Madras High Court
Uti Bank Ltd vs The Dy. Commissioner Of Central Excise on 20 December, 2006
Equivalent citations: AIR 2007 MADRAS 118, 2007 CLC 291 (MAD), (2007) 1 MAD LW 50, (2007) 77 CORLA 131, (2007) 3 BANKJ 221, (2007) 135 COMCAS 329, (2007) 50 ALLINDCAS 718 (MAD), (2006) 5 CTC 801 (MAD), (2007) 2 JCR 19 (MAD)
Bench: P. Sathasivam, A. Kulasekaran, S. Tamilvanan
IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED:20.12.2006 CORAM: THE HONOURABLE MR. JUSTICE P. SATHASIVAM THE HONOURABLE MR. JUSTICE A. KULASEKARAN AND THE HONOURABLE MR. JUSTICE S. TAMILVANAN W.P. No.39536 of 2005 and W.P.M.P. No.42376 of 2005 & W.V.M.P. No.1536 of 2006 UTI Bank Ltd., 82 Dr. Radhakrishnan Salai, Chennai 600 004. .. Petitioner vs. 1. The Dy. Commissioner of Central Excise Chennai II Division R.40 TNHB Complex Mogappair Chennai 600 037. 2. The Secretary Ministry of Finance Government of India, South Block New Delhi. .. Respondents Petition filed under Article 226 of the Constitution of India praying for issuance of a writ of Mandamus as stated therein. For petitioner : Mr. V.V. Sivakumar For respondents : Mr. V.T. Gopalan, Addl. Solicitor General assisted by Mr. P.Wilson, Asst. Solicitor General ORDER
(Order of the Court was made by P. SATHASIVAM,J.) The Following question is referred to Full Bench for decision:-
Whether the Crowns debts, for which there is no priority or charge is created under the statute, should have precedence over the secured creditors?
2. Brief facts:
The petitioner, UTI Bank Ltd., has approached this Court to issue a Writ of Mandamus forbearing the first respondent - Deputy Commissioner of Central Excise, Chennai II Division and the second respondent - Secretary, Ministry of Finance, Government of India from bringing the property situated at Plot No.55, Ambattur Industrial Estate, Ambattur, Chennai 600 058 into auction for any alleged dues payable by the debtor company, namely M/s.Sumeet Research and Holdings Private Limited, since the said property has already been taken possession by the petitioner in pursuance to its statutory rights under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Act 54 of 2002) (in short SARFAESI Act).
3. M/s.Sumeet Research and Holdings Private Limited, (hereinafter called the borrower company) sought financial assistance from the writ petitioner/UTI Bank, of a sum of Rs.635 lakhs towards working capital besides term loan of Rs.150 lakhs, which was sanctioned by the Bank, as per Sanction Letter No.Adv./1650/2002-03 dated 28.9.2002. For the total working capital provided and enjoyed by the borrower, the borrower company had created a mortgage by deposit of title deeds, in respect of various properties, including the factory land and building situate at Plot Nos.54 and 55, Ambattur Industrial Estate, Ambattur, Chennai-58 (hereinafter referred to as Plot No.54 and Plot No.55 respectively).
4. The borrower company, despite requests and reminders, failed to repay the amount, which compelled the writ petitioner to take proceedings under the SARFAESI Act, and a notice issued under Section 13(2) of the SARFAESI Act on 17.4.2004. As there was no response from the borrower, after the lapse of time as provided under the statute, the petitioner Bank took constructive possession of the secured assets on 8.2.2005 as contemplated under the SARFAESI Act, and also took physical possession of the same on 29.3.2005.
5. In the meanwhile, the first respondent addressed a letter dated 28.3.2005 to the petitioner Bank informing that a sum of Rs.41,17,246/- was due and payable by the borrower company to the Department of Central Excise, and requested the writ petitioner to hold the money or property with it, as dues to the Department. The borrower company sold Plot No.54, and repaid a part of the amount due to the petitioner Bank and the property now available as secured asset, is the Unit at Plot No.55.
6. Under the provisions of the Central Excise Act, 1944, the first respondent did not have any statutory first charge over the property secured by the petitioner Bank. Ignoring the said settled position, the first respondent is taking action to sell the property, which is in possession of the writ petitioner, as if the first respondent is having first charge over the property, for the dues payable by the borrower, which is legally incorrect. Under these circumstances, the petitioner is constrained to file the writ petition, seeking the relief referred to above.
7. In the counter affidavit filed by the first respondent, it is alleged that the Central Excise Department can claim priority over the secured creditor/the petitioner Bank herein, who has exercised its powers under the provisions of the SARFAESI Act and this issue has already been settled by this Court and therefore, the writ petition is not maintainable and liable to be dismissed.
