http://JUDIS.NIC.

IN SUPREME COURT OF INDIA Page 1 of 10

PETITIONER:
DENA BANK

Vs.

RESPONDENT:
BHIKHABHAI PRABHUDAS PAREKH & CO. & ORS.

DATE OF JUDGMENT: 25/04/2000

BENCH:
R.C.Lahoti, S.R.Babu

JUDGMENT:

R.C. Lahoti, J.

On 12.4.1972 Dena Bank (hereinafter the Bank for

short), who is appellant before us, filed a suit for
recovery of a sum of Rs.19,27,142.29 paise with future
interest and costs against a partnership firm namely, M/s
Bhikhabhai Prabhudas Parekh & Co. and its partners. The
suit was based inter alia on a mortgage by deposit of title
deeds made by the partnership firm and its partners on
24.4.1969. The suit sought for enforcement of the mortgage
security. During the pendency of the suit some of the
defendants expired and their legal representatives were
brought on record. Three tenants in the mortgage property
were also joined as parties to the suit so as to eliminate
the possibility of their causing any hindrance in the
enforcement of the charge created by the equitable mortgage
of the property in favour of the Bank. During the pendency
of the suit the State of Karnataka tried to attach and sell
the mortgaged properties for recovery of sales tax arrears
due and payable by the partnership firm, the first
defendant. The arrears of sales tax related to the
assessment years 1957-58, 1966-67 to 1969-70 under the State
Act and to the assessment years 1958-59 to 1964-65 and
1967-68 to 1969-70 under the Central Act. It appears that
there was a court receiver appointed who tried to resist the
States attempt to attach and sale the mortgaged property by
preferring objections but he was unsuccessful. It appears
(as is stated by the Trial Court in para 4 of its judgment)
the State of Karnataka itself purchased the property in
auction held on 30.4.1976. Upon a prayer made by the Bank
the State of Karnataka was impleaded as a defendant in the
suit. The Trial Court found all the material plaint
averments proved and the Bank entitled to a decree. The
charge created on suit properties by mortgage was also held
proved. The trial court also held that the State could not
have attached and sold the said properties belonging to
partners for recovery of sales tax dues against the firm.
However, the suit was directed to be dismissed as in the
opinion of the Trial Court, Shri R.K. Mehta the Chief
Manager and Power of Attorney holder of the Bank was not
proved to be a person duly authorised to sign and verify the
plaint and institute the suit.

The Bank preferred an appeal before the High Court.

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 10
The High Court has held Shri R.K. Mehta to be a person duly
authorised to sign, verify and present the plaint. During
the course of hearing of the appeal, on 27.1.1992 a
compromise was entered into between the Bank and the
borrowers (firm and the partners). The settlement as
arrived at between the Bank and the borrowers provided for a
mode of payment of the decretal amount as agreed upon
between the parties. Clauses 7 and 8 of the Deed of
Compromise provide as under:-

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

14 & 15 are at liberty to sell the plaint schedule property
either in portion or in one lot within a period of 2 years
from the date of the decree. The plaintiff-appellant shall
co-operate with the defendants-respondents in such sale or
sales and the price (sale proceeds) shall be credited by the
defendants-respondents to the account of the
plaintiff-appellant Bank and the plaintiff-appellant shall
thereafter give their consent and no objection to such sale
or sales.

(8) The plaintiff-appellant shall be entitled to

refund of the Court fee paid on the appeal memo and an
appropriate direction may be issued by the Honble Court.

