Holding

Statutory provisions, particularly Section 158(1) of the Karnataka Land Revenue Act and Section 15(2‑A) of the Karnataka Sales Tax Act, give the State of Karnataka a preferential right to recover sales tax arrears over the bank's mortgage, and the partners' property may be attached for the firm’s tax liability.

Summary

Dena Bank had taken a mortgage over the property of the partnership firm Mis Bhikhabhai Prabhudas Parekh & Co. and its partners. While the suit was pending, the State of Karnataka attached and auctioned the mortgaged property to recover arrears of sales tax. The trial court granted a decree to the bank but dismissed the suit on a technical ground; the High Court, relying on a statutory provision, held that the State’s claim to the tax arrears had priority over the bank’s secured claim and excluded the compromise clauses that would have allowed the bank to receive the sale proceeds. On appeal, the Supreme Court examined whether a crown debt (sales tax) can outrank a mortgagee’s right, the effect of Section 158(1) of the Karnataka Land Revenue Act and Section 15(2‑A) of the Karnataka Sales Tax Act, and whether the partners’ personal property could be attached for the firm’s tax liability. The Court held that the statutory provisions give the State a preferential right over the bank’s mortgage and that the partners’ property may be proceeded against, while the common‑law doctrine of Crown priority does not extend over secured creditors. Consequently, the appeal was dismissed.

Issues considered

The recovery of sales tax arrears (a crown debt) has precedence over the bank's secured mortgage claim.
Whether the partners' personal property can be attached to satisfy sales tax dues of the partnership firm.
Whether the common‑law doctrine of Crown priority applies over a secured creditor.
Whether Section 158(1) of the Karnataka Land Revenue Act confers statutory preference to the State over mortgagees.
Whether Section 15(2‑A) of the Karnataka Sales Tax Act operates retrospectively.

Legislation cited

Income Tax Acts. 188A, s. 276(d), s. 46(2)
Indian Partnership Act, 1932s. 25
Karnataka Land Revenue Act, 1964s. 158(1), s. 190
Karnataka Sales Tax Act, 1957s. 13, s. 15, s. 15(2-A)

Subjects

sales taxmortgagepreferential claimstate priorityland revenuepartnershipstatutory interpretationcommon law doctrinesecured creditorretrospective legislation

Judgment

.... DENA BANK
v.
A

BHIKHABHAI PRABHUDAS PAREKH AND CO. AND ORS.

APRIL 25, 2000

[S. RAJENDRA BABU AND RC. LAHOTI, JJ.] B

Kamataka Sales Tax Act, 1957-Sections 13 & 15-Arrears of Sales
Tax-Recovery through mortgage of property ignoring the second debt pay-
able to appellant by partners of respondent finn-Trial Court found appellant
entitled to a decree but dismissed suit on a technical ground-High Cow1 lzeld
that State has preferential claim to recover arrears of sales tax-On appeal
c
Held, State shall have a preferential right to recover its dues.

Karnataka Land Revenue Act, 1964-Section 158(1)-Claim of State
~
Government to any moneys recoverable under Chapter XVI shall have prec-
edence over any other debt, demand or claim whatsoever including a mart- D
gage-Statutory recognition given to the doctrine of State's pri01ity extending
applicability over private debts forming subject matter ofm011gage, judgment-
decree, execution or attachment etc.-Section 190-Procedure for recovery of

.,. land revenue applicable for recovery of Sale Tax arrears-Karnataka Sales Tax
Act, 1957-Sections 13 & 15.
E
Interpretation of Statutes-Retrospectivity-Kamataka Sales Tax Act,
1957-Section 15(2-A) inserted w. e.f. 18.11.1983-Partners offirm made jointly
and severally liable for tax and penalty-Legislative enactment comes into
operation only on its enactment, retrospectivity is not to be inferred unless

... expressly or necessarily implied-Determining the obligations of tlie pa11ners
to pay tax assessed against the firm by making them personally liable does not
amount to giving retrospective effect to the amendment.
F

Pa11nership Act, 1932-Section 25-Afirm is not a legal entity, it is only
a collective or compendious name for all the partners-The principle that all
partners are jointly and severally liable for all acts of the firm cannot be G
extended to situations in which firm is deemed to be a person and hence a legal
entity for certain purpose.

Doctrine-Rule of "detur digniori"-Applicability of.

