A public debt has priority over a private debt and the State can claim a right of priority for being paid out from the sale proceeds of attached goods, even in the absence of a decree or attachment pursuant to a decree.

Headnote:
HYPOTHECATION - RIGHTS OF HYPOTHECATEE - PRIORITY OVER PUBLIC DEBT - INCOME-TAX ARREARS - ATTACHMENT OF HYPOTHECATED GOODS - RIGHTS OF STATE - SECTION 114(E) OF THE EVIDENCE ACT - SECTION 80 OF THE CIVIL PROCEDURE CODE - PUBLIC DEBT - PRIORITY OVER PRIVATE DEBT - BUILDERS SUPPLY CORPORATION V. UNION OF INDIA (1965) 1 SCR 621 - MANICKAM CHETTIAR V. INCOME-TAX OFFICER, MADURAI (1957) 31 ITR 495 (FB) - VENKATACHALAM CHETTI V. VENKATRAMI REDDI (1959) 34 ITR 413 (DB) - RE MORRIT (1886) 18 QBD 222.
Fact of the Case:

The plaintiff, a creditor, filed a suit against the defendants, the Union of India and the District Collector of Salem, seeking a declaration that a camera, which was the subject matter of a hypothecation bond, was not liable to be attached by the defendants for the recovery of arrears of income-tax and that the plaintiff had a prior mortgage over it. The plaintiff claimed that the camera was hypothecated to him under a deed of hypothecation and that he had obtained a decree in a previous suit for the recovery of the debt secured by the hypothecation. The defendants contended that they had attached the camera for the recovery of arrears of income-tax due from the third defendant, the owner of the camera, and that their rights of priority should be recognized.
Finding of the Court:

The court held that the plaintiff's rights under the hypothecation bond were not equatable to the rights of a mortgagee under a deed of mortgage of movables, as no interest in the property had ever passed to the plaintiff under the said deed of hypothecation. The court further held that, as between the State and the plaintiff, the debt due to the former, it being a public debt, prevailed over the debt payable to the latter as a private debt and that, in the absence of any secured rights which the plaintiff could project in a manner known to law by virtue of the hypothecation bond, the ordinary rule of priority applied and hence the claim of the defendants in the matter of the attachment and sale of the camera pursuant thereto was unassailable and their rights of priority should be recognized.
Issues: 1. Whether the alleged attachment of the camera by the Government for income-tax arrears on 22nd March, 1963 will prevail over the hypothecation of the said camera to the plaintiff on 31st August, 1960 which is decreed upon in O. S. No. 106 of 1964 on 25th June, 1964? 2. Whether the plaintiff is entitled to the declaration sought? 3. Whether the suit is barred by limitation ? 4. Whether there is no valid notice of suit under section 80 of the Civil Procedure Code? 5. Whether Court-fee paid is correct ? 6. To what relief or reliefs, if any, is plaintiff entitled?
Ratio Decidendi: 1. A hypothecation of goods is a concept which is not expressly provided for in the law of contracts, but is accepted in the law merchant by long usage and practice. Hypothecation is not a pledge and there is no transfer of interest or property in the goods by the hypothe-cator to the hypothecatee. It only creates a notional and an equitable charge in favour of the hypothecatee and the right of the hypothecatee, as already stated, is only to sue on the debt and proceed in execution against the hypothecated goods, if they are available. 2. As delivery of possession is not a sine qua non for the creation of a notional charge under a deed of hypothecation and as possession of the hypothecated goods is always with the hypothecator, a wide door is open to the owner to deal with the goods without reference to the hypothecatee. 3. If the hypothecatee expressly or constructively notifies the equitable charge, matters would be different. Even so, when the hypothecatee has constructive possession of the goods, though not physical possession of the same. 4. In the instant case, it is not pretended that any such express or constructive notice of the existence of the hypothecation was ever given, nor it is claimed that the hypothecatee, namely, the plaintiff, did ever come into possession of the goods which were the subject-matter of Exhibit A-1. In the absence of such a constructive notice or express notice to the public at large, the right of the hypothecatee is that of a bare private money creditor with the ancillary right to proceed against the goods hypothecated after obtaining a decree in a Court of law. 5. Thus a hypothecation is a right in a creditor over a thing belonging to another and which consists in the power in him to cause the goods to be sold in order that his debt might be paid to him from the sale proceeds. This right is distinguishable from a mortgage of chattels. 6. As between a public debt payable to the State and a private debt payable to a citizen, the former has priority and this is too well established.
Final Decision: The court allowed the appeal, set aside the judgment and decree of the trial court, and held that the plaint camera which had been attached by the defendants was capable of being attached by them for recovery of arrears of income-tax and that they had a right of priority in the sense that from out of the sale proceeds of the camera they were entitled to recover arrears of income-tax payable for the assessment year 1958-59 by the third defendant, on such sale of the camera.

