Andhra HC (Pre-Telangana)
The Andhra Bank Represented By Its ... vs The State Of Andhra Pradesh Represented ... on 1 May, 2008
JUDGMENT G. Bhavani Prasad, J.
1. The success of the State of Andhra Pradesh in O.S. No. 58 of 1985 on the file of the Subordinate Judge's Court, Bhimavaram by being granted a decree for Rs. 23,99,720-88 ps. with costs and subsequent interest at 12 per cent per annum from the date of the suit till the date of realization against both the defendants recoverable to an extent of Rs. 2,66,467-25 ps., together with interest from the date of deposit into bank with proportionate costs from the 1st defendant and the balance from the 2nd defendant by the judgment dated 20- 01-1989, led the Andhra Bank, Tanuku, the 1st defendant in the suit, to file the appeal.
The plaintiff-State filed the suit against the appellant and Sivakami Sugars Limited, Pydiparru alleging that the 2nd defendant, a manufacturer of sugar by vacuum pan process, received sugarcane from various growers in Tanuku and nearby Tanuku in the crushing seasons in 1968-69 and 1969-70, for which the price had to be paid within 14 days from the date of delivery and in default with interest at 15 per cent per annum recoverable as arrears of land revenue, under Section 19(2) of the Andhra Pradesh Sugarcane (Regulation of Supply and Purchase) Act, 1961. The 2nd defendant had already to pay tax to the plaintiff on such purchases with interest at 9 per cent per annum under Section 21 of the said Act. For recovery of sugarcane price and purchase tax due from the 2nd defendant by 14-04-1970, the Tahsildar, Tanuku attached sugar godown No. I of the 2nd defendant, against which the 2nd defendant filed W.P. No. 1558 of 1970, in which the 1st defendant got itself impleaded claiming the godown to be under its pledge. As per the interim order of the High Court, Rs. 4,46,559-35 ps. realized by sale of 4,331 bags of sugar in the said godown were deposited with the 1st defendant bank and as the demand was not satisfied, the Tahsildar, Tanuku directed the 1st defendant to hand over the keys of godown Nos. II and III of the 2nd defendant on 28-05-1970 to enable attachment of sugar stocks. The 2nd defendant filed another writ in W.P. No. 2850 of 1970 in which the 1st defendant got itself impleaded as a party and the High Court gave an interim direction restraining the State from attaching any sugar stocks more than the quantity, the value of which was equal to the amount demanded. Accordingly, Rs. 2,16,844- 25 ps. realized by sale of sugar sought to be attached on 23-05-1970 and the value of 834 bags of sugar sold by Tahsildar, Tanuku at Rs. 49,623/- were kept in deposit with the 1st defendant bank. Thus, a total sum of Rs. 7,13,026-58 ps. was with the 1st defendant bank as per the interim orders of the High Court. The bank claimed the sugar stocks in the three godowns to be under its pledge for Rs. 5,00,000/- advanced under open cash credit system and Rs. 15,00,000/- advanced under key cash credit system. The 1st defendant claimed priority over the State as a secured creditor. But the High Court directed the rival claims to be agitated in separate proceedings. The 1st defendant bank filed W.P. No. 4987 of 1974 to restrain the State from taking action for recovery of the amount due to it, which was dismissed on 19-01-1976. W.A. No. 11 of 1977 by the 1st defendant was also dismissed leaving open the parties to agitate before civil Court. The pledge in favour of the 1st defendant is illegal and void being prohibited under Clause 4 of the Sugar (Control) Order read with the notification in G.S.R.1762 (1752) published in the Gazette of India dated 20-11- 1967. Under the doctrine of priority of Crown debts, the 1st defendant cannot claim any priority over the State and its claim of having any lien over the funds available with it, was repelled in W.A. No. 11 of 1977. The High Court also held in the said writ appeal that the 1st defendant cannot claim priority over Crown debts, basing on the decision in W.A. No. 459 of 1973 dated 10-08- 1973. The 1st defendant still refused to return the amounts lying in deposit with it claiming the question to have been kept open to be decided in a civil suit and hence, the suit for recovery of Rs. 23,56,127-98 ps. with interest at 12 per cent per annum till payment and costs.