Legal Maxim : H
• 509
510 SUPREME COURT REPORTS [2000] 3 S.C.R.
A Quando jus domini regis et subditi concurrent jus regis praeferri debet- ~
Applicability of

Appellant Bank had filed a recovery suit to the mortgage security
against the respondent firm and its partners. During the pendency of the
suit the State of Karnataka attached and auctioned the mortgaged prop-

.
B erty to realise arrears of sales tax. The State was impleaded as a party as
the said properties were purchased by it, Trial Court found the appellant
entitled to a decree but dismissed the suit on a technical ground. During the
pendency of the appeal before the High Court a compromise was entered
into between the parties, to whicli State of Karnataka was not a party.
Under Clauses (7) and (8) of the compromise the respondents were made
~
c free to sell the suit properties and credit the proceeds to the appellant. The
~

'
High Court excluded these clauses holding that the State has a preferential
claim to recover sales tax by sale of the suit properties. Hence this appeal.

D
The appellant contended before this Court that the State cannot take
precedence over its secured interest; that the property of the partners
cannot be attached to recover arrears of sales tax assessed against the firm;
•
that under the Karnataka Land Revenue Act and Karnataka Sales Tax
Act, arrears of sales tax do not become arrears of land revenue and are
merely recoverable as arrears of land revenue.
Dismissing the appeal, this Court ~
E
HELD : 1.1. The general rights of the Crown in relation to property
are preferred under common law. Where the Crown's right and that of a
subject meet at one and the same time then the right of the crown is I-
preferred, the rule being "detur dignion'"· The principles of priority of
Government debts is founded on the rule of necessity and of public policy.
F The basic justification for the claim for priority of state debts rests on the
well recognised principle that the State is entitled to raise money by taxa- ~
tion because unless adequate revenue is received by the State, it would not
be able to function as a sovereign government at all. It must be in possession
of necessary funds and this consideration emphasises the necessity and the
wisdom of conceding to the State, the right to claim property in respect of
G its tax dues. The State can claim priority over private debts and that this
rule of common law amounts to law in force in the territory of British India
at the relevant time within the meaning of Article 372(1) of the Constitution
A
of India and therefore continues to be in force thereafter. On the very
principle on which the rule is founded, the priority would be available only
H to such debts as are incurred by the subjects of the Crown by reference to
DENA BANK v. B.P. PAREKH AND CO. 511
the State's sovereign power of compulsory exaction and would not extend A
to charges for commercial services or obligation incurred by the subjects to
the State pursuant to commercial transactions. [517-F-H; 518-A-B]
1.2. The Crown's preferential right to recovery of debts over other
creditors is confined to ordinary or unsecured creditors. The Common Law
of England or the principles of equity and good conscience (as applicable to B
India) do not accord the Crown a preferential right for recovery of its debts
over a mortgagee or pledgee of goods or a secured creditor. It is only in
cases where the Crown's right and that of the subject meet at one and the
same time that the Crown isr in general preferred. Where the right of the
subject is complete and perfect before that of the King commences, the rule
does not apply. [518-H; 519·-A-BJ c
Mis. Builders Supply Corporation v. Union of the India, AIR (1965) SC
1061, followed.
Bank of Bihar v. State of Bihar & Ors., AIR (1971) SC 1210 and
Collector of Aurmzgabad v. Central Bank of India, AIR (1967) SC 1831, relied D
on.
Bank of India v. John Bowman, AIR (1955) Bombay 305; Manickam
Chettiar v. lncome Tax Office1; Madura, AIR (1938) Mad. 360; People's Bank
of Northern India Ltd. v. Secretary of State.for India, AIR (1935) Sind 232 and
Vassa11bai Topandas v. Radhabai Tirathdas and Ors., AIR (1933) Sind 368, E
approved.

Giles v. Grover, 1832 131 ER 563, referred to.

Laws of England, Fourth Edition Vol. 8 Para 1076 Herbert Brown :
Legal Maxims 10th Edition, pp. 35-36; Rashbehary Ghose; Law of Mort-
F
gage (T.L.L., Seventh Edition) p. 386, referred to.

2. Section 158(1) of the Land Revenue Act, 1964 specifically provides
that the claim of the State Government to any moneys recoverable under
Chapter XVI shall have precedence over any other debt, demand or claim
whatsoever including in respect of mortgage. It not only gives a statutory
G
recognition to the doctrine of State's priority for recovery of debts but also
extends its applicability over private debts forming subject matter of
mortgage, judgment-decree, execution or attachment and the like. The
effect of Section 190 of the Land Revenue Act is to make the procedure for
recovery of arrears of land revenue applicable for recovery of sales tax
arrears. H
512 SUPREME COURT REPORTS [2000] 3 S.C.R.
A Mis. Builders Supply Corporation v. Union of India, AIR (1965) SC
1061, followed.

Collector ofAurangabad v. Central Bank of India, AIR (1967) SC 1831,
relied on.