Ramaprasada Rao, J. - The first and the second defendants, the former being the Union of India represented by the Finance Department dealing with income-tax matters and the latter being the District Collector of Salem, who were unsuccessful in O.S. No. 146 of 1965 on the file of the Subordinate Judge’s Court, Salem, are the appellants. Certain relevant facts which led to the present litigation may he traced. The plaintiff in the action appealed against, on the foot of a hypothecation bond dated 31st August, 1960 (Exhibit A-1) filed O.S. No. 106 of 1964 on the file of the Subordinate Judge’s Court, Salem, for the recovery of a sum of Rs. 69,778.99p. with interest and costs by directing the sale of the hypothecated properties mentioned in the plaint and for the passing of the usual charge decree. In the above suit a commissioner was appointed to take an inventory of the goods which the plaintiff claimed to have a right of hypothecation over, but which were admittedly in the possession of the hypothecator, namely, the third defendant. In the course of such an inventory prepared by the Commissioner, it was discovered that a camera, which is the subject-matter of the present action and which the plaintiff claimed was also included in the hypothecation bond as above, was missing. During the pendency of the above suit, the third defendant, as owner of the hypothecated goods and as an assessee, was subjected to penalty and assessment proceedings under the provisions of the Indian Income-tax Act. For a period prior to the assessment year 1958-59 penalty proceedings as also assessment proceedings were initiated under Exhibits B-1 to B-6 for the recovery of various sums due by him as assessee under the Act. Under Exhibits B-7 and B-8 distraint proceedings were also issued directing the distraint of certain Articles including the said camera. It is common ground that under Exhibit B-8 the camera was attached by the second defendant pursuant to the usual orders of the tax recovery officers functioning under the Indian Income-tax Act, and it is also common ground that On 22nd February, 1963 the camera was attached pursuant to the tax. recovery certificate issued by the authorised officer under the Act and it was brought under the possession of the second defendant. After the attachment was effected, which as we said, was during the pendency of O.S. No. 106 of 1964, on the file of the Subordinate Judge’s Court, Salem, the plaintiff had to file a claim petition for the release of the said camera. Before we trace the necessary details connected with the claim petition and the orders passed thereon subsequently, it is necessary at this stage to notice the course which the attachment proceedings took and which were undertaken by the statutory officers functioning under the Indian Income-tax Act. As we said, the third defendant was in arrears of Income-tax for a period prior to the assessment year 1958-59 and for the said assessment year as well. Under Exhibit A-19 dated 17th September, 1963, consequent upon the payment of the amounts due by the assessee for the period earlier to the assessment year 1958-59, the attachment of the camera and other materials which were distrained earlier was raised on that date. But it is common ground that under Exhibit B-10 a fresh warrant of attachment was issued for the attachment of the said camera in respect of arrears due for the assessment year 1958-59. Pursuant to the said order of attachment issued under Exhibit B-10, the Tahsildar of the District issued a notice calling upon the third defendant to pay the amount by then due by him as defaulter under the Income-tax Act, 1961, within a period named by him in Exhibit B-11. The third defendant having committed default, under Exhibit B-13 a sale notice was issued whereunder it was proclaimed, inter alia, that the said camera would be the subject-matter of a public sale on the date named in Exhibit B-13. Coming to know of such a sale which was duly announced b

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1974 Supreme(Mad) 460

A public debt has priority over a private debt and the State can claim a right of priority for being paid out from the sale proceeds of attached goods, even in the absence of a decree or attachment pursuant to a decree.

Cases Referred (3)