The 1st defendant contested the suit claiming that the 1st defendant sanctioned credit facilities to the 2nd defendant to a tune of Rs. 5,00,000/- under open cash credit, Rs. 15,00,000/- under key cash credit, Rs. 5,00,000/- under documentary bills and Rs. 2,00,000/- under usance discounting bills by 13-11- 1969. The 2nd defendant executed promissory notes for Rs. 5,00,000/- and Rs. 15,00,000/- and other usual documents on 22-01-1970 in respect of the first two facilities. Sri Kurumuttu Thyagaraja Chettiar executed a letter of guarantee on 22-01-1970 undertaking liability of Rs. 27,00,000/-. The 2nd defendant executed documents at Tanuku where it is carrying on business as a public limited company in the manufacture of sugar. The amounts were lent from time to time on hypothecation of sugar stocks then in possession or thereafter coming into possession of the 2nd defendant under an agreement of hypothecation of goods dated 22-01-1970. A similar agreement was executed for key cash credit facility also on 22-01-1970 and by 14-04-1970 there were 4,331, 2,997 and 5,550 bags of sugar in godowns I to III respectively, the stock in the first godown being hypothecated and the stock in godowns II and III being given as security to the 1st defendant. The plaintiff did not state why action was not taken for recovery of the cane price before 22- 01-1970 or why the Cane Commissioner did not insist upon the 2nd defendant to make a suitable provision for payment or why he did not take any action for recovery of cane value or purchase tax and hence, the said arrears towards cane price and purchase tax to a tune of Rs. 3,86,767/-, Rs. 2,16,844-25 ps. and Rs. 1,33,915-96 ps. are not first charge Crown debts or debts with precedence over secured creditors. The plaintiff is estopped from taking such action in April, 1970 against the stocks already secured to the bank contrary to the rule of 14 days and in fact, the plaintiff attached the property of Sivakami mills and machinery as per Form No. 1 notice dated 11-04-1970. The 2nd defendant claims that many payments were not given credit to in spite of its letter dated 02-05-1970 and stated the arrears to be not more than Rs. 62,712-27 ps. in the affidavit in W.P. No. 2850 of 1970. The plaintiff cannot claim any relief against the bank, which is not its debtor. The plaintiff attached 4,331 bags in godown No. I and the Tahsildar, Tanuku issued a notice on 26-05-1970 to the 1st defendant seeking the key of godown No. II for attachment of stocks for recovery of cane price. But no attachment was made on 28-05-1970 as threatened. The bank informed on 27-05-1970 itself its paramount right as pledgee. The 2nd defendant filed W.P. No. 1558 of 1970 and W.P. No. 2850 of 1970 in which the interim orders were passed. By way of abundant caution, the 1st defendant kept an amount of Rs. 2,16,844-25 ps. towards the outstanding debt. The amount was accordingly appropriated and later the Collector, West Godavari by a letter dated 16-04-1972 claimed that the Tahsildar had no jurisdiction to hold that there was no attachment and directed the 1st defendant to deposit the amount in a separate account. The Collector's letter is void and inoperative. But the Tahsildar, Tanuku issued another notice dated 22-08-1972 to transfer the money within three days. Hence, the 1st defendant filed W.P. No. 4987 of 1974 in which an interim injunction was granted against the State from seizing any cash. The High Court held that no attachment was made by the plaintiff and the 1st defendant's rights as pledgee outweigh those of the plaintiff. The plaintiff can claim only any surplus amount for satisfaction of the debt due from the 2nd defendant to the 1st defendant. Clause 4 of the Sugar (Control) Order was amended in 1974 removing the restriction against pledge of sugar stocks and hence, the pledge is perfectly valid. In any view, a charge is created for the debt, which was duly registered with Registrar of Companies under Section125 of the Companies Act making the 1st defendant a secured creditor. It was never held in the writ that the plaintiff has priority over the 1st defendant and no amount can be recovered from the 1st defendant as arrears of land revenue. Cane price is not a Crown debt and as the amount was directed to be kept in suspense account with the 1st defendant and as it was not utilized or adjusted towards the liabilities of the 2nd defendant, the amount did not earn any interest or advantage and the plaintiff cannot claim any interest. The 1st defendant is a secured creditor with first charge and priority and the plaintiff cannot make the claim in respect of stocks in godown No. I of a value of Rs. 4,48,644-20 ps. in view of the judgment in O.S. No. 33 of 1973, which is the subject of first appeal in A.S. No. 737 of 1978. Hence, the 1st defendant sought for dismissal of the suit with costs.
The 2nd defendant remained ex parte.
On such pleadings, the trial Court framed the following issues for trial:
1. What is the amount due to plaintiff towards purchase tax and cane price from the 2nd defendant and during which period the liability arose ?
2. Whether the plaintiff is entitled to any decree against the 1st defendant and if so, in what amount ?
3. Whether the plaintiff is entitled to claim any priority against the 1st defendant who is a second creditor ?
4. Whether the plaintiff is entitled to claim any priority in respect of the value of stocks covered by godown No. I in view of the decision in O.S. No. 33 of 1973 ?
