Karnataka High Court
Canara Bank vs Tax Recovery Officer (Central) on 17 September, 2024
Author: S.R.Krishna Kumar
Bench: S.R.Krishna Kumar
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WP No. 13840 of 2024
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 17TH DAY OF SEPTEMBER, 2024
BEFORE
THE HON'BLE MR JUSTICE S.R.KRISHNA KUMAR
WRIT PETITION NO. 13840 OF 2024 (T-IT)
BETWEEN:
CANARA BANK,
VALENCIA BRANCH,
MENEZES BUILDING,
FR. MULLERS HOSPITAL ROAD,
VELNCIA,
MANGALORE 575 002
REPRESENTED BY ITS CHIEF MANAGER
...PETITIONER
(BY SRI. HEMANT RAO, ADVOCATE FOR
SRI. RUKKOJI RAO H.S., ADVOCATE)
AND:
1. TAX RECOVERY OFFICER (CENTRAL),
INCOME TAX OFFICER,
Digitally signed
by TRO (CENTRAL) BENGALURU,
LEELAVATHI S CR BUILDING NO.1,
R
QUEEN'S ROAD,
Location: HIGH
COURT OF BENGALURU 560 001
KARNATAKA
2. TAX RECOVERY OFFICER,
INCOME TAX OFFICER,
TRO PANAJI,
REAC, PANAJI,
GOA 403 001
3. MR. MOHAMMED AMEER,
AGED ABOUT 53 YEARS,
S/O MR. HUSSAIN BAWA B.,
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NC: 2024:KHC:38553
WP No. 13840 of 2024
RESIDING AT
FLAT NO. 306, HAJI RESIDENCY
KANDAK, BEHIND D.C. OFFICE,
BUNDER,
MANGALURU 575 001.
...RESPONDENTS
(BY SRI. THIRUMALESH M., A/W
SRI. M. DILIP, ADVOCATE FOR R1 AND R2;
NOTICE TO R3 IS D/W, V/O DATED: 24.07.2024)
THIS WP IS FILED UNDER ARTICLES 226 AND 227 OF
THE CONSTITUTION OF INDIA PRAYING TO SET ASIDE THE
ORDER OF ATTACHMENT OF IMMOVABLE PROPERTY
DATED 6.03.2023 BEARING NO. ITBA/COM/F/17/2022-
23/1050444211(1) PASSED BY THE R-2 PRODUCED AT
ANNEXURE-A AND ETC.
THIS PETITION, COMING ON FOR ORDERS, THIS DAY,
ORDER WAS MADE THEREIN AS UNDER:
CORAM: HON'BLE MR JUSTICE S.R.KRISHNA KUMAR
ORAL ORDER
In this petition, petitioner seeks quashing of the impugned order(Annexure-A) dated 06.03.2023 passed by respondent No.2 attaching subject immovable property.
2. Heard Shri Rukkoji Rao H.S., learned Counsel for the petitioner and Shri Thirumalesh M. along with Shri M.Dilip, learned Counsel for respondents No.1 & 2.
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3. A perusal of the material on record would indicate that on 25.03.2013 and 22.03.2014, respondent No.3 mortgaged the subject property in favour of the petitioner by deposit of title deeds and obtained loan from the petitioner.
From 2013 till 2020, respondent No.3 also availed facilities from the petitioner towards the said mortgage. On 29.01.2022, petitioner bank instituted SARFAESI proceedings as against the respondent No.3. Meanwhile, respondent No.1 had initiated proceedings against the respondent No.3 in the year 2021 by issuance of a notice dated 31.03.2021 pursuant to which respondent No.1 passed an order of attachment on 06.03.2023 in relation to the subject property.
Since the petitioner had already instituted the proceedings under the SARFAESI Act as against respondent No.3, subject property was brought to sale by way of public auction and the successful auction bidder Shri Imran Hussain purchased the property in the auction sale and the sale certificate was issued in his favour on 28.04.2023. It is the specific contention of the petitioner that the petitioner's right has priority and would prevail over the claim of respondent Nos.1 & 2 as well as the impugned order of attachment by virtue of -4- NC: 2024:KHC:38553 WP No. 13840 of 2024 Section 26(E) of the SARFAESI Act which has a over riding effect over all debts payable to anyone else including claims/attachments of respondent Nos.1 & 2 and consequently, since the petitioner had already been mortgaged with the subject property in the year 2013 itself much prior to initiation of the proceedings by respondent Nos.1 & 2, the impugned attachment order would be sub-servant to mortgage already created in favour of the petitioner which would have an over-riding effect over the said proceedings initiated by respondents No.1 & 2 and as such impugned of attachment order deserves to be quashed.
