Gujarat High Court
Ski Specialties Private Limited vs State Of Gujarat on 21 January, 2020
Author: Bhargav D. Karia
Bench: J.B.Pardiwala, Bhargav D. Karia
C/SCA/11870/2015 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 11870 of 2015
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE J.B.PARDIWALA
and
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
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1 Whether Reporters of Local Papers may be allowed to
see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the
judgment ?
4 Whether this case involves a substantial question of law
as to the interpretation of the Constitution of India or any
order made thereunder ?
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SKI SPECIALTIES PRIVATE LIMITED & 1 other(s)
Versus
STATE OF GUJARAT & 2 other(s)
================================================================
Appearance:
MR. S.N. SOPARKAR, THE LEARNED SENIOR ADVOCATE ASSISTED BY LEARNED ADVOCATE MR.
SHASHVATA SHUKLA, AND LEARNED ADVOCATE MR. S.P. MAJMUDAR FOR THE PETITIONER(S) NO.
1,2
ADVANCE COPY SERVED TO GOVERNMENT PLEADER/PP(99) for the Respondent(s) No. 1
MR CHINTAN DAVE, AGP for the Respondent(s) No. 2
LEARNED SENIOR ADVOCATE MR. DHAVAL C. DAVE ASSISTED BY MR JIGAR M PATEL(3841) for the
Respondent(s) No. 3
RULE SERVED(64) for the Respondent(s) No. 1,2,3
==========================================================
CORAM: HONOURABLE MR. JUSTICE J.B.PARDIWALA
and
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
Date : 21/01/2020
ORAL JUDGMENT
(PER : HONOURABLE MR. JUSTICE BHARGAV D. KARIA)
1. The petitioner No.1, a Private Ltd. Company incorporated under the provisions of the Companies Act, 1956 has filed this petition through its Authorized Officer along with petitioner No.2, who is Page 1 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT shareholder of the petitioner No.1-Company.
1.1. By this petition, the petitioners have challenged the action of the respondent Nos.1 and 2 in not removing the charge of the outstanding sales tax dues in attachment over Plot No.60/A for sale consideration of Rs.8 crores and Plot No. 60/B for sale consideration of Rs.7.5 crores situated at GIDC, Phase-I, Vatva, Ahmedabad.
1.2. It is the case of the petitioners that the aforesaid plots were belonging to one M/s. Choksi Tubes Company Limited (for short 'Chokshi Tubes'), who mortgaged the said plots against the term loan and working capital loan (on export) was given from the Export Import Bank of India (EXIM Bank) in the year 1999.
1.3. It appears that M/s Choksi Tubes obtained the loan from State Bank of India and Bank of India by creating joint mortgage and the construction thereon, all machinery, raw-material, stock, stock of current proceedings, semi full stock and all movable and immovable properties by executing a joint mortgage deed dated 11.12.2000. It appears that thereafter, Development Credit Bank Ltd. also provided loan to the M/s Choksi Tubes by mortgaging the property and executed a joint mortgage deed on 02.07.2001.
1.4. It appears that the Assistant Sales Tax Commissioner Unit-21, Ahmedabad passed an order dated 18.03.2005 to attach the aforesaid plots for recovery Page 2 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT of the sales tax dues of Rs.1,11,84,000/- with interest and penalty.
1.5. A mutation entry for the same was made in the record of rights in Village Form No.6 vide Entry No.14214 on 28.03.2006. It appears that thereafter, M/s Choksi Tubes filed case under the Sick Industrial Companies (Special Provisions) Act, 1985 before the Board for Industrial and Financial Reconstruction (for short the 'BIFR'). The BIFR by order dated 25.09.2007 declared, the M/s Choksi Tubes as sick industrial company on 19.12.2007.
1.6. It appears that thereafter, the respondent No.3- Edelweiss Asset Reconstruction Company Limited (for short, 'EARC') was assigned all the rights of the said plots with interest by EXIM Bank by assignment agreement dated 15.12.2011.
1.7. The respondent No.3, after getting possession of the aforesaid plots had given public notice in daily newspaper Indian Express on 03.12.2013 and daily newspaper Sandesh on 04.12.2013.
1.8. The respondent No.3 published a possession Notice on 09.12.2013.
1.9. It appears that thereafter, the respondent No.3 EARC sold the said plots to the petitioner No.1- Company by private treaty on 27.03.2014. Thereafter, registered sale deed was executed on 21.05.2014 with respect to Plot No.60/A between the petitioner Page 3 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT No.1and the respondent No.3, whereas the registered sale dated 10.06.2014 was executed on 16.07.2014 for Plot No.60/B between the petitioner No.1 and the respondent No.3. The GIDC also passed transfer orders of both the plots in the name of petitioner No.1-Company.
1.10. The petitioner No.1-Company thereafter, obtained the title clearance certificate from its Solicitor, wherein it was mentioned that there is attachment of the Commercial Tax Department on the said plots.
1.11. The petitioner made a representation before the respondent No.2 for removal of the charge vide letter dated 24.04.2015.
1.12. The petitioners have preferred this petition being aggrieved by the action of the respondent Nos.1 and 2 authorities in not removing their charge of the outstanding sales tax dues with regard to the plots in question and in not lifting its attachment.
2. Mr. S.N. Soparkar, the learned Senior Advocate assisted by learned Advocate Mr. Shashvata Shukla, and learned Advocate Mr. S.P. Majmudar for the petitioners submitted that the action of the respondent No.2 is contrary to the provisions of Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short the 'Securitisation Act') as the Securitisation Page 4 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT Act has overriding effect over the provisions of the Gujarat Sales Tax Act.
2.1. It was further submitted that both the plots were mortgaged in the year 1999 with the EXIM Bank, which is much prior to the order of attachment passed by the respondent No.2 in the year 2005.
2.2. It was further submitted that sales tax dues of erstwhile Choksi Tubes was for the year from 2003- 2004, whereas the property of plot No.60/A and 60/B situated at GIDC was mortgaged by M/s Chokshi Tubes, in the year 1999 and thereafter, with other Banks in the year 2000-2001.
2.3. It was further submitted that the provisions of Section 48 of the Sales Tax Act, 1960 would not be applicable.
2.4. It was submitted that the Division Bench of this Court in the case of Baroda City Co-operative Bank Ltd. v. State of Gujarat and others reported in (2010) 2 GLH 525, has held that Section 48 of the VAT Act would not create a first charge in case of secured creditors, if the property is already mortgaged with the secured creditors.
2.5. Reliance was also placed in the decision of Division Bench of this Court rendered in the case of Kalupur Commercial Co-operative Bank Ltd. v. State of Gujarat passed in SCA No.17891 of 2018, in support of his contentions.
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3. On the other hand, Mr. Chintan Dave, the learned Assistant Government Pleader relied upon the following averments made in the Affidavit-in-reply :
"6. I say and submit that there were certain dues of a different payment was not paid by the Choksi Tube Company Ltd. The recovery of sales tax dues regarding differed payment (collected Tax) since 1997-98 to 2002-03 is outstanding of Rs.3.33 crore plus interest breakup of the same is as under
Sr. No. Year Recovery of Amount (lacs) 1 1997-98 108.68 2 1998-99 167.52 3 1999-00 43.78 4 2000-01 2.31 5 2001-02 8.49 6 2002-03 2.35 Total 333.08
7. I say and submit that for the recovery purpose, an attachment was made on the movable and immovable property of the company on dated 18.07.2003. I further submit that the Choksi Tube Company Ltd.
had filed reference with BIFR (Board for Industrial and Finance Reconstruction) under section 15(1) of the Sick Industries Companies (Special Provision) Act 1985. The case under BIFR was registered as Misc.
Page 6 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021C/SCA/11870/2015 JUDGMENT application No.399/2014, case No.111/2006.
8. I say and submit that the BIFR has passed an order on 24.09.2014 in aforesaid order the BIFR submits as follows.
"Having considering the submission made during the hearing and the material on record, the bench observed that every party present in the hearing unequivocally admitted that EARCL (Edleweiss Asset Reconstruction Co. Ltd.) is the sole secured creditor representing 100% of the secured debt of the Company the bench noted that reference of the M/s. Choksi Tube Company Ltd. stands abated under the third provision of section 15(1) of SICA (Sick Industrial Companies Act) as sole secured creditor Viz. Edelweiss Asset reconstruction Company Ltd. (EARCL) has taken action under section 1394) of SARFAESI Act." The BIFR bench has issued the following direction a. The board discharges State Bank of India (SBI) from the responsibility of the operating agency to the board.
b. All creditor statutory authority are at liberty to recover their dues, if any according to law.
A copy of order dated 24.09.2014 passed by the BIFR is annexed herewith and marked as ANNEXURE R-I.
