IMPORTANT POINTS
1. Common law doctrine of priority of State s 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 Constitution.
2. The common law doctrine of priority of crown debts would not extend to providing preference to crown debts over secured private debts.
3. 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 Karnataka Sales Tax Act, 1957.
4. Where statute so provides, State would have preference over a secured creditor s right to recover its dues.

Headnote:(i) Recovery suit-Detur digniori -Common law rule of preference of Crown s right-Scope of doctrine quando jus domini regis et subditi concurrent jus regis praeferri debt-Crown s preferential right to recovery of debts over other creditors is confined to ordinary unsecured creditors.
       Common law doctrine of priority of State s 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 Constitution. 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. However, the Crown s 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 Crown s 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 question which of the two ought to prevail in a case where one, that of the subject, has prevailed already. (Paras 7, 8 and 10)
       (ii) Bank-Recovery suit-Suit on basis of mortgage debt-State Government attaching property of debtor towards arrears of sales tax-Claim of Bank that it being a secured creditor State cannot have preference over its right to recover debt-Not tenable-Section 158 of Karnataka Land Revenue Act not only gives statutory recognition to doctrine of State s priority for debts but also extends its applicability over private debts forming subject matter of mortgage, judgment-decree etc.-Section 158 accords primacy to all moneys recoverable which includes sales tax arrears-Partners property can be proceeded against by State for recovery of sales tax dues in terms of Sales Tax Act.
       Held : The common law doctrine of priority of crown debts would not extend to providing preference to crown debts over secured private debts. But Section 158(1) of the Karnataka Land Revenue Act 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 State s 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. 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. Therefore, the State shall have a preferential right to recover its dues over the rights of the Bank. 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 Bank s security in view of the law as laid down by this Court in Commissioner of Sales Tax, M.P. v. Radhakrishan & Ors., AIR 1979 SC 1588. However, still in the facts and circumstances of the case, the appellant Bank cannot be allowed any relief. Section 15(2A) of Karnataka 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. (Paras 15 & 21)
       (iii) Karnataka Sales Tax Act, 1957-Section 15(2A)-Recovery of sales tax arrears-Arrears of dues of firm-Property belonging to partners can be proceeded against for recovery of dues on account of sales tax assessed against partnership firm.
       Section 25 of the Partnership Act 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 for 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. Therefore 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 Karnataka Sales Tax Act, 1957. (Paras 6 and 18)

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 and 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 State s 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.

2. The Bank preferred an appeal before the High Court. 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 Hon ble Court."

3. 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

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2000 Supreme(SC) 847

Cases Referred (6)