8. When the writ petition came up before M. Thanikachalam,J. the learned Judge, after hearing the arguments of both parties at length, and after noticing that two Division Bench decisions of this Court in ICICI BANK LTD. vs. THE OFFICIAL LIQUIDATOR (2005 (1) CTC 758) and COMMISSIONER OF CENTRAL EXCISE, PONDICHERRY vs. INDIAN BANK [2006 (198) E.L.T. 334 (Madras)], though relied on the judgment of the Supreme Court in Dena Bank v. Bhikhabhai Prabhudas Parekh & Co., 2000 (4) CTC 170 : 2000 (5) SCC 694, had taken different views, referred the matter to a Larger Bench and on the orders of the Hon'ble Chief Justice, now the matter is before us.
9. We have already referred to the fact that since there was no response from the borrower company for the notice issued under section 13(2) of the SARFAESI Act on 17.4.2004, after lapse of time as provided under the SARFAESI Act, the petitioner bank took constructive possession of the secured assets on 8.2.2005 and physical possession of the same on 29.3.2005. While so, the first respondent, viz., Deputy Commissioner of Central Excise, Chennai intimated the petitioner Bank in his letter dated 28.3.2005 that a sum of Rs.41,17,246/- was due and payable to the Department of Central Excise and requested the petitioner Bank to hold the said money or property with it towards the amount due to the said Department. The borrower company sold plot No.54 and repaid a part of the amount due to the petitioner bank and the only property now available as secured asset is the unit at plot No.55. While the petitioner Bank claims that a legal right under section 13(2) of the SARFAESI Act has been created in its favour, the Central Excise Department, first respondent herein claims that it has a statutory first charge over the property. Now, we have to see whether the petitioner has got statutory first charge over the secured asset and in exercise of the statutory rights under the SARFAESI Act , took possession of the same or the first respondent has got priority over the property for its dues as per the provisions of Customs Act and Central Excise Act.
10. What we have to see is, as per the provisions of SARFAESI Act, after issuance of proper notice, when the petitioner Bank took possession of the secured asset, viz., Plot No.55, whether the same can be set at naught by way of Section 142(C) of Customs Act, 1962. It is the contention of the petitioner Bank that the SARFAESI Act is a special enactment and the same is applicable notwithstanding the fact that other enactments are in force or not and in other words, the general power of recovery under the Customs Act, Central Excise Act, is subject to the proceedings under SARFAESI Act. It is also the case of the petitioner Bank that the SARFAESI Act is a complete code by itself and it provides for all contingencies for recovery of debt due from a defaulter. It is further stated that if the debtor is an unsecured creditor like the first respondent, then it has to make a claim under Section 13(7) of the SARFAESI Act. It is also stated that since the SARFAESI Act has already been invoked, the first respondent will not have jurisdiction to proceed under Section 142 or any other provision of the Customs Act, but it must take a claim under Section 13(7) of the SARFAESI Act. According to the petitioner, any action taken by the first respondent is totally without jurisdiction. It is also projected before us that since a statutory first charge is created in favour of the petitioner Bank by the provisions of SARFAESI Act, the same will prevail over all other subsequent charges. It is also pointed out that the first respondent, viz., Department of Central Excise does not have a first charge over the property.
11. Before considering various decisions on this subject, it is useful to refer the relevant provisions.
Chapter I of the SARFAESI Act
2. Definitions:
2(zd) "secured creditor' means any bank or financial institution or any consortium or group of banks or financial institutions and includes-
(i) debenture trustee appointed by any bank or financial institution; or [(ii) securitisation company or reconstruction company, whether acting as such or managing a trust set up by such securitisation company or reconstruction company for the securitisation or reconstruction, as the case may be; or]
(iii) any other trustee holding securities on behalf of a bank or financial institution;
in whose favour security interest is created for due repayment by any borrower of any financial assistance;
2 (zf) "security interest" means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in Section 31; "
Chapter III of the SARFAESI Act
13. Enforcement of security interest.-
(1) Notwithstanding anything contained in Section 69 or Section 69-A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of the Court or tribunal, by such creditor in accordance with the provisions of this Act.
(2) ....
(3) ....
(4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:-
(a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realising the secured asset;
(b) ....
(c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor;
(5) ....
(6) ....
(7) Where any action has been taken against a borrower under the provisions of sub-section (4), all costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, shall be recoverable from the borrower and the money which is received by the secured creditor shall, in the absence of any contract to the contrary, be held by him in trust, to be applied, firstly, in payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money so received shall be paid to the person entitled thereto in accordance with his rights and interests. "
The Central Excise Act,1944 "Section 11. Recovery of sums due to Government.-
In respect of duty and any other sums of any kind payable to the Central Government under any of the provisions of this Act or of the rules made thereunder, [including the amount required to be paid to the credit of the Central Government under Section 11D], the officer empowered by the [Central Board of Excise and Customs constituted under the Central Boards of Revenue Act, 1963 (54 of 1963)] to levy such duty or require the payment of such sums may deduct the amount so payable from any money owing to the person from whom such sums may be recoverable or due which may be in his hands or under his disposal or control, or may recover the amount by attachment and sale of excisable goods belonging to such person; and if the amount payable is not so recovered, he may prepare a certificate signed by him specifying the amount due from the person liable to pay the same and send it to the Collector of the district in which such person resides or conducts his business and the said Collector, on receipt of such certificate, shall proceed to recover from the said person the amount specified therein as if it were an arrear of land revenue.
