Gujarat High Court
Nilesh Keshavlal Modi vs State Of Gujarat on 7 January, 2023
Author: Sonia Gokani
Bench: Sonia Gokani
NEUTRAL CITATION
C/SCA/7651/2022 ORDER DATED: 07/01/2023
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 7651 of 2022
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NILESH KESHAVLAL MODI
Versus
STATE OF GUJARAT
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Appearance:
HIREN J TRIVEDI(8808) for the Petitioner(s) No. 1,2,3,4,5,6
MR SIDDHARTH RAMI, ASST.GOVERNMENT PLEADER for the
Respondent(s) No. 1,2
NOTICE SERVED BY DS for the Respondent(s) No. 3
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CORAM:HONOURABLE MS. JUSTICE SONIA GOKANI
and
HONOURABLE MR. JUSTICE SANDEEP N. BHATT
Date : 07/01/2023
ORAL ORDER
(PER : HONOURABLE MS. JUSTICE SONIA GOKANI)
1. Petition is preferred by the petitioner seeking extraordinary jurisdiction to delete the charge created under Gujarat Value Added Tax Act for the property owned by the petitioner as per the private treaty under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and Rule 8(5) read with Rule (6) of the Security Interest Rules, 2002 (Security Rules).
2. The entire premise of the petitioner is that the provisions contained in SARFAESI Act have an Page 1 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined overriding effect over the provisions of the VAT Act and the secured creditors shall have priority over the dues of Central Excise Department. The act of creating a charge over the property, which has been bought by the petitioners (purchasers for recovering dues of erstwhile owners) is totally without jurisdiction and hence, the present petition with the following reliefs;
"(16) In the premises aforesaid, the petitioner most humbly and respectfully prays that:
(A) YOUR LORDSHIPS may be pleased to issue a writ of mandamus or a writ in the nature of mandamus or any other appropriate writ, order or directions to the respondent authorities to quash and set aside noting of the charge in revenue record of the R.S.no.277, Village: Kamod, Taluka:
Vatva, District: Ahmedabad.
(B) YOUR LORDSHIPS may be pleased to issue a writ of mandamus or any other appropriate writ, order or directions to the respondent authorities to delete the charge created under the Act on land located at R.S.no.277, village:
Kamod, Taluka: Vatva, District: Ahmedabad and further be pleased to and direct the Respondent No.2 herein to lift/remove all its charges, encumbrances over the land situated at R.S.no.277, village: Kamod, Taluka: Vatva, District: Ahmedabad;
(BB) YOUR LORDSHIPS may be pleased to issue a writ of mandamus and/pr a writ in the nature of mandamus and/pr any other appropriate writ, order or direction commanding the mamlatdar, Vatva, Ahmedabad, to post and certify a mutation entry to record the Certificate of Sale dated 15.03.2021 ( bearing registration no.4498) for the land in question.
(C) During the pendency and final disposal of the present petition YOUR LORDSHIPS may be pleased to direct the respondent authorities to restrain from taking any Page 2 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined coercive steps pursuant to charge created under the Act on property located at R.S.no.277, Village: Kamod, Taluka:
Vatva, District: Ahmedabad;
(D) Pass any such other and/or further orders that may be thought just and proper, in the facts and circumstances of the present case;
3. The petitioners are purchasers of the property sold by the secured creditors viz the COSMOS Co-operative Bank Limited, upon which, the impugned charge is created and, thereafter, the mutation entry, being 2374, was passed in village Form No.6. Respondent No.1 is the Commissioner of State Tax/Commercial Tax, who exercises jurisdiction under the provisions of VAT Act and the GST Act.
