Gujarat High Court
M/S Pattech Fitwell Tube Components vs The State Of Gujarat on 30 March, 2022
Author: J. B. Pardiwala
Bench: J.B.Pardiwala
C/SCA/16352/2021 JUDGMENT DATED: 30/03/2022
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 16352 of 2021
With
R/SPECIAL CIVIL APPLICATION NO. 16358 of 2021
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE J.B.PARDIWALA
and
HONOURABLE MS. JUSTICE NISHA M. THAKORE
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1 Whether Reporters of Local Papers may be allowed NO
to see the judgment ?
2 To be referred to the Reporter or not ? NO
3 Whether their Lordships wish to see the fair copy NO
of the judgment ?
4 Whether this case involves a substantial question NO
of law as to the interpretation of the Constitution
of India or any order made thereunder ?
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M/S PATTECH FITWELL TUBE COMPONENTS
Versus
THE STATE OF GUJARAT
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Appearance:
for the Petitioner(s) No. 1
MS MEGHA JANI(1028) for the Petitioner(s) No. 1
ADVANCE COPY SERVED TO GOVERNMENT PLEADER/PP for the
Respondent(s) No. 1
BHASKAR SHARMA(9209) for the Respondent(s) No. 5
JUHI D CHAVDA(8626) for the Respondent(s) No. 5
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CORAM:HONOURABLE MR. JUSTICE J.B.PARDIWALA
and
HONOURABLE MS. JUSTICE NISHA M. THAKORE
Date : 30/03/2022
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C/SCA/16352/2021 JUDGMENT DATED: 30/03/2022
COMMON ORAL JUDGMENT
(PER : HONOURABLE MR. JUSTICE J.B.PARDIWALA)
1. Since the issues raised in both the captioned writ-applications are the same and the parties are also the same, those were taken up for hearing analogously and are being disposed of by this common judgment and order.
2. For the sake of convenience, the Special Civil Application No.16352 of 2021 is treated as the lead matter.
3. By this writ-application under Article 226 of the Constitution of India, the writ-applicant has prayed for the following reliefs:-
21(A) Be pleased to issue a writ of mandamus or any other appropriate writ, order or direction in the nature of mandamus, or any other appropriate writ, order or direction and hold and declare that the claim made by the respondents under section 48 of the VAT Act is illegal and ultra vires in view of the provisions contained in section 26E of the SARFEASI Act and therefore, the demand made by the respondents in the charge recorded in the revenue records in relation to block no.873B of village Por, Taluka and District Vadodara be quashed and set aside.
(B) Be pleased to issue a writ of mandamus or any other appropriate writ, order or direction in the nature of mandamus, or any other appropriate writ, order or direction and quash and set aside the charge recorded in form Nos.6, 7 and 12 of the land bearing block no.873B of Village Por, Taluka and District Vadodara and direct that no charge shall be recorded in relation to land bearing block no.873B of village Por, Taluka and District Vadodara in pursuance of any proceedings or orders recorded under section 48 of the VAT Act.
(B-1) Be pleased to issue a writ of mandamus and/or a writ in the nature of mandamus and/or any other appropriate writ, order or direction to quash and set aside the decision of the Mamlatdar, Vadodara (Rural) contained in the letter dated Page 2 of 13 Downloaded on : Sat Dec 24 13:55:56 IST 2022 C/SCA/16352/2021 JUDGMENT DATED: 30/03/2022 04.02.2022 (Annexure-H) and further be pleased to issue a writ of mandamus and/or a writ in the nature of mandamus and/or any other appropriate writ, order or direction commanding the Mamlatdar, Vadodara (Rural) to post and certify a mutation entry to record the Certificate of Sale dated 08.09.2021 (bearing registration no.2889) for the land bearing Block No.873-B, paiki 2 of Mouje Por, Taluka and District Vadodara.
(B-2) Pending the hearing and final disposal of this petition, be pleased to direct the Mamlatdar, Vadodara (Rural) to post and certify a mutation entry to record the Certificate of Sale dated 08.09.2021 (bearing registration no.2889) for the land bearing Block No.873-B paiki 2 of Mouje Por, Taluka and District Vadodara.
(C) Pending hearing and final disposal of this petition, be pleased to stay the implementation, execution and operation of the charge recorded in form nos.6, 7 and 12 of the land bearing block no.873B of village Por, Taluka and District Vadodara and direct that no charge shall be recorded in relation to land bearing block no.873B of village Por, Taluka and District Vadodara in pursuance of any proceedings or orders recorded under section 48 of the VAT Act.