5. Whether the plaintiff is entitled to any interest ?
6. Whether the hypothecation of stocks with 1st defendant pleaded in the written statement is true and valid ?
7. Whether 1st defendant is liable to refund any amount, if so in what sum ?
8. To what relief ? During trial, P.Ws.1 and 2 and D.W.1 were examined and Exs.A.1 to A.56 and B.1 to B.9 were marked.
The trial Court rendered the impugned judgment firstly concluding that the 1st defendant did not choose to dispute the correctness of the amount claimed by the Government to be due from the 2nd defendant. Nextly it held that Ex.B.1 judgment in O.S. No. 33 of 1973 precludes the plaintiff from making any claim in respect of the stocks in godown I or the value thereof. The trial Court noted the concession by the learned Assistant Government Pleader that the 1st defendant succeeded in its claim of priority over Crown debts as secured creditor in O.S. No. 33 of 1973 in respect of the sugar stocks in godown No. I. With reference to Clause 4 of the Sugar (Control) Order, 1966, the trial Court noted that in W.P. No. 4987 of 1974, the High Court accepted the contention of the pledge being illegal due to contravention of the said Clause following the decision in W.A. No. 457 of 1977 (459 of 1973). It was also noted that the High Court held the repeal of the said Clause in 1974 to be prospective and it did not save the prior illegal pledges. The trial Court referred to Ex.A.53 judgment in the writ and noted that it was confirmed in W.A. No. 11 of 1977 as in Ex.A.2, which has become final. The trial Court accepted the contention that these rulings would operate as res judicata and noted that the adjustment effected by the 1st defendant bank was contrary to the High Court's order and therefore, the amount had to be retransferred to suspense account. The trial Court also noted that the contract should be considered as forbidden by law under which no rights accrue to the parties and if the 1st defendant's right to recover the money under the pledges is unenforceable, the trial Court concluded that any priority for the 1st defendant or the 1st defendant being a secured creditor, does not arise. Consequently, the trial Court concluded that as between the unsecured creditor and the State, the doctrine of priority of State debts remained unaffected as State can claim priority over private debts though not secured debts. The application of Section 65 of the Contract Act to retain the amounts entrusted to the 1st defendant bank, was also not accepted and the State has a right to proceed against the sugar stocks for realization of the cane price and purchase tax, which are Crown debts. The plaintiff has a right to proceed against the money lying with the 1st defendant. The trial Court also noted that in W.P.(M.P.) No. 2537 of 1971, the High Court directed the amounts together with interest accrued to continue under attachment, which was confirmed in W.A. No. 11 of 1977. As such, no immunity from payment of interest can be claimed by the bank, more so, when the special statute provides that unpaid sugar price shall carry interest. No documentary evidence was placed before the trial Court in proof of the amount kept in suspense account being unutilized and when the 1st defendant cannot exercise any banker's lien under Section 171 of the Contract Act, it cannot claim immunity from interest. After arriving at a sum of Rs. 2,66,467-25 ps. as being kept in deposit with the 1st defendant as per the orders of the High Court, the trial Court found the 1st defendant to be liable to the plaintiff to that extent with proportionate costs and interest thereon and hence, while decreeing the suit for Rs. 23,99,720-88 ps. with costs and subsequent interest against both the defendants, the trial Court restricted the recoverability from the 1st defendant to the above stated sum only. The 1st defendant filed the appeal contending that the cane growers were necessary parties to the suit. The power to collect arrears of cane price on behalf of the cane growers given by law cannot make the State a creditor and the debt a Crown debt. The Government is, at best, a collecting agent and any question of priority of Crown debt against unsecured debts did not arise in the case. The distinction between the cane price and purchase tax was not drawn. The stock in godowns II and III was not proved to be attached before the pledge on 22-01-1970 and in fact, the communication from Tahsildar dated 29-06-1971 became final, from which the Collector cannot go back. The Collector's order dated 16-04-1972 is void and the bank's claim is always superior over the Government's claim. The amended Sugar (Control) Order, 1966 saved the pledge, as the declaratory amendment is retrospective. The normally permitted commercial activity of a bank sanctioned by Banking Regulation Act, cannot be abridged by a Control Order. The amount kept in suspense account never earned any interest or profit and the question of interest has no link with the legality of the pledge. The decree against the 1st defendant was for a higher amount than what was demanded by the plaintiff itself in its notice dated 26-05-1970. The transactions of the 1st defendant with the 2nd defendant were normal, innocent and not vitiated by any fraud and the 1st defendant should not be made to suffer. The claims of the plaintiff or the cane growers cannot be pursued against the cash recovered by sale of sugar and hence, the appellant desired the suit to be dismissed with costs.
Sri V. Raghu, learned Counsel for the appellant strenuously reiterated the contentions of the 1st defendant, while admitting that the findings of the trial Court on issues 1 and 4 are not disputed. The learned Counsel stated that in any view, there could not have been a decree against the 1st defendant for the entire suit claim and no interest could have been granted on the amount kept in suspense account. The learned Counsel stated that as per Ex.A.2, the Division Bench directed the Civil Court to decide the question of priority and argued that a contract can be partly legal and partly illegal and the pledge is only by way of collateral security. Equating the arrears of cane price or purchase tax with the arrears of land revenue cannot mean that they are Crown debts and unless the Statute specifies any preference, no preference can be given. The learned Counsel referred to various decisions on the doctrine of priority of Crown debts and also stated that prior to the insertion of Sub-section (3) in Section 21 of A.P. Act XLV of 1961 by A.P. Act 25 of 1976, there was no first charge. The learned Counsel argued that firstly the doctrine of priority is not a law in force in India and secondly even if the pledge is illegal, it will be a tussle between the two unsecured creditors giving no advantage to the State. Hence, he desired the suit to fail against the 1st defendant.
