Holding

The decree for appointment of a receiver to recover the tax dues from the appellant’s deposits is valid and the Union of India is entitled to the amount.

Summary

The Union of India sought to recover tax arrears owed by an assessee company and was informed that the amount could be recovered from a debt the appellant, Kalyan Mills Ltd., owed to the assessee. Notices under Sections 46(2) and 46(5A) of the Income Tax Act were issued to the appellant, and the Union filed a suit for a decree and appointment of a receiver. The trial court and the Gujarat High Court upheld the decree, holding that the appellant held the tax money as a credit and could not evade payment by asserting a counter‑claim. The appellant appealed to the Supreme Court, arguing that a receiver could be appointed only in execution of a decree against the original debtor. The Supreme Court affirmed the lower courts, holding that the provisions of Section 46(2) attached the money, the machinery under Section 46(5A) was exhausted once a counter‑claim was raised, and a decree for appointment of a receiver was the proper remedy. The appeal was dismissed.

Issues considered

Whether a suit for recovery of tax dues under Sections 46(2) and 46(5A) of the Income Tax Act can be maintained against a third party holding the money as a credit.
Whether the appointment of a receiver is permissible in such a suit when the money is held by the appellant.
Whether the machinery under Section 46(5A) becomes ineffective upon the filing of a counter‑claim, necessitating civil adjudication.

Legislation cited

Income Tax Act, 1961s. 46(2), s. 46(5A)

Subjects

Income TaxSection 46tax recoveryreceiver appointmentcivil suitcounter‑claimmoney decreeUnion of Indiacorporate liability

Judgment

A . KALYAN MILLS LTD.
v.
UNION OF INDIA & ORS.

NOVEMBER 21, 1986
B [O. CHINNAPPA REDDY AND G.L. OZA, JJ.]

INCOME TAX ACT, 1961-Section 46(2) & 46(5A)-Tax dues
recoverable from· assessee company-Assessee company informing 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
C appellant company-Validity of such claim.
,
The Union of India-Respondent No. l, had to recover certain arrears of
taxes from the assessee-company-Respondent No. 2. The assessee-company
informed the Union oflndia that the tax dues recoverable from it he recovered
from the amount which was owed by the appellant-company to it. The debt due
0
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-.,ompany acknowledged and :•dmitted its liability to the assessee-
company and promised the Union of India to pay the amount of tax dues
against the debt due by it to the assessee-company.

E Notices under s. 46(2) ands. 46(5A) of the Income Tax Act were issued to
the appellant-company for the recover:r of the said amount.

The Union of India filed a suit seeking a decree against the appellant-
company and four other defendants. The appellant-company set up a false
F theory that the assessee-company itself was liable to pay the appellant-
company and; theN{ore, 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 appellant-company.

G
The appeal preferred by the appullant-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
H trial court was not permissible in law because proceedings for appointment of

362

.- ..~.
KALY AN MILLS v. UNION OF INDIA [OZA, J] 363

, y receiver can only be contemplated in execution proceedings of a decree against A
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 commission earned by the assessee- B
company 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 C
adjudication from the civil court. [365H - 366B J
2. No money decree could be pasSed against the appellant-company
except for the money lying in the deposits with them for tho 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 plaintiff-Union of India, D
(366C-D] '

CIVIL APPELLATE JURISDICTION: Civil Appeal No. 447(N) of
1973.

)>-. From the Judgment and Decree dated 18/ 19.4.1972 of the Gujarat High
E
·Court in First Appeal No. 184-of 1964.

- V.A. Bobde and A.G. R_atnaparkhi for the Appellant.

,_ S.C. Manchanda, Ms. A. Subhashini and K.C. Dua for the
Respondents.
F
j . 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 filed a suit against the petitioner. The petitioner is a public
limited company. Respondent No. 2 which is also a public limited company G
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 assessee company and others as defendants. It was alleged that
the assessee company by its letter dated 4.10.48 informed the plaintiff Union of H
364 SUPREME COURT REPORTS [1987] I S.C.R.