4. One Anilbhai Kanjibhai Patel, proprietor of M/s.
Manan Auto Spares, was the owner of the non- agricultural land situated at Revenue Survey No.277, Village: Kamod, Taluka; Vatva,District: Ahmedabad. The said land was bought vide sale deed dated 13.12.2007. The owner approached the Bank for over draft facility of Rs.14,50,00,000/-(Rupees Fourteen Crore Fifty lakhs only), which was sanctioned with various terms and conditions, wherein the owner was Page 3 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined required to provide collateral security by way of mortgage of the land in question. Simple mortgage deed dated 06.04.2015 was registered before the Sub- Registrar, Ahmedabad-10, at Sr.No.1586 on 07.04.2015. The owner could not repay the outstanding loan and dues of the bank and had committed default in repayment and, therefore, the account was classified as Non-Performing Asset. The authorised officer of the Bank issued a demand notice under section 13(2) of the SARFAESI Act for the recovery of outstanding amount and advised the owner to pay such sum within 60 days, failing which steps were to be taken under the SARFAESI Act. The mortgager failed to repay the amount together with interest in stipulated time and, hence, the District Magistrate on 09.07.2018 had passed an order and, accordingly, on 30.11.2018, the bank took over the physical possession of the land in question under the SARFAESI Act. The authorised officer issued the advertisement in various newspapers on 07.02.2018 in Page 4 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined DNA and Gujarat Samachar. No bidder came forward and auction was unsuccessful. Thereafter, the land was put to auction, which was conducted on 12.03.2019. The petitioners were desirous of buying the land and gave their offer vide communication dated 07.10.2020. Offer from the petitioners under the private treaty was received by the authorised officer of the bank, who had issued the sale notice under Sub- Rule (6) of the Security Rules to the owners and upon receipt of such notice, owners gave consent to sell the property by private treaty under sub-Rule (5) of Rule 8 of the Security Rules. The authorised officer accepted the request for an agreed consideration of Rs.10 crores on "as is where is" basis and the petitioners were required to pay the full consideration on or before 31.01.2021 which had been already done by the petitioner.
5. The Bank confirmed the sale in favour of the petitioners and issued sale certificate dated 08.03.2021 in terms of sub-Rule (6) of Rule 9 under Page 5 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined the Security Rules. The sale certificate was registered in favour of the petitioners vide sale deed, certificate registration deed dated 15.03.2021.
6. As averred in the petition, to the utter shock and surprise of the petitioners before the sale certificate could be registered in favour of the petitioners, the respondent , vide letter dated 29.10.2021, addressed to jurisdictional revenue officer, stating that since the owner of the land in question owes Rs.17,66,95,879/- towards tax and other dues under the VAT Act and despite issuing notice under sections 152 and 200 of the Bombay Land Revenue Code, 1879, towards tax and other dues under the VAT Act and despite issuance of notice under the said sections, the same had not been paid. The entry of charge being Revenue Entry No.2374 was mutated in revenue records on 22.11.2021 and their names had been, accordingly, mutated. Hence, the action of creating a charge of the land in question and getting entry mutated in revenue records was subsequent to the sale, which had been Page 6 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined effected to the petitioner. Hence, the present petition with aforementioned prayers.
7. On issuance of notice for final disposal, the other side appeared and filed the written statement, where it does not dispute the factum of creating the charge in the year 2021.
8. It is contended by the respondent that the petitioner has challenged the charge mutated in the Revenue Records for the land in question. The impugned charge has been mutated by the Revenue by following procedure as per the provisions of the Gujarat Land Revenue Code, 1879. The action of the revenue authorities in mutating the impugned charge upon the land in question is required to be challenged before the appropriate forum, as prescribed under the Gujarat Land Revenue Code and the same cannot be challenged directly before this Court under Article 226 of the Constitution of India.