9. I say and submit that EARCL i.e. Page 7 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT respondent No.3 of the present petition has auctioned the property of the Choksi Tube Company Ltd. on 21.05.2014 for the plot No.60A and 60B of Vatva GIDC, Ahmedabad. A sale certificate was issued in the name of SKI Specialty Pvt Ltd on the basis of the aforesaid sale certificate, GIDC has also transferred the property in the name of SKI Specialty Pvt. Ltd.
10. I say and submit that the respondent No.3 i.e. EARCL had never mentioned about the sales tax dues in the sale certificate nor in offer letter. During the proceeding for the auction, the attachment under section 155 of the Land Revenue Code was already existed. Even though EARCL has never informed the party who interested to take part in auction.
11. I say and submit that the State authority sent a letter dated 20.05.2015 by addressed to EARCL for the issued to lodged a claim for pending recovery of sales tax dues from the Choksi Tube Company Ltd. I humbly submit that the respondent state authority has sent second letter on 01.10.2015 to EARCL. A letter was issued to produce following details.
1) Property details of the Company under auction.
2) Date of auction
3) Quantum of the secured debt with
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C/SCA/11870/2015 JUDGMENT
details
4) Amount received by auction
5) Details of distribution to the secured
debtors
6) Excess amount after distribution to the
secured debtors
7) Provision for Government dues
8) Your contract with SKI Specialty Pvt.
Ltd in which the sales tax recovery of M/s. Choksi Tube Co. Ltd. is mentioned or not. A copy of letter dated 20.05.2015 and 01.10.2015 are annexed herewith and marked as ANNEXURE R-II (Colly).
12. I say and submit that since today EARCL has not replied to the above mentioned letters or produced any information. I further submit that as the movable and immovable property of the Choksi Tube Ltd had been attached under LRC (Land Revenue Code) Act and no any distribution or account with details was produced to the State of Gujarat, the attachment has not been lifted.
13. I say and submit that as the Choksi Tube Company Ltd had taken loan on the mortgaged basis with Exim Bank on both plots viz. 60A and 60B of Vatva GIDC, Ahmedabad following citation of the Hon'ble Supreme Court is applicable to this case is mentioned as below CA No.1434/2003 M/s Orrisa State Financial Organization v/s Page 9 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT Commissioner of Commercial Tax and Others. The above mentioned case decided on 03.12.2009 by observation "it was held that charge created by section 33C of the MP General Sales Tax Act 1958 in favour of the State in respect of Sales Tax dues shall prevail over the charge created by the dealer in favour of the bank respect of the loan."
A copy of Civil Application No.1434/2003 passed by Hon'ble Supreme Court is annexed herewith and marked as ANNEXURE R-III.
14. I say and submit that as per section 48 of the Gujarat Value Added Tax Act 2003 read with the section 100, the sales tax dues (earlier act), can be recovered by Gujarat Value Added Tax Act and the charge remains as the first charge of the State Government. A copy of relevant section i.e. section 48 and section 100 of the GVAT Act 2003 is annexed herewith and marked as ANNEXURE R-IV (Colly)."
3.1. Relying upon the aforesaid submissions, the learned Assistant Government Pleader submitted that as per provision of section 48 of the VAT Act, 2003, the State Government will have first charge over the dues of the secured creditors including a Bank. It was submitted that the charge was registered in the year 2003, which is prior to the date of auction/sale of the property in question to the petitioner. The petitioner is liable to pay outstanding dues of the Page 10 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT Sales Tax Department as the petitioner has purchased the property on the "As is where is basis" and therefore the petitioner cannot claim that it has purchased the property free from encumbrances. It was submitted that there is outstanding sales tax dues to the tune of Rs.3.33 crores approximately and therefore it is in the interest of public exchequer to protect the revenue and to continue with the charge on the said property in question.
3.2. The learned Assistant Government Pleader therefore, submitted that the respondents were justified in not removing the charge of the outstanding dues over the in property in question.
3.3. The learned Senior Advocate Mr. Dhaval C. Dave assisted by Mr. Jigar Patel, the learned Advocate appearing for the respondent No.3 submitted that the respondent No.3 sold the property to the petitioner under the provisions of the Securitisaiton Act and as such under the Sales Tax Act, 1960, the respondents cannot be said to have lien over the property in question.
3.4. It was further submitted that the attachment order was passed by the respondent No.2 for the dues for the period prior to 2003 under the Gujarat Sales Tax Act, 1960 and under the said Act, there was no provision akin to Section 48 of the Gujarat Value Added Tax Act, 2003 which provides for creation of first charge for the dues of the State in preference Page 11 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT to the other charges of the secured creditor.
3.5. It was therefore submitted that the respondent No.2 cannot rely upon the provisions of Section 48 and Section 100 of the Gujarat Value Added Tax Act, 2003 for the purpose of enforcing so called substantive rights, which are alleged to have been accrued in its favour under the provisions of Gujarat Sales Tax Act, 1960.
3.6. Learned senior counsel also placed reliance upon the decision of the Division Bench of this Court rendered in the case of Kalupur Commercial Co- operative Bank Ltd. (supra).
4. Having heard the learned Advocates for the respective parties and having gone through the materials on record, the short question which arises for consideration of the Court is whether Section 48 of the Gujarat Value Added Tax Act, 2003 (for short, 'GVAT Act, 2003') would apply to reduce tax, which arose under the Gujarat Sales Tax Act, 1960 or not. If the answer is in affirmative, whether the provisions of Section 48 of the GVAT Act, 2003 would create first charge over the property which is already mortgaged in favour of a secured creditor.
5. The said questions are no more res-integra, in view of the decision of the co-ordinate bench of this Court rendered in the case of Kalupur Commercial Co- operative Bank Ltd. (supra), wherein it is held as under :
Page 12 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021C/SCA/11870/2015 JUDGMENT "15. The plain reading of Section 48 of the VAT Act indicates that it starts with a non-obstante clause 'notwithstanding anything to the contrary contained in any law for the time being in force. Section 48 of the VAT Act creates first charge on the property. The issue as regards the claim of priority of the secured creditor vis-a-vis the first charge of the property under the State Legislation was considered by the Supreme Court in the case of Central Bank of India vs. State of Kerala & ors, reported in (2009) 4 SCC 94. The Supreme Court, in the said decision took the view that if the State Act creates first charge on the property, then the secured creditors cannot have the claim against the statutory provision. The Supreme Court also took into consideration Section 100 of the Transfer of Property Act, 1882. The relevant paras of the judgment in the case of Central Bank of India (supra) are quoted hereunder for ready reference.
"111. However, what is most significant to be noted is that there is no provision in either of these enactments by which first charge has been created in favour of banks, financial institutions or secured creditors qua the property of the borrower.
112. Under Section 13(1) of the Securitisation Act, limited primacy has been given to the right of a secured creditor to enforce security interest vis-a-vis Section 69 or Section 69A of the Transfer of Property Act. In terms of that sub- section, secured creditor can enforce security interest without intervention of the Court or Tribunal and if the borrower has created any mortgage of the secured asset, the mortgagee or any person acting on his behalf cannot sell the mortgaged property or appoint a receiver of the income of the mortgaged property or any part thereof in a manner which Page 13 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT may defeat the right of the secured creditor to enforce security interest. This provision was enacted in the backdrop of Chapter VIII of Narasimham Committee's 2nd Report in which specific reference was made to the provisions relating to mortgages under the Transfer of Property Act.
113. In an apparent bid to overcome the likely difficulty faced by the secured creditor which may include a bank or a financial institution, Parliament incorporated the non obstante clause in Section 13 and gave primacy to the right of secured creditor vis a vis other mortgagees who could exercise rights under Sections 69 or 69A of the Transfer of Property Act. However, this primacy has not been extended to other provisions like Section 38C of the Bombay Act and Section 26B of the Kerala Act by which first charge has been created in favour of the State over the property of the dealer or any person liable to pay the dues of sales tax, etc. Sub-section (7) of Section 13 which envisages application of the money received by the secured creditor by adopting any of the measures specified under sub-section (4) merely regulates distribution of money received by the secured creditor. It does not create first charge in favour of the secured creditor.
116. The non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act give overriding effect to the provisions of those Acts only if there is anything inconsistent contained in any other law or instrument having effect by virtue of any other law. In other words, if there is no provision in the other enactments which are inconsistent with the DRT Act or Securitisation Act, the provisions contained in those Acts cannot override other legislations. Section 38C of the Bombay Act and Section 26B of the Kerala Act also contain non obstante clauses and give statutory recognition to the priority of State's charge over other debts, which was recognized by Indian High Courts even before 1950. In other words, these sections and similar provisions contained in other State legislations not only create first charge on the property of the dealer or any other person Page 14 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT liable to pay sales tax, etc. but also give them overriding effect over other laws.