(D) Be pleased to grant such other and further relief/s as may be deemed fit, just and proper, in the interest of justice.
4. The facts giving rise to this litigation may be summarized as under:-
4.1 A Public Limited Company namely M/s. Modern Tube Industries Ltd. had availed the cash credit facility to the tune of Rs.37.54 crore from the respondent no.5 - Bank of Baroda.
4.2 In pursuance of the sanction of the said facility, the Company mortgaged several properties owned by it by way of security in favour of the bank. The security included hypothecation of the current assets, mortgage of plant and machinery by depository of Page 3 of 13 Downloaded on : Sat Dec 24 13:55:56 IST 2022 C/SCA/16352/2021 JUDGMENT DATED: 30/03/2022 title, deeds of the immovable properties in favour of the bank.
4.3 M/s. Modern Tube Industries Ltd. defaulted in the repayment of the amount availed by it by way of cash credit facility over a period of time. The account of the company came to be declared as a non-performing asset (N.P.A.) on 12.12.2012. The bank initiated proceedings under the SARFEASI Act before the Debt Recovery Tribunal at Ahmedabad in the form of filing of the Original Application No.374 of 2013 against the defaulting company.
4.4 The Debt Recovery Tribunal by its judgment and order dated 31.03.2017 directed the company to make payment of Rs.55,48,75,761.79/-.
4.5 The Bank of Baroda, thereafter, initiated proceedings under the SARFEASI Act by issuing a notice under Sub-section (2) of Section-13 on 08.06.2013.
4.6 The bank ultimately took over the possession of the secured assets of the defaulting company. The bank issued a public notice for E-auction of the secured assets dated 22.01.2021. The auction proceedings were undertaken on 12.02.2021. The writ-applicant herein participated in the auction proceedings and was declared as the highest bidder in relation to the land bearing Block No.873B situated at Village - Por, Taluka and District Vadodara. The offer of the writ-applicant was accepted. The writ-applicant paid the full amount to the bank towards the sale consideration. The bank issued sale certificate in favour of the writ-applicant on 24.08.2021. In the Page 4 of 13 Downloaded on : Sat Dec 24 13:55:56 IST 2022 C/SCA/16352/2021 JUDGMENT DATED: 30/03/2022 sale certificate issued by the bank, it has been stated that the sale of the scheduled property was made free from all encumbrances known to the secured creditor. In the column of the list of encumbrances, it has been stated 'NIL' in accordance with the bank record.
4.7 It appears that two separate sale-deeds came to be executed by the bank in favour of the writ-applicant; one with respect to Block No.873A paiki 2 and another with respect to the Block No.873B situated at village Por, Taluka and District Vadodara. The property bearing Block No.873A paiki 2 came to be purchased by the writ-applicant for Rs.7,09,74,924/-, whereas, the property bearing Block No.873B came to be purchased for a total sale-
consideration of Rs.5,08,75,076/-. In all both the properties came to be purchased by the writ-applicant for a total sale consideration of Rs.12,18,50,000/-.
4.8 It appears that after the sale was finalized, the writ-applicant went before the Mamlatdar to get the entry of the sale mutated in the revenue records. The Mamlatdar declined to mutate the entry of the sale transaction on the premise that the State Government has a first charge over the properties in question under Section-48 of the Value Added Tax Act, 2003 towards the service tax liability incurred by M/s. Modern Tube Industries Ltd.
5. In such circumstances referred to above, the writ-applicant is here before this Court with the present writ-application.
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6. We have heard Ms. Megha Jani, the learned counsel appearing for the writ-applicant and Mr. Utkarsh Sharma, the learned AGP appearing for the State respondents.
7. The pivotal issue raised in the present writ-application is no longer res-integra in view of the two pronouncements of this Court as under:-
(1) Bank of India vs. State of Gujarat and others [Special Civil Application No.13863 of 2014; decided on 21st January 2020].
(2) Kalupur Commercial Co-operative Bank Ltd. vs. State of Gujarat [Special Civil Application No.17891 of 2018; decided on 23rd September 2019].
8. We quote the relevant paragraphs of the judgment rendered in Kalupur Commercial Co-operative Bank Ltd. (supra) as under:
"54. In view of the aforesaid discussion, We have no hesitation in coming to the conclusion that the first priority over the secured assets shall be of the Bank and not of the State Government by virtue of Section 48 of the VAT Act, 2003.