9. It is further contended that the land in question, owned by M/s. Manan Auto Spares. M/s. Manan Auto Page 7 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined Spares, was assessed for the purpose of income tax for the period of Assessment Year 2012-13 under the VAT Act and the Central Sales Tax Act. The demand for the respective taxes was to the tune of Rs.13,335/- and Rs.12,677/- vide order dated 10.03.2017. The notice for recovery was issued by the office of the respondent on 10.03.2007 for Assessment Year 2013-14 under the Central Sales Tax Act. The demand was to the tune of Rs.2153/-. Thereafter, notice for recovery was also issued for the Assessment Year 2014-15 under the Central Sales Tax Act. The demand was of Rs.12,387/- vide order dated 11.02.2019 for the period of 2015-16 under the Central Sales Tax Act. The assessment and the demand culminated into sum of Rs.8,52,82,536/- vide order dated 31.03.2021. Notice of recovery was issued by the office of the respondent on the very date.
10. M/s. Manan Auto Spares was assessed for the period of 2016-17 under the Central Sales Tax and the amount of Rs.7,35,76,033/- under the Act was demanded and notice of recovery also had been issued Page 8 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined for the period of 2017-18. The demand was of Rs.1,78,26,130/-.
11. M/s. Manan Auto Spares made an application to the respondent on 28.10.2021 claiming that it did not receive the copies of order of assessment for the Assessment Years 2015-16, 2016-17 and 2017-18. It sent communication to the State Bank of India, Ashram Road and intimated to attach the bank account of M/s. Manan Auto Spares under section 44 of the VAT Act.
12. It is further contended that the respondent issued a notice to the proprietor of M/s.Manan Auto Spares on 06.09.2021 under section 152 of the Gujarat Land Revenue Code at its residential house for recovering the arrears of dues for the period from Assessment Year 2012 to 2017. The wife of the proprietor of M/s.Manan Auto Spares received notice. However, the same was not reverted to.
13. Intimation was sent by the respondent to the office of Mamlatdar, Vatva on 29.102.2012 to create Page 9 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined charge upon the land in question for protection of Government revenue. The Kachha Entry No.2374 in Vilalge Form No.6 of the land in question was made. Mamlatdar issued notice under section 135D of the Gujarat Land Revenue Code on 06.12.2021. The respondent sent a communication dated 16.05.2022 and intimated M/s.Manan Auto Spares to provide the details of appeals preferred against the original assessment orders for this entire period. It was realized that it had not preferred the appeal for the Assessment Year 2012-13 and Assessment Year 2014-15. However, it had preferred the appeals for the Assessment Years 2015-16, Assessment Year 2016-17, Assessment Year 2017-18 before the first appellate authority, which had dismissed all the appeals vide order dated 31.03.2022.
14. Mutation Entry No.2374 was certified on 01.02.2022 creating the charge upon the land, certification of the mutation entry also is brought on the record.
15. The petitioner raised the contention that the Page 10 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined respondent authority could not have created the charge over the land in question for the dues accrued by its predecessor in title of the land in question relying on sections 47 and 48 of the Gujarat Value Added Tax Act. It is contended that M/s.Manan Auto Spares have mortgaged the land in question and this was never disclosed to the respondent at any point of time and, therefore, the transfer of the land in question in favour of any person including the petitioner can be said to be with an intent to defraud the Government revenue. The charge created upon the land in question being the first charge shall prevail over any other charges.
16. In rejoinder-affidavit the petitioner has stated that Anilbhai Kanjibhai Patel, proprietor of M/s. Manan Auto Spares was the owner of the non-agricultural land situated at Revenue Survey No.227, Village:
Kamod, Vatva, District: Ahmedabad. He had bought the land vide sale deed dated 13.12.2007. He approached the bank for overdraft facility of Rs. 14.50 Page 11 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined crores and the loan was sanctioned upon various terms and conditions. He was also required to provide collateral security by the mortgage of the land in question. The simple mortgage deed dated 06.04.2015 was registered with the Sub-Registrar, Ahmedabad -10 at Sr.No.1586 on 07.04.2015. Thus, the mortgage in favour of the bank was created prior in point of time than the date of framing of assessment for the year starting from Assessment Year 2013-14 to Assessment Year 2017-18. According to the petitioner, the notice under section 135D dated 6.12.2021 was not issued or served to any of the petitioners although the sale certificate was already registered in favour of the petitioner on 15.03.2021. It is also the say of the petitioner that the bank would have the first charge over the secured assets in accordance with the provisions of SARFAESI Act as well as the Recovery of Debts due to Banks and Financial Institutions Act (RDB Act) and the State cannot putforth its claim over such secured assets of the bank by relying on the Page 12 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined provisions of section 48 of the VAT Act. Section 26A and section 35 of the SARFAESI Act make it quite clear that the rights of the secured creditor to release its secured debts due and payable by sale of assets over which security interest is created, would have the priority over all Government debts and dues including revenue and tax dues to the State Government.