[Provided that where the person (hereinafter referred to as predecessor) from whom the duty or any other sums of any kind, as specified in this section, is recoverable or due, transfers or otherwise disposes of his business or trade in whole or in part, or effects any change in the ownership thereof, in consequence of which he is succeeded in such business or trade by any other person, all excisable goods, materials, preparations, plants, machineries, vessels, utensils, implements and articles in the custody or possession of the person so succeeding may also be attached and sold by such officer empowered by the Central Board of Excise and Customs, after obtaining written approval from the Commissioner of Central Excise, for the purposes of recovering such duty or other sums recoverable or due from such predecessor at the time of such transfer or otherwise disposal or change.] Section 12. Application of the provisions of Act 8 of 1878 to Central Excise Duties.-
The Central Government may, by notification in the Official Gazette, declare that any of the provisions of the [Customs Act, 1962 (52 of 1962)], relating to the levy of and exemption from customs duties, drawback of duty, warehousing, offences and penalties, confiscation and procedure relating to offences and appeals shall, with such modifications and alterations as it may consider necessary or desirable to adapt them to the circumstances, be applicable in regard to like matters in respect of the duties imposed by Section 3."
The Customs Act, 1962 "Section 142. Recovery of sums due to Government.-
(1) [Where any sum payable by any person] under this Act (including the amount required to be paid to the credit of the Central Government under section 28B] is not paid,-
(a) the proper officer may deduct or may require any other officer of customs to deduct the amount so payable from any money owing to such person which may be under the control of the proper officer or such other officer of customs; or
(b) the [Assistant Commissioner of Customs or Deputy Commissioner of Customs] may recover or may require any other officer of customs to recover the amount so payable by detaining and selling any goods belonging to such person which are under the control of the [Assistant Commissioner of Customs or Deputy Commissioner of Customs] or such other officer of customs; or [(c) if the amount cannot be recovered from such person in the manner provided in clause (a) or clause (b)-
(i) the [Assistant Commissioner of Customs or Deputy Commissioner of Customs] may prepare a certificate signed by him specifying the amount due from such person and send it to the Collector of the district in which such person owns any property or resides or carries on his business and the said Collector on receipt of such certificate shall proceed to recover from such person the amount specified thereunder as if it were an arrears of land revenue; or
(ii) the proper officer may, on an authorisation by a Commissioner of Customs and in accordance with the rules made in this behalf, distrain any movable or immovable property belonging to or under the control of such person, and detain the same until the amount payable is paid; and in case, any part of the said amount payable or of the cost of the distress or keeping of the property, remains unpaid for a period of thirty days next after any such distress, may cause the said property to be sold and with the proceeds of such sale, may satisfy the amount payable and the costs including cost of sale remaining unpaid and shall render the surplus, if any, to such person.
[Provided that where the person (hereinafter referred to as predecessor) by whom any sum payable under this Act including the amount required to be paid to the credit of the Central Government under this Act including the amount required to be paid to the credit of the Central Government under section 28B is not paid, transfers or otherwise disposes of his business or trade in whole or in part, or effects any change in the ownership thereof, in consequence of which he is succeeded in such business or trade by any other person, all goods, materials, preparations, plants, machineries, vessels, utensils, implements and articles in the custody or possession of the person so succeeding may also be attached and sold by the proper officer, after obtaining written approval from the Commissioner of Customs, for the purposes of recovering the amount so payable by such predecessor at the time of such transfer or otherwise disposal or change.] (2) Where the terms of any bond or other instrument executed under this Act or any rules or regulations made thereunder provide that any amount due under such instrument may be recovered in the manner laid down in sub-section (1), the amount may, without prejudice to any other mode of recovery, be recovered in accordance with the provisions of that sub-section."
12. Mr.Sivakumar, learned counsel appearing for the petitioner Bank, by drawing our attention to the above mentioned provisions of the SARFAESI Act, the Customs Act and the Central Excise Act, submitted that the petitioner Bank all along has statutory first charge and the first respondent, Deputy Commissioner of Central Excise has no such statutory first charge.