India that the arrears due from it be reco·1ered from the petitioner on account of y
A
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. I I .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. I assessce-company had informed the plaintiff
B Union of India by a letter dated October 11, 1948 that the tax dues recoverable .,__
from the assessee-<:ompany be recovered from the amount which was owed by
the appellant-<:ompany to the assessee-<:•)mpany. It was inter-alia asserted in the
plaint that the debt due by the appellant-<:ompany to the assessee-<:ompany was
shown to the credit of the assessee-<:ompany in the accounts of the appellant-
company. It is said that by two letters addressed by the appellant-company on -?-i -- ..
November 18, 1948 and December 3, 1948, it acknowledged and admitted its
c liability to the assessee-<:ompany and had further more promised the plaintiff to
pay the amount of tax dues against the debt due by the appellant-<:ompany, to :>-
the assessee-<:ompany. The plaintiff proceeded to assert in view of the
admissions made by the appellant com·)any and the promise made by it to pay
the tax dues from the debt due by it to the assessee-<:ompany and having regard
D to the recovery proceedings undertahn 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 appellant c:ompany was under an obligation to pay I
the amount of Rs 1,32,400.87 p. under these circumstances. It was also alleged
by the plaintiff-respondent (Union of India) that 'notwithstanding the fact that
the debt due by the appellant-<:ompan:; to the assessee-<:ompany w.as shown to r-4
E the credit of the assess<e-<:ompany in the books of accounts of the appellant
company. The appellant company had subsequently set up a false theory that
the assessee company itself was liable to the appellant compa 0 y and that the
appellant company was not liable to 'ay dues of the assessee. It was in terms ~

asserted that the version set up by th' appellant company that it had a claim
against the assessee company was a gPt up version and that it had been create<I
F merely with a view to defeat or delay the dues of the plaintiff. It was contended )
that the appellant company had made a false counter 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 r•egard 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
G Managing Agents' commission 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 connection with the alleged
malfeasance and misfeasance of the assessee company in the course of discharge
+
of their functions as the Managing Agents of the appellant company. As
admitt~dly the assessee-<:ompany was functioning as the Managing Agents of
H the appellant-<:ompany, it was contended that no action was taken for more ~

I

~
KALY AN MILLS v. UNION OF INDIA [OZA, J] 365

than three years and that no steps have been taken in this connection because A
the counter claim was a sham one.

It was further contended by the plaintiff-respol1dent(Union oflndia) 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 B
accounts were a step in this direciton. Such entries 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 cmnpany 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 C
company and the other defendants. With these facts the respondent Union of
India instituted the present suit seeking a decree against defendants 1to 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 appointmeni of receiver for recovery of
the amount due from defei1dant No. 5 and its nominees other defendants.
Various defences were raised. The suit was decreed by the trial court and the D
trial court held that the plaintiff respondent was not entitled to a money decree
against the appellant company. It 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 E
respect of damages for malfeasance and misfeasance against the as;essee
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 asscssce company against the appellant 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 F
appellant company w~s 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 Aprjl 19, 1972 dismissed the appeal and
maintained the decree passed by the trial court and on certificate 'lgainst that G
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
contended that such proceedings fqr appointment of receiver can only be
coniemplated in execution proceedings of a decree against the original debtor.
Facts a.re not in dispute. The learned Judges of the High Court maintained the H
366 . SUPREME COURT REPO.RTS . [1987] I S.C.R.

A decree by coming to the conclusion that the amount of commission 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 ihe 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
B the appellant set up a counter-<:laim against the assesseecompany 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
C 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 forthat
purpose that the decree for appointment of receiver was made so that the
amount be recovered and paid to the plaintiff-Union of India.
D
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
Gujarai. The apP<;al is therefore dismissed with costs.

A.P.J. Appeal dismissed ..
E
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