4. In support of this submission, learned Counsel for the petitioner placed reliance upon the following judgments:
1. State Bank of India Vs. Tax Recovery Officer, Income Tax Department and Ors. (01.09.2022-MADHC):
MANU/TN/9360/2022;
2. Punjab National Bank Vs. Union of India (UOI) and Ors.
(24.02.2022-SC): MANU/SC/0234/2022; and
3. Canara Bank Vs. The Commissioner of Customs and others - W.P.No.10895/2023 DD 10.06.2024.
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5. Per contra, learned Counsel for respondent No.1 & 2 would reiterate the various contentions urged in the statement of objections and submits that there is no merit in the petition and the same is liable to be dismissed.
6. The perusal of material on record would indicate that it is an undisputed fact that respondent No.3 had mortgaged the subject property in favour of the petitioner in the year 2013-14 much prior to the search conducted by the respondent Nos.1 & 2 under Section 132 of the Income Tax Act on 01.02.2017. In this context, it is relevant to extract Section 26E of the SARFAESI Act, which reads as under:
"26E. Priority to secured creditors.--Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.
Explanation.--For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, -6- NC: 2024:KHC:38553 WP No. 13840 of 2024 priority to secured creditors in payment of debt shall be subject to the provisions of that Code."
7. As can be seen from the aforesaid provision and undisputed facts and circumstances obtaining in the instant case, the claim of the petitioner as against the subject property mortgaged by respondent No.3 in favour of the petitioner is as long back as in year 2013 would have an over riding effect in respect of all subsequent claims including the alleged claims of respondent Nos.1 & 2 which was only in the year 2017 as held by the Madras High Court in the case of State Bank of India Vs. Tax Recovery Officer (supra), wherein it reads as under:
"28. One more rule of construction is that when two competing Acts construed to further the purposes behind them produce a conflict; the court may resolve the conflict by taking into consideration as to which Act represents "the superior purpose", as held in the case of Allahabad Bank v. Canara Bank [MANU/SC/0262/2000: (2000) 4 SCC 406], which reads as under:
"34. While it is true that the principle of purposive interpretation has been applied by the Supreme Court in favour of jurisdiction and powers of the Company Court in Sudarsan Chits (I) Ltd. case [MANU/SC/0037/1984: (1984) 4 SCC 657], and other cases, the said principle, in our view, cannot be invoked in the present case against the Debts Recovery Tribunal in view of the superior purpose of the RDB Act and the special provisions contained therein. In our opinion, the very same -7- NC: 2024:KHC:38553 WP No. 13840 of 2024 principle mentioned above equally applies to the Tribunal/Recovery Officer under the RDB Act, 1993 because the purpose of the said Act is something more important than the purpose of Sections 442, 446 and 537 of the Companies Act. It was intended that there should be a speedy and summary remedy for recovery of thousands of crores which were due to the banks and to financial institutions, so that the delays occurring in winding-up proceedings could be avoided.
If the above rule is applied, then there is no room for doubt that Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act which was introduced with a specific purpose to override and grant priority to recovery of debts due to secured creditors over all other debts, taxes, cesses etc., must be understood as prevailing over Section 281 of the Income Tax Act, in the event of conflict of priority. This is also in view of the fact that the Parliament must be understood to have given priority to the secured creditors under Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, fully aware and conscious of the status and importance that taxes enjoy under the Constitution. Therefore, with regard to operation of section 281 of the Income Tax Act vis-à-vis the operation of sections 26E and 31B of the SARFAESI Act and Recovery of Debts and Bankruptcy Act, sections 26E and 31B according priority to secured creditors shall prevail and thus, the attachment by the Tax Recovery Officer is impermissible in the facts and circumstances of the case.
