2008 (1) TMI 836 - HC - VAT and Sales Tax

Preferential right to the State to recover the sales tax in preference to unsecured creditors - Right to sell the mortgaged property - Held that - In view of the decision in Dena Bank case 2000 (4) TMI 36 - SUPREME Court it is clear that it only gives preferential right to the State to recover the sales tax in preference to unsecured creditors but once the property in question already stood mortgaged and they had proceeded prior in time, they can recover the amount in pursuance of the consent decree passed in their favour, the State has no preferential right to sell the property and, therefore, the petitioner-bank is entitled to sell the mortgaged property and realise the arrears of amount due to them and State shall be entitled to recover the balance amount, if any, left with the bank or in the alternative, they are at liberty to proceed against respondent Nos. 4 to 6 for recovery of the amount by proceeding against them in accordance with law. The Division Bench in the above case has already taken the view that the provisions of section 35 of the Act would override the inconsistent provisions of section 16B of the Tax Act and as such, these provisions of the Sales Tax Act section 16B as they are inconsistent with section 35 of the Act are declared ultra vires of the Constitution. The writ petition filed by the petitioner-bank is accordingly allowed in terms of the above and they are entitled to sell the property of respondent No. 4 in accordance with law. Parties are left to bear their own costs.

Summary

Issues Involved:
1. Restraint on the sale of immovable property for recovery of sales tax arrears.
2. Validity of Section 16B of the Himachal Pradesh General Sales Tax Act, 1968.
3. Priority of secured debt over sales tax arrears.
4. Conflict between the Sales Tax Act and the Banking Companies Act.

Issue-wise Detailed Analysis:

1. Restraint on the Sale of Immovable Property for Recovery of Sales Tax Arrears:
The petitioner-bank sought directions to restrain the respondents from auctioning the immovable property of respondent No. 4 for the recovery of alleged sales tax arrears. The property was mortgaged to the petitioner-bank, which had a secured interest in it. Despite a consent decree in favor of the bank, the Collector-cum-Assistant Excise Commissioner issued a notice for auctioning the property to recover sales tax arrears as land revenue under the H.P. Land Revenue Act, 1953. The bank argued that its secured debt had priority over the sales tax arrears.

2. Validity of Section 16B of the Himachal Pradesh General Sales Tax Act, 1968:
The petitioner-bank challenged the validity of Section 16B of the Sales Tax Act, asserting it was ultra vires of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970, and the Transfer of Property Act, 1872. Section 16B states that any amount of tax and penalty payable by a dealer shall be a first charge on the property of the dealer. The bank argued this provision was inconsistent with the central legislation and should be struck down.

3. Priority of Secured Debt over Sales Tax Arrears:
The petitioner-bank contended that its secured debt, which was prior in time, had precedence over the alleged sales tax liability. The bank had advanced loans to respondent No. 4 in 1984-85, and the property was mortgaged in 1984. The bank relied on the Supreme Court's decision in Dena Bank v. Bhikhabhai Prabhudas Parekh Co., which held that the State's right to recover tax dues does not have priority over secured creditors. The bank asserted that it had a prior right to recover its dues from the mortgaged property, and any balance amount could be paid to the State Government for sales tax dues.

4. Conflict between the Sales Tax Act and the Banking Companies Act:
The respondents argued that Section 16B of the Sales Tax Act had an overriding effect on the provisions of the Banking Act. They cited the Supreme Court's decision in Dena Bank, which recognized the State's priority in recovering tax dues over unsecured creditors. However, the petitioner-bank argued that Section 35 of the Banking Act, being a central legislation enacted later in time, would override the inconsistent provisions of the Sales Tax Act. The Division Bench of the High Court reiterated that the bank's secured interest, created prior to the sales tax assessment, had priority over the State's claim.

Judgment:
The High Court allowed the writ petition filed by the petitioner-bank. It held that the bank had the right to sell the mortgaged property and realize the arrears due to it. The State could recover the balance amount, if any, from the proceeds or proceed against respondent Nos. 4 to 6 in accordance with the law. The court declared the provisions of Section 16B of the Sales Tax Act ultra vires of the Constitution to the extent they were inconsistent with Section 35 of the Banking Act. The court emphasized that the bank's secured debt had priority over the State's claim for sales tax arrears.