TMI Blog2013 (11) TMI 511X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of a provision for enforcing a charge in the KGST Act will not whittle down the effect of Section 26B of the Act. This is especially since by virtue of the operation of law the State will have prior charge over the properties in question which will prevail over all rights created by the Bank - Appellants are not entitled to succeed in the appeals. The argument whether there should be a separate provision for enforcement of the first charge raised by the learned Senior Counsel for the appellants, cannot hold good especially in the light of the non-obstante clause in Section 26B of the KGST Act and in the light of the view taken in State Bank of Bikaner & Jaipur's case {1994 (12) TMI 72 - SUPREME Court} that "when a first charge is created by operation of law over any property, that charge will have precedence over an existing mortgage", which is reiterated in Central Bank of India's case {2009 (2) TMI 451 - SUPREME COURT OF INDIA} has upheld the Division Bench decision in later cases regarding the effect of Section 26B of the KGST Act - Decided against assessee. - WA No.1262,1263 of 2012 , WP(C).5513/2012 - - - Dated:- 14-8-2013 - T R Ramachandran Nair And A V Ramakrishna Pil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge in respect of the property, on 28.9.2004. When the account became NPA, proceedings under the SARFAESI Act were initiated and finally the property was brought to sale on 9.6.2008. Ext.P1 is the copy of the sale certificate dated 19/09/2009. Ext.P1(3) sale certificate is still later, i.e. dated 19.6.2010. 5. In W.A. No.1263/2012 respondents 4 and 5 availed credit facilities from the sixth respondent Bank by creating equitable mortgage in respect of the property in question on 29.9.2004. The property was brought to sale on 12/01/2010 under the SARFAESI Act and sale certificate has been issued. Ext.P1 produced in the writ petition is the copy of the sale certificate dated 26/04/2010. Ext.P4 reply given to the Appellants by the Tahsildar will show that notice for completing the assessment, for the years 2003-2004 and 2004-2005 dated 22/11/2008 was issued to the 4th respondent on 25/11/2008, and assessment was completed on 01/12/2008 under Sections 17(3) and 17D of the KGST Act. In respect of the 5th respondent, the notice and the proceedings are of the same date and the assessment year is 2004-2005. 6. In both the appeals the common contention raised is that revenue recovery pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the defaulter, under Section 100 of the Transfer of Property Act no charge shall be enforced against the property in the hands of the purchaser for value and without notice of the charge. The appellants being purchasers for value and without notice of the charge, the property is not liable to be proceeded against. Learned Senior Counsel submitted that unless there is a specific provision in the statute enabling the enforcement of a statutory charge, even as against the bona fide purchaser for value and without notice of charge, the said charge could not be enforced. 13. With reference to the facts of the case, learned Senior Counsel submitted that the mortgage was created in favour of the Bank on 28.9.2004. The arrears of sales tax are related to the periods 2003-2004 and 2004-2005. The appellants in W.A.No.1262/2012 purchased the property on 09.06.2008. The notices issued under Section 17(3) of the KGST Act is subsequent to it, viz. 25.11.2008. As far as Section 23 of the KGST Act is concerned, a demand notice is necessary for creating a charge and Section 26B applies only if a charge is created. Therefore, the provisions of Section 26B will not apply. 14. Learned Senior Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that Section 26B of the KGST Act creates a first charge on the property itself and therefore the State gets precedence. Section 26B contains a non obstante clause. Therefore, it has got an overriding effect over other laws. Apart from that, KGST Act is a special law and the Transfer of Property Act is a general law and for the said reason also the argument of the learned Senior Counsel cannot be accepted. The learned Government Pleader relied upon the following decisions, in support of his contentions: Central Bank of India v. State of Kerala [(2009) 17 KTR 189], Dena Bank v. Bhikhabhai Prabhudas Parekh Co. [(2000) 5 SCC 694], Union of India v. SICOM Ltd. and another [(2009) 2 SCC 121], Builders Supply Corporation v. Union of India [(1965) 56 ITR 91], Sree Durga Distributors v. State of Karnataka [(2008) 16 KTR 55 SC], Maharashtra State Co-operative Bank v. Assistant PF Commissioner [(2009) 10 SCC 123], Recovery Officer EPF v. KFC [ILR 2002 (3) Kerala 4], Hamsa v. Assistant Commissioner [2008 (3) KLT 180], Lucy Vincent v. State [2008 (4) KLT 876], Shiny Linson v. Tahsildar [2010 (4) KLT (SN) 90 (Case No.104)], ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nner prescribed, in addition to the amount due, a sum equal to,- (a) one per cent of such amount for each month or part thereof for the first three months after the date specified for its payment; (b) two per cent of such amount for each month or part thereof subsequent to the first three months aforesaid. [Explanation:- Where the period of default is less than one month, interest shall be calculated for the actual number of days of default]. Going by Section 26A, to