As the State of Karnataka was not a party to the

compromise, the appeal had to be decided as contested
insofar as the rights of the State are concerned. On behalf
of the Bank, as also on behalf of the borrowers who
supported the Bank in this regard, two pleas were raised.
Firstly, it was submitted that the right of the State to
realise its arrears of tax could not take precedence over
the right of the Bank to enforce its security, it being a
secured creditor. Secondly, it was submitted that the
property mortgaged in favour of the Bank was the property
belonging to the partners while the arrears of sales-tax
related to the partnership firm which was assessed as a
legal entity; the arrears of tax could be recovered from
the assets of the partnership firm and not by proceeding
against the property of the individual partners. Both the
contentions were repelled by the High Court. While
recording the compromise and passing a decree in terms
thereof by its judgment dated 3.8.1992 the High Court has
excluded clauses (7) and (8) aforesaid being illegal and not
enforceable against the State. Accordingly the suit filed
by the Bank has been decreed by the High Court superseding
the judgment and decree of the Trial Court. The operative
part of the decree passed by the High Court reads as under:-

We have already held that the sales tax arrears due

to the State from the first respondent- partnership, shall
have preference over the plaintiffs claim. Therefore, we
accept the compromise except Clauses 7 and 8 and other terms
which affect the preferential claim of the State to recover
Sales Tax arrears by sale of the suit properties, and decree
the suit of the plaintiff in terms of the compromise subject
to exemption as stated above, and subject to the condition
that the sales tax arrears including the penalty, if any,
due under the Sales Tax Act from the 1st respondent and its
partners shall have preference over the plaintiffs claim,
and the plaintiff shall have to first pay the amount
recovered during the course of execution to the State
towards the sales tax arrears and the other amount due under
the Sales Tax Act from the 1st respondent and its partners
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 10
and thereafter the plaintiff is entitled to adjust the
remaining amount towards the amount due under the decree.

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

Karanth and the learned Advocate General, we further direct
that though the State has a preferential claim, the right to
recover the amount is assigned to the plaintiff on condition
that the amount recovered shall first be paid towards the
arrears of sales tax plus penalty, if any, under the Sales
Tax Act and then adjust the balance amount if any towards
the amount due under the decree.

The appeal is allowed. The judgment and decree of the

trial Court are set aside. The suit of the plaintiff is
decreed for a sum of Rs.25 lakhs as per the terms of the
compromise subject to exceptions and conditions specified
above. The amount deposited by the receiver into the Court
upto this date shall be paid over to the plaintiff. The
period of six months from today is fixed for redemption. If
the contesting respondents fail to discharge the decretal
amount, the plaintiff shall bring the property for sale
immediately on the expiry of six months and complete the
execution within a period of one year from today. In the
event the contesting respondents pay the decretal amount
within the aforesaid stipulated period, the State will be at
liberty to recover its sales tax arrears with penalty, if
any, under the Act, by sale of the suit schedule properties.
As far as the plaintiff and the contesting respondents are
concerned, they have compromised and in the compromise they
have agreed to bear the respective costs through out. As
far as the State is concerned, it is one of the defendants
in the suit and it is one of the respondents in this appeal.
The trial court also has directed the parties to bear their
own costs. Further, the State is benefited by getting its
right of preference adjudicated in a suit filed by the Bank.
Under these circumstances, we order no costs in this appeal
as far as the State is concerned.

The Bank has come up in appeal by special leave to

this Court feeling aggrieved by the decree of the High Court
to the extent to which it recognises the right of the State
to proceed against the suit property and that too in
preference to the Banks right to proceed against the
mortgaged property for realisation of its dues.

We have heard the learned counsel for the Bank and the
learned counsel for the partnership firm and its partners,
i.e., the borrowers. There has been no appearance on behalf
of the State of Karnataka though served.

Two questions arise for consideration. Firstly,

whether the recovery of sales tax dues (amounting to crown
debt) shall have precedence over the right of the Bank to
proceed against the property of the borrowers mortgaged in
favour of the Bank. Secondly, whether property belonging to
the partners can be proceeded against for recovery of dues
on account of sales-tax assessed against the partnership
firm under the provisions of the Kartanaka Sales Tax Act,
1957.

