TMI Blog2006 (12) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... at Plot No.55, Ambattur Industrial Estate, Ambattur, Chennai 600 058 into auction for any alleged dues payable by the debtor company, namely M/s.Sumeet Research and Holdings Private Limited, since the said property has already been taken possession by the petitioner in pursuance to its statutory rights under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Act 54 of 2002) (in short SARFAESI Act). 3. M/s.Sumeet Research and Holdings Private Limited, (hereinafter called the 'borrower company') sought financial assistance from the writ petitioner/UTI Bank, of a sum of Rs.635 lakhs towards working capital besides term loan of Rs.150 lakhs, which was sanctioned by the Bank, as per Sanction Letter No.Adv./1650/2002-03 dated 28.9.2002. For the total working capital provided and enjoyed by the borrower, the borrower company had created a mortgage by deposit of title deeds, in respect of various properties, including the factory land and building situate at Plot Nos.54 and 55, Ambattur Industrial Estate, Ambattur, Chennai-58 (hereinafter referred to as Plot No.54 and Plot No.55 respectively). 4. The b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Madras)], though relied on the judgment of the Supreme Court in Dena Bank v. Bhikhabhai Prabhudas Parekh Co., 2000 (4) CTC 170 : 2000 (5) SCC 694, had taken different views, referred the matter to a Larger Bench and on the orders of the Hon'ble Chief Justice, now the matter is before us. 9. We have already referred to the fact that since there was no response from the borrower company for the notice issued under section 13(2) of the SARFAESI Act on 17.4.2004, after lapse of time as provided under the SARFAESI Act, the petitioner bank took constructive possession of the secured assets on 8.2.2005 and physical possession of the same on 29.3.2005. While so, the first respondent, viz., Deputy Commissioner of Central Excise, Chennai intimated the petitioner Bank in his letter dated 28.3.2005 that a sum of Rs.41,17,246/- was due and payable to the Department of Central Excise and requested the petitioner Bank to hold the said money or property with it towards the amount due to the said Department. The borrower company sold plot No.54 and repaid a part of the amount due to the petitioner bank and the only property now available as secured asset is the unit at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act 2. Definitions: 2(zd) "secured creditor' means any bank or financial institution or any consortium or group of banks or financial institutions and includes- (i) debenture trustee appointed by any bank or financial institution; or [(ii) securitisation company or reconstruction company, whether acting as such or managing a trust set up by such securitisation company or reconstruction company for the securitisation or reconstruction, as the case may be; or] (iii) any other trustee holding securities on behalf of a bank or financial institution; in whose favour security interest is created for due repayment by any borrower of any financial assistance; 2 (zf) "security interest" means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in Section 31; " Chapter III of the SARFAESI Act 13. Enforcement of security interest.- (1) Notwithstanding anything contained in Section 69 or Section 69-A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his disposal or control, or may recover the amount by attachment and sale of excisable goods belonging to such person; and if the amount payable is not so recovered, he may prepare a certificate signed by him specifying the amount due from the person liable to pay the same and send it to the Collector of the district in which such person resides or conducts his business and the said Collector, on receipt of such certificate, shall proceed to recover from the said person the amount specified therein as if it were an arrear of land revenue. [Provided that where the person (hereinafter referred to as predecessor) from whom the duty or any other sums of any kind, as specified in this section, is recoverable or due, transfers or otherwise disposes of his business or trade in whole or in part, or effects any change in the ownership thereof, in consequence of which he is succeeded in such business or trade by any other person, all excisable goods, materials, preparations, plants, machineries, vessels, utensils, implements and articles in the custody or possession of the person so succeeding may also be attached and sold by such officer empowered by the Central Board of Ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder as if it were an arrears of land revenue; or (ii) the proper officer may, on an authorisation by a Commissioner of Customs and in accordance with the rules made in this behalf, distrain any movable or immovable property belonging to or under the control of such person, and detain the same until the amount payable is paid; and in case, any part of the said amount payable or of the cost of the distress or keeping of the property, remains unpaid for a period of thirty days next after any such distress, may cause the said property to be sold and with the proceeds