13. Before considering the divergent views expressed by two Division Benches of this Court, based on the judgment of the Supreme Court in Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. [(2000) 5 SCC 694], let us refer the very decision of the Supreme Court. The Dena Bank, appellant before the Supreme Court on 12.4.1972 filed a suit for recovery of a sum of Rs.19,27,142.29 with future interest and costs against a partnership firm, M/s.Bhikhabhai Prabhudas Parekh & Co. and its partners. The suit was based inter alia on a mortgage by deposit of title deeds by partnership firm and its partners on 24.4.1969. The suit sought for enforcement of the mortgage security. During the pendency of the suit, the State of Karnataka tried to attach and sell the mortgaged properties for recovery of sales tax arrears due and payable by the partnership firm, the first defendant. It appears that there was a Court Receiver appointed who tried to resist the State's attempt to attach and sell the mortgaged properties by preferring objections, but he was unsuccessful. The State of Karnataka purchased the property on auction held on 30.4.1976. Upon a prayer made by the bank, the State of Karnataka was impleaded as a defendant in the suit. The trial Court found all the material plaint averments proved and the bank entitled to a decree. The charge created on suit properties by mortgage was also held proved. The trial Court also held that the State could not have attached and sold the said properties belonging to partners for recovery of sales tax dues against the firm. However, the suit was directed to be dismissed as in the opinion of the trial Court the Chief Manager and Power of Attorney Holder of the bank was not proved to be a person duly authorised to sign and verify the plaint and institute the suit. The bank preferred an appeal before the High Court. During the course of hearing of the appeal, on 27.01.1992, a compromise was entered into between the bank and the borrowers; and the settlement as arrived at between the bank and the borrowers provided for a mode of payment of the decretal amount as agreed between the parties. As the State of Karnataka was not a party to the compromise, the appeal had to be decided as contested in so far as the rights of the State are concerned. On behalf of the bank as also on behalf of the borrowers who supported the bank, two pleas were raised. Firstly, it was submitted that the right of the State to realise its arrears of tax could not take precedence over the right of the bank to enforce its security, it being a secured creditor. Secondly, it was submitted that the property mortgaged in favour of the bank was the property belonging to the partners while the arrears of sales tax related to the partnership firm which was assessed as a legal entity and the arrears of tax could be recovered from the assets of the partnership firm and not by proceeding against the property of the individual partners. The contentions were repelled by the High Court. While recording the compromise and passing a decree in terms thereof by judgment dated 3.8.1992, the High Court excluded clauses (7) and (8) of the deed of compromise as being illegal and not enforceable against the State. Accordingly, the suit filed by the bank was decreed by the High Court superseding the judgment and decree of the trial Court. The bank has come up in appeal by special leave to the Supreme Court feeling aggrieved by the decree of the High Court to the extent to which it recognised the right of the State to proceed against the suit property and that too, in preference to the bank's right to proceed against the mortgaged property for realisation of its dues.
14. Before the Supreme Court two questions arose for consideration, Firstly, 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. Secondly, whether property belonging to the partners can be proceeded against for recovery of dues on account of sales tax assessed against the partnership firm under the provisions of Karnataka Sales Tax Act, 1957. The second question is not relevant for our purpose and we are concerned with the first issue raised. The relevant findings rendered are as under:
" 7. What is common law doctrine of priority or precedence of crown debts ? Halsbury, dealing with general rights of the crown in relation to property, states that where the Crown's right and that of a subject meet at one and the same time, that of the Crown is in general preferred, the rule being "detur digniori" (Laws of England, Fourth Edition Vol. 8 para 1076 at page 666). Herbert Brown states - "Quando just domini regis et subditi concurrunt jus regis. praeferri debet - Where the title of the king and the title of a subject concur, the king's title must be preferred. In this case detur digniori is the rule ....where the titles of the king and of a subject concur, the king takes the whole ....where the king's title and that of a subject concur, or are in conflict, the king's title is to be preferred" (Legal Maxims 10th edition, pp. 35-36).
This common law doctrine of priority of State's debts has been recognised by the High Courts of India as applicable in British India before 1950 and hence the doctrine has been treated as "law in force" within the meaning of Article 372 (1) of Constitution. An illuminating discussion of the subject made by Chagla, C.J. is to be found in Bank of India v. John Bowman - AIR 1955 Bombay 305. We may also refer to Full Bench decision of Madras High Court in Manickam Chettiar v. Income Tax Officer, Madura, AIR 1938 Madras 360 as also to two Judicial Commissioner's Court decisions in People's Bank of Northern India Ltd. v. Secretary of State for India - AIR 1935 Sind 232 and Vassanbai Topandas v. Radhabai Tirathdas, AIR 1933 Sind 368. Without multiplying the authorities we would straightway come to the Constitution Bench decision in M/s Builders Supply Corporation v. Union of India - AIR 1965 SC 1061.
8. The principle of priority of Government debts is founded on the rule of necessity and of public policy. The basic justification for the claim for priority of State debts rests on the well recognised principle that the State is entitled to raise money by taxation because unless adequate revenue is received by the State, it would not be able to function as a sovereign government at all. It is essential that as a sovereign, the State should be able to discharge its primary governmental functions and in order to be able to discharge such functions efficiently, it must be in possession of necessary funds and this consideration emphasises the necessity and the wisdom of conceding to the State, the right to claim priority in respect of its tax dues.(See M/s Builders Supply Corporation, (AIR 1965 SC 1061) (supra). In the same case the Constitution Bench has noticed a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts and that this rule of common law amounts to law in force in the territory of British India at the relevant time within the meaning of Article 372 (1) of the Constitution of India and therefore continues to be in force thereafter. On the very principle on which the rule is founded, the priority would be available only to such debts as are incurred by the subjects of the Crown by reference to the State's sovereign power of compulsory exaction and would not extend to charges for commercial services or obligation incurred by the subjects to the State pursuant to commercial transactions. Having reviewed the available judicial pronouncements Their Lordships have summed up the law as under :-
1. There is a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts.
2. The common law doctrine about priority of crown debts which was recongnised by the Indian High Courts prior to 1950 constitutes "law in force" within the meaning of Article 372 (1) and continues to be in force.