What is common law doctrine of priority or precedence

of crown debts? Halsbury, dealing with general rights of
the crown in relation to property, states where the Crowns
right and that of a subject meet at one and the same time,
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 10
that of the Crown is in general preferred, the rule being
detur digniori (Laws of England, Fourth Edition Vol.8 para
1076 at page 666). Herbert Brown states Quando jus
domini regis et subditi concurrunt jus regis praeferri debet
- Where the title of the king and the title of a subject
concur, the kings title must be preferred. In this case
detur digniori is the rulewhere the titles of the
king and of a subject concur, the king takes the
whole.where the kings title and that of a subject
concur, or are in conflict, the kings title is to be
preferred (Legal Maxims 10th edition, pp.35-36). This
common law doctrine of priority of States debts has been
recognised by the High Courts of India as applicable in
British India before 1950 and hence the doctrine has been
treated as law in force within the meaning of Article 372
(1) of Constituiton. An illuminating discussion of the
subject made by Chagla C.J. is to be found in Bank of India
Vs. John Bowman AIR 1955 Bombay 305. We may also refer
to Full Bench decision of Madras High Court in Manickam
Chettiar Vs. Income Tax Officer, Madura AIR 1938 Mad. 360
as also to two Judicial Commissioners Court decisions in
Peoples Bank of Northern India Ltd. Vs. Secretary of
State for India AIR 1935 Sind 232 and Vassanbai Topandas
Vs. Radhabai Tirathdas and ors. AIR 1933 Sind 368.
Without multiplying the authorities we would straightaway
come to the Constitution Bench decision in M/s Builders
Supply Corporation Vs. Union of India AIR 1965 SC 1061.

The principle of priority of Government debts is

founded on the rule of necessity and of public policy. The
basic justification for the claim for priority of state
debts rests on the well recognised principle that the State
is entitled to raise money by taxation because unless
adequate revenue is received by the State, it would not be
able to function as a sovereign government at all. It is
essential that as a sovereign, the State should be able to
discharge its primary governmental functions and in order to
be able to discharge such functions efficiently, it must be
in possession of necessary funds and this consideration
emphasises the necessity and the wisdom of conceding to the
State, the right to claim priority in respect of its tax
dues. (See M/s. Builders Supply Corporation, Supra). In
the same case the Constitution Bench has noticed a consensus
of judicial opinion that the arrears of tax due to the State
can claim priority over private debts and that this rule of
common law amounts to law in force in the territory of
British India at the relevant time within the meaning of
article 372 (1) of the Constitution of India and therefore
continues to be in force thereafter. On the very principle
on which the rule is founded, the priority would be
available only to such debts as are incurred by the subjects
of the Crown by reference to the States sovereign power of
compulsory exaction and would not extend to charges for
commercial services or obligation incurred by the subjects
to the State pursuant to commercial transactions. Having
reviewed the available judicial pronouncements Their
Lordships have summed up the law as under :-

1. There is a consensus of judicial opinion that the

arrears of tax due to the State can claim priority over
private debts.

2. The common law doctrine about priority of crown

debts which was recognised by Indian High Courts prior to
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 10
1950 constitutes law in force within the meaning of
Article 372 (1) and continues to be in force.

3. The basic justification for the claim for priority

of State debts is the rule of necessity and the wisdom of
conceding to the State the right to claim priority in
respect of its tax dues.

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

to the State if they are contracted by citizens in relation
to commercial activities which may be undertaken by the
State for achieving socio-economic good. In other words,
where welfare State enters into commercial fields which
cannot be regarded as an essential and integral part of the
basic government functions of the State and seeks to recover
debts from its debtors arising out of such commercial
activities the applicability of the doctrine of priority
shall be open for consideration.

