1986 (11) TMI 2 - SC - Income Tax

Supreme Court Upholds Union of India's Priority in Tax Dues Recovery Case

Kalyan Mills Limited Versus Union of India And Others

The Supreme Court affirmed the decisions of the lower courts in a case involving the priority of tax dues recovery by the Union of India from the ... Decree passed by the trial court - contention of appellant that a suit as filed by the respondent and the decree granted by the trial court was not permissible in law as it was contended that such proceedings for appointment of a receiver can only be contemplated in execution proceedings of decree against the original debtor, is not acceptable - held that decree for appointment of receiver to realise dues of managing agency company from the managed company is proper Issues:1. Priority of recovery of tax dues.2. Validity of adjustments made by the appellant-company.3. Permissibility of appointing a receiver in the present suit.4. Form of the decree passed by the trial court.Analysis:1. Priority of recovery of tax dues:The case involved a dispute regarding the priority of recovery of tax dues by the Union of India from the appellant-company. The Union of India claimed priority based on admissions made by the appellant-company acknowledging its liability to pay the tax dues from the debt owed to the assessee-company. The trial court held that the Union of India was entitled to a decree for the recovery of the amount due, considering that the appellant-company was indebted to the assessee-company for a sum exceeding the tax dues claimed by the plaintiff. This decision was upheld by the Gujarat High Court, emphasizing the validity of the Union of India's claim for recovery.2. Validity of adjustments made by the appellant-company:The appellant-company had made adjustments in its books of account regarding the debt owed to the assessee-company, which the Union of India alleged were illegal and aimed at defeating or delaying the payment to the plaintiff. The trial court found that the adjustments made by the appellant were unfounded and not binding on the Union of India. The High Court concurred with this finding, highlighting that the appellant's actions, including setting up a counter-claim against the assessee-company, were invalid. The courts emphasized the fraudulent and collusive nature of the adjustments made by the appellant-company.3. Permissibility of appointing a receiver in the present suit:The appellant challenged the decree passed by the trial court, arguing that proceedings for appointing a receiver could only be initiated in execution proceedings of a decree against the original debtor. However, the High Court upheld the trial court's decree, stating that the Union of India had no other option but to seek adjudication from the civil court due to the ineffectiveness of the recovery machinery under the Income-tax Act. The courts justified the appointment of a receiver to facilitate the recovery of the amount owed to the Union of India.4. Form of the decree passed by the trial court:An objection was raised regarding the form of the decree passed by the trial court, which was solely for the appointment of a receiver. It was contended that no money decree could be issued against the appellant-company except for the money of the assessee-company held by them. The decree aimed at appointing a receiver to recover and pay the amount to the Union of India. The courts found no error in the decree passed by the trial court and upheld its validity, leading to the dismissal of the appeal with costs.In conclusion, the Supreme Court dismissed the appeal, affirming the decisions of the lower courts regarding the priority of tax dues recovery, the invalidity of adjustments made by the appellant-company, the permissibility of appointing a receiver in the present suit, and the form of the decree passed by the trial court.