B 3. Sub-Section 2-A was inserted in Section 15-A of the Karnataka
Sales Tax Act with effect from 18.11.83, which made partners of a firm
jointly and severally liable for: any tax or penalty in respect of their firm. A
legislation may be made to commence from a date previous to the date of its
enactment. A legislature is competent to enact a law governing a past
c period on a subject and this is retrospectivity. Ordinarily a legislative
enactment comes into operation only on its enactment. Retrospectivity is
not to be inferred unless expressly or necessarily implied in the legislation,
specially those dealing with substantive rights and obligation. It is a misno-
mer to say that Section 15(2-A) has retrospective operation. Determining
the obligations of the partners to pay the tax assessed against the firm by
D making them personally liable is not the same thing as giving the amend-
ment a retrospective operation. The amendment is prospective and even if
it was not, it does not make any difference for the facts of the instant case.

Principles of Statutory Interpretation by Justice G.P. Singh, Seventh I-
Edition, 1999 page 369, referred to.
E
4. Section 25 of the Partnership Act, 1932 provides that every partner
is liable, jointly with all the other partners and also severally for all acts of
the firm done while he is a partner. A firm is not a legal entity. It is only a
collective or compendious name for all the partners. In other words, a firm
F does not have any existence away from its partners. A decree in favour of or
against a firm in the name of the firm has the same effect as a decree in
favour of or against the partners. While the firm is incurring a liability it
can be assumed that all the partners were incurring that liability and so the
partners remain liable jointly and severally for all the acts of the firm. This
principle cannot be stretched and extended to such situations in which the
G
firm is deemed to be a person and hence a legal entity for certain purpose.
This principle is further strengthened when there is a statutory provision to
this effect.

Commissioner of Sales Tax, M.P. & Ors. v. Radha Krishnan & Ors., AIR
H (1979) SC 1588, followed.
DENA BANK v. B.P. PAREKH AND CO. [LAHOTI, J.] 513
Third Income Tax Officer & Am: v. Arungiri Chettiar, (1996) 220 ITR A
~;
232 SC, relied on.

5. The State of Karnataka could not have appropriated the sale
proceeds to sales tax arrears defeating the Bank's security, on the day on
which it proceeded to attach and sell the mortgaged property. Appellant,
B
still cannot be allowed any relief in the facts and circumstances of the case.
Section 15-(2-A) had come into force before the decree passed in favour of
the appellant, which is yet to be executed and the claim is still outstanding.
Even if the sale is set aside, it will merely revive the arrears outstanding on
account of sales tax to which further interest and penalty shall have to be
added. The State shall hav.e a preferential right to recover its dues over the c
rights of the appellant Bank and the property of the partners shall also be
liable to be proceeded against•
.,,.
-4. Commissioner of Sales Tax, M.P. v. Radha Krishnan & Ors., AIR (1979)
SC 1588, followed.
D
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 2853 of 1993.

From the Judgment and Order dated 29.7.92 and 3.8.92 of the Karnataka
High Court in RF.A. No. 152 of 1984.
E
Vmod A. Bobde, Yogesh Kr. Jain, R.C. Pathak, Arnn Aggarwal and Ms.
Babin Akhtar for the Appellant.

Shreepal Singh for the Respondents.
F
The Judgment of the Court was delivered by

R.C. LAHOTI, J. On 12.4.1972 Dena Bank (hereinafter 'the Bank' for
short), who is appellant before us, filed a suit for recovery of a sum of Rs.
19,27,142.29 paise with future interest and costs against a partnership finn
namely, Mis Bhikhabhai Prabhudas Parekh & Co. and its partners. The suit G

. was based inter alia on a mortgage by deposit of title deeds made by the
partnership firm and its partners on 24.4.1969. The suit sought for enforce-
ment of the mortgage security. During the pendency of the suit some of the
defendants expired and their legal representatives were brought on record.
Three tenants in the mortgage property were also joined as parties to the suit H
514 SUPREME COURT REPORTS [2000] 3 S.C.R.
A so as to eliminate the possibility of their causing any hindrance in the ~·
enforcement of the charge created by the equitable mortgage of the property
in favour of the Bank. During the pendency of the suit the State of Karnataka
tried to attach and sell the mortgaged properties for recovery of sales tax
arrears due and payable by the partnership finn, the first defendant. The
arrears of sales tax related to the assessment years 1957-58, 1966-67 to 1969-
B
70 under-the State Act and to the assessment years 1958-59 to 1964-65 and
1967-68 to 1969-70 under the Central Act. It appears that there was a court
receiver appointed who tried to resist the State's attempt to attach and sale the
mortgaged property by preferring objections but he was unsuccessful. It
appears (as is stated by the Trial Court in para 4 of its judgment) the State of
c Karnataka itself purchased the property in auction held on 30.4.1976. Upon
a prayer made by the Bank the State of Karnataka was impleaded as a
defendant in the suit. The Trial Court found all the material plaint avennents
proved and the Bank entitled to a decree. The charge created on suit properties '1111(1
by mortgage was also held proved. The Trial Court also held that the State >
could not have attached and sold the said properties belonging to partners for
D
recovery of sales tax dues against the firm. However, the suit was directed to
be dismissed as in the opinion of the Trial Court, Shri R.K. Mehta the Chief
Manager and Power of Attorney holder of the Bank was not proved to be a
person duly authorised to sign and verify the plaint and institute the suit.