The Constitution Bench decision has been followed by

three- judges Bench in Collector of Aurangabad Vs. Central
Bank of India AIR 1967 SC 1831. However, the Crowns
preferential right to recovery of debts over other creditors
is confined to ordinary or unsecured creditors. The Common
Law of England or the principles of equity and good
conscience (as applicable to India) do not accord the Crown
a preferential right for recovery of its debts over a
mortgagee or pledgee of goods or a secured creditor. It is
only in cases where the Crowns right and that of the
subject meet at one and the same time that the Crown is in
general preferred. Where the right of the subject is
complete and perfect before that of the King commences, the
rule does not apply, for there is no point of time at which
the two rights are at conflict, nor can there be a question
which of the two ought to prevail in a case where one, that
of the subject, has prevailed already. In Giles v. Grover
1832 131 ER 563 it has been held that the Crown has no
precedence over a pledgee of goods. In Bank of Bihar v.
State of Bihar & Ors. AIR 1971 SC 1210, the principle has
been recognised by this Court holding that the rights of the
pawnee who has parted with money in favour of the pawnor on
the security of the goods cannot be extinguished even by
lawful seizure of goods by making money available to other
creditors of the pawnor without the claim of the pawnee
being first fully satisfied. Rashbehary Ghose states in Law
of Mortgage (T.L.L., Seventh Edition, p.386) It seems a
Government debt in India is not entitled to precedence over
a prior secured debt. The abovesaid being the position of
law, the High Court has however proceeded to rely on certain
provisions contained in Chapter XVI of Karnataka Land
Revenue Act, 1964 as also the provisions contained in
Sections 13 and 15 of Kartanaka Sales Tax Act, 1957 for
holding that the arrears of sales-tax would be entitled to a
preference even over the debt secured by mortgage in favour
of the appellant Bank. We would notice the relevant legal
provisions.

Chapter XVI of Kartanaka Land Revenue Act, 1964 is

titled as Realisation Of Land Revenue And Other Public
Demand. Sections 158, 190 and 2 (relevant parts thereof)
are extracted and reproduced hereunder:-

158. Claim of State Government to have precedence

over all others. (1) Claim of the State Government to any
moneys recoverable under the provisions of this Chapter
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 10
shall have precedence over any other debt, demand or claim
whatsoever whether in respect of mortgage, judgment-decree,
execution or attachment, or otherwise howsoever, against any
land or the holder thereof.

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

revenue year, of land for agricultural purposes, if not
otherwise discharged, shall be recoverable in preference to
all other claims, from the crop of such land.

(2) Definitions In this Act, unless the context

otherwise requires, -

xxx xxx xxx

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

and things attached to the earth, or permanently fastened to
anything attached to the earth, and also shares in, or
charges on, the revenue or rent of villages or other defined
areas;

190. Recovery of other public demands.- The following

moneys may be recovered under this Act in the same manner as
an arrear of land revenue, namely :-

(a) xxx xxx xxx

(b) xxx xxx xxx

(c) all sums declared by this Act or any other law for
the time being in force to be recoverable as an arrear of
land revenue.

(Emphasis supplied)

Section 13 of the Karnataka Sales Tax Act, 1957 is

also relevant. Sub-sections (1) and (3) (to the extent
relevant) are extracted and reproduced hereunder :-

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

[or any other amount due] under this Act shall be paid in
such manner [in such instalments, subject to such
conditions, on payment of such interest] and within such
time, as may be prescribed.]

xxx xxx xxx

xxx xxx xxx

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

this Act from a dealer or any other person may without
prejudice to any other mode of collection be recovered

xxx xxx xxx

xxx xxx xxx

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

xxx xxx xxx

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 7 of 10
xxx xxx xxx

(emphasis supplied)

The Act had come into force on 1.10.1957. With effect

from 18.11.1983 the following sub-section (2-A) was inserted
into the body of Section 15 of the Kartanaka Sales Tax Act,
1957 by Amending Act No.23 of 1983 and came into force on
the same day:-

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

penalty or any other amount under this Act, the firm and
each of the partners of the firm shall be jointly and
severally liable for such payment.