Smt. A. Manikyavalli and Smt. B. Kavita Yadav, learned Assistant Government Pleaders defended the impugned judgment and argued that when the contract is void, there is no question of recovery under pledge and the void nature of the contract by virtue of Clause 4 of the Sugar (Control) Order as held by the High Court, had become final between the parties. The learned Assistant Government Pleaders also contended that any concessions by the learned Assistant Government Peader before the trial Court are unnatural and cannot bind the State. Hence, they requested for dismissal of the appeal.
In so far as the finding of the trial Court about the correctness of the amount claimed by the plaintiff as due towards the cane price and purchase tax from the 2nd defendant during the relevant period is concerned, the same is no subject matter of the grounds of appeal and has been stated to be undisputed by the learned Counsel for the appellant. Similarly, the learned Counsel for the appellant stood by the finding on issue No. 4 under which it was held that in view of the judgment in O.S. No. 33 of 1973, Ex.B.1, the plaintiff is not entitled to claim any priority in respect of the value of the stocks in godown No. I. That finding was based on not only the merits as discussed by the trial Court as well as the reasons for the decision in O.S. No. 33 of 1973, but also due to the concession made by the learned Assistant Government Pleader before the trial Court. The learned Assistant Government Pleaders before this Court referred to P. Kasilingam v. P.S.G. & Sons Charities 1990 (Supp) Supreme Court Cases 89 (II) which was about a new plea of not obtaining the consent of the Advocate General for initiation of contempt proceeding, not being allowed to be raised for the first time before the Supreme Court. But there is nothing in the decision which makes the concession made by the learned Assistant Government Pleader before the trial Court irregular or questionable or unacceptable in any manner. Whether the learned Assistant Government Pelader before the trial Court conceded or not, if the plaintiff and 1st defendant were parties to O.S. No. 33 of 1973 and if the question directly and substantially in issue between the parties about the sugar stocks in godown No. I, was finally decided against the State, the same cannot be considered not binding in this suit.
While the result of A.S. No. 737 of 1978 against the said judgment is reported in State of A.P. v. Andhra Bank Ltd. , it is seen from the said decision that the Division Bench was dealing with the same facts as herein. The Division Bench noted the difference between 'pledge' and 'hypothecation' as based on retention of possession by the owner or transfer of possession to the pledgee, including constructive possession. While noting that hypothecation of movable property is also a recognized form of mortgage, the Division Bench held that hypothecation is not prohibited by Clause 4 of the Sugar (Control) Order or G.S.R. 1752 dated 20-11-1967, while it also referred to the decision in W.A. No. 459 of 1973 where another Division Bench held the pledge to be prohibited by the Sugar (Control) Order and G.S.R. 1752. While noting that the doctrine of priority of Crown debts amounts to a law in force within the meaning of Article 272(1) of the Constitution of India adopted in India, the Division Bench deduced from Director of Rationing and Distribution v. Corporation of Calcutta and Builders Supply Corporation v. Union of India that the doctrine of priority of State debts is not automatically applicable, if the State seeks to recover debts from its debtors arising out of commercial activities. The Division Bench also noted the observations of the other Division Bench in W.A. No. 459 of 1973 that in cases of unsecured debts, the Government's demand regarding tax would have preference which shall have to be paid first from the sale of sugar in the possession of the bank, after satisfaction of which, the bank may be able to recover its loan from the sugar in its possession. The Division Bench also referred to Bank of Bihar v. State of Bihar , wherein it was held that by mere act of lawful seizure, the Government could not deprive the bank of the amount which was secured by the pledge of goods to it and held that as the transaction is a hypothecation, the bank has a lien on the goods which are held by way of security and has a preferential claim as secured creditor even against the Government's demand of taxes. The Division Bench also referred to Andhra Bank Ltd. v. State of Andhra Pradesh 1976 An.W.R. 190 (HC) where, after referring to Builders Supply Corporation v. Union of India (4 supra) and Bank of Bihar v. State of Bihar (5 supra), the learned Judge held that the bank has preferential claim for payment of the amount due to it and secured against the sugar pledged to it and the State is only entitled to surplus money after satisfaction of the plaintiff's dues. That was also a case of the Government claiming purchase tax to be due. Therefore, the Division Bench concluded that hypothecation made the bank a secured creditor with a lien and rejecting the contention that the doctrine of priority of Crown debts is applicable even as against the secured creditor, dismissed the appeal. Thus, Ex.B.1 judgment has become final with admittedly no further proceedings being taken by the parties against the said decision and therefore, the finding of the trial Court on issue No. 4 also must be deemed to have become final, more so, when the State did not challenge that finding by way of any separate appeal or cross-objections.
