R.C. Lahoti, J. - (1.) 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 firm namely, M/s Bhikhabhai Prabhudas Parekh and Co. and its partners. The suit 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 enforcement 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 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 firm, the first defendant. The arrears of sales tax related to the assessment years 1957-58, 1966-67 to 1969-70 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 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 averments proved and the Bank entitled to a decree. The charge created on suit properties 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 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.
(2.) 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 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 and 15 are at liberty to sell the plaint schedule property either in portion or in one lot within 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 of the plaintiff-appellant Bank and the plaintiff-appellant shall thereafter give their consent and no objection to such sale or sales. (8) The plaintiff-appellant shall be entitled to refund of the Court-fee paid on the appeal memo and an appropriate direction may be issued by the Hon'ble Court".
(3.) 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 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 crditor. Secondly, 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 could be recovered from the assets of the partnership firm and not by proceeding 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 suit filed by the Bank has been decreed by the High 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 plaintiff's claim. Therefore, we accept the compromise except Clauses 7 and 8 and other terms 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 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 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 assigned to the plaintiff on condition that the amount recovered shall first be paid towards the arrears of sales tax plus penalty, if any, under the Sales Tax 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 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 up to this date shall be paid over to the plaintiff. The period of six months from today is fixed for redemption. If the 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 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 throughout. 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. 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." ;