E The Bank preferred an appeal before the High Court. The High Court ....
has held Shri R.K. Mehta to be a person duly authorised to sign, verify and
present the plaint. During the course of hearing of the appeal, on 27 .1.1992
a compromise was entered into between the Bank and the borrowers (firm and
the partners). The settlement as arrived at between the Bank and the borrowers
provided for a mode of payment of the decretal amount as agreed upon
F
between the parties. Clauses 7 and 8 of the Deed of Compromise provide as
under:-
-.,..
"(7) That the defendant-respondent Nos.1-4, 6, 8-12, 14 & 15 are at
liberty to sell the plaint schedule property either in portion or in one lot within
G a period of 2 years from the date of the decree. The plaintiff-appellant shall
co-operate with the defendants-respondents in such sale or sales and the price
(sale proceeds) shall be credited by the defendants-respondents to the account ..4,
of the plaintiff-appellant Bank and the plaintiff-appellant shall thereafter give
their consent and no objection to such sale or sales.

H (8) The plaintiff-appellant shall be entitled to refund of the Court fee
c
DENA BANK v. B.P. PAREKH AND CO. [LAHOTI, J.] 515

~- paid on the appeal memo and an appropriate direction may be issued by the A
Hon'ble Court."

As the State of Karnataka was not a party to the compromise, the appeal
had to be decided as contested insofar as the rights of the State are concerned.
On behalf of the Bank, as also on behalf of the borrowers who supported the
Bank in this regard, two pleas were raised. Firstly, it was submitted that the B
right of the State to realise its arrears of tax could not take precedence over
the right of the Bank to enforce its security, it being a secured creditor. Sec-
ondly, it was submitted that the property mortgaged in favour of the Bank was
the property belonging to the partners while the arrears of sales-tax related to
the partnership firm which was assessed as a legal entity; the arrears of tax c
could be recovered from the assets of the partnership firm and not by proceed-
ing against the property of the individual partners. Both the contentions were
repelled by the High Court. While recording the compromise and passing a
decree in terms thereof by its judgment dated 3.8.1992 the High Court has
excluded clauses (7) and (8) aforesaid being illegal and not enforceable against
the State. Accordingly the sJit filed by the Bank h.is been decreed by the High D
Court superseding the judgment and decree of the Trial Court. The operative
part of the decree passed by the High Court reads as under:-

"We have already held that the sales tax arrears due to the State
from the first respondent- partnership, shall have preference over the E
plaintiff's claim. Therefore, we accept the compromise except Clauses
7 and 8 and other tenns which affect the preferential claim of the State
to recover Sales Tax arrears by sale of the suit properties, and decree
the suit of the plaintiff in terms of the compromise subject to
exemption as stated above, and subject to the condition that the sales
tax arrears including the penalty, if any, due under the Sales Tax Act F
from the 1st respondent and its partners shall have preference over
the plaintiff's claim, and the plaintiff shall have to first pay the amount
recovered during the course of execution to the State towards the sales
tax arrears and the other amount due under the Sales Tax Act from
the 1st respondent and its partners and thereafter the plaintiff is G
entitled to adjust the remaining amount towards the amount due under
the decree.

On the basis of the submission made by Sri K.R.D. Karanth and
the learned Advocate General, we further direct that though the State
has a preferential claim, the right to recover the amount is assi$ned H
516 SUPREME COURT REPORTS [2000] 3 S.C.R.
A to the plaintiff on condition that the amount recovered shall first be y-
paid towards the arrears of sales tax plus penalty, if any, under the
SalesTax Act and then adjust the balance amount, if any, towards the
amount due under the decree.

