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PETITIONER: KALYAN MILLS LTD.

       Vs.

RESPONDENT: UNION OF INDIA & ORS.

DATE OF JUDGMENT21/11/1986

BENCH: OZA, G.L. (J) BENCH: OZA, G.L. (J) REDDY, O. CHINNAPPA (J)

CITATION:  1987 AIR  371            1987 SCR  (1) 362  1987 SCC  (1)  27        JT 1986   905  1986 SCALE  (2)862

ACT:     INCOME  TAX ACT, 1961--Section 46(2) & 46(5A)--Tax  dues recoverable from assessee company--Assessee company  inform- ing that amount can be recovered by Union of India from  the amount  owed by Appellant Company--Suit for recovery of  tax dues  by Union of India against appellant  company--Validity of such claim.

HEADNOTE:     The  Union of India-- Respondent No. 1, had  to  recover certain arrears of taxes from the assessee-company--Respond- ent No. 2. The assessee--company informed the Union of India that the tax dues recoverable from it be recovered from  the amount  which was owed by the appellant-company to  it.  The debt  due by the appellant-company to  the  assessee-company was shown to the credit of assessee--company in the accounts of  the appellant--company. The appellant--company  acknowl- edged and admitted its liability to the assesseecompany  and promised  the Union of India to pay the amount of  tax  dues against the debt due by it to the assessee-company.     Notices  under s. 46(2) and s. 46(5A) of the Income  Tax Act  were issued to the appellant--company for the  recovery of the said amount.     The Union of India filed a suit seeking a decree against the appellant-company and four other defendants. The  appel- lant--company    set   up   a   false   theory   that    the assessee--company itself was liable to pay the appellantcom- pany  and, therefore, it was not liable to pay tax  dues  of the assessee-company.     The trial court decreed the suit holding that the  Union of  India was entitled to a money decree against the  appel- lant--company.     The  appeal  preferred  by  the  appellant--company  was dismissed by the High Court.     In   the  appeal  to  this  Court  on  behalf   of   the appellant--company it was contended that a suit as filed  by the respondent and the decree granted by the trial court was not  permissible in law because proceedings for  appointment of 363 receiver  can only be contemplated in execution  proceedings

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of a decree against the original debtor. Dismissing the appeal the Court,     HELD:  1.  The  High Court has  rightly  maintained  the decree  by coming to the conclusion that the amount of  com- mission  earned by the assesseecompany was  admittedly  with the  appellant. It was withheld by the appellant  under  the pretext  that  it had a counter-claim against  the  assessee Under  s. 46(2) of the Income Tax Act, a  prohibitory  order attaching the said money of the assessee--company was issued and  the machinery under S.46(5A) of the Act was  no  longer effective  as the appellant set up a  counter-claim  against the assessee and there was no option for the Union of  India but  to obtain adjudication from the civil court.  [365H  -- 366B]     2.  No money decree could be passed against  the  appel- lant--company  except  for the money lying in  the  deposits with  them for the assessee-company and it is for that  pur- pose that the decree for appointment of receiver was made so that the amount be recovered and paid to the plaintiff-Union of India. [366C-D]

JUDGMENT: CIVIL APPELLATE JURISDICTION: Civil Appeal No. 447(N) of 1973.     From  the Judgment and Decree dated 18/19.4.1972 of  the Gujarat High Court in First Appeal No. 184 of 1964. V.A. Bobde and A.G. Ratnaparkhi for the Appellant.     S.C. Manchanda, Ms.  A. Subhashini and K.C. Dua for  the Respondents. The Judgment of the Court was delivered by     OZA. J. This appeal arises out of a certificate  granted by this Court. The facts necessary for the disposal of  this appeal are that the respondent No. 1 Union of India fried  a suit  against  the petitioner. The petitioner  is  a  public limited  company.  Respondent No. 2 which is also  a  public limited  company was the assessee company and the  Union  of India,  respondent  No.  1  had  to  recover  a  sum  of  Rs 1,32,400.87 p. from the said assessee company on account  of arrears  of income tax, excess profit tax,  business  profit tax.  To  recover this amount a suit was  filed  on  15.2.58 impleading therein besides the present appellant said asses- see  company and others as defendants. It was  alleged  that the  assessee company by its letter dated  4.10.48  informed the plaintiff Union of 364 India  that  the arrears due from it be recovered  from  the petitioner on account of its commission. It was alleged that for  recovery of the said amount notice under Section  46(2) of  the Income Tax Act was issued on two occasions,  9.11.48 and 30.3.51 and thereafter a notice under Section 46(5A)  of the  Act  was issued against the appellant-defendant  No.  1 Kalyan  Mills Ltd. on July 22, 1949. It is alleged that  the defendant No. 1 assessee-company had informed the  plaintiff Union  of India by a letter dated October 11, 1948 that  the tax dues recoverable from the assessee-company be  recovered from  the amount which was owed by the appellant-company  to the  assessee-company.  It was inter-alia  asserted  in  the plaint  that  the debt due by the appellant-company  to  the assessee-company  was shown to the credit of  the  assessee- company in the accounts of the appellantcompany. It is  said that  by two letters addressed by the  appellant-company  on November 18, 1948 and December 3, 1948, it acknowledged  and admitted  its  liability  to the  assessee-company  and  had