29. Now coming to the question of whether the amendments by way of Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, would be applicable to the Bankers in the present case in view of the fact that Section 31B was inserted with effect from 01.09.2016, while Section 26E was inserted and notified to come into force on 24.01.2020. The above question need not detain us long for the following reasons:
a) Firstly, the Full Bench of this court in w.p.
no.2675 of 2011 etc. batch, dated:10.11.2016 has held that it would -8- NC: 2024:KHC:38553 WP No. 13840 of 2024 govern the rights of the parties even in respect of a pending lis. The relevant portion of the same reads as under:
"3. There is, thus, no doubt that the rights of a secured creditor to realise secured debts due and payable by sale of assets over whichsecurity interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority. This section introduced in the Central Act is with "notwithstanding" clause and has come into force from 01.09.2016.
The law having now come into force, naturally it would govern the rights of the parties in respect of even a lis pending."
The Special Leave Petition is stated to be pending before the Apex Court and there is an order of "Status Quo" in SLP (Civil) No. 20471 of 2021 dated 16.03.2018. In view thereof, the Full Bench Order of this Court would continue to bind/govern.
b) Secondly, we would think the examination of the above question may be academic, in view of the fact that even if the recovery proceeding is set-aside for any reason, the same may not serve any purpose. The claim of the Bankers/Financial Institutions is admittedly still outstanding, hence it is open for the Bankers/Financial Institutions on proceeding being set-aside to invoke Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act as it is applicable presently in any view. In similar circumstances, the Hon'ble Supreme Court in the case of Dena Bank v.
Bhikhabhai Prabhudas Parekh and Co.
[MANU/SC/0317/2000: (2000) 5 SCC 694] while examining the question whether the State would have precedence to recover the tax dues over that of secured creditors after clarifying the position on the above issue, proceeded to examine the further contention -9- NC: 2024:KHC:38553 WP No. 13840 of 2024 that the petitioners therein who were partners of a firm that Section 15(2-A) of the Karnataka Sales Tax Act, which provided that where any firm is liable, the firm and each of the partners would be jointly and severally liable was introduced only with effect from 18.11.1983, however the taxes that were sought to be recovered related to periods prior to 1964-65 i.e., prior to the insertion of the above provision. The Apex Court after holding that it would be prospective, however proceeded to hold that even if the recovery proceedings were to be set aside, it may not serve any purpose since it was open for the State to resort to the amended Section 15(2-A) of the Karnataka Sales Tax Act which would prevail over the right of the appellant Bank. The following portion is relevant and thus extracted:
"21.....Even if we were to set aside the sale held by the State, it will merely revive the arrears 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 Karnataka Sales Tax Act shall apply. The State shall have a preferential 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."
The position here is no different. Apart from the fact that the Full Bench has while considering the applicability of Section 31B of the Recovery of Debts and Bankruptcy Act has held that it would apply even to lis pending, which would be the position in respect of Section 26E of the SARFAESI Act as well. Even if this Court were to set aside the recovery proceedings for any reason, the Bankers/Financial Institutions right to claim priority in terms of Section 31B of the Recovery of Debts and Bankruptcy Act and Section 26E of the SARFAESI Act would be
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NC: 2024:KHC:38553 WP No. 13840 of 2024 available and the right to recover under the Income Tax Act, 1961 must yield to the provisions under the SARFAESI Act and the Recovery of Debts and Bankruptcy Act and thus, the above exercise may not serve any useful purpose. Therefore, the above issue appears to be a mere academic exercise and we do not intend to examine the question any further.
30.1. In view of the legal position explained above and applying the same to the facts of the present case, we arrive at the following conclusion:
(i) In WA. No. 60 of 2022, the appellant is a secured creditor, who offeredcredit facilities to the Respondents 4 and 5, for which, mortgages were created in favour of appellant on 23.04.2013 vide document No. 453 of 2013, on 18.08.2014 vide document No. 2467 of 2014 and on 22.10.2015 vide document No. 3168 of 2015. However, the Income Tax Department passed the order of attachment on 03.11.2015, for recovery of the tax dues, in respect of the properties over which mortgages were already created.
(ii) In W.A. No. 1249 of 2022, the appellant sought to quash the communication of the Respondent dated 27.12.2007 with respect to recovery of income tax arrears of M/s. NEPC Agro Foods Limited and its Directors, on the premise that mortgage in respect of the property, was executed in favour of the Bank on 31.03.1999 itself, i.e., prior to the recovery proceedings.
(iii) In WA. No. 1385 of 2022, the writ petitioner/Bank challenged the attachment notice dated 27.03.2017 issued by the Income Tax Department, in respect of the properties which were offered to them as security by way of mortgage by deposit of title deeds for securing loans on 10.02.2014. The learned Judge allowed the writ petition on the ground that the mortgage preceded the attachment.