The appeal is allowed. The judgment and decree of the Trial
B Court are set aside. The suit of the plaintiff is decreed for a sum of
Rs. 25 lakhs as per the terms of the compromise subject to exceptions
and conditions specified above. The amount deposited by the receiver
into the Court upto this date shall be paid over to the plaintiff. The
period of six months from today is fixed for redemption. If the
c contesting respondents fail to discharge the decretal amount, the
plaintiff shall bring the property for sale immediately on the expiry
of six months and complete the execution within a period of one year
from today. In the event the contesting respondents pay the decretal
amount within the aforesaid stipulated period, the State will be at
liberty to recover its sales tax arrears with penalty, if any, under the
D Act, by sale of the suit schedule properties. As far as_ the plaintiff and
the contesting respondents are concerned, they have compromised
and in the compromise they have agreed to bear the respective costs
through out. As far as the State is concerned, it is one of the
defendants in the suit and it is one of the respondents in this appeal.
E The Trial Court also has directed the parties to bear their own costs.
Further, the State is benefited by getting its right of preference
adjudicated in a suit filed by the Bank. Under these circumstances,
we order no costs in this appeal as far as the State is concerned."

The Bank has come up in appeal by special leave to this Court feeling
F aggrieved by the decree of the High Court to the extent to which it recognises
the right of the State to proceed against the suit property and that too in
preference to the Bank's right to proceed against the mortgaged property for
realisation of its dues.

We have heard the learned counsel for the Bank and the learned counsel
G
for the partnership firm and its partners, i.e., the borrowers. There has been
no appearance on behalf of the State of Karnataka though served.

Two questions arise for consideration. Firstly, whether the recovery of
sales tax dues (amounting to crown debt) shall have precedence over the right
H of the Bank to proceed against the property of the borrowers mortgaged in
,.

DENA BANK v. B.P. PAREKH AND CO. [R.C. LAHOTI, J.] 517
favour of the Bank. Secondly, whether property belonging to the partners can A
be proceeded against for recovery of dues on account of sales-tax ltssessed
against the partnership firm under the provisions of the Kartanaka Sales Tax
Act, 1957.

What is common law doctrine of priority or precedence of crown debts?
Halsbury, dealing with general rights of the crown in relation to property,
B
states where the Crown's right and that of a subject meet at one and the same
time, that of the Crown is in general preferred, the rule being "detur digniori"
(Laws of England, Fourth Edition Vol.8 para 1076 at page 666). Herbert
Brown states - "Quando jus domini regis et subditi concurrunt jus regis
praeferri debet - Where the title of the king and the title of a subject concur, c
the king's title must be preferred. In this case detur digniori is the
rule .............................. where the titles of the king and of a subject concur, the
king takes the whole ...................... where the king's title and that of a subject
concur, or are in conflict, the king's title is to be preferred" (Legal Maxims
10th edition, pp.35-36). This common law doctrine of priority of State's debts
D
has been recognised by the High Courts of India as applicable in British India
before 1950 and hence the doctrine has been treated as "law in force" within
the meaning of Article 372 (1) of Constituiton. An illunin~ting discussion of
the subject made by Chagla C.J. is to be found in Bank of India v. John
Bowman, AIR (1955) Bombay 305. We may also refer to Full Bench decision
of Madras High Court in Manickam Chettiar v. Income Tax Officer; Madurai, E
AIR.(1938) Mad. 360 as also to two Judicial Commissioner's Court decisions
in People's Bank of No11hem India Ltd. v. Secretary of State for India, AIR
(1935) Sind 232 and Vassanbai Topandas v. Radhabai Tirathdas and ors.,
AIR 1933 Sind 368. Without multiplying the authorities we would straighta-
way come to the Constitution Bench decision in Mis Builders Supply Corpo- F
ration v. Union of India, AIR 1965 SC 1061.

The principle of priority of Government debts is founded on the rule of
necessity and of public policy. The basic justification for the claim for priority
of state debts rests on the well recognised principle that the State is entitled
to raise money by taxation because unless adequate revenue is received by the G
State, it would not be able to function as a sovereign government at all. It is
essential that as a sovereign, the State should be able to discharge its primary
.. governmental functions and in order to be able to discharge such functions
efficiently, it must be in possession of necessary funds and this consideration
emph'!sises the necessity and the wisdom of conceding to the State, the right H
518 SUPREME COURT REPORTS [2000) 3 S.C.R.

A to claim priority in respect qf its tax dues. (See Mis. Builders Supply
Corpofation, Supra). In the same case the Constitution Bench has noticed a
consensus of judicial opinion that the arrears of tax due to the State can claim
priority over private debts and that this rule of common law amounts to law
in force in the territory of British India at the relevant time within the meaning
of Article 372 (1) of the Constitution of India and therefore continues to be
B
in force thereafter. On the very principle on which the rule is founded, the
priority would be available only to such debts as are incurred by the subjects
of the Crown by reference to the State's sovereign power of compulsory
exaction and would not extend to charges for commercial services or obliga-
tion incurred by the subjects to the State pursuant to commercial transactions.
C Having reviewed the ~vailable judicial pronouncements Their Lordships have
summed up the law as under :-

1. There is a consensus of judicial opinion that the arrears of tax due
to the State can claim p1iority over private debts. ~

D 2. The common law doctrine about priority of crown debts which was
recognised by Indian High Comts prior to 1950 constitutes "law. in force"
within the meaning of Article 372 (1) and continues to be in force.