of such sale, may satisfy the amount payable and the costs including cost of sale remaining unpaid and shall render the surplus, if any, to such person. [Provided that where the person (hereinafter referred to as predecessor) by whom any sum payable under this Act including the amount required to be paid to the credit of the Central Government under this Act including the amount required to be paid to the credit of the Central Government under section 28B is not paid, transfers or otherwise disposes of his business or trade in whole or in part, or effects any change in the ownership thereof, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rty on auction held on 30.4.1976. Upon a prayer made by the bank, the State of Karnataka was impleaded as a defendant in the suit. The trial Court found all the material plaint averments proved and the bank entitled to a decree. The charge created on suit properties by mortgage was also held proved. The trial Court also held that the State could not have attached and sold the said properties belonging to partners for recovery of sales tax dues against the firm. However, the suit was directed to be dismissed as in the opinion of the trial Court the Chief Manager and Power of Attorney Holder of the bank was not proved to be a person duly authorised to sign and verify the plaint and institute the suit. The bank preferred an appeal before the High Court. During the course of hearing of the appeal, on 27.01.1992, a compromise was entered into between the bank and the borrowers; and the settlement as arrived at between the bank and the borrowers provided for a mode of payment of the decretal amount as agreed between the parties. As the State of Karnataka was not a party to the compromise, the appeal had to be decided as contested in so far as the rights of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the rule being "detur digniori" (Laws of England, Fourth Edition Vol. 8 para 1076 at page 666). Herbert Brown states - "Quando just domini regis et subditi concurrunt jus regis. praeferri debet - Where the title of the king and the title of a subject concur, the king's title must be preferred. In this case detur digniori is the rule ....where the titles of the king and of a subject concur, the king takes the whole ....where the king's title and that of a subject concur, or are in conflict, the king's title is to be preferred" (Legal Maxims 10th edition, pp. 35-36). This common law doctrine of priority of State's debts has been recognised by the High Courts of India as applicable in British India before 1950 and hence the doctrine has been treated as "law in force" within the meaning of Article 372 (1) of Constitution. An illuminating discussion of the subject made by Chagla, C.J. is to be found in Bank of India v. John Bowman - AIR 1955 Bombay 305. We may also refer to Full Bench decision of Madras High Court in Manickam Chettiar v. Income Tax Officer, Madura, AIR 1938 Madras 360 as also to two Judicial Commissioner's Court decisions in People's Bank of Northern India Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m for priority of State debts is the rule of necessity and the wisdom of conceding to the State the right to claim priority in respect of its tax dues. 4. The doctrine may not apply in respect of debts due to the State if they are contracted by citizens in relation to commercial activities which may be undertaken by the State for achieving socio-economic good. In other words, where the welfare State enters into commercial fields which cannot be regarded as an essential and integral part of the basic government functions of the State and seeks to recover debts from its debtors arising out of such commercial activities the applicability of the doctrine of priority shall be open for consideration. 9. The Constitution Bench decision has been followed by a three judge Bench in Collector of Aurangabad v. Central Bank of India, AIR 1967 SC 1831. 10. However, the Crown's preferential right to recovery of debts over other creditors is confined to ordinary or unsecured creditors. The Common Law of England or the principles of equity and good conscience (as applicable to India) do not accord the Crown a preferential right for recovery of its debts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed any relief. Section 15(2-A) of Karnataka Sales Tax Act had come into force on 18-12-1983 while the decree in favour of the Bank was passed on 3-8-1992 and is yet to be executed. The claim of the appellant Bank is still outstanding. Even if we were to set aside the sale held by the State, it will merely revive the arrears outstanding on account of sales tax to which further interest and penalty shall have to be added. The amended Section 15 (2-A) of the Karnataka Sales Tax Act shall apply. The State shall have a preferential right to recover its dues over the rights of the appellant-Bank and the property of the partners shall also be liable to be proceeded against. No useful purpose would therefore, be served by allowing the appeal which will only further complicate the controversy." 