(iv) In WA. No. 1512 of 2021, the appellant/Bank sought a direction to the first respondent-Tax Recovery Officer, Income Tax Department to remove the attachment made on 16.06.2017 and 23.07.2017 in respect of the properties, which were already mortgaged on 28.01.2016 and 07.02.2016, by the fourth and fifth Respondents to raise loan.
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NC: 2024:KHC:38553 WP No. 13840 of 2024 30.2. In all these cases, the orders of attachment passed by the Tax Recovery Officer/Income Tax Department were subsequent to the mortgage created in favour of the secured creditors and hence, the same will have no legs to stand, in view of the principles laid above by this court. Therefore, the orders impugned in the writ appeals viz., WA Nos. 1512/2021, 60/2022 and 1249/2022 and in the writ petitions, are quashed. Regarding WA No. 1385 of 2022 filed by the Revenue, there is no necessity to interfere with the order passed by the learned Judge.
8. Under the identical circumstances, in the proceeding arising under the Central Excise Act, 1944, the Apex Court in Punjab National Bank's case(supra) has held as under:
43. 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 the provisions contained in Section 2(zc) to (zf) of SARFAESI Act, 2002, read with provisions contained in Section 13 of the SARFAESIAct, 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.
44. Thus, as has been authoritatively established by the aforementioned cases in general, and Union of India v. 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.
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45. 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.
46. 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.
47. To conclude, the Commissioner of Customs and Central 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.
48. 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.
9. So also in the proceedings arising out of a Foreign Exchange Management Act, 1999, this Court held as under:
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NC: 2024:KHC:38553 WP No. 13840 of 2024 "2. The material on record discloses that for the purpose of availing two housing loans in sums of Rs.1,70,00,000/- and Rs.1,24,00,000/-, from the petitioner -
Bank, the 3rd respondent mortgaged the schedule property along with the other property on 20.02.2015 by way of registered Memorandum of Title Deeds and letter handing over title deeds of the properties. Since the 3rd respondent defaulted in repayment of loan, the loan accounts were classified as 'NPA' by the petitioner - Bank. It is contended that when the petitioner - Bank was contemplated initiation of proceedings under the SARFAESI Act, 2002, it learnt that the 2nd respondent had seized the schedule property for alleged offences said to have been committed by the 3rd respondent under the provisions of the Foreign Exchange Management Act, 1999 (for short 'the FEMA') and passed the impugned order dated 31.03.2022 directing seizure of the schedule property and other properties of the 3rd respondent.
3. It is contended that the petitioner submitted a representation dated 29.07.2022 to the 2nd respondent requesting release / cancellation of the attachment / seizure, to which, the 2nd respondent issued a reply dated 04.08.2022 intimating the petitioner that a petition under Section 37A(2) of FEMA had already been filed by the 2nd respondent before the competent authority and objections may be submitted by the petitioner before the authority. In pursuance of the same, petitioner submitted a representation / objections dated 23.08.2022 to the 1st respondent - Commissioner and since no decision has been taken by him and the order of seizure continues to subsist in respect of the schedule property, petitioner is before this Court by way of the present petition.
4. The 2nd respondent has filed statement of objections and has contested the petition.
5. Heard Sri.Dhyan Chinnappa, learned Senior counsel for the petitioner and Sri.H.Shanthi Bhushan, learned DSGI for 1st respondent and Sri.H.Jayakar Shetty, learned counsel for 2nd respondent.
6. In addition to reiterating the various contentions urged in the petition and referring to the material on record, learned Senior counsel for the petitioner has made the following submissions:-
(i) That by virtue of Section 26E of the SARFAESI Act, the petitioner being a secured creditor, the debt due to the petitioner shall have priority and prevail over all other
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NC: 2024:KHC:38553 WP No. 13840 of 2024 debts / dues including all revenues, taxes, cesses and other rates payable to the respondents 1 and 2 and the provisions of the SARFAESI Act overrides the provisions of the FEMA, since both are special laws and SARFAESI Act is a subsequent enactment, which would prevail over FEMA which was an earlier enactment.