That leaves the following points to be determined in this appeal.
1. Whether the State can claim any priority against the Andhra Bank in respect of the value of stocks in godowns II and III in respect of either the cane price or the purchase tax and if so, to what extent ?
2. Whether the State can claim any interest on any such sum found accountable by the 1st defendant to the State ?
3. To what relief ?
Point No. 1:
2. In Peoples Bank of Northern India Ltd. v. Secretary of State for India A.I.R. 1935 Sind 232, it was made clear that 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 in general is preferred. But 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 can there be a question which of the two rights to prevail on a case where one that of the subject has prevailed already. It was, therefore, held that although the Crown may have certain preferential rights over ordinary creditors, it has no preferential right over a secured creditor.
3. In Builders Supply Corporation v. Union of India (4 supra), it was held that arrears of tax due to the State can have priority over private debts. But if the State seeks to recover debts arising out of commercial activities undertaken by it for achieving socio-economic good, it may become necessary to consider whether the doctrine of priority can be extended to such transactions. In the case before the Apex Court, it was noted that Section 46(2) of the Income Tax Act does not deal with the doctrine of priority of Crown debts at all, but merely provides for recovery of arrears of tax as if it were an arrear of land revenue. It was also pointed out that the procedure prescribed for recovery of public debts cannot displace the application of doctrine of priority of arrears of tax over private debts.
4. In Superintendent and Remembrance of Legal Affairs, West Bengal v. Corporation of Calcutta , a nine Judge Bench referred to Builders Supply Corporation v. Union of India (4 supra) with approval.
5. In Collector, Aurangabad v. Central Bank of India , it was pointed out that the authority of Builders Supply Corporation v. Union of India (4 supra) was unaffected by the Superintendent and Remembrance of Legal Affairs, West Bengal v. Corporation of Calcutta (8 supra). But as there was no proof that the doctrine was given judicial recognition in the territory of Hyderabad State prior to 26-01-1950, the Apex Court did not give effect to the same in that case. However, it has to be noted that the present dispute arose in a territory which was part of the composite Madras State and the then Andhra State before it became a part of the State of Andhra Pradesh. As the preponderance of judicial opinion in reported precedents recognized that the doctrine of priority of Crown debts has been given judicial recognition in the territory known as British India prior to 1950, (like in Builders Supply Corporation v. Union of India (4 supra)), the doctrine cannot be excluded from consideration in the present case.
6. In Satyam v. Krishna Murthy , the learned Judge referring to Builders Supply Corporation v. Union of India (4 supra) and other precedents, observed that the distinction to be borne in mind is whether the revenue sale is for recovery of land revenue itself, or for recovery of a sum of money which by any particular statute is equated to land revenue and if the sale under the Revenue Recovery Act is for recovery of sums as if they are arrears of land revenue by an enabling statute, the title would not be free of encumbrances. The learned Judge consequently held that the sale for recovery of arrears of income tax subsequent to the mortgage did not have the effect of superseding the rights of the mortgagee or give any priority over the rights of the mortgagee.
7. In Bank of Bihar v. State of Bihar (5 supra), the Supreme Court held that the rights of the pawnee who has parted with money in favour of the pawnor on the security of the goods cannot be defeated by the goods being lawfully seized by the Government and the money being made available to the other creditors of the pawnor without the claim of the pawnee being fully satisfied. The pawnee was held to have a special property and lien on the goods, which is not of ordinary nature and the Government was held to be not competent to deprive the pawnee of the amount secured by the pledge of goods to it.
8. In Indian Bank v. State of A.P. 1993 (2) An.W.R. 609, Builders Supply Corporation v. Union of India (4 supra), Satyam v. Krishna Murthy (10 supra) and State of A.P. v. Andhra Bank Ltd. (2 supra) were referred to. It was held that there is a right to the creditor to recover the amount by sale of hypothecated properties by filing a suit and in case of recovery of a debt, other than land revenue from the defaulter, which has to be treated as arrears of land revenue, the debt will not have priority over the secured debt. The learned Judge concluded that the unsecured Crown debt will have priority over the unsecured debts of other creditors, while the secured debts of other creditors prevail over the unsecured debt of the Crown.