3. The basic justification for the claim for priority of State debts is the rule of necessity and the wisdom of conceding to the State the right to claim priority in respect of its tax dues.
4. 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 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 its debtors arising out of such commercial activities the applicability of the doctrine of priority shall be open for consideration.
9. The Constitution Bench decision has been followed by a three judge Bench in Collector of Aurangabad v. Central Bank of India, AIR 1967 SC 1831.
10. However, the Crown's preferential right to recovery of debts over other creditors is confined to ordinary or unsecured 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 for recovery of its debts over a mortgage or pledgee of goods or a secured creditors. 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 is in general preferred. 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 ought to prevail in a case where one, that of the subject, has prevailed already. In Giles v. Grover (1832) 131 ER 563 it has been held that the Crown has no precedence over a pledgee of goods. In Bank of Bihar v. State of Bihar, AIR 1971 SC 1210, the principle has been recognised by this Court holding that the rights of the pawnee who has parted with money in favour of the pawnor on the security of the goods cannot be extinguished even by lawful seizure of goods by making money available to other creditors of the pawnor without the claim of the pawnee being first fully satisfied. Rashbehary Ghose states in Law of Mortgage (T.L.L., Seventh Edition, P. 386) - 'It seems a Government debt in India is not entitled to precedence over a prior secured debt'.
11. The above said being the position of law, the High Court has however proceeded to rely on certain provisions contained in Chapter XIV of Karnataka Land Revenue Act, 1964 as also the provisions contained in Ss. 13 and 15 of Karnataka Sales Tax Act, 1957 for holding that the arrears of Sales Tax would be entitled to a preference even over the debt secured by mortgage in favour of the appellant Bank. We would notice the relevant legal provisions.
15. We have seen that the common law doctrine of priority of crown debts would not extend to providing preference to crown debts over secured private debts. ...
21. The learned counsel for the appellant is right in submitting that on the day on which the State of Karnataka proceeded to attach and sell the property of the partners of the firm mortgaged with the Bank, it could not have appropriated the sale proceeds to sales tax arrears payable by the firm and defeating the Bank's security in view of the law as laid down by this Court in Commissioner of Sales Tax, M.P. v. Radhakrishan (AIR 1979 SC 1588) (supra). However, still in the facts and circumstances of the case, the appellant Bank cannot be allowed any relief. Section 15(2-A) of Karnataka Sales Tax Act had come into force on 18-12-1983 while the decree in favour of the Bank was passed on 3-8-1992 and is yet to be executed. The claim of the appellant Bank is still outstanding. 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."
14. It is relevant to note Chapter XIV of the Karnataka Land Revenue Act, 1964, particularly, Sections 158 and 190, which make it clear that the claim of the State Government to monies recoverable under the provisions of the said Chapter shall have precedence over any other debt (emphasis supplied), demand or claim whatsoever whether in respect of mortgage, judgment, decree, execution or attachment or otherwise howsoever, against any land or the holder thereof. In this connection, Section 13 of the Karnataka Sales Tax Act, 1957 is also relevant. Sub-sections (1) and (3) of Section 13 relate to payment and recovery of tax. They make it clear that the tax or any other amount due under the said Act shall be paid with interest in such manner in installments, subject to certain conditions, and within such time, as may be prescribed. It further says that any tax assessed, or any other amount due under this Act from a dealer or any other person may without prejudice to any other mode of collection be recovered as if it were an arrear of land revenue. The above provisions of Karnataka Sales Tax Act, 1957 make it clear that the arrears of sales tax would have a preference even over the debts secured by mortgage in favour of the appellant Bank.
15. Let us consider the views expressed by the two Division Benches of this Court based on Dena Bank case (cited supra). Firstly, in ICICI Bank Ltd., vs. The Official Liquidator, High Court, Madras, Liquidator of Vibrant Investments & Properties Ltd., (2005 (1) CTC 758), the Division Bench consisting of Markandey Katju, C.J. and D. Murugesan,J. considered the ratio laid down in Dena Bank case. In that case, the revision petitioner is ICICI Bank - secured creditor and the borrower is M/s.Vibrant Investments & Properties Ltd., which went in liquidation and the question arose is, whether the claim of the revision petitioner Bank would prevail over the claims of Income-tax Department and Karnataka Sales Tax Department. The conclusion of the Division Bench reads as follows.
"3. This issue is no longer res integra in view of the decision of the Supreme Court in Dena Bank v. Bhikhabhai Prabhudas Parekh & Co., 2000 (4) CTC 170 : 2000 (5) SCC 694 vide para 10 where it has been held that the claim of a secured creditor will prevail over crown debts."
