Government priority claim denied in execution; plaintiff suit dismissed; costs awarded; bank guarantee canceled.

The court held that the Government's claim for priority could not be enforced against the amount realized in execution and paid to the decree-holder before the Government's application. The appeal was allowed, the plaintiff's suit was dismissed, and the appellant was awarded costs throughout. The bank guarantee provided as security for the amount decreed was ordered to be canceled and delivered to the appellant.

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Issues Involved:
1. Priority of Government dues over other creditors' claims.
2. Application of common law right of priority in the context of the Indian Constitution.
3. The necessity of the Government to apply to the executing court for priority.
4. The effect of payment to the decree-holder before the Government's application.
5. The role of attachment by the Collector under the Income-tax Act.

Issue-wise Detailed Analysis:

1. Priority of Government Dues Over Other Creditors' Claims:
The primary issue in this appeal is the nature of the priority to be given to the claims of the State over the claims of other money creditors. The court emphasized that the right to priority is a common law right recognized in India before the Indian Constitution and preserved after its enforcement under Article 372. This principle was reaffirmed in several decisions, including Builders Supply Corporation v. Union of India, which highlighted the Crown's priority over unsecured creditors.

2. Application of Common Law Right of Priority in the Context of the Indian Constitution:
The court noted that the Crown's right to priority, which existed under common law, continues to be valid under Article 372 of the Indian Constitution. This right can be enforced by invoking the inherent power of the court under Section 151 of the Civil Procedure Code, as established in Manickam Chettiar v. Income-tax Officer I. This case clarified that the Crown's priority could be enforced without filing a suit, through a simple application to the court.

3. Necessity of the Government to Apply to the Executing Court for Priority:
The court stressed that the Government must apply to the executing court, which has the assets in its custody, to claim priority. An attachment by the Collector in independent proceedings under Section 46 of the Income-tax Act is insufficient. The executing court must be specifically moved by the Government while the assets are still the property of the judgment-debtor. This principle was supported by decisions such as Collector of Tiruchirapplli v. Trinity Bank and Pichu Vadhir Secretary of State for India.

4. Effect of Payment to the Decree-holder Before the Government's Application:
The court held that if the assets have become the property of the decree-holder, the Government's claim for priority cannot be enforced. This was illustrated in Basbla Kumar v. Panchu Gopal, which stated that once an order for rateable distribution is made, the judgment-debtor's title to the fund in court is extinguished, and the Government's right to proceed against it ceases. In the present case, the court found that the money had already been paid to the decree-holder before the Government's application, thus negating the Government's claim for priority.

5. Role of Attachment by the Collector Under the Income-tax Act:
The court rejected the argument that the attachment by the Collector in 1957 was sufficient to give the Government priority. It reiterated the necessity for the Government to apply to the executing court while the assets are still in its custody. The court also dismissed the contention that the Government's application should be considered valid if made before the entire assets are realized and distributed, emphasizing that each sale in execution should be viewed independently.

Conclusion:
The court concluded that the Government's claim for priority could not be enforced against the amount realized in execution and paid to the decree-holder before the Government's application. The appeal was allowed, and the plaintiff's suit was dismissed. The appellant was awarded costs throughout, and the bank guarantee provided as security for the amount decreed was ordered to be canceled and delivered to the appellant.

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