9. In Sitani Textiles & Fabrics (P) Ltd. v. Asstt.C. of Cus.& C.E., Hyderabad-I , a Division Bench referred to Bank of Bihar v. State of Bihar (5 supra), State of A.P. v. Andhra Bank Ltd. (2 supra), Satyam v. Krishna Murthy (10 supra) and Indian Bank v. State of A.P. (11 supra) and concluded that in the case of a pledge, pawnee has special property and lien which is not of an ordinary nature on the goods and so long as his claim is not satisfied, no other creditor of pawnor has any right to take away the goods or its price. The right of a pawnee could not be extinguished by the subsequent attachment/seizure of the goods under any other law. It gives the pawnee a primary right to sell the goods in satisfaction of the liability of the pawnor. An unsecured creditor could not have any higher rights than the pawnor (pawnee) and was entitled only to the surplus money after satisfaction of the secured creditor's dues. The above principle applies to hypothecation as well, as the hypothecatee has a lien on the goods which are held by way of security and the hypothecatee has a preferential claim as a secured creditor even against the Government's demands of taxes. The Division Bench held the principles to be applicable to the case of a mortgage also. The Division Bench approved Satyam v. Krishna Murthy (10 supra) and Indian Bank v. State of A.P. (11 supra) and on facts concluded that the Industrial Development Corporation being secured creditor, has preferential claim even against the demand of Central Excise duty of the Government.
10. In Dena Bank v. B.P. Parekh & Co. , it was pointed out that the principle of priority of Government debts is founded on the rule of necessity and of public policy. But 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 as an essential and integral part of the basic Government functions of the State and seeks to recover debts from debtors arising out of such commercial activities, the applicability of the doctrine of priority shall be open for consideration. It was also further held that the Crown's preferential right to recovery of debts over other creditors is confined to ordinary or unsecured creditors and the common law or the principles of equity and good conscience as applicable to India do not accord the Crown a preferential right for recovery of its debts over a mortgagee or pledgee of goods or secured creditors. The Apex Court referred to Bank of Bihar v. State of Bihar (5 supra), Collector, Aurangabad v. Central Bank of India (9 supra) and Builders Supply Corporation v. Union of India (4 supra) in this regard.
11. In State of M.P. v. State Bank of Indore , following Dena Bank v. B.P. Parekh & Co. (13 supra), a statutory first charge created by a special law was held to prevail over any charge that may be already in existence.
12. In Andhra Bank, Kodad v. Vattikuti Sreemannarayana , a Division Bench was considering the effect of Sections 23 and 65 of the Contract Act and held that it is settled law that so long as an agreement is unlawful, any amount paid under it may be restored to the person who has paid it, as Section 65 envisages that a party should be put back to the position at the time of agreement and mutual advantages received from each other can be restored to each other. Holding that Section 65 applies even to contracts, which were void ab initio, the Division Bench decreed the suit of the bank though the contract of loan advanced by the bank was void.
13. The learned Assistant Government Pleaders relied on T. Rama Rao v. D. Suryanarayana , R. Manikyam v. M. Satyanarayana and Rajat Kumar Rath v. Government of India to contend that the contracts between defendants 1 and 2 are unenforceable being forbidden by law i.e. Clause 4 of the Sugar (Control) Order and Section 23 of the Contract Act bars any relief to the 1st defendant.
14. Ex.A.1 statement shows a total of Rs. 6,58,752-11 ps. to be due to the cane growers.
15. In Ex.A.2 judgment in Writ Appeal No. 11 of 1977 dated 16-09-1981, the Division Bench referred to the learned Single Judge holding the pledge in favour of Andhra bank to be illegal and void being prohibited by Clause 4 of the Sugar (Control) Order and also that there was no attachment of sugar stocks in fact. The Division Bench concluded that if the pledge was illegal, there could be no banker's lien also and noted that the bank and the Government did not take proceedings to establish their respective claims of priority as directed in the earlier writ petitions and writ appeals and till such compliance, the money should be brought back into the suspense account. The argument that both the bank and the Government being unsecured creditors, the payment made by the debtor to the bank could be voluntarily appropriated by the bank, was considered to be beside the point in the writ appeal for that reason and is, thus, left open.
16. Ex.A.9 is the final notice demanding arrears of purchase tax to a tune of Rs. 1,87,818-14 ps. with interest thereon. Ex.A.22 shows that after giving credit to the subsequent payments and calculating the interest, a sum of Rs. 1,37,986-80 ps. was due by 01-07-1970 towards purchase tax with further interest from 28-01-1970. Exs.A.24 and A.25 show the total dues of purchase tax to be Rs. 1,52,515-13 ps. for 1968-69 and Rs. 1,25,435-89 ps. for 1969-70.
