Income Tax Officer vs K.A. Govindaswamy and Others

Ramaprasada Rao, J.—This appeal is directed against the judgment of Paul J., in Application No. 173 of 1973, in I.P. No. 39 of 1970. A

petitioning creditor filed a petition in insolvency against his debtor, one P. Vasudevan, on the ground that the debtor committed acts of insolvency

under Sections 9(d)(ii) and 9(d)(iii) and 9(g) of the Presidency Towns Insolvency Act. This petition was presented on May 4, 1970. Prior to the

presentation of this petition, to wit, on January 15, 1970, Vasudevan (the debtor) entered into an agreement with one Govindaswamy, the first

respondent for the sale of his house and ground bearing plot No. 113, 12th Cross Street, Indra Nagar, for a sum of Rs. 83,000 and in pursuance

of that agreement, the first respondent, Govindaswamy, had paid Rs. 43,000 and it was agreed that the balance should be paid after Vasudevan

gets clearance from the State Housing Board with whom Vasudevan had a lease-cum-sale agreement entered into between him and the board in

or a.bout July 15, 1965. We shall presently refer to the terms of the said agreement. The insolvency petition filed as above by the petitioning

creditor was heard and by an order dated March 23, 1971, Vasudevan was adjudicated as an insolvent. Whilst these proceedings were pending,

Govindaswamy, on the strength of the agreement for sale dated January 15, 1970, which was indeed oral and further on the footing that he has

paid a sum of Rs. 43,000 to the insolvent pursuant to the said agreement of sale desired to bring himself on record in the insolvency proceedings so

as to secure his rights as intending purchaser who parted with a part of the purchase price to the vendor. Fearing that Govindaswamy was likely to

claim an interest as a secured creditor pursuant to the payment of the part of the agreed purchase price in furtherance of the agreement of sale

referred to above, the insolvent filed Application No. 589 of 1971, and sought for a declaration that Indra Nagar house as above did not vest in

the official assignee, as he had no transferable or assignable interest therein. The application of Vasudevan (Application No. 589 of 1971) was

rejected by Palaniswamy J., who held that Vasudevan under the lease-cum-sale agreement with the State Housing Board acquired an interest in

the property and was entitled to get a conveyance from the Housing Board on his fulfilment of the obligation undertaken by him under the lease-

cum-sale agreement and that that right was in the nature of a right to get a sale and that such a right was property which on adjudication of

Vasudevan as lessee-allottee vested in the official assignee. This matter was taken up in appeal to the First Bench in O.S.A. No. 2 of 1972.

Veera-swami C.J. agreed with Palaniswamy J., and observed that Vasudevan before his adjudication did possess certain rights over the Indra

Nagar house property, hereinafter referred to as ""the property"", which included continuance in possession till the end and asking for a conveyance

to be made in his favour by the board. The Division Bench also observed that Vasudevan''s rights were valuable rights which could well be treated

as property, which on adjudication would vest in the official assignee. Whilst this was the position and when the official assignee sought to bring the

property to sale as a statutory functionary representing the body of creditors, Govindaswamy, who was anxious to get a sale deed but for the

intervening of insolvency, and who, it appears, has also prepared a. draft sale deed for the purpose, could not proceed with it; but he was, on the

other hand, willing to permit the official assignee to sell the property publicly, provided the statutory charge to which he was entitled u/s 55(6)(b) of

the Transfer of Property Act, was declared in his favour. The official assignee with the concurrence of the court (vide order in Application No. 338

of 1970), accepted the stand of Govindaswamy and brought the property to sale, after admitting the claim of Govindaswamy for the sum of Rs.

43,000 with interest at 6 per cent. per annum thereon as a secured debt. Thereafter, in March, 1973, the Income Tax Officer, Hundi Circle I,

Madras-6, filed Application No. 173 of 1973, praying to set aside the order of the official assignee dated May 5, 1971, admitting the claim of

Govindaswamy as a secured creditor and sought for an interim direction to the official assignee to stay the payment of the amount due to

Govindaswamy as such secured creditor. Govindaswamy resisted this application and asserted that he has secured a statutory charge as per the

provisions of the Transfer of Property Act and that, therefore, the Income Tax Officer representing the "" State, cannot dislodge the vested rights in

him and sought for a dismissal of the said application.