126. While enacting the DRT Act and Securitisation Act, Parliament was aware of the law laid down by this Court wherein priority of the State dues was recognized. If Parliament intended to create first charge in favour of banks, financial institutions or other secured creditors on the property of the borrower, then it would have incorporated a provision like Section 529A of the Companies Act or Section 11(2) of the EPF Act and ensured that notwithstanding series of judicial pronouncements, dues of banks, financial institutions and other secured creditors should have priority over the State's statutory first charge in the matter of recovery of the dues of sales tax, etc. However, the fact of the matter is that no such provision has been incorporated in either of these enactments despite conferment of extraordinary power upon the secured creditors to take possession and dispose of the secured assets without the intervention of the Court or Tribunal. The reason for this omission appears to be that the new legal regime envisages transfer of secured assets to private companies.
129. If Parliament intended to give priority to the dues of banks, financial institutions and other secured creditors over the first charge created under State legislations then provisions similar to those contained in Section 14A of the Workmen's Compensation Act, 1923, Section 11(2) of the EPF Act, Section 74(1) of the Estate Duty Act, 1953, Section 25(2) of the Mines and Minerals (Development and Regulation) Act, 1957, Section 30 of the Gift- Tax Act, and Section 529A of the Companies Act, 1956 would have been incorporated in the DRT Act and Securitisation Act.
130. Undisputedly, the two enactments do not contain provision similar to Workmen's Compensation Act, etc. In the absence of any specific provision to that effect, it is not possible to read any conflict or inconsistency or overlapping between the provisions of the DRT Act and Securitisation Act on the one hand Page 15 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT and Section 38C of the Bombay Act and Section 26B of the Kerala Act on the other and the non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act cannot be invoked for declaring that the first charge created under the State legislation will not operate qua or affect the proceedings initiated by banks, financial institutions and other secured creditors for recovery of their dues or enforcement of security interest, as the case may be.
131. The Court could have given effect to the non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act vis a vis Section 38C of the Bombay Act and Section 26B of the Kerala Act and similar other State legislations only if there was a specific provision in the two enactments creating first charge in favour of the banks, financial institutions and other secured creditors but as the Parliament has not made any such provision in either of the enactments, the first charge created by the State legislations on the property of the dealer or any other person, liable to pay sales tax etc., cannot be destroyed by implication or inference, notwithstanding the fact that banks, etc. fall in the category of secured creditors. "
16. Indisputably, the judgment of the Apex Court in the case of Central Bank of India (supra) was prior to the amendment in the Act, 2002 and 1993 respectively. However, what is important are the observations of the Supreme Court as contained in para-126 of this decision quoted above. The Supreme Court observed that while enacting the DRT Act, the Parliament was aware of the law laid down by the Supreme Court, wherein priority of the State dues was recognized. If the Parliament intended to create the first charge in favour of the Banks, Financial Institutions or other secured creditors on the Page 16 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT property of the borrower, then it would have incorporated a provision like Section 529A of the Companies Act or Section 11(2) of the EPF Act and ensured that notwithstanding the series of judicial pronouncements, the dues of Banks, Financial Institutions and other secured creditors should have priority over the State's statutory first charge in the matter of recovery of the dues of sales tax etc. The Supreme Court proceeded to observe that the fact of the matter was that no such provision had been incorporated in either of those enactments despite conferment of extraordinary power upon the secured creditors to take possession and dispose of the secured assets without the intervention of the Court or Tribunal.
17. In our prima facie opinion, such observations probably might have weighed with the Parliament which ultimately might have led to the introduction of Section 31B in the RDB Act, 1993 and 26E in the SARFAESI Act, 2002.
18. Section 31B of the RDB Act also starts with a non- obstante clause 'notwithstanding anything contained in any other law for the time being in force'.
19. Section 26E of the SARFAESI Act also starts with a non- obstante clause 'notwithstanding anything contained in any other law for the time being in force'.
20. As regards the non-obstante clause, this Court deems it fit to consider few decisions :
(i) In State of West Bengal v. Union of India, AIR 1963 SC 1241, it is observed as under:Page 17 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021
C/SCA/11870/2015 JUDGMENT "The Court must ascertain the intention of the legislature by directing its attention not merely to the clauses to be construed but to the entire statute; it must compare the clause with the other parts of the law and the setting in which the clause to be interpreted occurs."
(ii) In Union of India v. Maj I.C. Lala, AIR 1973 SC 2204, the Supreme Court held that non-obstante clause does not mean that the whole of the said provision of law has to be made applicable or the whole of the other law has to be made inapplicable.
It is the duty of the Court to avoid the conflict and construe the provisions to that they are harmonious.
(iii) In Union of India v. G.M. Kokil, AIR 1984 SC 1022, the Supreme Court, at Paragraph 10, held as follows:
"It is well-known that a non-obstante clause is a legislative device which is usually employed to give overriding effect to certain provision over some contrary provision that may be found either in the same enactment or some other enactment, that is to say, to avoid the operation and effect of all contrary provisions."
(iv) In Chandavarkar Sita Ratna Rao v. Ashalata S. Guram, [1986] 4 SCC 447, at Paragraph 67, the Supreme Court held as follows:
"67. A clause beginning with the expression "notwithstanding any thing contained in this Act or in some particular provision in the Act or in some particular Act or in any law for the time being in force, or in any contract" is more often than not appended to a section in the beginning with a view to give the enacting part of the section in case of conflict an overriding effect over the provision of the Act or the contract mentioned in the non- obstante Page 18 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT clause. It is equivalent to saying that in spite of the provision of the Act or any other Act mentioned in the non-obstante clause or any contract or document mentioned the enactment following it will have its full operation or that the provisions embraced in the non- obstante clause would not be an impediment for an operation of the enactment. See in this connection the observations of this Court in The South India Corporation (P.) Ltd., v. The Secretary, Board of Revenue, Trivandrum & Anr., AIR 1964 SC 207 at 215-[1964] 4 SCR 280."
(v) In Vishin N. Kanchandani v. Vidya Lachmandas Khanchandani, AIR 2000 SC 2747, at Paragraph 11, the Supreme Court held that, "There is no doubt that by non-obstante clause the Legislature devices means which are usually applied to give overriding effect to certain provisions over some contrary provisions that may be found either in the same enactment or some other statute. In other words such a clause is used to avoid the operation and effect of all contrary provisions. The phrase is equivalent to showing that the Act shall be no impediment to measure intended. To attract the applicability of the phrase, the whole of the section, the scheme of the Act and the objects and reasons for which such an enactment is made has to be kept in mind."
(vi) In ICICI Bank Ltd. v. SIDCO Leathers Ltd., [2006] 67 SCL 383 (SC), the Supreme Court, at Paragraphs 34, 36 and 37, held as follows:
"34. Section 529-A of the Companies Act no doubt contains a non-obstante clause but in construing the provisions thereof, it is necessary to determine the purport and object for which the same was enacted....
36. The non-obstante nature of a provision although may be of wide amplitude, the interpretative process thereof must be kept Page 19 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT confined to the legislative policy....
37. A non-obstante clause must be given effect to, to the extent the Parliament intended and not beyond the same."
(vii) The Supreme Court, in the case of Central Bank of India v. State of Kerala, [2009] 4 SCC 94, at Paragraphs 103 to 107, considered many cases on non-obstate clause, which are extracted, "103. A non obstante clause is generally incorporated in a statute to give overriding effect to a particular section or the statute as a whole. While interpreting non- obstante clause, the Court is required to find out the extent to which the legislature intended to do so and the context in which the non obstante clause is used. This rule of interpretation has been applied in several decisions.
104. In State Bank of West Bengal v. Union of India, [(1964) 1 SCR 371], it was observed that:
"68... the Court must ascertain the intention of the legislature by directing its attention not merely to the clauses to be construed but to the entire statute; it must compare the clause with the other parts of the law and the setting in which the clause to be interpreted occurs."
105. In Madhav Rao Jivaji Rao Scindia v. Union of India and another [(1971) 1 SCC 85], Hidayatullah, C.J. observed that the non obstante clause is no doubt a very potent clause intended to exclude every consideration arising from other provisions of the same statute or other statute but "for that reason alone we must determine the scope" of that provision strictly. When the section containing the said clause does not refer to any particular provisions which it intends to override but refers to the provisions of the statute generally, it is not permissible to hold that it excludes the whole Act and stands all alone by itself. A search has, therefore, to be made with a view to determining which provision answers the description and which Page 20 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT does not.
106. In R.S. Raghunath v. State of Karnataka and another [(1992) 1 SCC 335], a three-Judge Bench referred to the earlier judgments in Aswini Kumar Ghose v. Arabinda Bose [AIR 1952 SC 369], Dominion of India v. Shrinbai A. Irani [AIR 1954 SC 596], Union of India v. G.M. Kokil [1984 (Supp.) SCC 196], Chandravarkar Sita Ratna Rao v. Ashalata S. Guram [(1986) 4 SCC 447] and observed:
"... The non-obstante clause is appended to a provision with a view to give the enacting part of the provision an overriding effect in case of a conflict. But the non- obstante clause need not necessarily and always be co- extensive with the operative part so as to have the effect of cutting down the clear terms of an enactment and if the words of the enactment are clear and are capable of a clear interpretation on a plain and grammatical construction of the words the non-obstante clause cannot cut down the construction and restrict the scope of its operation. In such cases the non-obstante clause has to be read as clarifying the whole position and must be understood to have been incorporated in the enactment by the legislature by way of abundant caution and not by way of limiting the ambit and scope of the Special Rules."