17. The Andhra Pradesh Sugar Cane (Regulation of Supply and Purchase) Act, 1961 is the legislation which applies and the payment of cane price is provided by Section 19, whereunder the occupier of a factory shall be liable to pay within fourteen days from the date of delivery of cane, the price of cane so supplied. Under Sub-section (3) thereof, if any occupier of a factory fails to pay the price of the cane sold to him in accordance with the provisions of Sub-section (2), he shall, in addition to the said price being recovered from him as an arrear of land revenue, be liable to the penalty provided for under Section 3 (4) (b) of the Essential Commodities Act, 1955, as if he has contravened a direction issued under that Clause. As such, it is clear that the unpaid cane price was enabled to be recovered as an arrear of land revenue by Section 19(3). Section 21 provides for levy of tax on purchase of cane and Section 21(3) states that notwithstanding anything in any other law for the time being in force, any sum due to the Government towards the purchase tax levied under this Section shall be a first charge on the sugar produced out of cane already subject to purchase tax. However, it has to be noted that this Sub-section was substituted for the original Sub-section by A.P. Act 25 of 1976 with effect from 29-12-1975 and nothing has been placed before this Court to show that the said amendment was given any retrospective effect. The transactions in question in the present suit relate to a much earlier period than 29-12-1975. Sub-section (4) thereof provides that the tax payable under Sub-section (1) shall be levied and collected from the occupier of the factory in such manner and by such authority as may be prescribed. Arrears of tax shall carry interest at 9 per cent per annum under Sub-section (5). It is Sub-section (6) which provides that if the tax and interest due is not paid by the occupier of a factory within the prescribed time, it shall be recoverable from him as an arrear of land revenue. Therefore, the unpaid cane price under Section 19(3) and the unpaid purchase tax with interest under Section 21(6) shall be recoverable as an arrear of land revenue.
18. The suit is for recovery of unpaid cane price and purchase tax with interest from the 2nd defendant with the 1st defendant becoming involved to the extent of the sale proceeds of sugar stocks realized and kept with it, though the plaint broadly asked for a decree against both the defendants. In so far as the sugar stocks in godown I are concerned, the State can have no claim against Andhra bank in the light of State of A.P. v. Andhra Bank Ltd. (2 supra) (A.S. No. 737 of 1978 against O.S. No. 33 of 1973 (Ex.B.1)). Any claim of the Andhra bank on the basis of the pledge of the sugar stocks prohibited by Clause 4 of the Sugar (Control) Order and G.S.R. No. 1752, dated 20-11-1967 in force till an amendment in 1974, is unavailable in the light of the decision in W.A. No. 459 of 1973 as well as W.A. No. 11 of 1977 confirming the judgment in W.P. No. 4987 of 1974 (Exs.A.2 and A.53). While the quantum of dues towards cane price and purchase tax with interest is not seriously in dispute, even if the pledge in favour of Andhra Bank by Sivakami sugars was forbidden by law within the meaning of Section 23 of the Contract Act, Sivakami sugars which received the advantage under the different sanctions of loans made by the Andhra bank, was bound to restore any amount paid to it back to the Andhra bank. While the pledge being void makes the Andhra bank an unsecured creditor, the statutory powers and obligations undertaken by the State under the Andhra Pradesh Sugar Cane (Regulation of Supply and Purchase) Act, 1961 are occupying a commercial field in relation to commercial activities.
As laid down in various precedents cited ending with Dena Bank v. B.P. Parekh & Co. (13 supra) followed by State of M.P. v. State Bank of Indore (14 supra), doctrine of priority of Crown debts recognized in British India was a law in force within the meaning of Article 372(1) of the Constitution making arrears of tax due to the State to have priority over private debts. But the doctrine may not apply in respect of the 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. At the cost of repetition, the Apex Court made it clear that where the welfare State enters into commercial fields which cannot be regarded as an essential and integral part of the basic Government functions of the State and seeks to recover debts from debtors arising out of such commercial activities, the applicability of the doctrine of priority shall be open for consideration. Similarly, like Section 46(2) of the Income Tax Act under consideration in Builders Supply Corporation v. Union of India (4 supra) and similar provisions under the decisions that followed, the Andhra Pradesh Sugar Cane (Regulation of Supply and Purchase) Act, 1961 provides by Sections 19(3) and 21(6) for recovery of the arrears of cane price and purchase tax with interest as if they were an arrear of land revenue. If so, the provisions cannot be said to convert the said arrears into arrears of land revenue and as summarized in Sitani Textiles & Fabrics (P) Ltd. v. Asstt.C. of Cus.& C.E., Hyderabad-I (12 supra) by a Division Bench, the Government cannot claim any preferential right for recovery, if no charge lies on the property for recovery of the sum sought to be recovered or in other words, if the amount sought to be recovered is not a secured debt, for recovery of which, any charge lies on the property. In this case, as already stated, the statutory first charge was created on such sums with effect from 29-12-1975 with no retrospective effect. If so, the debt due to the Government towards arrears of cane price and purchase tax with interest is clearly an unsecured debt. But it was pointed out in Indian Bank v. State of A.P. (11 supra) that an unsecured Crown debt will have priority over the debt of an unsecured creditor. However, when the right of the subject is complete before the Crown's right commences, the subject's rights already prevailed as held in Peoples Bank of Northern India Ltd. v. Secretary of State for India (7 supra) and any action for recovery of sums as if they were arrears of land revenue, will not pass a title free of encumbrances as held in Satyam v. Krishna Murthy (10 supra).