3. The basic justification for the claim for priority of State debts is the
rule of necessity and the wisdom of conceding to the State the right to claim
E priority in respect of its tax dues.

4. The doctrine may not apply in respect of debts due to the State if they
are contracted by citizens in relation to commercial activities which may be
undertaken by the State for achieving socio-economic good. In other words,
where welfare State enters into commercial fields which cannot be regarded
F as an essential and integral part of the basic government functions of the State
and seeks to recover debts from its debtors arising out of such commercial
activities the applicability of the doctrine of priority shall be open for
consideration.

G The Constitution Bench decision has been followed by three-Judge
Bench in Collector of Aurangabad v. Central Bank of India, AIR (1967) SC
1831.

However, the Crown's preferential right to recovery of debts over other
creditors is confined to ordinary or unsecured creditors. The Common Law of
H England or the principles of equity and good conscience (as applic.able to
('

DENA BANK v. B.P. PAREKH AND CO. [LAHOTI, J.] 519
India) do not acconl the Crown a preferential right for recovery of its debts A
over a mortgagee or pledgee of goods or a secured creditor. It is only in cases
where the Crown's right ~d that of the subject meet at one and the same time
that the Crown is in general preferred. Where the right of the subject is
complete and perfect before that of the King commences, the rule does not
apply, for there is no point of time at which the two rights are at conflict, nor B
can there be a question which of the two ought to prevail in a case where one,
that of the subject, has prevailed already. In Giles v. Grover, [1832) 131 ER
563 it has been held that the Crown has no precedence over a pledgee of
goods. In Bank of Bihar v. State of Bihar & Ors., AIR (1971) SC 1210, the
principle has been recognised by this Court holding that the rights of the
pawnee who has paited with money in favour of the pawnor on the security C
of the goods cannot be extinguished even by lawful seizure of goods by
making money available to other creditors of the pawnor without the claim of
the pawnee being first fully satisfied. Rashbehary Ghose states in Law of
Mortgage (T.L.L., Seventh Edition, p.386) - 'It seems a Government debt in
India is not entitled to precedence over a prior secured debt.' D
The abovesaid being the position of law, the High Court has however
proceeded to rely on certain provisions contained in Chapter XVI of Kamataka
Land Revenue Act, 1964 as also the provisions contained in Sections 13 and
15 of Kartanaka Sales Tax Act, 1957 for holding that the arrears of sales-tax
would be entitled to a preference even over the debt secured by mortgage in E
favour of the appellant Bank. We would notice the relevant legal provisions.

Chapter XVI of Kartanaka Land Revenue Act, 1964 is titled as -
"Realisation Of - Land Revenue And Other Public Demand". Sections 158,
190 and 2 (relevant parts thereot) are extracted and reproduced hereunder:-
F
"158. Claim of State Government to have-precedence over all others.
- (1) Claim of the State Government to any moneys recoverable under
the provisions of this Chapter shall have precedence over any other
debt, demand or claim whatsoever whether in respect of mortgage,
judgment-decree, execution or attachment, or otherwise howsoever,
G
against any land or the holder thereof.

(2) In all cases, the land revenue for the current revenue year, of
land for agricultural purposes, if not otherwise discharged, shall be
recoverable in preference to all other claims, from the crop of such
land." H
520 SUPREME COURT REPORTS [2000] 3 S.C.R.
A (2) Definitions - In this Act, unless the context otherwise requires, -

xxx xxx xxx

(14) "land" includes benefits to arise out of land, and things
attached to the earth, or permanently fastened to anything attached to
B the earth, and also shares in, or charges on, the revenue or rent of
villages or other defined areas;

190. Recovery of other public demands.- The following moneys may
be recovered under this Act in the same manner as an arrear of land
revenue, namely :-
c
(a) xxx xxx xxx

(b) xxx xxx xxx

(c) all sums declared by this Act or any other law for the time
being in force to be recoverable as an an-ear of land revenue.
D
(Emphasis supplied)

Section 13 of the Kamataka Sales Tax Act, 1957 is also relevant. Sub-
sections (1) and (3) (to the extent relevant) are extracted and reproduced
hereunder :-
E
"Sec.13. Payment and Recovery of Tax. - [(l) The Tax [or any other
amount due] under this Act shall be paid in such manner [in such
instalments, subject to such conditions, on payment of such interest]
and within such time, as may be prescribed.]"
F xxx xxx xxx

xxx xxx xxx

(3) Any tax assessed, or any other amount due under this Act
from a dealer or any other person may without prejudice to any other
G mode of collection be recovered -

xxx xxx xxx

H (a) as if it were an arrear of land revenue, or"
,.