107. In A.G. Varadarajulu v. State of Tamil Nadu [(1998) 4 SCC 231], this Court relied on Aswini Kumar Ghose's case. The Court while interpreting non obstante clause contained in Section 21-A of Tamil Nadu Land Reforms (Fixation of Ceiling on Land) Act, 1961 held :-
"It is well settled that while dealing with a non-obstante clause under which the legislature wants to give overriding effect to a section, the court must try to find out the extent to which the legislature had intended to give one provision overriding effect over another provision. Such intention of the legislature in this behalf is to be gathered from the enacting part of the section. In Aswini Kumar Ghose v. Arabinda Bose [AIR 1952 SC 369], Patanjali Sastri, J. observed:Page 21 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021
C/SCA/11870/2015 JUDGMENT "The enacting part of a statute must, where it is clear, be taken to control the non obstante clause where both cannot be read harmoniously;"
21. A non-obstante clause is generally appended to a section with a view to give the enacting part of the section, in case of conflict, an overriding effect over the provision in the same or other Act mentioned in the non-obstante clause. It is equivalent to saying that inspite of the provisions or Act mentioned in the non-obstante clause, the provision following it will have its full operation or the provisions embraced in the non-obstante clause will not be an impediment for the operation of the enactment or the provision in which the non- obstante clause occurs. [See 'Principles of Statutory Interpretation', 9th Edition by Justice G.P. Singh Chapter V, Synopsis IV at pages 318 & 319]
22. When two or more laws or provisions operate in the same field and each contains a non-obstante clause stating that its provision will override those of any other provisions or law, stimulating and intricate problems of interpretation arise. In resolving such problems of interpretation, no settled principles can be applied except to refer to the object and purpose of each of the two provisions, containing a non-obstante clause. Two provisions in same Act each containing a non- obstante clause, requires a harmonious interpretation of the two seemingly conflicting provisions in the same Act. In this difficult exercise, there are involved proper consideration of giving effect to the object and purpose of two Page 22 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT provisions and the language employed in each. [See for relevant discussion in para 20 in Shri Swaran Singh & Anr. v. Shri Kasturi Lal; (1977) 1 SCC 750]
23. Normally the use of the phrase by the Legislature in a statutory provision like 'notwithstanding anything to the contrary contained in this Act' is equivalent to saying that the Act shall be no impediment to the measure [See Law Lexicon words 'notwithstanding anything in this Act to the contrary']. Use of such expression is another way of saying that the provision in which the non- obstante clause occurs usually would prevail over the other provisions in the Act. Thus, the non- obstante clauses are not always to be regarded as repealing clauses nor as clauses which expressly or completely supersede any other provision of the law, but merely as clauses which remove all obstructions which might arise out of the provisions of any other law in the way of the operation of the principle enacting provision to which the non-obstante clause is attached. [See Bipathumma & Ors. v. Mariam Bibi; 1966(1) Mysore Law Journal page 162, at page 165]
24. Having regard to the nature of the controversy which I am called upon to resolve, I would like to look into two decisions of the Supreme Court; one, in the case of Kumaon Motor Owners' Union Ltd. and another v. State of U.P., reported in AIR 1966 SC 785, and another, in the case of Solidaire India Ltd. v. Fairgrowth Financial Services Ltd. and others, reported in (2001)3 SCC 71. Although the ratio of the two decisions referred to above may not be directly applicable to the case on hand, yet Page 23 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT having regard to certain principles of law enunciated, I would like to follow and apply the same for the purpose of resolving the controversy as regards Section 48 of the VAT Act, Section 31B of the RDB Act and Section 26E of the SARFAESI Act.
25. In Kumaon Motor Owners' Union Ltd. (supra), the Supreme Court had the occasion to resolve the conflict between the provisions of the Defence of India Act (No.51 of 1962) and the Motor Vehicles Act. The Supreme Court noticed that there was an apparent conflict between Section 43 of the Defence of India Act on the one hand and Section 68-B of the Motor Vehicles Act, 1939 read with Section 6(4) of the Act on the other. The Supreme Court resolved the conflict by holding that the provisions of Section 43 of the Act would prevail over the provisions of Section 68-B of the Motor Vehicles Act for the following reasons :
(1) Section 43 appears in an Act which is later than the Motor Vehicles Act and, therefore, unless there is anything repugnant, the provisions in the later Act must prevail.
(2) If the object behind the two statutes is to be looked into, namely, the Act and the Motor Vehicles Act, the Act which was passed to meet an emergency arising out of the Chinese invasion of India in 1962 must prevail over the provisions contained in Chapter IV-A of the Motor Vehicles Act which were meant to meet a situation arising out of the taking over of the motor transport by a State.
(3) The language of Section 43 was found to be more emphatic than the language of Section 68-B. The Page 24 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT Supreme Court took notice of the fact that Section 43 provided that the provisions of the Act or any rule made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any enactment other than the Act. This, according to the Supreme Court, was indicative of the intention of the legislature that the Act shall prevail over the other statutes.
26. The observations made in para-12 of the judgment are relevant. The observations are as under :
"12. This argument is met on behalf of the State by reference to S. 43 of the Act which lays down that "the provisions of this Act or any rule made thereunder or any order made under any such rule shall have effect notwithstanding anything inconsistent therewith contained in any enactment other than this Act or in any instrument having effect by virtue of any enactment other than this Act." It does appear that there is some apparent conflict between S.43 on the one hand and S.68-B of the Motor Vehicles Act read with S.6(4) of the Act on the other, and that conflict has to be resolved. The only way to do it is to decide whether in such a situation, S.43 of the Act will prevail or S.68-B of the Motor Vehicles Act will prevail. We are of opinion that S.43 of the Act must prevail. In the first place, S.43 appears in an Act which is later than the Motor Vehicles Act and therefore in such a situation unless there is anything repugnant, the provisions in the later Act must prevail. Secondly, if we look at the object behind the two statutes, namely, the Act and the Motor Vehicles Act, there can be no doubt that the Act, which was passed to meet an emergency arising out of the Chinese invasion of India in 1962, must prevail over the provisions contained in Ch.IV-A of the Motor Vehicles Act which were meant to meet a situation arising out of the taking over of motor transport by the State. Thirdly, if we compare the language of S.43 of the Act with S.68-B of the Motor Page 25 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT Vehicles Act we find that the language of S.43 is more emphatic than the language of S.68-B. Section 43 provides that the provisions of the Act or any rule made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any enactment other than the Act. This would show that the intention of the legislature was that the Act shall prevail over other statutes. But we do not find the same emphatic language in S.68-B which lays down that the provisions of Ch.IV-A would prevail notwithstanding anything inconsistent therewith contained in Ch.IV of the Motor Vehicles Act or in any other law for the time being in force. The intention seems to be clear in view of the collocation of the words "in Chapter IV of this Act" with the words "in any other law for the time being in force" that Ch.IV-A was to prevail over Ch.IV of the Motor Vehicles Act or over any other law of the same kind dealing with motor vehicles or for compensation. On the other hand s. 43 of the Act emphatically says that the Act will prevail over any enactment other than the Act, and this suggests that the legislature intended that the emergency legislation in the Act will be paramount if there is any inconsistency between it and any other provision of any other law whatsoever. Such a provision is understandable in view of the emergency which led to the passing of the Act."
27. The principles discernible from the decision of the Supreme Court in the case of Kumaon Motor Owners' Union Ltd. (supra) are that, if there is a conflict between the provisions of the two Acts and if there is nothing repugnant, the provisions in the later Act would prevail. The second principle discernible is that, while resolving the conflict, the court must look into the object behind the two statutes. To put it in other words, what necessitated the legislature to enact a particular provision, later in point of time, which may be in Page 26 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT conflict with the provisions of the other Acts. The third principle discernible is that the court must look into the language of the provisions. If the language of a particular provision is found to be more emphatic, the same would be indicative of the intention of the legislature that the Act shall prevail over the other statutes.
28. The Supreme Court, in the case of Solidaire India Ltd. (supra), had the occasion to consider the effect of conflict between two special Acts. In the case before the Supreme Court, the conflict was between the provisions of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 with the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985. The Supreme Court took the view that the later one would prevail. I may quote the relevant observations thus :
"7. Coming to the second question, there is no doubt that the 1985 Act is a special Act. Section 32(1) of the said Act reads as follows:
"32. Effect of the Act on other laws-(1) The provisions of this Act and of any rules or schemes made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any other law except the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973) and the Urban Land (Ceiling and Regulation) Act, 1976 (33 of 1976) for the time being in force or in the Memorandum or Articles of Association of an industrial company or in any other instrument having effect by virtue of any law other than this Act."