Therefore, either due to the inapplicability of the doctrine of priority of Crown debts to commercial fields entered into and commercial activities undertaken by the State for achieving socio-economic good and the Andhra Pradesh Sugar Cane (Regulation of Supply and Purchase) Act, 1961, under which the suit claim is made squarely falling within such a description or due to the amounts of arrears of cane price and purchase tax with interest being recoverable as if they were arrears of land revenue having no effect of extinguishing the pre- existing rights of even an unsecured creditor, the State/State Government cannot override or nullify the claim of Andhra bank for appropriation of the sale proceeds of the sugar stocks towards the amounts advanced by it to the 2nd defendant even by virtue of its right under Section 65 of the Contract Act assuming the pledge of the sugar stocks to it to be void being in violation of Clause 4 of the Sugar (Control) Order then in force. It should also be remembered that the different loan facilities advanced to the 2nd defendant were under demand promissory notes and various other documents obtained from the concerned with the hypothecation or pledge of the stocks being only as collateral security and if so, the transactions themselves or the liabilities arising there from are not null and void, while the pledge may be void. When the transaction is severable, and legal and illegal parts/components of the transaction are separable, the whole transaction may not be susceptible to be construed as null and void and even in that view, the right of the Andhra bank to recover amounts advanced by it to the 2nd defendant, cannot be in question. That right to recover either under the contract itself or by virtue of Section 65 of the Contract Act obviously ripened much prior to the demand made or the action taken by the State Government in respect of the arrears of cane price and purchase tax with interest. In the absence of any priority for its claims under the circumstances, the State Government cannot enforce any claim against the 1st defendant.
19. State of A.P. v. Andhra Bank (2 supra) (A.S. No. 737 of 1978 against O.S. No. 33 of 1973) between the same parties about the same transactions covering the same questions in issue, which has become final, also estops the State Government from claiming otherwise.
20. Hence, it has to be concluded deciding the questions of priority left by the earlier writ proceedings to be decided herein that the State cannot claim any priority against the Andhra bank in respect of the value of stocks in godowns II and III in respect of either the cane price or the purchase tax. The decision in Andhra Bank Ltd. v. State of Andhra Pradesh (6 supra) referred to by the Division Bench in State of A.P. v. Andhra Bank (2 supra) contrary to which no authority was placed before the Division Bench or brought to my notice, strengthens such a conclusion, apart also from the fact that it was concluded in the earlier proceedings that any attachment of the stocks in godowns II and III or the value thereof by the State Government, was not proved.
Point No. 2:
21. As noted by the trial Court, Ex.A.2 shows the observation of the trial Court that the amount representing the sale proceeds of the sugar deposited in State Bank of India, Tanuku and Andhra Bank at Tanuku together with interest accrued thereon will continue to be under attachment. This observation was confirmed in Ex.A.2 in writ appeal and by its own volition of keeping the amount in suspense account, the Andhra bank cannot probably deny the liability to pay interest, if it is otherwise liable to pay the principal sum. Hence, while the State could have claimed such interest, if any such sum was found accountable by the 1st defendant to the State, that contingency did not arise in view of the conclusions on point No. 1.
Point No. 3:
Though the trial Court observed in para 30 of its judgment that the plaintiff is entitled to a decree against the 1st defendant only to the extent of Rs. 2,66,467-25 ps., in the result portion at para 32, the trial Court held the plaintiff to be entitled to the decree for the entire sum with costs and future interest against both the defendants, though, of course, it stated that the plaintiff is entitled to recover only the first stated sum with interest and proportionate costs from the 1st defendant. The decree also followed suit accordingly. But the said result portion of the judgment and the consequential decree convey a wrong impression that the 1st defendant is also liable for the entire suit sum with interest and costs, while it was only the recoverability of such sum that was restricted to a lesser sum. However, no further probe need be made into it, as in view of the other conclusions in this judgment, the plaintiff is not entitled to any decree at all against the appellant/1st defendant. However, in view of the complicated technicalities having led the parties to fight so long and as the State also is fighting for a public cause like the bank fighting for securing the public money entrusted to it, the parties can be directed to bear their own costs, while the 1st defendant/appellant should succeed. In the result-,
(a) The judgment and decree in O.S. No. 58 of 1985 on the file of the Subordinate Judge's Court, Bhimavaram dated 20-01-1989 are set aside in so far as they went against the 1st defendant;
(b) O.S. No. 58 of 1985 on the file of the Subordinate Judge's Court, Bhimavaram is dismissed without costs against the 1st defendant; and
(c) The appeal is allowed accordingly without costs.