Priority of public dues: State tax claims prevail over unsecured creditors and custody courts must decide competing claims.

State claims for public dues, specifically income-tax arrears, enjoy a legal priority over unsecured creditors that survives into post Constitution law; statutory recovery procedures do not extinguish that pre existing right. Where property subject to certificate attachment is in a court's custody, the proviso to Rule 22/Order 21 Rule 52 requires the custody court to determine competing priority claims and permit payment accordingly; reliance on inherent jurisdiction was unnecessary but did not vitiate the exercise of jurisdiction. Outcome: the revenue claim to priority and the executing court's payment order are sustained.

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Issues: (i) Whether the Union of India was entitled to priority in respect of the income-tax debt claimed against the judgment-debtor and thereby to payment of the money in the custody of the executing court; (ii) Whether the procedure adopted by the executing court in allowing payment to the Union of India (including reliance on applications invoking the court's jurisdiction under the proviso to Rule 22/Order 21 Rule 52) was legally erroneous.

Issue (i): Whether the Union of India had a preferential right to the funds in court in respect of income-tax arrears.

Analysis: The historical common-law principle of priority for Crown/state debts as recognised in Indian decisions was examined and contrasted with provisions of the Income-tax Act and the Public Demands Recovery Act. The Public Demands Recovery Act and the Income-tax Act were found to be machinery for recovery and did not displace or extinguish the State's pre-existing right of priority against unsecured creditors. The State's priority operates vis-a -vis other creditors when the competing claims meet at the same time and must be established before the custody court. Constitutional provisions preserving pre-constitutional law were considered and found to carry the priority principle into post Constitution law.

Conclusion: In favour of Revenue.

Issue (ii): Whether the executing court erred in procedure by permitting payment to the Union of India on the applications filed and by treating the matter under Section 151 or otherwise.

Analysis: The applications before the executing court properly raised the question of priority under the proviso to Rule 22 of Schedule II to the Public Demands Recovery Act (and correspondingly Order 21 Rule 52 of the Code of Civil Procedure). The custody court was required to determine priority when property attached under the Public Demands Recovery Act was in its custody. The invoking of Section 151 was unnecessary but did not render the proceedings defective; the court had jurisdiction under Rule 22/Order 21 Rule 52 to decide the priority question and to make orders accordingly.

Conclusion: In favour of Revenue.

Final Conclusion: The Union of India's claim to priority in respect of the income-tax debt was upheld and the executing court's order directing payment to the Union of India is sustained; the Rule challenging that order is discharged and the petition dismissed.

Ratio Decidendi: State claims for public dues, including income-tax arrears, enjoy a priority over unsecured creditors which survives into post Constitution Indian law, and where property subject to a certificate attachment is in the custody of a court the proviso to Rule 22 (or Order 21 Rule 52) requires the custody court to determine competing claims of priority.

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