8. The effect of this provision is that the said Act will have effect notwithstanding anything inconsistent therewith contained in any other law except to the provisions of the Foreign Exchange Regulation Act, 1973 and the Urban Land (Ceiling and Regulation) Act, 1976.
Page 27 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021C/SCA/11870/2015 JUDGMENT A similar non- obstante provision is contained in Section 13 of the Special Court Act which reads as follows:
"13. Act to have overriding effect-The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any: instrument having effect by virtue of any law, other than this Act, or in any decree or order of any court, tribunal or other authority."
9. It is clear that both these Acts are special Acts. This Court has laid down in no uncertain terms that in such an event it is the later Act which must prevail. The decisions cited in the above context are as follows: Maharashtra Tubes Ltd. v. State Industrial & Investment Corporation of Maharashtra Ltd. & Anr., [1993 ] 2 SCC 144; Sarwan Singh & Anr. v. Kasturi Lal, [1977] 2 SCR 421; Allahabad Bank v. Canara Bank & Anr., [2000] 4 SCC 406 and Shri Ram Narain v. The Simla Banking Industrial Co. Limited, [1956] SCR 603.
10. We may notice that the Special Court had in another case dealt with a similar contention. In Bhoruka Steel Ltd. v. Fairgrowth Financial Services Ltd. [1997] v. 89 Company Cases 547, it had been contended that recovery proceedings under the Special Court Act should be stayed in view of the provisions of the 1985 Act. Rejecting this contention, the Special Court had come to the conclusion that the Special Court Act being a later enactment would prevail. The head note which brings out succinctly the ratio of the said decision is as follows :
"Where there are two special statutes which contain non- obstante clauses the later statute must prevail. This is because at the time of enactment of the later statute, the Legislature was aware of the earlier legislation and its non-obstante clause. If the Legislature still confers the later enactment with a non-obstante clause it means that the Legislature wanted that enactment to prevail. If the Legislature does not want the later enactment to prevail then it could and would provide in the later enactment that the provisions of the earlier Page 28 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT enactment continue to apply.
The Special Court (Trial of Offences Relating to Transactions and Securities) Act, 1992, provides in Section 13, that its provisions are to prevail over any other Act. Being a later enactment, it would prevail over the Sick Industrial Companies (Special Provisions) Act, 1985. Had the Legislature wanted to exclude the provisions of the Sick Companies Act from the ambit of the said Act, the Legislature would have specifically so provided. The fact that the Legislature did not specifically so provide necessarily means that the Legislature intended that the provisions of the said Act were to prevail even over the provisions of the Sick Companies Act.
Under Section 3 of the 1992 Act, all property of notified persons is to stand attached. Under Section 3(4), it is only the Special Court which can give directions to the custodian in respect of property of the notified party. Similarly, under Section 11(1), the Special Court can give directions regarding property of a notified party. Under Section 11(2), the Special Court is to distribute the assets of the notified party in the manner set out thereunder. Monies payable to the notified parties are assets of the notified party and are, therefore, assets which stand attached. These are assets which have to be collected by the Special Court for the purposes of distribution under Section 11(2). The distribution can only take place provided the assets are first collected. The whole aim of these provisions is to ensure that monies which are siphoned off from banks and financial institutions into private pockets are returned to the banks and financial institutions. The time and manner of distribution is to be decided by the Special Court only. Under Section 22 of the 1985 Act. Recovery proceedings can only be with the consent of the Board for Industrial and Financial Reconstruction or the Appellate Authority under that Act. The Legislature being aware of the provisions of Section 22 under the 1985 Act still empowered only the Special Court under the 1992 Act to give directions to recover and Page 29 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT to distribute the assets of the notified persons in the manner set down under section 11(2) of the 1992 Act. This can only mean that the Legislature wanted the provisions of Section 11(2) of the 1992 Act to prevail over the provisions of any other law including those of the Sick Industrial Companies (Special Provisions) Act, 1985.
It is a settled rule of interpretation that if one construction leads to a conflict, whereas on another construction, two Acts can be harmoniously constructed then the latter must be adopted. If an interpretation is given that the Sick Industrial Companies (Special Provisions) Act, 1985, is to prevail then there would be a clear conflict. However, there would be no conflict if it is held that the 1992 Act is to prevail. On such an interpretation the objects of both would be fulfilled and there would be no conflict. It is clear that the Legislature intended that public monies should be recovered first even from sick companies. Provided the sick company was in a position to first pay back the public money, there would be no difficulty in reconstruction. The Board for Industrial and Financial Reconstruction against considering a scheme for reconstruction has to keep in mind the fact that it is to be paid off or directed by the Special Court. The Special Court can, if it is convinced grant time or instalments."
11. We are in agreement with the aforesaid decision or the case, more so when we find that whenever the Legislature wishes to do so it makes appropriate provisions in the Act in that behalf. Mrs. Shiraz Rustomjee has drawn our attention to Section 34 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 wherein after giving an overriding effect to the 1993 Act it is specifically provided that the said Act will be in addition to and not in derogation of a number of other Acts including the 1985 Act. Similarly under Section 32 of the 1985 Act the applicability of the Foreign Exchange Regulation Act and the Urban Land Ceiling Act is not excluded. It is clear that in the instant case there was no intention of the Legislature to permit the 1985 Page 30 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT Act to apply notwithstanding the fact that proceedings in respect of a company may be going on before the B.I.F.R. The 1992 Act is to have an overriding effect notwithstanding any provision to the contrary in another Act."
29. The principles of law discernible from the decision of the Supreme Court in the case of Solidaire India Ltd. (supra) are that, if there is a conflict between the two special Acts, the later Act must prevail. To put it in other words, when there are two special statutes which contain the non- obstante clauses, the later statute must prevail. This is because at the time of enactment of the later statute, the legislature could be said to be aware of the earlier legislation and its non- obstante clause. If the legislature still confers the later enactment with a non- obstante clause, it means that the legislature wanted that enactment to prevail.
30. We are conscious of the fact that in the case on hand there is no conflict between two special statutes enacted by the Parliament. The conflict is with the State Act and the Central Act. We are trying to understand the true purport and effect of Section 26E of the SARFAESI Act which came to be enacted later in point of time and also the effect of Section 31B of the RDB Act which came to be enacted later in point of time. In other words, what necessitated the introduction of the two provisions in the two enactments and what object the two provisions would subserve.
31. We may, at the outset, clarify that the Government of India, Ministry of Finance, notified the provisions of Section 26(E) on 1st September Page 31 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT 2016. The copy of the Notification issued by the Government of India, published in the Official Gazette Part-II, Section 3, at Serial No.2142 dated 1st September 2016 has been placed on record. The Notification reads as under :
"MINISTRY OF FINANCE (Department of Financial Services) NOTIFICATION New Delhi, the 1st September, 2016 S.O. 2831 (E).--In exercise of the powers conferred by sub-section (2) of section 1 of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (44 of 2016), the Central Government hereby appoints the 1st day of September, 2016 as the date on which the following provisions of the said Act shall come into force, namely :-
Sr. No. Sections 1 Sections 2 and 3 (both inclusive); 2 Sections 4 [except clause (xiii)]; 3 Section 5 and 6 (both inclusive); 4 Sections 8 to 16 (both inclusive); 5 Sections 22 to 31 (both inclusive); 6 Sections 33 to 44 (both inclusive). [F.No. 3/5/2016 - DRT] ANANDRAO VISHNU PATIL, Jt. Secy."
32. Section 31B has been inserted in the Recovery of Debts and Bankruptcy Act, 1993 (herein after referred to as "the Act") by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, Page 32 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT w.e.f. 1.9.2016, which contains a non-obsante clause and which expressly provides that the secured debts shall be paid in priority over all other debts and Government dues including the State taxes.
33. Apart from the fact that Section 31B of the RDB Act is a later enactment, the language of the said provision also clearly indicates the intention of the Parliament to give precedence even over the Government dues notwithstanding anything to the contrary in any other law.
34. We are sure of one thing that there exists no repugnancy in the two legislations. The intention of the Parliament could not be said to nullify the State enactment providing the first charge on the property. The legislations have been made by the Central Government and the State respectively under Entries I and II of the Schedule and not of the Concurrent List. The amendment made by the Parliament is to give priority to the secured creditors vis-a-vis the State dues without speaking about the first charge. This aspect was duly considered by the Supreme Court in the case of Central Bank of India (supra). The amended provision, i.e. Section 26E of the SARFAESI Act and Section 31B of the RDB Act, would have been different as indicated by the Apex Court in the case of Central Bank of India (supra).