(ii) That the impugned order was passed under Section 37A of the FEMA which was inserted vide Central Act No.20 of 2015 w.e.f. 09.09.2015, while the mortgage created in favour of the petitioner -Bank was prior / earlier thereto i.e., on 20.05.2015 and consequently, Section 37A of FEMA was neither applicable nor could be invoked in relation to the schedule property which had been mortgaged in favour of the petitioner -Bank much prior / earlier to Section 37A being inserted in FEMA and coming into force for the purpose of the present case.
(iii) That by virtue of Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 (for short 'the RDBI Act'), which applies to proceedings under the SARFAESI Act, the rights of the secured creditors viz., petitioner - Bank to realise secured debts due and payable to them by sale of assets, over which security interest is created shall prevail and shall be paid in priority over all other debts / dues including Government dues viz., revenues, taxes, cesses and rates due to the respondents 1 and 2.
(iv) That the impugned seizure order dated 31.03.2022 passed under Section 37A(1) of the FEMA is illegal, arbitrary and without jurisdiction or authority of law and the same deserves to be quashed.
In support of his submissions, learned Senior counsel relied upon the following judgments:-
(i) SBICAP Ventures Ltd, Vs. Joint Director, Directorate of Enforcement (Bengaluru Zonal Office) and others- W.P.No.1360/2023 dated 20.03.2023(Bombay);
(ii) Solidaire India Ltd., Vs Fairgrowth Financial Services and others - (2001) 3 SCC 71;
(iii) Assistant Commissioner vs. Indian Overseas Bank
- 2016 SCC Online MAD 10030.
7. Per contra, learned counsel for respondents 1 and 2 submits that the alleged dues payable in respect of the property attached in the impugned order would not be covered under any of the amounts / sums mentioned / stated in Section 26E of the SARFAESI Act and the contention of the petitioner was liable to be rejected. It was also submitted that in the light of availability of equally efficacious alternative remedy before the appellate tribunal under Section 37A(5) of the FEMA, the present petition was not maintainable and liable to be dismissed.
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8. By way of reply, learned Senior counsel for the petitioner submits that since the impugned order was without jurisdiction or authority of law, mere availability of an appeal under Section 37A(5) of the FEMA would not come in the way of this Court entertaining and adjudicating upon the present petition.
9. I have given my anxious consideration to the rival submissions and perused the material on record.
10. Before adverting to the rival contentions, it would be profitable to extract the statutory provisions which are germane and relevant for consideration of the issue involved in the present petition.
11. Section 26E of SARFAESI Act, reads as under:-
" 26E. Priority to secured creditors.--Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.
Explanation.--For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016, in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code."
12. As is clear from the aforesaid provision, debts due to any secured creditor shall be paid in priority over all other debts, dues and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or other local authority; it follows therefrom that the provisions of the SARFAESI Act would prevail over the provisions of other earlier enactments, under which, amounts are allegedly due to the Central Government; it is well settled that if there are two special Acts / enactments, it is the later enactment that shall prevail; in the instant case, it cannot be gainsaid that the FEMA (a special law / Act) is an earlier enactment, while the SARFAESI Act (a special law / Act) is a later / subsequent enactment which would prevail over FEMA in the light of the principles laid down by the Apex Court in several judgments including Solidaire India's case supra, wherein it was held as under:-
7. Coming to the second question, there is no doubt that the 1985 Act is a special Act. Section 32(1) of the said Act reads as follows:
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NC: 2024:KHC:38553 WP No. 13840 of 2024 "32. Effect of the Act on other laws.--(1) The provisions of this Act and of any rules or schemes made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any other law except the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973) and the Urban Land (Ceiling and Regulation) Act, 1976 (33 of 1976) for the time being in force or in the Memorandum or Articles of Association of an industrial company or in any other instrument having effect by virtue of any law other than this Act."
8. The effect of this provision is that the said Act will have effect notwithstanding anything inconsistent therewith contained in any other law except to the provisions of the Foreign Exchange Regulation Act, 1973 and the Urban Land (Ceiling and Regulation) Act, 1976. A similar non obstante provision is contained in Section
13 of the Special Court Act which reads as follows:
"13. Act to have overriding effect.--The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law, other than this Act, or in any decree or order of any court, tribunal or other authority."