By holding so, the Division Bench modified the judgment of the Debts Recovery Appellate Tribunal dated 27.08.2004 and directed that the claim of the petitioner will prevail over that of the Income-tax Department and the Karnataka Sales Tax Department, but this will be subject to the provisions of Section 529-A of the Companies Act. The Division Bench relying on para 10 of the judgment in Dena Bank case (cited supra) and finding that the claim of a secured creditor will prevail over crown debts, arrived a conclusion in favour of the petitioner, viz., ICICI Bank.
16. In Commissioner of Central Excise, Pondicherry vs. Indian Bank [2006 (198) E.L.T. 334 (Mad.)], after noting Section 142 of the Customs Act and the law laid down by the Apex court in Dena Bank case (cited supra), the Division Bench consisting of A.P. Shah, C.J. and M.Jaichandren,J. concluded that the claim of Central Excise Department will have precedence over that of secured creditors. After holding so, the Division Bench directed the first respondent, Indian Bank to pay the excess dues to the appellant (Commissioner, Central Excise, Pondicherry ), after adjudication.
17. As rightly pointed out by the referring Judge, both the Division Benches relied on the decision of the Supreme Court in Dena Bank's case (cited supra). Before analysing the principles laid down by the Supreme Court in Dena Bank case, it is also relevant to refer the other decisions cited on either side. The learned counsel for the petitioner Bank at the foremost relied on the decision of the Supreme Court in Bank of Bihar vs. State of Bihar (AIR 1971 SC 1210) wherein, among many issues framed, issue No.6(a) is relevant, which reads as under:
"Was the sugar seized by the Government in possession of the Bank as a pledgee at the time of the seizure and have the rights of the Bank as such pledgee been determined by the seizure in question?"
In paragraphs 7 and 8, their Lordships have concluded, " 7. In our judgment the High Court is in error in considering that the rights of the pawnee who had parted with money in favour of the pawnor on the security of the goods can be defeated by the goods being lawfully seized by the Government and the money being made available to other creditors of the pawnor without the claim of the pawnee being fully satisfied. The pawnee has special property and a lien which is not of ordinary nature on the goods and so long as his claim is not satisfied no other creditor of the pawnor has any right to take away the goods or its price. After the goods had been seized by the Government it was bound to pay the amount due to the plaintiff and the balance could have been made available to satisfy the claim of other creditors of the pawnor. But by a mere act of lawful seizure the Government could not deprive the plaintiff of the amount which was secured by the pledge of the goods to it. As the act of the Government resulted in deprivation of the amount to which the plaintiff was entitled it was bound to reimburse the plaintiff for such amount which the plaintiff in ordinary course would have realized by sale of the goods pledged with it on the pawnor making a default in payment of debt.
8. The approach of the trial Court was unexceptionable. The plaintiff's right as a pawnee could not be extinguished by the seizure of the goods in its possession inasmuch as the pledge of the goods was not meant to replace the liability under the cash credit agreement. It was intended to give the plaintiff a primary right to sell the goods in satisfaction of the liability of the pawnor. The Cane Commissioner who was an unsecured creditor could not have any higher rights than the pawnor and was entitled only to the surplus money after satisfaction of the plaintiff's dues."
18. In State of M.P. vs. State Bank of Indore [2002 (10) SCC 441 - Three Judge Bench], the Hon'ble Supreme Court referred to Section 33-C of the Madhya Pradesh General Sales Tax Act, 1958, which reads thus, "33-C. Tax to be first charge.- Notwithstanding anything to the contrary contained in any law for the time being in force, any amount of tax and/or penalty, if any, payable by a dealer or other person under this Act shall be a first charge on the property of the dealer or such person."
Placing reliance on the above provision, their Lordships have held, " 5. Section 33-C creates a statutory first charge that prevails over any charge that may be in existence. Therefore, the charge thereby created in favour of the State in respect of the sales tax dues of the second respondent prevailed over the charge created in favour of the Bank in respect of the loan taken by the second respondent. There is no question of retrospectivity here, as, on the date when it was introduced, Section 33-C operated in respect of all charges that were then in force and gave sales tax dues precedence over them. This position in law is discussed in detail in the judgment of this Court in Dena Bank v. Bhikhabhai Prabhudas Parekh & Co."