We have seen that the common law doctrine of priority

of crown debts would not extend to providing preference to
crown debts over secured private debts. It was submitted by
the learned counsel for the appellant that under the
Karnataka Land Revenue Act as also under the Karnataka Sales
Tax Act the arrears of sales tax do not become arrears of
land revenue; they have been declared merely to be
recoverable as arrears of land revenue. Relying on the
observations of this Court in Builders Supply Corporation
case (supra), vide para 28, the learned counsel for the
appellant submitted that the appellant being a secured
creditor the arrears of sales tax could not have preference
over the rights of the appellant. It is true that the
Constitution Bench has in Builders Supply Corporation case
(supra) observed by reference to Section 46(2) of the
Income-tax Act, 1922 that that provision does not deal with
the doctrine of the priority of crown debts at all; it
merely provides for the recovery of the arrears of tax due
from an assessee as if it were an arrear of land revenue
which provision cannot be said to convert arrears of tax
into arrears of land revenue either. The submission so made
by the learned counsel omits to take into consideration the
impact of Section 158(1) of the Karnataka Land Revenue Act
which specifically provides that the claim of the State
Government to any moneys recoverable under the provisions of
Chapter XVI shall have precedence over any other debt,
demand or claim whatsoever including in respect of mortgage.
Section 158 of the Karnataka Land Revenue Act not only gives
a statutory recognition to the doctrine of States priority
for recovery of debts but also extends its applicability
over private debts forming subject matter of mortgage,
judgment-decree, execution or attachment and the like. In
Collector of Aurangabad Vs. Central Bank of India (Supra),
the provisions of Hyderabad Land Revenue Act and Hyderabad
General Sales Tax Act had come up for consideration of this
Court. This Court had refused to grant primacy to the dues
on account of sales tax over secured debt in favour of the
Bank. A perusal of the relevant statutory provisions quoted
in the judgment goes to show that any provision pari materia
with the one contained in Section 158 of Karnataka Land
Revenue Act was not to be found in any of the local acts
under consideration of this Court in Collector of Aurangabad
Vs. Central Bank of India. The effect of Section 190 is to
make the procedure for recovery of arrears of land revenue
applicable for recovery of sales tax arrears. The effect of
Section 158 is to accord a primacy to all the moneys
recoverable under Chapter XVI, which will include sales tax
arrears.
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 8 of 10

The learned counsel for the appellant submitted that

sub-section (2-A) of Section 15 of Karnataka Sales Tax Act
could not be given a retrospective operation. This
submission is misconceived. A legislation may be made to
commence from a back date, i.e. from a date previous to the
date of its enactment. To make a law governing a past
period on a subject is retrospectivity. A legislature is
competent to enact such a law. The ordinary rule is that a
legislative enactment comes into operation only on its
enactment. Retrospectivity is not to be inferred unless
expressed or necessarily implied in the legislation,
specially those dealing with substantive rights and
obligations. It is a misnomer to say that sub-section (2A)
of Section 15 of the Karnataka Sales Tax Act is being given
retrospective operation. Determining the obligation of the
partners to pay the tax assessed against the firm by making
them personally liable is not the same thing as giving the
amendment a retrospective operation. In Principles of
Statutory Interpretation (by Justice G.P. Singh, Seventh
Edition, 1999, at page 369) it is stated :- The rule
against retrospective construction is not applicable to a
statute merely because a part of the requisites for its
action is drawn from a time antecedent to its passing. If
that were not so, every statute will be presumed to apply
only to persons born and things come into existence after
its operation and the rule may well result in virtual
nullification of most of the statutes. An amending Act is,
therefore, not retrospective merely because it applies also
to those to whom pre-amended Act was applicable if the
amended Act has operation from the date of its amendment and
not from an anterior date.

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

of Section 15 of the Karnataka Sales Tax Act being given a
retrospective operation. It is prospective. However, it
does not make any difference for the facts of the present
case.