Paul J. heard the application and held that under the terms of the lease-cum-sale agreement entered into between Govindaswamy and the State

Housing Board, Govindaswamy had a right in the property and was entitled to become full owner on the fulfilment of the stipulations under it and in

that sense he agreed with Palaniswamy J. He upheld the charge over the property in favour of Govindaswamy to the extent of Rs. 43,000. On the

question whether the Government can claim priority over the debt due to Govindaswamy, he held that as such a priority can be claimed over

unsecured creditors only and as the debt in question is a secured debt, in consequence of which Govindaswamy secured a statutory charge u/s

55(6)(b) of the Transfer of Property Act, he would not agree with the State and dismissed the said application. The present appeal is by the

Income Tax Officer, representing the State, questioning once over the nature of the right of Govindaswamy in the property and claiming priority in

respect of the arrears of Income Tax admittedly payable by the insolvent.

The learned counsel for the appellant once again reiterated the same ground which, in our view, has become final that under the lease-cum-sale

agreement the insolvent did not get any transferable or assignable interest in the property and that, therefore, any agreement entered into by him

with Govindaswamy is of no avail. Incidentally, it was also argued that Govindaswamy could not, in the circumstances, claim a statutory charge u/s

55(6)(b) of the Transfer of Property Act and that, therefore, Govindaswamy could not claim any priority in the disbursement of the assets of the

insolvent.

As in the earlier proceedings, the State Housing Board was not represented, we thought that the board should be given an opportunity to state

their views on the rights and obligations which are set out in the lease-cum-sale agreement commonly entered into by the board with their allottees.

We heard counsel forthe State Housing Board as well.

The points that arise for consideration are :

Whether the insolvent has acquired an interest in the property and if so, what is the nature of that interest ? Whether it is assignable and

transmittable ?

Whether the charge claimed by Govindaswamy under the provisions of the Transfer of Property Act is sustainable ?

Whether the State can claim any right in the payment of the arrears of Income Tax over and above the rights of Govindaswamy who sought for

a charge on the property and after a sale thereof a charge on the sale proceeds of that property ? and

Whether the order of the official assignee dated May 5, 1971, in having admitted the claim of Govindaswamy for a sum of Rs. 43,000 with

interest at 6 per cent. per annum as a secured debt is correct or not ?

We have seen that in July, 1965, the insolvent entered into an agreement with the Housing Board with regard to the property in question. This is

ordinarily known as a lease-cum-sale agreement. What is contended is that the rights flowing under the said agreement is a personal right and that

the insolvent does not, acquire any property right which he could transmit to the official assignee after adjudication. On a perusal of the lease-cum-

sale agreement the primary intention of the parties appears to be to create a saleable interest in the property provided the allottee-lessee (insolvent

herein) complies with the terms and conditions therein. The allottee-lessee is entitled to occupy the property on the terms and conditions mentioned

therein and under Clause 15 thereto, the board shall sell the property to the lessee for such price as the chairman of the board may fix ; the

allottee-lessee is bound to bear all the expenses of sale, besides paying the price fixed by the board. If the allottee-lessee commits default, the

agreement is liable to be terminated. Clause 24 provides that if the allottee-lessee commits breach of any of the terms of the agreement, the board

is at liberty but is not bound to determine the lease and the agreement of sale without prejudice to the rights of the board to recover from the

allottee-lessee any loss incurred by the board. No doubt Clause 29 interdicts the lessee from assigning, transferring or dealing with his rights in

favour of third parties and provides that the lessor-board is not bound to recognise any such transfer or assignment in favour of third parties. The

agreement is, however, silent in the case where the lessee-allottee becomes an insolvent. It is in the light of these provisions that the counsel for the

appellant contends that Vasudevan, as insolvent lessee-allottee, obtained only a contingent right under the lease-cum-sale agreement and such

rights would not vest in the official assignee.

What is it that vests in the official assignee is specifically-dealt with in Section 52 of the Presidency Towns Insolvency Act. In law, on the making

of an order of adjudication, the property of the insolvent vests in the official, assignee for the benefit of his creditors and becomes divisible amongst

them.

Section 52 :

Under the Presidency Towns Insolvency Act the property which is not divisible amongst the creditors of the insolvent comprises the following

particulars, namely :

(i) Property held by the insolvent on trust for any other person ;

(ii) the tools (if any) of his trade and the necessary wearing apparel, bedding, cooking vessel, and furniture of himself, his wife and children, to a

value, inclusive of tools and apparel and other necessaries as aforesaid, not exceeding Rs. 300 in the whole.