55. In the result, this writ application succeeds and is hereby allowed. The impugned attachment notice dated 22.01.2018 (Annexure-A) and the impugned communication dated 19.04.2018 (Annexure-B) issued by the respondent No.2 is hereby quashed and set aside. It is hereby declared that the Bank has the first charge over the properties mortgaged from M/s. M.M. Traders by virtue of Section 26E of the SARFAESI Act.
56. It is further clarified that the excess, if any, shall be adjusted towards the dues of the State under the VAT Act. It is further declared that the respondents cannot proceed against the purchasers of the properties sold under the SARFAESI Act."Page 6 of 13 Downloaded on : Sat Dec 24 13:55:56 IST 2022
C/SCA/16352/2021 JUDGMENT DATED: 30/03/2022
9. What came to be purchased by the writ-applicant in the auction proceedings conducted by the Bank of Baroda was a secured asset under the provisions of the SARFAESI Act. In such circumstances, the State cannot claim preference over the subject property for the purpose of recovery of the dues towards tax. It is not in dispute that the first charge was created in favour of the bank and the bank in exercise of its powers under the SARFAESI Act, put the subject property to auction.
10. The view taken by this High Court in the above referred two decisions now stands fortified by a recent pronouncement of the Supreme Court in the case of Punjab National Bank Vs. Union of India and Others reported in 2022 SCC OnLine SC 227. We quote the relevant observations as under:-
40. Secondly, coming to the issue of priority of secured creditor's debt over that of the Excise Department, the High Court in the impugned judgment has held that "In view of the matter, the question of first charge or second charge over the properties would not arise." In this context, we are of the opinion that the High Court has misinterpreted the issue to state that the question of first charge or second charge over the properties, would not arise.
41. A Full Bench of the Madras High Court in the case of UTI Bank Ltd. Vs. Dy. Commissioner Central Excise [2006 SCC Online Madras 1182], while dealing with a similar issue, has held that:
"25. In the case on hand, the petitioner Bank which took possession of the property under Section 13 of the SARFAESI Act, being a special enactment, undoubtedly is a secured creditor. We have already referred to the provisions of the Central Excise Act and the Customs Act. They envisage procedures to be followed and how the amounts due to the Departments are to be recovered. There is no specific provision either in the Central Excise Act or the Customs Act, claiming "first charge" as provided in other enactments, which we have pointed out in earlier paragraphs.
26. In the light of the above discussion, we conclude, Page 7 of 13 Downloaded on : Sat Dec 24 13:55:56 IST 2022 C/SCA/16352/2021 JUDGMENT DATED: 30/03/2022 "(i) Generally, the dues to Government, i.e., tax, duties, etc. (Crown's debts) get priority over ordinary debts.
(ii) Only when there is a specific provision in the statute claiming "first charge" over the property, the Crown's debt is entitled to have priority over the claim of others.
(iii) Since there is no specific provision claiming "first charge" in the Central Excise Act and the Customs Act, the claim of the Central Excise Department cannot have precedence over the claim of secured creditor, viz., the petitioner Bank.
(iv) In the absence of such specific provision in the Central Excise Act as well as in Customs Act, we hold that the claim of secured creditor will prevail over Crown's debts."
In view of our above conclusion, the petitioner UTI Bank, being a secured creditor is entitled to have preference over the claim of the Deputy Commissioner of Central Excise, first respondent herein."
(emphasis supplied)
42. This Court, while dismissing the Civil Appeal No.3627 of 2007 filed against the judgment of the Full Bench, vide order dated 12.09.2009 held as under:
"Having gone through the provisions of the Securitization Act, 2002, in light of the judgment of the Division Bench of this court in the case of Union of India vs Sicom Ltd. & Anr., reported in 2009 (1) SCALE 10, we find that under the provisions of the said 2002 Act, the appellants did not have any statutory first charge over the property secured by the respondent bank. In the circumstances, the Civil Appeal is dismissed with no order as to costs"
(emphasis supplied)
43. Hence the reasoning given by the High Court stands strong and has been affirmed by this Court.
44. This Court, in Dena Bank vs Bhikhabhai Prabhu Dass Parikh & Anr. [(2000) 5 SCC 694], wherein the question raised was whether the recovery of sales tax dues (amounting to Crown debt) shall have precedence over the right of the bank to proceed against the property of the borrowers mortgaged in favour of the bank, observed as under:
"10. However, the Crowns preferential right of recovery of debts over other creditors is confined to ordinary or unsecured Page 8 of 13 Downloaded on : Sat Dec 24 13:55:56 IST 2022 C/SCA/16352/2021 JUDGMENT DATED: 30/03/2022 creditors. The common law of England or the principles of equity and good conscience (as applicable to India) do not accord the Crown a preferential right of recovery of its debts over a mortgagee or pledgee of goods or a Secured Creditor."