17. Section 26E of the SARFAESI Act starts with a non-obstante clause and thus it overrides section 48 of the Gujarat VAT Act. The Bank has taken over the possession of the assets of the defaulter under the SARFAESI Act and not under RDB Act. Section 31B of the RDB Act being a substantive provision gives priority to the secured creditor and the same would be applicable regardless 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 clause "secured creditor" to have the same meaning as assigned to it under the SARFAESI Act. Moreover, section 37 of the SARFAESI Act provides with the Page 13 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined provision of the SARFAESI Act, which shall be in addition to and not in derogation of the RDB Act. The SARFAESI Act was enacted only with an intention of allowing faster recovery of the debts to the secured creditors without intervention of the Court. It is denied that the charge created upon the land would be the first charge of the State and would prevail over other charges.
18. We have heard extensively, learned advocate Mr. Hiren Trivedi, learned advocate for the petitioner and Mr.Siddharth Rami, learned Assistant Government Pleader for the State.
19. The short question that arises for consideration of this Court is as to whether the charge created under the Gujarat Value Added Tax over the property in question would have an overriding power over the charge created under the provisions of the SARFAESI Act and the Security Interest Rules, 2002. The answer shall need to be in negation. It is quite clear from the provisions contained in SARFAESI Act that this Act Page 14 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined would have an overriding effect over the provisions of the Gujarat Value Added Tax Act.
20. The law on the subject requires consideration. Firstly, this Court in the case of Kalupur Commercial Cooperative Bank vs. State of Gujarat passed in Special Civil Application No. 17891 of 2018 on 23.09.2019 held that the plain reading of section 48 of the VAT Act indicates that it starts with non- obstante clause and this provision creates first charge on the property. The issue as regards the claim of the property of the secured creditors vis-a-vis the first charge of the property under the State legislation was considered by the Apex Court in the case of Central Bank of India vs. State of Kerala and others, (2009) 4 SCC 94, where the apex Court had held that if the State acts to create the first charge on the property, then the secured creditors cannot have the claim against the statutory provision. While so holding, it took into consideration section 100 of the Transfer of Property Act, 1882. The Court held that Page 15 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined when two or more laws or provisions operate in the same field and each contains nonobstante clause stating that its provision will override those of any other provisions of the law stimulating an intricate problem of the interpretation arises while relying on such problems of interpretation, no settled principles can be applied, except to refer to the object and purpose of each of the provisions containing non obstante clause. Two provisions in the same Act, each containing a non obstante clause requires harmonious interpretation of the two seemingly conflicting provisions of the same Act. The conflict here is with the State Act and the Central Act. On considering the true purport and effect of section 26A 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, the Court considered in detail necessity for introduction of these two provisions in two enactments.