The property which is divisible amongst the insolvent''s creditors includes:--

(a) all such property as may belong to or be vested in the insolvent at the commencement of the insolvency or may be acquired by or devolve on

him before his discharge ;

(b) the capacity to exercise and to take proceedings for exercising all such powers in or over or in respect of property as might have been

exercised by the insolvent for his own benefit at the commencement of his insolvency or before his discharge; and

(c) all goods in the possession, order or disposition of the insolvent."" (Vide Mulla on the Law of Insolvency in India, 3rd edition, by D. S. Chopra,

para. 472, page 369).

It is seen that all such property over which the insolvent had the capacity to exercise rights and take proceedings for exercising all such powers,

in or over or in respect of property as might have been exercised by the insolvent for his own benefit at the commencement of his insolvency shall

be deemed to be property of the insolvent. On a fair reading of the lease-cum-sale agreement it is clear that he has a right to obtain ownership over

the property on fulfilment of certain conditions agreed to therein. Once the stipulations under the agreement are satisfied he has a right to purchase

the property from the board and the board has no option except to sell it to the allottee-lessee. There is no discretion in the Housing Board to

avoid such a result. This right to obtain a conveyance of immovable property which is apparent in the lease-cum-sale agreement is not equable to a

contingent right. It has to be fairly held that this right is a right in immovable property and is certainly property which comes within the meaning of

the expression "" property over which he has the capacity to exercise and take proceedings for exercising such powers in or over or in respect of

property "". Palaniswamy J. rightly relied upon the decision in Willingham v. Joyce [1796] ER 951 and Buckland v. Papillon [1867] 2 Ch App 67,

and held that the benefit of the rights which flow from the lease-cum-sale agreement being property rights would pass on to the official assignee. In

our view, the rights inbuilt in the lease-cum-sale agreement are not bare expectancies or possibilities, but are rights which could be transmitted in

accordance with law and, in this sense, the right, title and interest of the insolvent over the property under the said agreement would vest in the

official assignee after adjudication. As the effect of an order of adjudication is to vest in the official assignee every beneficial matter belonging .0 the

insolvency estate, it cannot be said that the benefit which the insolvent has obtained under the lease-cum-sale agreement cannot pass on to the

official assignee. The learned counsel for the State Housing Board was unable to place before us any decision or authority to hold that the insolvent

did not have a right in the property at the time of adjudication and that it was the board alone which had the predominant right over it and that the

insolvent had no rights at all under it. The Division Bench which approved of the judgment of Falaniswamy J. in Application No. 589 of 1971 and

O. S. A. No. 2 of 1972 also reiterated that the rights which the allottee-lessee acquired are valuable rights which could be treated as property

which on adjudication will vest in the official assignee. We respectfully agree with the view expressed by the learned judges as above and hold on

the first point that the insolvent, Vasudevan, had an interest in the property in question and the benefit of such an interest automatically got

transmitted and vested in the official assignee u/s 52 of the Presidency Towns Insolvency Act.

The second point is whether Govindaswamy as the intending purchaser who parted with a sum of Rs. 43,000 could claim a charge over the

property. In application No. 338 of 1970 in the main insolvency proceedings, the insolvency judge of this court directed Govindaswamy to file an

affidavit of claim relinquishing his rights for specific performance and thereupon an order dated February 19, 1971, was passed admitting the claim

of Govindaswamy to a charge over the property for a sum of Rs. 43,000 and interest, and that order has become final in the eye of law. This is

binding on all the creditors including the appellant before us. Even apart from it, Section 55(6)(b) of the Transfer of Property Act provides an

answer to the objection raised by the appellant before us. Section 55(6)(b) of the Transfer of Property Act provides that the buyer is entitled

unless he has improperly declined to accept delivery of the property, to a charge on the property, as against the seller and all persons claiming

under him to the extent of the seller''s interest in the property, for the amount of any purchase-money properly paid by the buyer, in anticipation of

the delivery and for interest on such amount; and, when he properly declines to accept the delivery, also for the earnest (if any) and for the costs (if

any) awarded to him in a suit to compel specific performance of the contract or to obtajn a decree for its recession. In the instant case, it is

nobody''s case that Govindaswamy improperly declined to accept delivery of the property. On the other hand, he was ready to complete the sale

but for the attitude of the official assignee, who wanted to bring the property to sale in the interest of body of creditors. It was in those

