Mortgage decree and tax recovery rules: civil execution stops after Rule 2 notice, while Revenue priority claims remain available in tax proceedings.

The commentary explains that tax arrears may be pursued through the Income-tax recovery machinery without excluding the traditional priority of Crown debts, allowing a court to consider a Revenue request for payment out from funds in court custody. It states that a mortgage decree is treated as a decree for the payment of money for Rule 16(1) of Schedule II, so once notice under Rule 2 is served, civil execution against the defaulter's property cannot continue, though the mortgagee may still raise any priority claim before the tax recovery process. It also notes that Rule 51, which relates attachment back to the date of Rule 2 notice, was upheld as a valid ancillary recovery measure.

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Issues: (i) whether an application by the Revenue for payment out and for recognition of its claim to tax arrears was maintainable in the execution proceedings; (ii) whether a mortgage decree is a decree for the payment of money so as to attract Rule 16(1) of Schedule II to the Income-tax Act, 1961, and whether execution proceedings instituted after service of notice under Rule 2 could be interdicted; (iii) whether Rule 51 of Schedule II, which makes attachment of immovable property relate back to the date of service of notice under Rule 2, is constitutionally valid.

Issue (i): whether an application by the Revenue for payment out and for recognition of its claim to tax arrears was maintainable in the execution proceedings

Analysis: The statutory scheme permits recovery of arrears of income-tax through a certificate proceeding under Section 222 and also by other modes recognised by the Act, including an application to court in respect of money lying in court custody under Section 226(4). The recovery provisions do not exclude the pre-existing doctrine of Crown debt priority, which continues by virtue of Article 372(1) of the Constitution of India. The application made by the Union of India through the Tax Recovery Officer was therefore competent, and the court could entertain the request for payment out and determine the inter se claim in the pending proceedings.

Conclusion: The application by the Revenue was maintainable and the objection to maintainability failed.

Issue (ii): whether a mortgage decree is a decree for the payment of money so as to attract Rule 16(1) of Schedule II to the Income-tax Act, 1961, and whether execution proceedings instituted after service of notice under Rule 2 could be interdicted

Analysis: A decree for enforcement of a mortgage, though it proceeds against the security, is still directed to realise money due under the mortgage and is therefore within the expression decree for the payment of money. Rule 16(1) bars a civil court from issuing process against property of a defaulter after service of notice under Rule 2 in execution of such a decree. The embargo operates at the level of the execution court, and the mortgagee cannot insist that the civil court continue the execution once the statutory notice has been served. The mortgagee may still assert any alleged priority before the tax recovery machinery in the manner provided by the rules, but that does not preserve the civil execution once the statutory bar has attached.

Conclusion: Rule 16(1) applied to the mortgage decree, and the execution sale held after service of Rule 2 notice was invalid.

Issue (iii): whether Rule 51 of Schedule II, which makes attachment of immovable property relate back to the date of service of notice under Rule 2, is constitutionally valid

Analysis: The rule is directed to preventing tax evasion and securing recovery of tax dues. It operates as a procedural safeguard within the ancillary field of tax collection, and such a provision does not impose an unreasonable restriction on property or business rights. The legislative competence of Parliament extends to such incidental and ancillary measures under the tax entry and, in any event, the residuary power. The rule was therefore not shown to be ultra vires or unconstitutional.

Conclusion: Rule 51 was held to be constitutionally valid.

Final Conclusion: The Revenue's statutory objection to the mortgage execution succeeded, the bank's challenge to the tax recovery machinery failed, and the order recognising the Revenue's claim was restored.

Ratio Decidendi: A mortgage decree is a decree for the payment of money for purposes of Rule 16(1) of Schedule II to the Income-tax Act, 1961, and once notice under Rule 2 has been served the civil court cannot continue execution against the defaulter's property, though the mortgagee may pursue any priority claim before the tax recovery process as provided by law.

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