35. While it is true that the Bank has taken over the possession of the assets of the defaulter under the SARFAESI Act and not under the RDB Act, Section 31B of the RDB Act, being a substantive provision Page 33 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT giving priority to the "secured creditors", the same will be applicable irrespective of the procedure through which the recovery is sought to be made. This is particularly because Section 2(la) of the RDB Act defines the phrase "secured creditors" to have the same meaning as assigned to it under the SARFAESI Act. Moreover, Section 37 of the SARFAESI Act clearly provides that the provisions of the SARFAESI Act shall be in addition to, and not in derogation of inter-alia the RDB Act. As such, the SARFAESI Act was enacted only with the intention of allowing faster recovery of debts to the secured creditors without intervention of the court. This is apparent from the Statement of Objects and Reasons of the SARFAESI Act. Thus, an interpretation that, while the secured creditors will have priority in case they proceed under the RDB Act they will not have such priority if they proceed under the SARFAESI Act, will lead to an absurd situation and, in fact, would frustrate the object of the SARFAESI Act which is to enable fast recovery to the secured creditors.
36. The insertion of Section 31B of the RDB Act will give priority to the secured creditors even over the subsisting charges under other laws on the date of the implementation of the new provision, i.e. 1.9.2016. The Supreme Court, in the case of State of Madhya Pradesh v. State Bank of Indore, (2001) 126 STC 1 (SC), has held that a provision creating first charge over the property would operate over all charges that may be in force. The following observations made in para 5 of the said judgment are relevant:Page 34 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021
C/SCA/11870/2015 JUDGMENT "5. Section 33-C creates a statutory 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 charge that where then in force and gave sales tax dues precedence over them..."
37. The Rajasthan High Court, in the case of G.M.G. Engineers & Contractor Pvt. Ltd. (supra), has taken the view as under :
"The first issue for my consideration is as to whether amended provisions of Section 26E of the Act of 2002 and Section 31B of the Act of 1993 would apply to the present case. It is for the reason that both the provisions were inserted in the year 2016, whereas, attachment of the property in question to recover the dues was made by the respondent-department in the year 2014 itself. It is not the case of either of the parties that amended provision is retrospective and otherwise perusal of amended provision does not show it thus would apply prospectively. The property already attached towards recovery of State dues cannot be nullified by the subsequent legislation when it has not been given retrospective effect. If argument of the learned counsel for petitioner about priority rights of the secured creditors vis a vis Government dues is accepted, it would apply from the date of amendment, whereas, attachment of the property was made in the year 2014, thus it was not free for auction. The enforcement of statutory first charge by attachment cannot be nullified by subsequent auction when no priority right was existing in favour of the secured creditors at the relevant time. Section 47 of the Act of 2003 is relevant for it, thus quoted hereunder for ready reference:Page 35 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021
C/SCA/11870/2015 JUDGMENT "47. 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 and any other sum payable by a dealer or any other person under this Act, shall be the first charge on the property of such dealer or person."
Section 47 of the Act of 2003 starts with non- obstante clause and creates first charge on the property. The issue about priority claim of the secured creditor vis a vis first charge on the property under the State legislation was considered by the Supreme Court in the case of Central Bank of India (supra). If State Act creates first charge on the property then secured creditors cannot have claim against the statutory provision. Therein, consideration was also made even in reference to Section 100 of the Act of 1882.
It is submitted that judgment of the Apex Court in the case of Central Bank of India (supra) was prior to the amendment in the Act of 2002 and 1993 thus would not apply to the cases governed by the amended provisions. In the case in hand, the attachment of property by the State is prior to the amendment thus amended provision would not apply. Section 47 of the Act of 2003 was invoked prior to the amendment. We are yet considering the effect of the amended provision. The Apex Court has made analysis of a provision of first charge vis a vis secured creditor in the case of Central Bank of India (supra). The first charge was given supremacy than rights under mortgagee or to a secured creditor. The distinction between "first charge and secured creditor" is necessary to analyse scope of Section 26E of the Act of 2002 and Section 31B of the Act of 1993. The amended provisions are having overriding effect and give priority to the secured creditors vis a vis State dues. It does not, however, nullify the effect of first charge created on the property under the State Act. If intention of Parliament would have been to nullify the effect of first charge, the language of Section 26E of the Act of 2002 and Section 31B of the Act of 1993 would have been Page 36 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT different as indicated by the Apex Court in the case of Central Bank of India (supra). It should have been with non-obstante clause and that secured creditors would have priority over the first charge created under a State legislation. The amendment made by Parliament is to give priority to the secured creditors vis a vis State dues without speaking about the first charge. "
38. The Madhya Pradesh High Court, in the case of Bank of Baroda v. Commissioner of Sales Tax, M.P., Indore and another, reported in (2018)55 GSTR 210 (MP), had the occasion to consider identical issue. The Madhya Pradesh High Court took cognizance of the notice of sale by the commercial department. The notice of sale was issued on 19th July 2017. The High Court took notice of the fact that Section 31-B came into force with effect from 1st September 2016, and by virtue of the said amendment, the right of the secured creditors to realize the secured dues and debts dues, which are payable to the secured creditors by sale of assets over which security has been created, has priority over all other debts and Government dues including revenue, taxes, cesses and rates due to the Central Government, State Government and local authorities. The relevant observations are as under :
"8. In the present case, undisputedly a notice of sale by the respondent/Commercial Department has been issued on 19.07.2017. The Amendment Act, 2016, which incorporates Section 31B reads as under:-
"31B. Notwithstanding anything contained in any law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have Page 37 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT priority and shall be paid in priority over all the other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority.
Explanation - For the purpose of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016, in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that code."
9. Thus, the aforesaid statute makes it very clear that the dues of the bank are to be recovered at the first instance. Section 33 of the MP VAT Act, 2002 reads as under:-
"33 : Tax to be first charge (1) Notwithstanding anything to the contrary, contained in any law for the time being in force and subject to the provisions of section 530 of the Companies Act, 1956 (No.1 of 1956), any amount of tax and/ or penalty or interest, if any, payable by a dealer or other person under this Act shall be first charge on the property of the dealer or such person. (2) Notwithstanding anything contained in this Act, where a dealer or person is in default or is deemed to be in default under clause (a) of subsection (11) of section 24 and whose property is being sold by a bank or financial institution for recovery of its loan, the Commissioner may forgo the right of first charge as mentioned in subsection (1) against the property sold on the following conditions:-
(a) if the arrears of tax, penalty, interest or part thereof or any other amounts is up to 25 percent of the total auction value, the arrears shall be paid in full by the bank or financial institution;
(b) if the arrears of tax, penalty, interest or part thereof or any other amount is more than 15 percent of the total auction value, the 25 percent of the total auction value and the amount in the same proportion of the remaining auction value as the remaining arrears bear to Page 38 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT the total dues of the bank or financial institution, shall be paid by the bank or financial institution."
In the considered opinion of this Court, the Enforcement of Security Interest and Recovery of Debts and Loans and Miscellaneous Provision (Amendment) Act, 2016 came into force w.e.f. 01.09.2016 and by virtue of the said amendment, the right of secured creditors to realise the secured dues and debts dues, which are payable to the secured creditors by sale of assets over which security has been created, is having priority over all other debts and government dues including revenue, taxes, cesses and rates due to Central Government, State Government and local authorities.
Not only this, it is having overriding effect over all other enactment including the provisions of MP VAT Act, Central Sales Tax Act, Entry Tax Act and any other Tax Act. Though, an attempt has been made by the State Government to demonstrate before this Court that the amendment will not dis-entitle to recover the dues by them as the dues are outstanding since 2012.
Nothing prevented the State Government to recover the dues since 2012 and the State Government woke up from plumber only after the amendment has come into force and by virtue of the amendment in the Central Act, this Court is of the considered opinion that by no stretch of imagination, the State Government can be permitted to auction the property in question as the Bank of Baroda is having priority in the matter in light of the amendment which has been quoted above."
39. The Full Bench of the Madras High Court, in the case of The Assistant Commissioner (CT), Anna Salai- III Assessment Circle v. The Indian Overseas Bank and others, reported in AIR 2017 Mad 67, was called upon to answer the following two questions :
"(i) As to whether the Financial Institution, which is a Secured Creditor, or the Department of the Government concerned, would have the 'Priority of Charge' over the Mortgaged Page 39 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT property in question, with regard to the tax and other dues, and
(ii) As to the status and the rights of a Third party Purchaser of the Mortgaged property in question."
40. Sanjay Kishan Kaul, CJ. (as His Lordship then was) observed as under :
"...We are of the view that if there was at all any doubt, the same stands resolved by view of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, Section 41 of the same seeking to introduce Section 31B in the Principal Act, which reads as under:-
"31B. Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority.
Explanation. - For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016, in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code."