The High Court has relied on Section 25 of the

Partnership Act, 1932 for the purpose of holding the
partners as individuals liable to meet the tax liability of
the firm. Section 25 provides that every partner is liable,
jointly with all the other partners and also severally for
all acts of the firm done while he is a partner. A firm is
not a legal entity. It is only a collective or compendious
name for all the partners. In other words, a firm does not
have any existence away from its partners. A decree in
favour of or against a firm in the name of the firm has the
same effect as a decree in favour of or against the
partners. While the firm is incurring a liability it can be
assumed that all the partners were incurring that liability
and so the partners remain liable jointly and severally for
all the acts of the firm. This principle cannot be
stretched and extended to such situations in which the firm
is deemed to be a person and hence a legal entity for
certain purpose. The Karnataka Sales Tax Act, with which we
are concerned, also gives the firm a legal status by
treating it as a dealer and hence a person for the limited
purpose of assessing under the Sales Tax Act. It was,
therefore, held by a three-judges Bench in Commissioner of
Sales Tax, M.P. & Ors. v. Radhakrishan & Ors. AIR 1979
SC 1588:- ..a firm in a partnership and a Hindu
undivided family are recognised as legal entities and as
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 9 of 10
such proceedings can only be taken against the firm or
undivided family as the case may be. Neither the partners
of the firm nor the members of the Hindu undivided family
will be liable for the tax assessed against the firm or the
undivided Hindu family.

However, this principle would have no applicability if

there be a statutory provision to the contrary. In the case
of Radhakrishan & Ors. (supra), vide para 7 itself, this
Court observed :- It may be noted that S. 276 (d) of the
Income-tax Act specifically includes all partners within the
definition of the word firm and a company includes
directors. In Bombay Sales Tax Act, 1959, under Section 18
it is specifically provided that where any firm is liable to
pay tax under the Act, the firm and each of the partners of
the firm shall be jointly and severally liable for such
payment. In the absence of a specific provision as found in
Section 18 of the Bombay Act the partners of the firm cannot
be held liable for the tax assessed on the firm.

A provision similar to the one included in Section 18

of the Bombay Sales Tax Act has been incorporated in the
Karnataka Sales Tax Act as referred to hereinabove and that
is why the partners of the borrower firm in the case before
us cannot take shelter behind the law laid down by this
court in Radhakrishan & Ors. (supra). Here we may also
refer to a two-judge Bench decision of this Court in Third
Income- tax Officer & Anr. Vs. Arunagiri Chettiar (1996)
220 ITR 232 SC in which provisions of S.188 A Income-tax
Act, 1971 have been noticed. S.188 A declares a partner and
his legal representatives jointly and severally liable along
with the firm to pay any tax, penalty or sum payable for the
year in which he was a partner. It was observed that S.188
A explicitly provides what was implicit hitherto. In the
case at hand the partners are being held liable by reason of
Sec.15(2A) of the Karnataka Sales Tax Act, 1957.

The learned counsel for the appellant is right in

submitting that on the day on which the State of Karnataka
proceeded to attach and sell the property of the partners of
the firm mortgaged with the Bank, it could not have
appropriated the sale proceeds to sales tax arrears payable
by the firm and defeating the Banks security in view of the
law as laid down by this Court in Commissioner of Sales Tax,
M.P. Vs. Radhakrishan & Ors. (supra). However, still in
the facts and circumstances of the case, the appellant Bank
cannot be allowed any relief. Section 15 (2A) of Kartanaka
Sales Tax Act had come into force on 18.12.1983 while the
decree in favour of the Bank was passed on 3.8.1992 and is
yet to be executed. The claim of the appellant Bank is
still outstanding. Even if we were to set aside the sale
held by the State, it will merely revive the arrears
outstanding on account of sales tax to which further
interest and penalty shall have to be added. The amended
Section 15 (2-A) of the Karnataka Sales Tax Act shall apply.
The State shall have a preferential right to recover its
dues over the rights of the appellant Bank and the property
of the partners shall also be liable to be proceeded
against. No useful purpose would, therefore, be served by
allowing the appeal which will only further complicate the
controversy.

For the foregoing reasons, the appeal is dismissed

though without any order as to the costs in the facts and
circumstances of the case.
http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 10 of 10