(emphasis supplied)
45. Further, in Central Bank of India Vs. Siriguppa Sugars & Chemicals Ltd. & Ors. [(2007) 8 SCC 353], while adjudicating a similar matter, this Court has held as under:
"18. Thus, going by the principles governing the matter, propounded by this Court there cannot be any doubt that the rights of the appellant-bank over the pawned sugar had precedence over the claims of the Cane Commissioner and that of the workmen. The High Court was, therefore, in error in passing an interim order to pay parts of the proceeds to the Cane Commissioner and to the Labour Commissioner for disbursal to the cane growers and to the employees. There is no dispute that the sugar was pledged with the appellant bank for securing a loan of the first respondent and the loan had not been repaid. The goods were forcibly taken possession of at the instance of the revenue recovery authority from the custody of the pawnee, the appellant-bank. In view of the fact that the goods were validly pawned to the appellant bank, the rights of the appellant-bank as pawnee cannot be affected by the orders of the Cane Commissioner or the demands made by him or the demands made on behalf of the workmen. Both the Cane Commissioner and the workmen in the absence of a liquidation, stand only as unsecured creditors and their rights cannot prevail over the rights of the pawnee of the goods."
(emphasis supplied)
46. The Bombay High Court in Krishna Lifestyle Technologies Ltd. Vs. Union of India & Ors. [2008 SCC Online Bombay 137], wherein the issue for consideration was "whether tax dues recoverable under the provisions of The Central Excise Act, 1944 have priority of claim over the claim of secured creditors under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002"
held that:
"Considering the language of Section 35 and the decided case law, in our opinion it would be of no effect, as the provisions of SARFAESI Act override the provisions of the Central Sales Tax Act and as such the priority given to a secured creditor would override Crown dues or the State dues. In so far as the SARFAESI Act is concerned a Full Bench of the Madras High Court in UTI Bank Ltd. v. Deputy Commissioner of C. Excise, Chennai-II has examined the issue in depth. The Court was pleased to hold that Page 9 of 13 Downloaded on : Sat Dec 24 13:55:56 IST 2022 C/SCA/16352/2021 JUDGMENT DATED: 30/03/2022 tax dues under the Customs Act and Central Excise Act, do not have priority of claim over the dues of a secured creditor as there is no specific provision either in the Central Excise Act or the Customs Act giving those dues first charge, and that the claims of the secured creditors will prevail over the claims of the State. Considering the law declared by the Apex Court in the matter of priority of state debts as already discussed and the provision of Section-35 of SARFAESI Act we are in respectful agreement with the view taken by the Madras High Court."
(emphasis supplied)
47. An SLP (No.12462/2008) against the above judgement of the Bombay High Court stands dismissed by this Court on 17.07.2009 by relying upon the judgement in the matter of Union of India vs SICOM Ltd. & Anr. Reported in [(2009) 2 SCC 121], wherein the question involved was "Whether realization of the duty under the Central Excise Act will have priority over the secured debts in terms of the State Financial Corporation Act, 1951" and this Court held as under:
"9. Generally, the rights of the crown to recover the debt would prevail over the right of a subject. Crown debt means the debts due to the State or the king; debts which a prerogative entitles the Crown to claim priority for before all other creditors. See Advanced Law Lexicon by P. Ramanatha Aiyear (3rd Edn.) p.1147]. Such creditors, however, must be held to mean unsecured creditors. Principle of Crown debt as such pertains to the common law principle. A common law which is a law within the meaning of Article 13 of the Constitution is saved in terms of Article 372 thereof. Those principles of common law, thus, which were existing at the time of coming into force of the Constitution of India are saved by reason of the aforementioned provision. A debt which is secured or which by reason of the provisions of a statute becomes the first charge over the property having regard to the plain meaning of Article 372 of the Constitution of India must be held to prevail over the Crown debt which is an unsecured one.