9. It is clear that both these Acts are special Acts. This Court has laid down in no uncertain terms that in such an event it is the later Act which must prevail. The decisions cited in the above context are as follows: Maharashtra Tubes Ltd. v. State Industrial & Investment Corpn. of Maharashtra Ltd. (1993) 2 SCC 144 ; Sarwan Singh v. Kasturi Lal (1977) 1 SCC 750 : (1977) 2 SCR 421 ; Allahabad Bank v. Canara Bank (2000) 4 SCC 406 and Ram Narain v. Simla Banking & Industrial Co. Ltd. AIR 1956 SC 614 :
1956 SCR 603."
13. So also, in SBICAP's case supra, the Division Bench of the Bombay High Court held that the provisions of the Prevention of Money Laundering Act, 2002 (for short 'the PMLA') would be subservient to the rights of a secured creditor under the SARFAESI Act which would prevail and override the provisions of the PMLA.
14. In the instant case, in the light of the undisputed fact that the SARFAESI Act, 2002 is a later Act / law, the same would prevail over the earlier Act / law, i.e., FEMA, 1999 and having regard to the language employed in Section 26E of the SARFAESI Act, the provisions contained therein would have a overriding effect over the provisions of the FEMA and the SARFAESI Act would prevail over FEMA; as a natural corollary, the dues payable in favour of the petitioner - Bank which is a secured creditor would prevail over the dues allegedly payable to the respondents 1 and 2 by the 3rd respondent under FEMA and consequently, the impugned
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NC: 2024:KHC:38553 WP No. 13840 of 2024 order purporting to seize / attach the schedule property for alleged dues under FEMA are clearly without jurisdiction or authority of law, inasmuch as since the schedule property had already been mortgaged in favour of the petitioner - Bank by the 3rd respondent, prior to the impugned order, the 2nd respondent was neither entitled to nor empowered to pass the impugned order of seizure / attachment of the property which had already stood mortgaged in favour of the petitioner prior to the impugned order; in other words, since the schedule property had already been mortgaged by the 3rd respondent in favour of the petitioner - Bank, by virtue of Section 26E of the SARFAESI Act which overrides and prevails over alleged dues of 3rd respondent under FEMA, the 2nd respondent was not entitled or empowered to invoke 37A of FEMA because of the overriding effect contained in 26E of the SARFAESI Act. Under these circumstances, I am of the view that the impugned order passed by the 2nd respondent is illegal and arbitrary in addition to being without jurisdiction or authority of law and the same deserves to be quashed.
15. A perusal of the material on record will indicate that the schedule property had been mortgaged in favour of the petitioner - Bank on 20.02.2015; it is an undisputed fact that Section 37A of the FEMA came into force w.e.f. 09.09.2015 by virtue of Act No.20 of 2015, under which, Section 37A was inserted into the FEMA; the said provisions of Section 37A being substantive in character clearly cannot be construed or treated as being retrospective or retroactive in operation and the same cannot be made applicable to the schedule property which had undisputedly been mortgaged in favour of the petitioner - Bank prior to Section 37A of the FEMA coming into force; to put it differently, Section 37A, under which the impugned order has been passed by the 2nd respondent being prospective in nature and operation, the said provision could not have been invoked by the 2nd respondent for the purpose of passing the impugned order of seizure / attachment in relation to the schedule property which had undisputedly stood mortgaged in favour of the petitioner - Bank prior to Section 37A coming into force and consequently, the said provision was not applicable to the schedule property and the 2nd respondent did not have jurisdiction or authority of law to invoke or apply Section 37A of the FEMA for the purpose of passing the impugned order which deserves to be quashed on this ground also.
16. Section 31B of the RDBI Act, reads as under:-
" 31B. Priority to secured creditors. -
Notwithstanding anything contained in any other law for the time
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NC: 2024:KHC:38553 WP No. 13840 of 2024 being in force, the rights of secure creditor to realise secure debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes cesses and rates due to the Central Government, State Government or local authority.
Explanation.--For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016, in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code."
17. In the case of Assistant Commissioner vs. Indian Overseas Bank supra, the Full Bench of the Madras High Court held as under:-
"The writ petitions have been listed before the Full Bench in pursuance to the reference order in W. P. No. 6267 of 2006 and W. P. No. 253 of 2011, in respect of the following issues :
"(a) As to whether the Financial Institution, which is a secured creditor, or the Department of the Government concerned, would have the 'priority of charge' over the mortgaged property in question, with regard to the tax and other dues.
(b) As to the status and the rights of a third party purchaser of the mortgaged property in question."