19. In State Bank of Bikaner & Jaipur vs. National Iron & Steel Rolling Corporation [1995 (2) SCC 19 - Three Judge Bench], the appellant, viz., the State Bank of Bikaner and Jaipur had given cash credit facilities to Respondent-1, National Iron and Steel Rolling Corporation. Respondents 2 to 5 are the partners of Respondent-1. As a security for repayment of the amounts advanced to Respondent 1 by the appellant-bank, Respondent-1 created a mortgage of their factory premises situated at Industrial Area, Bharatpur by a Deed of Mortgage dated 18-10-1977. They have also, by a Letter of Promise dated 10-6-1981, pledged the plant and machinery installed in the said premises to the bank as security for the said advances. There is also an agreement for the pledge of movables dated 7-1-1980 executed by the first respondent in favour of the appellant-bank. The appellant-bank filed Civil Suit No.5/86 in the court of the Additional District Judge II, Bharatpur against the respondents for the recovery of a sum of Rs.3,79,672 due and payable under the above cash credit facilities and for future interest @ 16.25% p.a. with quarterly rests. In this suit the appellant-bank also asked for the realisation of the mortgage security under Order 34, Rule 4 of the Code of Civil Procedure. While the suit was pending, the Commercial Taxes Officer, Bharatpur got himself impleaded in the suit on 18-5-1990 on the ground that he had a prior claim for the recovery of a sum of Rs.1,19,122/- as sales tax dues from Respondent-1 and was entitled to realize it by sale of the mortgaged property. The property which is the subject-matter of the mortgage was sold by auction under the orders of the court for a sum of Rs.4,02,000/- to one Kamlesh Goel. Under orders of the court, the sale proceeds were deposited in court. It was contended by the Commercial Taxes Officer, Bharatpur that the sales tax dues of the first respondent were liable to be paid first out of the sale proceeds and the claim of the appellant-bank could be satisfied only out of the balance amount. The trial court by judgment dated 18-5-1990 accepted the claim of the Commercial Taxes Officer. The revision petition of the appellant-bank was dismissed by the High Court by the impugned judgment. Hence the Bank filed this appeal by special leave. The claim of the Commercial Taxes Officer, Bharatpur rests on the provisions of Section 11-AAAA of the Rajasthan Sales Tax Act, 1954. Section 11-AAAA was introduced in the Rajasthan Sales Tax Act, 1954 by way of an amendment in 1989. Section 11-AAAA is as follows:
"11-AAAA. Liability under this Act to be the first charge.- Notwithstanding anything to the contrary contained in any law for the time being in force, any amount of tax, penalty, interest and any other sum, if any, payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer, or such person."
Under this section, the amount of sales tax or any other sum due and payable by a dealer or any other person will have the first charge over the property of the dealer or of such person. It is on account of the provisions of this section that the Commercial Taxes Officer claimed priority for the recovery of the sales tax dues from the sale proceeds of the mortgaged property. The appellant, however, contended that since the mortgage in their favour is prior in point of time, their claim will have precedence over the claim of the sales tax authorities. The following discussion and the ultimate conclusion of their Lordships are relevant.
" 7. It is, therefore, necessary to consider the effect of Section 11-AAAA of the Rajasthan Sales Tax Act, 1954 on an existing mortgage in respect of the property of the dealer or the person liable to pay sales tax or other sums under the Rajasthan Sales Tax Act, 1954. Section 100 of the Transfer of Property Act deals with charges on an immoveable property which can be created either by an act of parties or by operation of law. It provides that where immoveable property of one person is made security for the payment of money to another, and the transaction does not amount to a mortgage, a charge is created on the property and all the provisions in the Transfer of Property Act which apply to a simple mortgage shall, so far as may be, apply to such charge. A mortgage on the other hand, is defined under Section 58 of the Transfer of Property Act as a transfer of an interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced as set out therein. The distinction between a mortgage and a charge was considered by this Court in the case of Dattatreya Shanker Mote v. Anand Chintaman Datar - 1974 (2) SCC 799. The Court has observed (at pages 806-807) that a charge is a wider term as it includes also a mortgage, in that, every mortgage is a charge, but every charge is not a mortgage. The Court has then considered the application of the second part of Section 100 of the Transfer of Property Act which inter alia deals with a charge not being enforceable against a bona fide transferee of the property for value without notice of the charge. It has held that the phrase "transferee of property" refers to the transferee of entire interest in the property and it does not cover the transfer of only an interest in the property by way of a mortgage.
8. In the present case we have to consider whether the statutory first charge which is created under Section 11-AAAA of the Rajasthan Sales Tax Act over the property of the dealer or a person liable to pay sales tax and/or other dues under the Rajasthan Sales Tax Act, is created in respect of the entire interest in the property or only the mortgagors interest in the property when the dealer has created a mortgage on the property. In other words, will the statutory first charge have priority over an earlier mortgage. It was urged by Mr Tarkunde, learned counsel for the appellant-bank that at the time when the statutory first charge came into existence, there was already a mortgage in respect of the same property. Therefore, the only property which was possessed by the dealer and/or person liable to pay tax or other dues under the Rajasthan Sales Tax Act, was equity of redemption in respect of that property. The first charge would operate, therefore, only on the equity of redemption. The argument though ingenious, will have to be rejected. Where a mortgage is created in respect of any property, undoubtedly, an interest in the property is carved out in favour of the mortgagee. The mortgagor is entitled to redeem his property on payment of the mortgage dues. This does not, however, mean that the property ceases to be the property of the mortgagor. The title to the property remains with the mortgagor. Therefore, when a statutory first charge is created on the property of the dealer, the property subjected to the first charge is the entire property of the dealer. The interest of the mortgagee is not excluded from the first charge. The first charge, therefore, which is created under Section 11-AAAA of the Rajasthan Sales Tax Act will operate on the property as a whole and not only on the equity of redemption as urged by Mr Tarkunde.