21. This Court in the case Reliance Asset Page 16 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined Reconstruction Company Limited vs. State of Gujarat passed in Special Civil Application No. 2964 of 2021 on 23.12.2021 held and observed as under:
"11. So far as the issue of priority of charge over the subject properties in terms of Section 48 of the VAT Act as against the provisions of Section 26E of the SARFAESI Act is concerned, the same is no more res integra in view of the judgment delivered by this Court in the case of Kalupur Commercial Cooperative Bank P (Supra). This Hon'ble Court has extensively deal with the provisions of both enactment and following the ration laid down by the Hon'ble Apex Court has held that section 48 of the VAT act would come into operate only when the liability is finally assessed and the amount becomes due and payable. The relevant observations made in para 15 to 54 are reproduced as under:
"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-`-vis Section 69 or Section 69A of the Transfer of Property Act. In terms of that subsection, secured creditor can enforce security interest without intervention of the Court or Tribunal and if the borrower has created any mortgage Page 17 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined 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 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 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 Page 18 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined 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 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 Page 19 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined 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 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 xxx xxx xxx
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 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 Page 20 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined 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 Incometax 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 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 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 Page 21 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined 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 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. Page 22 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023
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52. The language of Section 48 of the VAT Act is plain and simple and the phrase 'any amount payable 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 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." Page 23 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023
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13. In view of the aforesaid legal position, this Court finds that the State cannot have prior charge over the secured assets, more particularly, as it transpires from the records that the mortgage deed was executed much prior in point of time before the outstanding dues of the Sales Tax had become due in favour of erstwhile borrower of the bank. Even otherwise assuming for a moment, that Section 26E of the SARFAESI Act had come on Statute Book in the 24.01.2020 or Section 31B of RDB Act was there than also as held by this Court in the case of Bank of Baroda, Through its Assistant General Manager Prem Narayan Sharma vs. State of Gujarat & Ors., Special Civil Application No.12995 of 2018, Section 48 of the VAT Act would come into play only after determination of tax, interest or penalty liability to be paid to the Government only thereafter it can be said that the Government shall have first charge on the property of dealer.
14. As discussed above, so far as outstanding dues in nature of Sales Tax amounting to Rs.4,17,40,000/- for the A.Y. 2005-06 to 2013-14 are concerned, the respondent Sale tax Officer has superficially made an attempt to create charge by applying for mutation entry vide mutation entry no.8845 dated 12.07.2018 which was entered in the Village Form No.6 of the subject properties. Thus, the charge seems to have been created by the respondent Sales Tax Authority pursuant to the communication dated 09.07.2018 addressed by the Sales Tax Officer - 3 Ghatak 26, Himmatnagar to the concerned Mamlatdar. As against that, the mortgage deed by erstwhile borrower was registered vide Registration No.2211 dated 20.03.2010 before the Office of SubRegistrar, Sabarkantha at Himmatnagar. In absence of any affidavit filed by the Sales Tax Officer specifying the details of any order, the only material about the assessment order, which has emerged on record is the reference of date 26.05.2016 as reflected in column of second rights in village form no. 7-12 produced at page no. 123. Notably, the mortgage deed was executed by the erstwhile borrower on 20.03.2010, proceedings under Section 14 of the SARFAESI Act had got concluded pursuant to the order darted 19.02.2015 passed by the learned District Magistrate, Sabarkantha at Himmatnagar and the registered deed of assignment came to be executed in favour of petitioner company on 07.02.2017.
15. In view of the aforesaid discussions, we have no hesitation in coming to the conclusion that first priority of charge over the secured assets shall be of the bank and not of the State Page 24 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023 NEUTRAL CITATION C/SCA/7651/2022 ORDER DATED: 07/01/2023 undefined Government as contended by referring to Section 48 of the VAT Act, 2003. It is hereby declared that the petitioner being secured creditor has first charge over the suit properties by virtue of Section 26E of the SARFAESI Act, 2002, which overrides the charge of the respondent Authorities as contended in terms of Section 48 of the Gujarat Sales Tax Act."
22. Resultantly, the petition stands allowed deleting and removing noting of all the charges and encumbrance created under the Act on land located at Revenue Survey No.277, Village: Kamod, Taluka: Vatva, District: Ahmedabad with consequential relief.
23. Petition stands disposed of accordingly.
(MS. SONIA GOKANI, J. ) (SANDEEP N. BHATT,J) SUDHIR Page 25 of 25 Downloaded on : Sun Sep 17 20:34:09 IST 2023