2. There is, thus, no doubt that the rights of a secured creditor to realise secured debts due and payable by sale of assets over which security interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority. This section introduced in the Central Act is with ''notwithstanding'' clause Page 40 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT and has come into force from 01.09.2016.
3. The law having now come into force, naturally it would govern the rights of the parties in respect of even a lis pending.
4. The aforesaid would, thus, answer question
(a) in favour of the financial institution, which is a secured creditor having the benefit of the mortgaged property.
5. In so far as question (b) is concerned, the same is stated to relate only to auction sales, which may be carried out in pursuance to the rights exercised by the secured creditor having a mortgage of the property. This aspect is also covered by the introduction of Section 31B, as it includes ''secured debts due and payable to them by sale of assets over which security interest is created."
41. The Full Bench decision of the Madras High Court referred to above has been referred to and relied upon by a Division Bench of the Bombay High Court in the case of Punjab National Bank, Bandra (E), Mumbai v. Maa Banbhori Steel Industry Pvt. Ltd. & Ors. (Writ Petition No.11018 of 2018, decided on 29th October 2018).
42. The Division Bench was dealing with Section 37 of the Maharashtra Value Added Tax Act, 2002 (for short, 'the MVAT Act'). We have noticed that there is a vast difference between Section 37 of the MVAT, 2002 Act and Section 48 of the GVAT Act, 2003. Section 37 of the MVAT Act, 2002 is much more comprehensive compared to Section 37 of the GVAT Act, 2003. Section 37 of the MVAT Act, 2002 reads as under;
" 37. Liability under this Act to be the first charge:- Notwithstanding anything contained in any contract to the contrary but subject to any provision regarding creation of first charge in Page 41 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT any Central Act for the time being in force, any amount of tax, penalty, interest, sum forfeited, fine or any other sum, payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer or, as the case may be, person.
[(2)(2) The first charge as mentioned in sub- section (1) shall be deemed to have been created on the expiry of the period specified in sub-section (4) of section 32, for the payment of tax, penalty, interest, sum forfeited, fine or any other amount."
43. Thus, Section 37 of the MVAT Act, 2002, although starts with a non-obstante clause "notwithstanding anything contained in any contract to the contrary", yet it clarifies that the same shall be subject to any provision regarding creation of the first charge in any Central Act, any amount of tax, penalty, interest, sum forfeited or any other sum payable by a dealer or any other person under the Act shall be the first charge on the property of the dealer. Clause (2) proceeds to explain the term "first charge". The first charge is deemed to have been created on the expiry of the period specified in sub- section (4) of Section 32, for the payment of tax, penalty, interest, sum forfeited, fine or any other amount. This is further suggestive of the fact that the first charge would be deemed to be created only after the tax, penalty, interest is determined in the assessment proceedings. Section 48 of the GVAT Act, 2003 is quite general and substantially differs from Section 37 of the MVAT Act, 2002, although both the provisions are with regard to first charge on the property of the dealer.
44. The Division Bench observed as under :
Page 42 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021C/SCA/11870/2015 JUDGMENT "A Division Bench of this Court in Writ Petition No. 1796 of 2015 in the case of Axis Bank Limited Vs. State of Maharashtra and Ors. Decided on 07.03.2017 had an occasion to consider the import of legislative change, in view of introduction of the Section 26-E of the SARFAESI Act. This Court had, inter alia, observed in paragraph 22 as under:
"22. Though the learned counsel appearing for the respondent State is justified in contending in normal circumstances in view of the provisions of SARFAESI Act (Unamended) primacy can be extended to the provisions like Section 38-C of the Bombay Sales Tax Act or Section 37 of the MVAT Act. Section 13 envisages application of money received by the secured creditor and by adopting any of the measures specified in Section 13 (4) merely regulates distribution of money received by the secured creditor and it does not create first charge in favour of the secured creditor. Though in normal course in view of Section 35 of the SARFAESI Act, 2002 no priority can be claimed by the bank or financial institutions over the State's statutory first charge in the matter of recovery of dues of sales tax etc. However, in respect of company under liquidation, in view of the provisions of Section 529-A of the Companies Act, a distinction has to be made and as has been laid down by the Division Bench of this Court in the matter of SICOM Ltd, which view has been upheld by the Supreme Court, the claim of the secured creditor in respect of the company being under liquidation shall have the priority in view of the language applied in Section 529-A of the Companies Act, 1956. It also must be taken note of that there is statutory recognition of priority claim of the secured creditor in view of the amendment brought into effect by virtue of Act No.44 of 2016 thereby introducing section 26E providing for priority to secured creditor over all other debts and all taxes, cess and other rates payable to Central Government or the State Government or the Local Authority. The applicability of provisions of Section 31B of RDB Act which is pari materia to Section 26E of the SARFAESI Act was subject matter for Page 43 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT consideration before the Full Bench of the Madras High Court in the matter of Assistant Commissioner (CT) Chennai vs. the Indian Overseas Bank decided on 11.11.2016 and the Full Bench has observed in paragraph 4 of the Judgment that "the law having now been come into force naturally it would govern the rights of the parties in respect of even lis pendence"
We do not propose to analyse the Full Bench judgment delivered by the Madras High Court."
45. The Madras High Court (Madurai Bench), in the case of Indian Overseas Bank v. The Sub Registrar, Tuticorin Keelur, Tuticorin District and others, (Writ Petition No.14618 of 2018, decided on 18th December 2018), had the occasion to consider Section 31B of the RDB Act. The Division Bench of the Madras High Court observed as under :
"Similar issue came up for consideration before this Court in W.P.(MD).No.10724 of 2018, dated 06.12.2018, Central Bank of India Vs the Joint Sub-Registrar No.1, wherein this Court has held as follows:-
"7. In Assistant Commercial Tax Officer (CT) v. Indian Overseas Bank reported in 2016 (6) CTC 769, the Full Bench of this Court has held as under:
"... 2. We are of the view that if there was at all any doubt, the same stands resolved by view of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, Section 41 of the same seeking to introduce Section 31B in the Principal Act, which reads as under:-
"31B. Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues Page 44 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority.
Explanation - For the purpose of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016, in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code."
3. There is, thus, no doubt that the rights of a secured creditor to realise debts due and payable by sale of assets over which security interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority. This section introduced in the Central Act is with "notwithstanding" clause and has come into force from 01.09.2016.
4. The law having now come into force, naturally it would govern the rights of the parties in respect of even a lis pending."
46. In the course of the hearing of this matter, two judgments, one of the Supreme Court, and another, of the Bombay High Court, were also discussed. The Supreme Court decision is in the case of Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. and others, reported in (247) ITR 165 (SC), and the Bombay High Court decision is in the case of Stock Exchange, Bombay v. V.S.Kandalgaonkar, reported in (2014)51 taxmann.com 246 (SC). In the case of Dena Bank (supra), it was held that, "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 Page 45 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT recovery of its debts over a mortgagee or pledgee of goods or a secured creditor. 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 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. Sec. 158(1) of the Karnataka Land Revenue Act specifically provides that the claim of the State Government to any moneys recoverable under the provisions of Chapter XVI shall have precedence over any other debts, demand or claim whatsoever including in respect of mortgage. Sec. 158 of the Karnataka Land Revenue Act not only gives a statutory recognition to the doctrine of State's priority for recovery of debts but also extends its applicability over private debts forming subject matter of mortgage, judgment- decree, execution or attachment and the like.-- Builders Supply Corporation vs. Union of India AIR 1965 SC 1061 relied on; Collector of Aurangabad vs. Central Bank of India AIR 1967 SC 1831 distinguished. A legislation may be made to commence from a back date, i.e., from a date previous to the date of its enactment. To make a law governing a past period on a subject is retrospectivity. A legislature is competent to enact such a law. The ordinary rule is that a legislative enactment comes into operation only on its enactment. Retrospectivity is not to be inferred unless expressed or necessarily implied in the legislation, specially those dealing with substantive rights and obligations. It is a misnomer to say that sub- s.(2A) of s. 15 of the Karnataka Sales-tax Act is being given retrospective operation. Determining the obligation of the partners to pay the tax assessed against the firm by making them personally liable is not the same thing as giving the amendment a retrospective operation. Principle of s. 25 of Partnership Act cannot be stretched and extended to such situations in which the firm is deemed to be a person and hence a legal entity for certain purpose. The Page 46 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT Karnataka Sales-tax Act also gives the firm a legal status by treating it as a dealer and hence a person for the limited purpose of assessing under the Sales-tax Act.--CST vs. Radhakishan AIR 1979 SC 1588 and ITO vs. Arunagiri Chettiar (1996) 134 CTR (SC) 167 :
(1996) 220 ITR 232 (SC) relied on. The 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 CST vs. Radhakishan (1979) 43 STC 4 : AIR 1979 SC 1588. However, still in the facts and circumstances of the case, the appellant bank cannot be allowed any relief. Sec. 15(2A) of Karnataka Sales-tax Act had come into force on 18th Dec., 1983 while the decree in favour of the bank was passed on 3rd Aug., 1992 and is yet to be executed. The claim of the appellant bank is still outstanding. Even if the sale held by the State is set aside, 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 s. 15(2A) 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.--CST vs. Radhakishan AIR 1979 SC 1588 distinguished. State had preferential right to recover sales- tax dues over the rights of bank and property of the partners could also be liable to be proceeded against for the dues of the firm."