After holding so, coming to the case on their hand, Their Lordships have held, " 10. ... the section creates a first charge on the property, thus clearly giving priority to the statutory charge over all other charges on the property including a mortgage. The submission, therefore, that the statutory first charge created by Section 11-AAAA of the Rajasthan Sales Tax Act can operate only over the equity of redemption, cannot be accepted. The charge operates on the entire property of the dealer including the interest of the mortgage therein."
20. Mr.V.T. Gopalan, learned Additional Solicitor General appearing for the first respondent heavily relied on the following decisions of the Supreme Court in Builders Supply Corporation vs. Union of India [AIR (1965) SC 1061]; Collector, Aurangabad vs. Central Bank of India [AIR (1967) SC 1831] and State of West Bengal vs. Corporation of Calcutta [AIR (1967) SC 997]. In Builders Supply Corporation vs. Union of India [AIR (1965) SC 1061], which is a Constitution Bench judgment, while construing Article 372 (1) of the Constitution, their Lordships have held that the rules of Common Law relating to substantive rights which had been adopted by this country and enforced by judicial decisions, amount to "law in force" in the territory of India at the relevant time within the meaning of Article 372(1). The decision has also emphasised the necessity and the wisdom of conceding to the State the right to claim priority in respect of its tax dues.
21. In Collector, Aurangabad vs. Central Bank of India [AIR 1967 SC 1831], the Supreme Court has recongnised the common law prerogative of the Crown. In State of West Bengal vs. Corporation of Calcutta [AIR 1967 SC 997], which is a Nine Judge Bench decision, in para 33, their Lordships have held, "33. ...... But the rule that the Crown debt is entitled to priority in payment of debts due to it has been adopted, and the State is entitled to priority in payment of debts due to it. .... "
22. In Union of India vs. Somasundram Mills (P) Ltd., [1985 (2) SCC 40] their Lordships have held that it is a general principle of law that debts due to the State are entitled to have priority over all other debts. They further held that, "....... However, if the State had already effected an attachment of the property which was sold even before its sale, the State would be entitled to recover the sale proceeds from whoever has received the amount from the court by filing a suit. Section 73(3) read with 73(2) CPC contemplate such a relief being granted in a suit. ..."
".... The prior attachment effected by the State similarly fastens itself to the sale proceeds taken away by the decree holder. The State is, therefore, entitled to recover the amount from the decree holder who has taken away the amount. ... "
23. In P.E. Ramakrishnan vs. The Assistant Commissioner of Agricultural Income Tax, Madurai [1999 (1) CTC 166], one of us (P.Sathasivam,J.) while considering the dues to the Government under Tamil Nadu Agricultural Income-tax Act, held that dues to Government will have priority over other debts.
24. All the decisions relied on by Mr. V.T. Gopalan, clearly show that the Government is entitled to claim its dues/taxes/duties in preference to other ordinary debts. In all those cases there is no provision as found in SARFAESI Act or a specific provision claiming to have "first charge" as provided in Rajasthan Sales Tax Act in State Bank of Bikaner & Jaipur vs. National Iron & Steel Rolling Corporation [1995 (2) SCC 19 - Three Judge Bench], Madhya Pradesh General Sales Tax in State of M.P. vs. State Bank of Indore [2002 (10) SCC 441 - Three Judge Bench], and Karnataka Sales Tax Act in Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. [(2000) 5 SCC 694]. As explained in the case of Constitution Bench judgment in Builders Supply Corporation vs. Union of India [AIR (1965) SC 1061], the arrears of tax due to the State can claim priority over private debts and thus the rule of common law amounts to law in force in the territory of British India at the relevant time within the meaning of Article 372 (1) of the Constitution of India and therefore continues to be in force thereafter. In Dena Bank case (cited supra) it is held that the Crown's preferential right to recover all debts over other creditors is confined to ordinary and unsecured creditors.
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. (Emphasis supplied)
26. In the light of the above discussion, we conclude, "(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.
27. It is made clear from our above conclusion and of the fact that the petitioner Bank being a secured creditor, the first respondent, the Deputy Commissioner of Central Excise Department is not entitled to bring the property viz., Plot No.55, Ambattur Industrial Estate, Ambattur, Chennai 600 058 into auction for their dues payable by the borrower company, viz., M/s. Sumeet Research and Holdings Private Limited. It is further made clear that after clearance of the petitioner's debt, the first respondent is free to proceed further if any property is available.
In the result, the writ petition is allowed. No costs. Connected miscellaneous petitions are closed.
kh To
1. The Deputy Commissioner of Central Excise Chennai II Division R.40 TNHB Complex Mogappair Chennai 600 037.
2. The Secretary Ministry of Finance Government of India, south Block New Delhi.