(emphasis supplied)
48. In view of the above, we are of the firm opinion that the arguments of the learned counsel for the Appellant, on the second issue, hold merit. Evidently, prior to insertion of Section 11E in the Central Excise Act, 1944 w.e.f. 08.04.2011, there was no provision in the Act of 1944 inter alia, providing for First Charge on the property of the Assessee or any person under the Act of 1944. Therefore, in the event like in the present case, where the land, building, plant machinery, etc. have been mortgaged/hypothecated to a secured creditor, having regard to Page 10 of 13 Downloaded on : Sat Dec 24 13:55:56 IST 2022 C/SCA/16352/2021 JUDGMENT DATED: 30/03/2022 the provisions contained in section 2(zc) to (zf) of SARFAESI Act, 2002, read with provisions contained in Section 13 of the SARFAESI Act, 2002, the Secured Creditor will have a First Charge on the Secured Assets. Moreover, section 35 of the SARFAESI Act, 2002 inter alia, provides that the provisions of the SARFAESI Act, shall have overriding effect on all other laws. It is further pertinent to note that even the provisions contained in Section 11E of the Central Excise Act, 1944 are subject to the provisions contained in the SARFAESI Act, 2002.
49. Thus, as has been authoritatively established by the aforementioned cases in general, and Union of India vs SICOM Ltd.(supra) in particular, the provisions contained in the SARFAESI Act, 2002, even after insertion of Section 11E in the Central Excise Act, 1944 w.e.f.08.04.2011, will have an overriding effect on the provisions of the Act of 1944.
50. Moreover, the submission that the validity of the confiscation order cannot be called into question merely on account of the Appellant being a secured creditor is misplaced and irrelevant to the issue at hand. The contention that a confiscation order cannot be quashed merely because a security interest is created in respect of the very same property is not worthy of acceptance. However, what is required to be appreciated is that, in the present case, the confiscation order is not being quashed merely because a security interest is created in respect of the very same property. On the contrary, the confiscation orders, in the present case, deserve to be quashed because the confiscation orders themselves lack any statutory backing, as they were rooted in a provision that stood omitted on the day of the passing of the orders. Hence, it is this inherent defect in the confiscation orders that paves way for its quashing and not merely the fact that a security interest is created in respect of the very same property that the confiscation orders dealt with.
51. Further, the contention that in the present case, the confiscation proceedings were initiated almost 8-9 years prior to the charge being created in respect of the very same properties in favour of the bank is also inconsequential. The fact that the charge has been created after some time period has lapsed post the initiation of the confiscation proceedings, will not provide legitimacy to a confiscation order that is not rooted in any valid and existing statutory provision.
51. To conclude, the Commissioner of Customs and Central Page 11 of 13 Downloaded on : Sat Dec 24 13:55:56 IST 2022 C/SCA/16352/2021 JUDGMENT DATED: 30/03/2022 Excise could not have invoked the powers under Rule 173Q(2) of the Central Excise Rules, 1944 on 26.03.2007 and 29.03.2007 for confiscation of land, buildings etc., when on such date, the said Rule 173Q(2) was not in the Statute books, having been omitted by a notification dated 12.05.2000. Secondly, the dues of the secured creditor, i.e.the Appellant-bank, will have priority over the dues of the Central Excise Department, as even after insertion of Section 11E in the Central Excise Act, 1944 w.e.f. 08.04.2011, and the provisions contained in the SARFAESI Act, 2002 will have an overriding effect on the provisions of the Central Excise Act of 1944.
52. Accordingly, the Appeal is Allowed and the confiscation orders dated 26.03.2007 and 29.03.2007, passed by the Commissioner Customs and Central Excise, Ghaziabad, are quashed."
11. In view of the aforesaid, this writ-application succeeds and is hereby allowed. It is hereby declared that the State cannot claim any first charge over the subject property by virtue of Section-48 of the GVAT Act, 2003. The decision of the Mamlatdar, Vadodara (Rural) contained in the Letter dated 04.02.2022 at Annexure-H to this writ-application is hereby quashed and set aside.
12. The Mamlatdar, Vadodara (Rural) is directed to post and certify a mutation entry to record the Certificate of Sale dated 08.09.2021 (bearing Registration No.2889) for the land bearing Block No.873B, paiki 2 of Mouje Por, Taluka and District Vadodara.
13. In view of the aforesaid, the connected writ-application i.e.Special Civil Application No.16358 of 2021 also succeeds and is hereby allowed in the aforesaid terms.
14. The Mamlatdar, Vadodara (Rural) to act accordingly and complete the exercise of mutation of entry in the revenue records within a period of 15 days from the date of the receipt of the writ of this order.
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15. Both the writ-applications stands disposed of accordingly.
Direct service is permitted.
(J. B. PARDIWALA, J) (NISHA M. THAKORE,J) A. B. VAGHELA Page 13 of 13 Downloaded on : Sat Dec 24 13:55:56 IST 2022