DENA BANK v. B.P. PAREKH AND CO. [LAHOTI, J.] 521
xxx xxx xxx A
xxx xxx xxx
(emphasis supplied)

The Act had come into force on 1.10.1957. With effect from 18.11.1983
the following sub-section (2-A) was inserted into the body of Section 15 of B
the Kartanaka Sales Tax Act, 1957 by Amending Act No.23 of 1983 and came
into force on the same day:- ·

"(2-A) Where any firm is liable to pay any tax or penalty or any other
amount under this Act, the firm and each of the partners of the firm
shall be jointly and severally liable for such payment."
c
We have seen that the common law doctrine of priority of crown debts
would not extend to providing preference to crown debts over secured private
debts. It was submitted by the learned counsel for the appellant that under the
Karnataka Land Revenue Act as also under the Karnataka Sales Tax Act the D
arrears of sales tax do not become arrears of land revenue; they have been
declared merely to be recoverable as arrears of land revenue. Relying on the
observations of this Court in Builders Supply Corporation case (supra), vide
para 28, the learned counsel for the appellant submitted that the appellant
being a secured creditor the arrears of sales tax could not have preference over
the rights of the appellant. It is true that the Constitution Bench has in Builders E
Supply Corporation case (supra) observed by reference to Section 46(2) of the
Income-tax Act, 1922 that that provision does not deal with the doctrine of
the priority of crown debts at all; it merely provides for the recovery of the
arrears of tax due from an assessee as if it were an arrear of land revenue which
provision cannot be said to convert arrears of tax into arrears of land revenue F
either. The submission so made by the learned counsel omits to take into
consideration the impact of Section 158(1) of the Kamataka Land Revenue
Act which specifically provides that the claim of the State Government to any
moneys recoverable under the provisions of Chapter XVI shall have prec-
edence over any other debt, demand or claim whatsoever including in respect
G
of mortgage. Section 158 of the Karnataka Land Revenue Act not only gives
a statutory recognition to 'the doctrine of State's priority for recovery of debts
but also extends its applicability over private debts forming subject matter of
mortgage, judgment-decree, execution or attachment and the like. In Collector
ofAurangabad v. Central Bank of India (Supra), the provisions of Hyderabad
Land Revenue Act and Hyderabad General Sales Tax Act had come up for H
SUPREME COURT REPORTS [2000) 3 S.C.R.
A consideration of this Court. This Court had refused to ~ant primacy to the
dues on account of sales tax over secured debt in favour of the Bank. A perusal
of the relevant statutory provisions quoted in the judgment goes to show that
any provision pari materia with the one contained in Section 158 of Kamataka
Land Revenue Act was not to be found in any of the local acts under
consideration of this Court in Collector of Aurangabad v. Central Bank of
India. The effect of Section 190 is to make the procedure for recovery of
arrears of land revenue applicable for recovery of sales tax arrears. The effect
of Section 158 is to accord a primacy to all the moneys recoverable under
Chapter XVI, which will include sales tiu arrears.

c The learned counsel for the appellant submitted that sub-section (2-A)
of Section 15 of Karnataka Sales Tax Act could not be given a retrospective
operation. This submission is misconceived. A legislation may be made to
commence from a back date, i.e. from a date previous to the date of its
enactment. To make a law governing a past period on a subject is retrospectivity.
A legislature is competent to enact such a law. The ordinary rule is fuat a
D legislative enactment comes into operation only on its enactment. Retrospectivity
is not to be inferred unless expressed or necessarily implied in the legislation,
specially those dealing with substantive rights and obligations. It is a misno-
mer to say that sub-section (2A) of Section 15 of the Karnataka Sales Tax Act
is being given retrospective operation. Determining the obligation of the
E partners to pay the tax assessed against the firm by making them personally
liable is not the same thing as giving the amendment a retrospective operation.
In Principles of Statutory Interpretation (by Justice G.P. Singh, Seventh
Edition, 1999, at page 369) it is stated :-

"The rule against retrospective construction is not applicable to a stat-
F ute merely "because a part of the requisites for its action is drawn
from a time antecedent to its passing". If that were not so, every stat-
ute will be presumed to apply only to persons born and things come
into existence after its operation and the rule may well result in virtual
nullification of most of the statutes. An amending Act is, therefore,
G not retrospective merely because it applies also to those to whom pre-
amended Act was applicable if the amen~d Act has operation from
the date of its amendment and not from an anterior date."