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further more promised the plaintiff to pay the amount of tax dues  against the debt due by the appellant-company, to  the assessee-company. The plaintiff proceeded to assert in  view of  the  admissions made by the appellant  company  and  the promise made by it to pay the tax dues from the debt due  by it to the assessee-company and having regard to the recovery proceedings  undertaken  by the  competent  authority  under Sections  46(2)  and 46(5A) of the Act,  the  plaintiff  had priority  over all other unsecured dues and that the  appel- lant company was under an obligation to pay the amount of Rs 1,32,400.87  p. under these circumstances. It was  also  al- leged  by  the plaintiff-respondent (Union  of  India)  that notwithstanding   the  fact  that  the  debt  due   by   the appellant-company  to the assessee-company was shown to  the credit  of the assessee-company in the books of accounts  of the appellant company. The appellant company had subsequent- ly  set up a false theory that the assessee  company  itself was  liable to the appellant company and that the  appellant company was not liable to pay dues of the assessee. It.  was in  terms asserted that the version set up by the  appellant company that it had a claim against the assessee company was a got up version and that it had been created merely with  a view  to defeat or delay the dues of the plaintiff.  It  was contended that the appellant company had made a false  coun- ter claim against the assessee company with this end in view viz.  to defeat and delay the claim of the plaintiff  though it  had  taken no action in regard to  the  alleged  counter claim.   A reference was made to a resolution passed by  the appellant  company on December 9, 1949 to transfer the  debt due to the assessee company to the Managing Agents’  commis- sion  and suspense account. No action was ever taken by  the appellant  company  against  the assessee  company  for  the alleged  claim arising in the context of damages in  connec- tion  with  the alleged malfeasance and misfeasance  of  the assessee  company in the course of discharge of their  func- tions  as the Managing Agents of the appellant  company.  As admittedly  the  assessee-company  was  functioning  as  the Managing  Agents of the appellant-company, it was  contended that no action was taken for more 365 than  three years and that no steps have been taken in  this connection because the counter claim was a sham one.     It  was  further contended by  the  plaintiff-respondent (Union of India) that the appellant company and the assessee company  were colluding with each other with the  object  of defeating or delaying the payment to the plaintiff and  that the adjustment entries made by the appellant company in  its books  of accounts were a step in this direction.  Such  en- tries or adjustments were illegal and they were not  binding on the plaintiff in as much as the recovery proceedings  had already been initiated against the assessee company and that the  adjustments and entries were false as was evident  from the  admissions made by the appellant-company in its  letter to  the plaintiff. A charge of fraud and collusion has  been levelled against the. appellant company, the assessee compa- ny and the other defendants. With these facts the respondent Union of India instituted the present suit seeking a  decree against  defendants  1 to 5 i.e. the present  appellant  and other  defendants  for an amount of Rs 1,32,400.87  p.  with interest  and  a  prayer also was made  for  appointment  of receiver for recovery of the amount due from defendant No. 5 and  its  nominees other defendants. Various  defences  were raised.  The  suit was decreed by the trial  court  and  the trial  court  held  that the plaintiff  respondent  was  not entitled to a money decree against the appellant company. It

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also recorded a finding that the contention of the appellant company  that  it  had a genuine  and  valid  counter  claim against  the assessee company and that it had been  adjusted was unfounded. In the opinion of the learned trial court  it was  a unilateral act of the appellant company of  adjusting the  sum  due to the assessee company  against  the  alleged claim in respect of damages for malfeasance and  misfeasance against the assessee company was invalid and was not binding on  the plaintiff-respondent. It also held that the sum  in’ excess of the tax claimed by the plaintiff from the assessee company  was due to the assessee company against the  appel- lant and it held that the plaintiff was entitled to a decree for  appointment  of  receiver to realise the  dues  of  the plaintiff  from the appellant company having regard  to  the fact  that  appellant company was indebted to  the  assessee company  for  a  sum in excess of tax dues  claimed  by  the plaintiff, and to that extent the suit was decreed.    The appellant preferred an appeal and a Division Bench of the  Gujarat  High Court by their judgment dated  April  19, 1972  dismissed the appeal and maintained the decree  passed by the trial court and on certificate against that  judgment that  the  present appeal is filed in this Court.  The  main contention  advanced on behalf of the appellant was  that  a suit  was filed by the respondent and the decree granted  by the  trial court was not permissible in law as it  was  con- tended that such proceedings for appointment of receiver can only  be contemplated in execution proceedings of  a  decree against the original debtor.  Facts are not in dispute.  The learned Judges of the High Court maintained the 366 decree  by coming to the conclusion that the amount of  com- mission  earned by the assessee company was admittedly  with the  appellant. It was withheld by the appellant  under  the pretext that it had a counter claim against the assessee. It is  also not in dispute that under Sec. 46(2)  a-prohibitory order  attaching the said money of the assessee company  was issued.  It is also not in dispute that the machinery  under Sec. 46(5A) of the Income Tax Act was no longer effective as the  appellant set up a counter-claim against  the  assessee company  and there was no option for the Union of India  but to obtain adjudication from the civil court and in this view of  the matter the learned Judges of the Gujarat High  Court maintained the decree passed by the trial court.     An objection was also taken about the form of the decree passed by the trial court which only was for the appointment of  a receiver. Admittedly no money decree could  be  passed against the appellant company except for the money lying  in the deposits with them of the assessee company and it is for that purpose that the decree for appointment of receiver was made so that the amount be recovered and paid to the  plain- tiff--Union of India.     Having  considered  the question and heard  the  learned counsel  for the appellant, we see no error in the  judgment passed  by the learned High Court of Gujarat. The appeal  is therefore dismissed with costs. A.P.J.                                                Appeal dismissed. 367