attract the same, the assessee should have created a charge on or part with the possession by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever, of any of his assets in favour of any person. It is provided that if such a charge is created, at any rate, during the pendency of any proceedings, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee under the Act. Going by Section 26B, any amount of tax, penalty, interest and any other amount, if any, payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer, or such person. The same is notwithstanding a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statutory obligation to file a return initiates the proceedings is to invoke a fiction not sanctioned by the Act. The obligation can be enforced by taking a suitable action under the Act. Taking of such an action may have the effect of initiating proceedings against the defaulter. The default may be the occasion for initiating the proceedings, but the default itself proprio vigore cannot initiate proceedings. Proceedings in respect of the assessment of the turnover for the relevant period cannot, therefore, be said to be pending before the Commissioner. It is of importance to notice that the Apex Court was of the view that the default itself proprio vigore cannot initiate proceedings. 22. Section 100 of the Transfer of Property Act came up for interpretation in an important decision of the Apex Court in Ahmedabad Municipal Corporation's case {(1971) 1 SCC 757}. In para 4 it has been held as follows: 4. This section in unambiguous language lays dawn that no charge is enforceable against any property in the hands of a transferee for consideration without notice of the charge except where it is otherwise expressly provided by any law for the time being in force. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the property charged in the hands of a transferee for consideration without notice of the charge. 23. The above will show that under Section 141 of the Bombay Provincial Municipal Corporation Act, 1949 it was provided that property taxes to be a first charge on premises on which they are assessed. The Apex Court was of the view that sub-section (1), as is obvious, merely creates a charge in express language. This charge is subject to prior payment of land revenue due to the State Government on such building or land. The section, apart from creating a statutory charge, does not further provide that this charge is enforceable against the property charged in the hands of a transferee for consideration without notice of the charge. Their Lordships have further held as follows: What is enacted in the second half of Section 100 of Transfer of Property Act is the general prohibition that no charge shall be enforced against any property in the hands of a transferee for consideration without notice of the charge and the exception to this general rule must be expressly provided by law. The real core of the saving provision of law must be not mere enforceability of the charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus, the property in the hands of the First Respondent was free of the charge and it is not open to the appellants to enforce the liabilities of the Defaulting Company in this manner against the First Respondent. 25. Learned Senior Counsel appearing for the appellants heavily relied upon the above decisions and drew parallel from the provisions under the KGST Act. We have noticed that there is some difference between the provisions under Section 13(2)(i) of the Karnataka Sales Tax Act and Section 26B of the KGST Act. Section 13(2)(i) of the Karnataka Act applies in a case of default in making payment of tax and the whole amount outstanding shall be a charge against the properties of the person or persons liable to pay tax, where as Section 26B of the KGST Act makes it a first charge on the property. This distinction will be significant. Section 13(2)(i) does not contain a non obstante clause as contained in Section 26B of the KGST Act. We may advert to it later, in the judgment. 26. AI Champdany Industries Ltd.'s case {(2009) 4 SCC 486} is a case where the property was having Municipal tax dues and it was sold in court sale in liquidation proceedings of a Company. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... self. But herein the impact of Section 26B of the KGST Act will have to be analysed. 29. Before going further into the said question, we will first consider the requirements under Section 26A of the KGST Act, so as to attract the said provision. 30. The position is no longer res integra in the light of the decision of a Division Bench of this Court in Hamsa v. Asst. Commissioner (2008 (3) KLT 180). Therein, the Bench was of the view that to attract Section 26A, it is not necessary that the assessment should be completed. It is also not necessary that a demand should be made to the assessee to pay any amount. In para 9, it was explained thus: To attract S.26A, it is not necessary that the assessment should be completed. It is also not necessary that a demand should be made to the assessee to pay any amount. If the transfer is made by the assessee during the pendency of any proceedings, such transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee under the K.G.S.T. Act. Inspection of the shop, factory or business premises of the assessee by the sales tax officers would also come within the meaning of the expression duri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n similar to Section 26B of the KGST Act. We extract Section 11-AAAA of Rajasthan Sales Tax Act hereunder: 11-AAAA. Liability under this Act to be the first charge.