There is, therefore no question of sub-section (2-A) of Section 15 of the
Karnataka Sales Tax Act being given a retrospective operation. It is prospec-
H tive. However, it does not make any difference for the facts of the present case.
DENA BANK v. B.P. PAREKH AND CO. [LAHOTI, J.] 523

The High Court has relied on Section 25 of the Partnership Act, 1932 A
for the purpose of holding the partners as individuals liable to meet the tax
liability of the firm. Section 25 provides that every partner is liable, jointly
with all the other partners and also severally for all acts of the firm done while
he is a partner. A firm is not a legal entity. It is only a collective or
compendious name for all the partners. In other words, a firm does not have
B
any existence away from its partners. A decree in favour of or against a firm
in the name of the firm has the same effect as a decree in favour of or against
the partners. While the firm is incurring a liability it can be assumed that all
the partners were incurring that liability and so the partners remain liable
jointly and severally for all the acts of the firm. This principle cannot be
stretched and extended to such situations in which the firm is deemed to be. c
a person and hence a legal entity for certain purpose. The Kamataka Sales Tax
Act, with which we are concerned, also gives the firm a legal status by treating
it as a dealer and hence a person for the limited purpose of assessing
under the Sales Tax Act. It was, therefore, held by a three-judge Bench in
Commissioner of Sales Tax, M.P. & Ors. v. Radhakrishan & Ors., AIR 1979 D
SC 1588:-

" ........... a firm in a partnership and a Hindu undivided family are
recognised as legal enHies and as such proceedings can only be taken
against the firm or undivided family as the case may be. Neither the
partners of the firm nor the members of the Hindu undivided family E
will be liable for the tax assessed against the firm or the undivided
Hindu family."

However, this principle would have no applicability if there be a
statutory provision to the contrary. In the case of Radhakrishan & Ors. (supra), p
vide para 7 itself, this Court observed :-

"It may be noted that S. 276 (d) of the Income-tax Act specifically
includes all partners within the definition of the word 'firm' and a
company includes directors. In Bombay Sales Tax Act, 1959, under
Section 18 it is specifically provided that where any firm is liable to a·
pay tax under the Act, the firm and each of the partners of the firm
shall be jointly and severally liable for such payment. In the absence
of a specific provision as found in Section 18 of the Bombay Act the
partners of the firm cannot be held liable for the tax assessed on the
firm." H
524 SUPREME COURT REPORTS [2000) 3 S.C.R.
' A A provision similar to the one included in Section 18 of the Bombay
Sales Tax Act haS been incorporated in the Kamataka Sales Tax Act as referred
to hereinabove and that is why the partners of the borrower firm in the case
before us cannot take shelter behind the law laid down by this court in
Radhakrishan & Ors. (supra). Here we may also refer to a two-judge Bench
decision of this Court in Third Income-tax Officer & Am: v. Arunagiri
B
Chettiar, (1996) 220 ITR 232 SC in which provisions of S.188 A Income-tax
Act, 1971 have been noticed. S.188 A declares a partner and his legal
representatives jointly and severally liable along with the firm to pay any tax,
penalty or sum payable for the year in which he was a partner. It was observed .
that S.188 A explicitly provides what was implicit hitherto. In the case at hand
c the partners are being held liable by reason of Sec.15(2A) of the Kamataka
Sales Tax Act, 1957.

The learned counsel for the appellant is right in submitting that on the
day on which the State of Kamataka proceeded to attach and sell the property
of the partners of the firm mortgaged with the Bank, it could not have
D appropriated the sale proceeds to sales tax arrears payable by the firm and
defeating the Bank's security in view of the law as laid down by this Court
in Commissioner of Sales Tax, M.P. v. Radhakrishan & Ors. (supra). However,
still in the facts and circumstances of the case, th(! appellant Bank cannot be
allowed any relief. Section 15 (2A) of Kartanaka Sales Tax Act had come into
E force on 18.12.1983 while the decree in favour of the Bank was passed on
3.8.1992 and is yet to be executed. The claim of the appellant Bank is still
outstanding. Even if we were to set aside the sale held by the State, it will
merely revive the airears outstanding on account of sales tax to which further
interest and penalty shall have to be added. The amended Section 15 (2-A) of
the Kamataka Sales Tax Act shall apply. The State shall have a preferential
F
right to recover its dues over the rights of the appellant Bank and the property
of the partners shall also be liable to be proceeded against No useful purpose
would, therefore, be served by allowing the appeal which will only further
complicate the controversy.

G For the foregoing reasons, the appeal is dismissed though without any
order as to the costs in the facts and circumstances of the case.

A.Q. Appeal dismissed.