47. Thus, the dictum of law as laid by the Supreme Court in the aforesaid decision is that the State's preferential right to the recovery of debts over other creditors is confined to ordinary or unsecured creditors. The Supreme Court took the view that the Page 47 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT 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 the recovery of its debts over a mortgagee or pledgee of the goods or a secured creditor. It is true that ultimately the bank was not granted any relief, but the same was not granted in the peculiar facts of the case. Otherwise, the principle of law as explained is very clear. In no uncertain terms, the Supreme Court held that the appellant, i.e. the bank, was right in submitting that on the date 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 the sales-tax arrears payable by the firm, thereby defeating the bank's security. In taking such view, the Supreme Court relied on its earlier decision in the case of CST vs. Radhakishan, (1979) 43 STC 4 : AIR 1979 SC 1588.
48. In the case of Stock Exchange, Bombay v. V.S.Kandalgaonkar, reported in (2014)51 taxmann.com 246 (SC), it was held by the Bombay High Court that, "By virtue of lien on securities under rule 43 of Bombay Stock Exchange Rules, BSE being secured creditor of defaulting member would have priority over dues of Income - tax department." While dealing with the tax recovery under Section 226 of the Income- tax Act, 1961, read with Sections 8 and 9 of the Securities Contracts (Regulation) Act, 1956, it was held by the Apex Court that collection and recovery of tax has to be based on proper appreciation of facts of the case. While deciding Page 48 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT Other modes of recovery (Priority over debts), the Apex Court duly considered the power of Central Government to direct rules to be made or to make rules and observed that a membership card is only a personal permission from Stock Exchange to exercise rights and privileges that may be given subject to Rules, Bye-Laws and Regulations of Exchange and moment a member is declared a defaulter, his right of nomination shall cease and vest in Exchange because even personal privilege given is at that point taken away from defaulting member. It therefore held that by virtue of rule 43 of Bombay Stock Exchange Rules security provided by a member shall be a first and paramount lien for any sum due to Stock Exchange. Thus, Bombay Stock Exchange being secured creditor would have priority over Govt. dues and if a member of BSE was declared a defaulter, Income-tax department would not have priority over all debts owned by defaulter member. The first thing to be noticed is that the Income Tax Act does not provide for any paramountancy of dues by way of income tax. This is why the Court in the case of Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. [2005] 5 SCC 694 (para 19) held that Government dues only have priority over unsecured debts and in so holding the Court referred to a judgment in Giles v. Grover (1832) (131) English Reports 563 in which it has been held that the Crown has no precedence over a pledgee of goods. In the present case, the common law of England qua Crown debts became applicable by virtue of Article 372 of the Constitution which states that all laws in force in the territory of India immediately before the commencement of the Page 49 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT Constitution shall continue in force until altered or repealed by a competent legislature or other competent authority. In fact, in Collector of Aurangabad v. Central Bank of India [1967] 3 SCR 855 after referring to various authorities held that the claim of the Government to priority for arrears of income tax dues stems from the English common law doctrine of priority of Crown debts and has been given judicial recognition in British India prior to 1950 and was therefore "law in force" in the territory of India before the Constitution and was continued by Article 372 of the Constitution (at page 861, 862). In the present case, as has been noted above, the lien possessed by the Stock Exchange makes it a secured creditor. That being the case, it is clear that whether the lien under Rule 43 is a statutory lien or is a lien arising out of agreement does not make much of a difference as the Stock Exchange, being a secured creditor, would have priority over Government dues.
49. The two decisions referred to above, one of the Supreme Court and another of the Bombay High Court, as such may not be helpful to the Bank because the principal issue in the case on hand is with regard to the statutory charge which is created by the State enactment. The Bombay High Court was dealing with a matter under the Income Tax Act and under the Income Tax Act, there is no provision analogous to Section 48 of the VAT Act which creates a statutory charge.
50. There is one another important argument of Mr. Sheth which is quite appealing and we are at one Page 50 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT with Mr. Sheth on the same. Indisputably, the Bank put forward its claim over the secured assets of the Bank for the first time on 01.10.2016 and that too by way of provisional attachment of the properties under Section 45 of the VAT Act, keeping in mind the dues that may be determined in future. It is not in dispute that there were no crystallized dues as on 01.10.2016 and, therefore, there was no question of there being any charge under Section 48 of the VAT Act which could only be in respect of the actual dues. It is also not in dispute that prior to the dues being crystallized in the case of the defaulting dealer, the Bank had already taken over the possession of the properties of the dealer, and by that time, Section 31B of the RDB Act had already been enforced by the Central Government. It is preposterous to suggest that the charge over the property under Section 48 of the State Act would come into force from the assessment of the earlier financial years and what is relevant in the present case is that the dues and resultantly the charge under Section 48 of the VAT Act came into existence after the implementation of Section 31B of the RDB Act.
51. Section 48 of the VAT Act would come into play only when the liability is finally assessed and the amount becomes due and payable. It is only thereafter if there is any charge, the same would operate. The authority under the VAT Act passed the assessment order later in point of time.
52. The language of Section 48 of the VAT Act is plain and simple and the phrase 'any amount payable Page 51 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT by a dealer or any other person on account of tax, interest or penalty' therein assumes significance. The amount could be said to be payable by a dealer on account of tax, interest or penalty once the same is assessed in the assessment proceedings and the amount is determined accordingly by the authority concerned. Without any assessment proceedings, the amount cannot be determined, and if the amount is yet to be determined, then prior to such determination there cannot be any application of Section 48 of the VAT Act. We may also refer to Section 47 of the VAT Act. Section 47 of the VAT Act is with respect to transfer of property by the dealer to defraud the Revenue. According to Section 47, if a dealer creates a charge over his property by way of sale, mortgage, exchange or any other mode of transfer after the tax has become due, then such transfer would be a void transfer. The reason why we are referring to Section 47 is that the phrase therein 'after any tax has become due from him' assumes significance. The same is suggestive of the fact that before the assessment proceedings, or, to put it in other words, before a particular amount is determined and becomes due to be payable if there is any transfer of property of the dealer, such transfer would not be a void transfer. Therefore, the condition precedent is that the tax should become due and such tax which has become due shall be payable by a dealer. Once this part is over, then Section 48 of the VAT Act would come into play.
53. One of us, J.B. Pardiwala, J., sitting as a Single Judge, had the occasion to consider this issue in the case of Bank of Baroda, Through its Page 52 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT Assistant General Manager Prem Narayan Sharma vs. State of Gujarat & Ors., Special Civil Application No.12995 of 2018, decided on 16.09.2019. We may quote the relevant observations made in the said judgment.
"It is preposterous to suggest in the case on hand that as the assessment year was 2012-13, Section 48 could be said to apply from 2012-13 itself. Even in the absence of Section 26E of the SARFAESI Act or Section 31B of the RDB Act, Section 48 of the VAT Act would come into play only after the determination of the tax, interest or penalty liable to be paid to the Government. Only thereafter it could be said that the Government shall have the first charge on the property of the dealer."
54. In view of the aforesaid discussion, We have no hesitation in coming to the conclusion that the first priority over the secured assets shall be of the Bank and not of the State Government by virtue of Section 48 of the VAT Act, 2003.
55. In the result, this writ application succeeds and is hereby allowed. The impugned attachment notice dated 22.01.2018 (Annexure-A) and the impugned communication dated 19.04.2018 (Annexure-B) issued by the respondent No.2 is hereby quashed and set aside. It is hereby declared that the Bank has the first charge over the properties mortgaged from M/s. M. M. Traders by virtue of Section 26E of the SARFAESI Act."
6. In view of the aforesaid dictum of law, the respondent No.2 cannot have a prior charge over the secured assets, which have already been mortgaged much prior in point of time before the outstanding dues of the sales tax notice of the assessee i.e. Page 53 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021 C/SCA/11870/2015 JUDGMENT M/s. Choksi Tubes in the facts of the present case.
7. The respondents are therefore, not entitled to continue the attachment over the property in question.
8. In such circumstances, the petition succeeds and is hereby allowed. The respondents are directed to remove the attachment in the revenue records with regard to the properties in question. Rule is made absolute to the aforesaid extent. No order as to costs.
(J. B. PARDIWALA, J) (BHARGAV D. KARIA, J) KUMAR ALOK Page 54 of 54 Downloaded on : Thu Feb 11 23:55:26 IST 2021