- Notwithstanding anything to the contrary contained in any law for the time being in force, any amount of tax, penalty, interest and any other sum, if any, payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer, or such person. In para 7, their Lordships considered the effect of the said provision on an existing mortgage in respect of the property of the dealer. It was held in para 8 that when a statutory first charge is created on the property of the dealer, the property subjected to the first charge is the entire property of the dealer. We extract the said findings in para 8 as follows: The title to the property remains with the mortgagor. Therefore, when a statutory first charge is created on the property of the dealer, the property subjected to the first charge is the entire property of the dealer. The interest of the mortgagee is not excluded from the first charge. The first charge, therefore, which is created under Section 11-AAAA of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sthan Sales Tax Act as well as that of KGST Act are in pari materia and Section 26B of the KGST At also creates a first charge. Therefore, evidently, the first charge under Section 26B of the KGST Act going by the dictum laid down above, will have precedence over an existing mortgage. 37. In para 7 of the decision of the Apex Court in Dattatreya Shanker Mote's case {(1974) 2 SCC 799} the meaning of the word 'charge' arising in Section 100 of the Transfer of Property Act was explained thus: A charge does not amount to a mortgage though all the provisions which apply to a simple mortgage contained in the preceding provisions shall, so far as may be, apply to such charge. While a charge can be created either by act of parties. A charge is thus a wider term as it includes also a mortgage, in that every mortgage is a charge, butt every charge is not a mortgage. 38. The next decision relied upon by the learned Government Pleader is that of the Apex Court in Dena Bank v. Bhikhabhai Prabhudas Parekh Co.{(2000) 5 SCC 694}. Therein, the Karnataka Sales Tax Act, 1957 came up for consideration. Para 6 of the judgment shows that the first question considered was whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ucial for coming to the said conclusion. 39. Union of India and others v. SICOM Ltd. {(2009) 2 SCC 121} also examined the priority of Crown debts and reiterated the principles stated in Dena Bank's case {(2000) 5 SCC 694} and other ecisions. Heavy reliance is placed by the learned Government Pleader on the decision of a Division Bench of this Court in Recovery Officer, Employees Provident Fund v. Kerala Financial Corporation (ILR 2002 (3) Ker. 4), wherein Section 11(2) of the Employees Provident Fund and Miscellaneous Provisions Act, 1952 came up for consideration. It was held that the same overrides all provisions of other enactments including Section 45B of the Employees Provident Fund and Miscellaneous Provisions Act. In para 9 of the judgment, the Division Bench relied upon the decision of the Apex Court in State Bank of Bikaner and Jaipur's case {(1995) 2 SCC 19} and Dattatreya Shanker Mote's case {(1974) 2 SCC 799}. 40. Maharashtra State Cooperative Bank Ltd. v. Assistant Provident Fund Commissioner and others {(2009) 10 SCC 123} is also a decision interpreting the provisions of Employees Provident Fund and Miscellaneous Provisions Act and the Apex Court hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t any amount of tax, penalty etc. payable by a dealer shall be the first charge on the property of the dealer or such person (emphasis supplied). S.26-B starts with a non-obstante clause, which necessarily gives it an overriding effect to any other law in force. It creates a first charge on the property of the dealer in no uncertain terms. But does this statutory first charge have an overriding effect on the pre-existing mortgage right of a secured creditor? Can the State take the plea that the statutory first charge operates on the entire property under mortgage and not only on the right of equity of redemption available to the mortgagor/dealer? (emphasis supplied) It was held that the non-obstante clause necessarily gives an overriding effect to any other law in force. After relying upon the dictum laid down in State Bank of Bikaner Jaipur's case {(1995) 2 SCC 19} and a later decision in State of Madhya Pradesh another v. State Bank of Indore others {(2002) 10 KTR 366 - SC), in para 22 it has been held as follows: 22. In view of the above two decisions of the Supreme Court in State Bank of Bikaner and State Bank of Indore (supra) which had dealt with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed mainly was that the provision under Section 26B of the KGST Act introduced with effect from 1.4.1999, has no retrospective effect and will not override the decree of the civil court passed on 30.1.1995. It was also contended that the notice issued by the second respondent was long after the decree, viz. 2.6.1999 and that the Bank has got prior charge over the immovable properties proposed to be sold for sales tax arrears by virtue of equitable mortgage created as early as 12.6.1984. The Division Bench considered various decisions of the Apex Court including State Bank of