2. We are of the view that if there was at all any doubt, the same stands resolved by view of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, section 41 of the same seeking to introduce section 31B in the Principal Act, which reads as under :
"31B. Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority.
Explanation.--For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016, in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code."
3. There is, thus, no doubt that the rights of a secured creditor to realise secured debts due and payable by sale of assets over which security interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority. This section introduced in the Central Act is with
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NC: 2024:KHC:38553 WP No. 13840 of 2024 "notwithstanding" clause and has come into force from September 1, 2016.
4. The law having now come into force, naturally it would govern the rights of the parties in respect of even a lis pending.
5. The aforesaid would, thus, answer question (a) in favour of the financial institution, which is a secured creditor having the benefit of the mortgaged property.
6. In so far as question (b) is concerned, the same is stated to relate only to auction sales, which may be carried out in pursuance to the rights exercised by the secured creditor having a mortgage of the property. This aspect is also covered by the introduction of section 31B, as it includes "secured debts due and payable to them by sale of assets over which security interest is created".
7. We, thus, answer the aforesaid reference accordingly.
8. The matters be placed before the roster Division Bench for dealing with the individual cases."
18. A perusal of Section 31B of the RDBI Act and the principles laid down by the Full Bench of the Madras High Court supra, is sufficient to come to the conclusion that in the proceedings sought to be initiated by the petitioner -Bank under SARFAESI Act, which would be governed by the procedure prescribed under the RDBI Act, the petitioner - Bank being a secured creditor would have priority and the claim of the petitioner would prevail over the alleged dues payable under the FEMA as directed in the impugned order in the light of the overriding effect of the RDBI Act over the FEMA and consequently, viewed from this angle also, I am of the view that the impugned order deserves to be quashed.
19. Insofar as the contention urged by the respondents that the dues payable to them under FEMA are not specifically covered by either Section 26E of the SARFAESI Act or by Section 31B of the RDBI Act is concerned, in the light of the express language employed in both the provisions which contemplate debts, government dues, revenues, taxes, cesses and rates due to the Central Government etc., the alleged dues under FEMA being payable to the respondents 1 and 2 who represent the Central Government, the same are covered by the aforesaid provisions and as such, the said contention urged by the respondents 1 and 2 cannot be accepted.
20. Insofar as the contention as regards availability of equally efficacious and alternative remedy by way of an appeal under Section 37A(5) of the FEMA is concerned, in the light of the findings recorded by me hereinbefore that the impugned order is without jurisdiction or authority of law and the same is not only illegal and arbitrary but also contrary to
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NC: 2024:KHC:38553 WP No. 13840 of 2024 the provisions contained in the SARFAESI Act and RDBI Act and consequently, mere availability of a remedy by way of an appeal cannot be construed or treated as denuding this Court of its jurisdiction under Article 226 of the Constitution of India and the said contention of the respondents 1 and 2 in this regard cannot be accepted.
21. In the result, I pass the following:
ORDER
(i) Petition is hereby allowed.
(ii) The impugned order at Annexure-A dated 31.03.2022 passed by the 2nd respondent insofar as it relates to the schedule property mortgaged by the 3rd respondent in favour of petitioner -Bank is hereby quashed.
(iii) The 2nd respondent is hereby directed to release the schedule property mortgaged to the petitioner as per Annexure-B dated 20.02.2015 as expeditiously as possible and at any rate, within a period of four weeks from the date of receipt of a copy of this order".
10. As is clear from the aforesaid facts and circumstances and the judgment of the Apex Court, Madras High Court and this Court as stated supra, by virtue of the provisions contained in Section 26E of the SARFAESI Act, coupled with the undisputed fact that mortgage of the subject property by the respondent No.3 in favour of the petitioner in 2013 was earlier/prior in point of time to the search conducted by respondents No.1 & 2 in the year 2017, I am of the considered opinion that the mortgage in favour of the petitioner over ride and prevail over the proceedings initiated
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NC: 2024:KHC:38553 WP No. 13840 of 2024 by respondents No.1 & 2 and consequently, the impugned order of attachment deserves to be quashed.
11. In the result, I pass the following:
ORDER
(i) Petition is allowed;
(ii) Impugned order (Annexure-A) dated 06.03.2023 passed by respondent No.2 is hereby quashed;
Sd/-
(S.R.KRISHNA KUMAR) JUDGE YN List No.: 1 Sl No.: 29