreted as in any way directing such an iss

ue to be decided only by the TRO and not by the court. We hold that the two limbs of r. 16(1) of the Second Schedule must be construed together as part of an integrated provision. The first part of the rule forbids any mortgage, charge, lease, or other dealing by the defaulter of the property, except with the TRO's permission, when once a notice under r. 2 has been served on him. It is in that connection that the second limb of r. 16(1) lays down that no court can levy any process in execution of a money decree against "such property. The expression such" property, in the context, can only refer to property of the defaulter which is incapable of being mortgaged, charged, leased or otherwise dealt with excepting under the TRO's permission. This situation can arise, if at all, only in a case where and at a time when the defaulter has already been served with at notice under r. 2. It follows, therefore, that r. 16(1) cannot be invoked to stay execution of a mortgage decree where the suit mortgage had been entered into by the defaulter prior to the service of notice under r. 2. If the ITO wishes to question any such mortgage, he must do so in a court in appropriate proceedings. Reference may be made in this contention to r. 9 of the Second Schedule. This rule provides that every question arising between the ITO, on the one hand, and the defaulter or his representative, on the other, relating to the execution, discharge or satisfaction of a tax recovery certificate, shall be determined not by a civil court, but by order of the TRO. This general bar to the civil court's jurisdiction, however, does not touch questions arising as between the ITO and a third party creditor of the defaulter because such a creditor can by no means Be regarded as the defaulter's representative within the meaning of r. 9. Rule 11 of the Second Schedule no doubt provides for investigation by the TRO of claims to property attached in execution of a tax recovery certificate. But that rule does not touch the determination of questions of priority of secured creditors of the defaulter. There is nothing in the Second Schedule to the Act which has the effect of making the TRO forum, much less an exclusive forum, for determining questions of priority. In the present proceedings the Department has not, and could not, question the validity of the mortgage on any ground whatever. It cannot even be suggested that the mortgage had been created to defraud the Revenue. As, we have already mentioned, the mortgage in the present case was executed on December 22, 1960, at a time when the I.T. Act had not even been extended to the State of Pondicherry. The learned judge himself has observed that there are no materials to hold that there was no mortgage created on December 22, 1960. Hence, the learned judge was not justified in directing the appellant to apply to the TRO under r. II of the Second Schedule and establish the validity of his claim as a secured creditor on the basis of the mortgage dated December 22, 1960., We accordingly set aside the decree of the learned judge and restore the order of sale made by the trial court. That leads us to the question of the constitutional validity of the provisions challenged. Though in the affidavit filed in support of the application the vires of rr. 2, 16 and 51 of Sch. II and s. 281 of the Act were raised, the learned counsel did not advance any argument on the validity of rr. 2 and 16 and s. 281 and, therefore, we proceed on the assumption that those provisions are valid. Rule 16(2) of the Second Schedule provides that where an attachment has been made under this Schedule, any private transfer or delivery of the property attached or of any interest therein and any payment to the defaulter of any debt, dividend or other monies contrary to such attachment, shall be void as against all claims enforceable under the attachment. In other words, alienations made after attachment are void as against claims under that attachment. This is similar to s. 64 of the CPC. As already stated, the learned counsel for the bank did not question the validity of this provision, though in the affidavits it, is generally mentioned that the provision is invalid. Further, the avoidance under this rule will operate only by actual attachment effected according to the provisions of law. A provision similar to r. 16(2) of the Second Schedule was necessary to secure the rights of the attaching creditor. In fact, the transferees are also protected by the warning inherent in the publicity of attachment. There can, therefore, be no question relating to the validity of r. 16(2). Rule 51 of the Second Schedule, however, provided that where any immovable property is attached under this Schedule, the attachment shall relate back to, and take effect from, the date on which the notice to pay the arrears, issued under this Schedule, was served upon the defaulter. That means that the attachment will date back to the date of r. 2 notice. It is this dating back and declaring transfers, which were effected at time when an attachment had not been effected, as void, which are assailed by the learned counsel as unreasonable and as not even covered by the ancillary power to provide for effective collection. It is well settled that provisions in a taxing statute designed to prevent evasion of tax or to prevent fraud and to secure payment of tax which had become due, do not amount to unreasonable restrictions within art. 19(1)(f) and (g): (vide Balaji v. ITO). There can be no doubt that r. 51 is intended to prevent an evasion of tax. Apart from the fact that art. 19(1)(f) has now been deleted, r. 16(2) only deals with the competency of the defaulter in transferring or delivering property which is the subject matter of the attachment and, therefore, the restriction placed under the rule is a reasonable restriction. The legislative competency to enact r. 51, as such, cannot also arise in this case. It has been repeatedly held by the Supreme Court that the legislative entries have to be read in a very wide manner and so as to include all subsidiary and ancillary matters. Thus, entry 82 of List I of Sch. VII should be read not only as authorising the imposition of a tax but also as authorising an enactment which prevents the tax imposed being evaded. Even if it were to be held that the impugned rule would not come under entry 82, Parliament would have authority under entry 97 of List I. That confers residuary powers of legislation on Parliament to enact legislation on all matters not enumerated in Lists II and III. Article 248 also provides that where a subject of legislation is not enumerated, it must belong to Parliament. Therefore, the question of legislative competency of Parliament to enact r. 51 could not arise. We are, therefore, unable to accept the contention of the learned counsel that r. 51 either impinges any of the appellant's fundamental rights or that it is in excess and, therefore, not within the ancillary power to provide for effective collection. Since even during the pendency of the suit, C.S. No. 84 of 1973, the question of priority of payment has arisen and the decree of the High Court is not attacked in any collateral proceedings, we do not think that any question relating to the validity of the decree of the High Court or the High Court Decrees Validation Act could arise in this case. In the result, L.P.A. No. 77 of 1980 is allowed with costs. Application No. 3832 of 1978 is ordered. Applications Nos. 3833 of 1978 and 952 of 1970 filed by the bank are dismissed. The applicant in Application No. 3832 of 1978 will be entitled to his costs. There will be no order as to costs in the other two applications. V. RAMASWAMI J The learned counsel for the bank sought leave to appeal to the Supreme Court under art. 134A of the Constitution. We are satisfied that the following substantial questions of law of general importance do arise out of our judgment, and that, in our opinion, these questions need to be decided by the Supreme Court. 1. Whether rule 51 of Schedule II providing that attachment of immovable property relates back to notice under rule 2 of the Schedule is unreasonable and void and beyond the legislative powers of Parliament as to procedure ? 2. Whether rule 16(1) is also void, for, its effect is also to avoid transfers by the defaulter after rule 2 notice ?" Accordingly we grant leave to appeal to the Supreme Court.