Bikaner Jaipur's case {(1995) 2 SCC 19}, Dattatreya Shanker Mote's case {(1974) 2 SCC 799} and Dena Bank's case {(2000) 5 SCC 694}. Significantly, the Division Bench also considered the decision in State of M.P. v. State Bank of Indore {(2002) 10 SCC 441} wherein the interpretation of Section 33-C of the Madhya Pradesh General Sales Tax Act came up for consideration. Finally, in para 7 it was held as follows: 7. Right of the State to have priority in the matter of recovery of sales tax from the defaulters over the equitable mortgages created by them in favour of Banks and Financial Instituti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of law over any property, that charge will have precedence over an existing mortgage and the decree obtained by the bank against the mortgagor will not affect the State since State was not a party to the suit. Decree has only conclusively determined the rights between the mortgagor and mortgagee which would not affect the statutory rights of the State. The expression rights of parties used in S.2(2) means rights of parties to the suit. State which has got a statutory first charge under S.26B of the K.G.S.T. Act would prevail over the rights created in favour of the Bank by an unexecuted decree. We therefore hold that the decree obtained by the Bank will not have any precedence over the first charge created in favour of the State under S.26B of the K.G.S.T.Act. Therefore, it is evident that the first charge will have precedence over an existing mortgage. The statutory first charge under Section 26B of the KGST Act would prevail over the rights created by the Bank over an unexecuted decree and finally in para 9 the Bench declared the law thus: By virtue of operation of law State will have prior charge over the properties in question. This exposition of law is signi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er laws. In para 36 the Apex Court relied on the dictum laid down in State Bank of Indore's case {(2002) 10 SCC 441} wherein the crucial portion shows the following: Section 33-C creates a statutory first charge that prevails over any charge that may be in existence. Therefore, the charge thereby created in favour of the State in respect of the sales tax dues of the second respondent prevailed over the charge created in favour of the Bank in respect of the loan taken by the second respondent. There is no question of retrospectivity here, as, on the date when it was introduced, Section 33-C operated in respect of all charges that were then in force and gave sales tax dues precedence over them. Section 33C of the M.P.General Sales Tax Act was the provision under discussion. 45. After considering the provisions of the DRT Act and SARFAESI Act containing the non obstante clauses, viz. Section 34(1) and Section 35, the Apex Court in para 39 explained the legal position further as hereunder: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... } a statutory first charge has been created by Section 26B of the KGST Act which will prevail over the mortgage created in favour of the Bank. These decisions have been followed in the two Division Bench decisions of this Court in Sherry Jacob's case (2004 (3) KLT 1089) and South Indian Bank Ltd.'s case (2006 (1) KLT 65). The consistent view taken, therefore, is that the statutory first charge created will have precedence over an earlier mortgage. The creation of such a charge by operation of law amounts to statutory recognition of priority over private debts including mortgage, as held by the Apex Court in Dena Bank's case {(2000) 5 SCC 694}. Section 23(2) of the KGST Act provides that any tax assessed or any other amount due under this Act from a dealer or other person may, without prejudice to any other mode of recovery, be recovered as if it were an arrear of land revenue. The law is also now settled in the light of the decisions of this Court and the Apex Court referred to above and further by the decision of the Apex Court in Central Bank of India's case {(2009) 17 KTR 189 - SC). The non obstante clause in a statutory provision like the one in Section 26B of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... para 58 held that the view taken by the High Court was unexceptional and calls for no interference. Section 38C of the Bombay Act is similar to Section 26B of the Kerala Act, the interpretation of both of which we have already adverted to. Section 38C of the Bombay Sales Tax Act is under the heading Liability under this Act to be First Charge and Section 26B of the Kerala Act makes a tax payable to be first charge on the property. 51. Apart from the same, we also notice from the decisions of the Apex Court in Ahmedabad Municipal Corporation's v. {(1971) 1 SCC 757}, Shreyas Papers (P) Ltd.'s case {(2006) 1 SCC 615} and AI Champdany Industries Ltd.'s case {(2009) 4 SCC 486) relating to Section 141 of Bombay Provincial (Municipal Corporation) Act, 1949 and that of the Karnataka Sales TaxAct that the respective provisions did not contain any non obstante clause also. The same is also therefore significant. 52. Herein, in W.A.No.1262/2012, even though the sale was scheduled on 09/06/2008, the sale certificate is on 19/09/2009 (Ext.P1) by which alone possession was handed over to the appellants. In W.A.No.1263/2012, the sale was on 12/01/2010 and the sale certificate ..... X X X X Extracts X X X X X X X X Extracts X X X X
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