circumstances, and under directions of court, Govindaswamy gave up his right to purchase the property but insisted upon a charge on the property

being created to the extent of his interest in the property for the amount of the purchase money paid by him as buyer in anticipation of the delivery

of the property and completion of the sale and for interest on such amount. Govindaswamy, therefore, secured a statutory charge for the pre-paid

price, that is, the price paid by him in anticipation of completion of sale. The principle u/s 55(6)(b) of the Transfer of Property Act is indeed a

converse of the seller''s charges for the unpaid purchase price contemplated u/s 55(4)(b) of the Transfer of Property Act. No doubt, the intending

buyer cannot claim a charge u/s 55(6)(b) of the Transfer of Property Act after the sale deed is executed and possession of the property is taken by

him. This statutory charge is the outcome of the rule of justice, equity and good conscience, though there is no question of ownership involved

while asserting the charge as above, as such ownership would still be in the seller. Yet in order to adjust the equity of the parties to the contract

which are contained in Section 55(6)(b) of the Transfer of Property Act, the buyer is privileged to claim a statutory charge u/s 55(6)(b) of the

Transfer of Property Act. There is even authority for the proposition that this statutory charge can be enforced even in court sales. No doubt the

position would be different if the agreement of sale is invalid or void or not genuine or in a case in which the seller has no personal interest in the

property at all. Vide Muthu Gounden v. Chellappa Gounden [1910] 8 MLT 464 (Mad), Shilendranath Palit v. Hade Kaza Mane ILR [1922] Cal

586 and Trimbak Narayan Hardas Vs. Babulal Motaji and Others, . We have already observed that this statutory privilege resulting in a charge in

favour of the intending buyer is based on the well-known principle of justice, equity and conscience. This is because that once the buyer has paid

the whole or part of the price of the property in question, the vendor becomes a trustee for him and to the extent to which the buyer has paid the

purchase money, the buyer acquires a lien over the property, ""as if upon the payment of a part of the purchase money the vendor has executed a

mortgage to him of the property to that extent"". We have, therefore, no hesitation in holding that the charge over the property and after the sale of

the property over the sale proceeds of the property as claimed by Govindaswamy and as accepted by the insolvency court earlier is valid and

sustainable in law.

The last question is whether the State, which is represented by the Income Tax Officer in this appeal is entitled to priority over Govindaswamy.

u/s 49 of the Presidency Towns Insolvency Act in the distribution of the property of the insolvent there shall be paid in priority to all other debts, all

debts due to the Government or to any local authority, etc. Undoubtedly, the arrears of Income Tax due to the Government would certainly come

within the meaning of debt which has been ascertained and has become due and payable by the insolvent. In particular, the tax payable need not

be quantified by the assessing authority. This is because there is inherent in the tax liability a concept that the assessee is obliged to pay it as and

when it is quantified. The proposition that the Government''s priority to claim its dues over other dues is a common law right is unassailable and is

preserved even after the coming into force of the Constitution by reason of article 372. But the question is whether the Government or the Crown

can have priority over all dues. Sains populi suprema, lex (Regard for the public welfare is the highest law) is the origin for such claims of priority

made by the Government. The Full Bench of our court in Collector of Tiruchirapalli Vs. Trinity Bank Ltd., Trichirapalli and Another, , following

another Full Bench of our court in MANICKAM CHETTIAR Vs. Income Tax OFFICER, MADURA., observed as follows at page 62 :

But this rule of priority in favour of the Crown for the realisation of its dues can only prevail and be enforceable as between unsecured creditors

of equal degree, there being no question of any lien, charge, or mortgage in favour of one or other of such creditors. The priority of the Crown

cannot rank as against a secured creditor so as to deprive him of his security or to affect or injure his rights as such secured creditor.

This charge of the secured creditor is not only traceable against the property over which it is charged but also against the proceeds obtained by

a sale of the charged property. In this case, the property has been sold under orders of court subject to the charge of Govindaswamy being

maintained throughout and indeed over the sale proceeds as a result of the public sale of the property held by the official assignee. Following the

ratio in the above two well-known decisions of our court, we accept the first respondent''s case that the appellant cannot claim a better right, since

the 1st respondent, Govindaswamy, was a secured creditor and that the act of the official assignee in having recognised him as such in

consequence has to be upheld. Paul J. was right in having done so.

This appeal is, therefore, dismissed ; but, in the circumstances, there will be no order as to costs.