14. It is relevant to note Chapter XIV of the Karnataka Land Revenue Act, 1964, particularly, Sections 158 and 190, which make it clear that the claim of the State Government to monies recoverable under the provisions of the said Chapter shall have precedence over any other debt (emphasis supplied), demand or claim whatsoever whether in respect of mortgage, judgment, decree, executi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim of a secured creditor will prevail over crown debts, arrived a conclusion in favour of the petitioner, viz., ICICI Bank. 16. In Commissioner of Central Excise, Pondicherry vs. Indian Bank [2006 (198) E.L.T. 334 (Mad.)], after noting Section 142 of the Customs Act and the law laid down by the Apex court in Dena Bank case (cited supra), the Division Bench consisting of A.P. Shah, C.J. and M.Jaichandren,J. concluded that the claim of Central Excise Department will have precedence over that of secured creditors. After holding so, the Division Bench directed the first respondent, Indian Bank to pay the excess dues to the appellant (Commissioner, Central Excise, Pondicherry ), after adjudication. 17. As rightly pointed out by the referring Judge, both the Division Benches relied on the decision of the Supreme Court in Dena Bank's case (cited supra). Before analysing the principles laid down by the Supreme Court in Dena Bank case, it is also relevant to refer the other decisions cited on either side. The learned counsel for the petitioner Bank at the foremost relied on the decision of the Supreme Court in Bank of Bihar vs. State of Bihar (AIR 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1958, which reads thus, "33-C. Tax to be first charge.- Notwithstanding anything to the contrary contained in any law for the time being in force, any amount of tax and/or penalty, if any, payable by a dealer or other person under this Act shall be a first charge on the property of the dealer or such person." Placing reliance on the above provision, their Lordships have held, " 5. Section 33-C creates a statutory first charge that prevails over any charge that may be in existence. Therefore, the charge thereby created in favour of the State in respect of the sales tax dues of the second respondent prevailed over the charge created in favour of the Bank in respect of the loan taken by the second respondent. There is no question of retrospectivity here, as, on the date when it was introduced, Section 33-C operated in respect of all charges that were then in force and gave sales tax dues precedence over them. This position in law is discussed in detail in the judgment of this Court in Dena Bank v. Bhikhabhai Prabhudas Parekh Co." 19. In State Bank of Bikaner Jaipur vs. National Iron Steel Rolling Corporation [1995 (2) SCC 19 - Three Judge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of an amendment in 1989. Section 11-AAAA is as follows: "11-AAAA. Liability under this Act to be the first charge.- Notwithstanding anything to the contrary contained in any law for the time being in force, any amount of tax, penalty, interest and any other sum, if any, payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer, or such person." Under this section, the amount of sales tax or any other sum due and payable by a dealer or any other person will have the first charge over the property of the dealer or of such person. It is on account of the provisions of this section that the Commercial Taxes Officer claimed priority for the recovery of the sales tax dues from the sale proceeds of the mortgaged property. The appellant, however, contended that since the mortgage in their favour is prior in point of time, their claim will have precedence over the claim of the sales tax authorities. The following discussion and the ultimate conclusion of their Lordships are relevant. " 7. It is, therefore, necessary to consider the effect of Section 11-AAAA of the Rajasthan Sales Tax Act, 1954 on an existing mortg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same property. Therefore, the only property which was possessed by the dealer and/or person liable to pay tax or other dues under the Rajasthan Sales Tax Act, was equity of redemption in respect of that property. The first charge would operate, therefore, only on the equity of redemption. The argument though ingenious, will have to be rejected. Where a mortgage is created in respect of any property, undoubtedly, an interest in the property is carved out in favour of the mortgagee. The mortgagor is entitled to redeem his property on payment of the mortgage dues. This does not, however, mean that the property ceases to be the property of the mortgagor. The title to the property remains with the mortgagor. Therefore, when a statutory first charge is created on the property of the dealer, the property subjected to the first charge is the entire property of the dealer. The interest of the mortgagee is not excluded from the first charge. The first charge, therefore, which is created under Section 11-AAAA of the Rajasthan Sales Tax Act will operate on the property as a whole and not only on the equity of redemption as urged by Mr Tarkunde. After holding so, coming to the case on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he property which was sold even before its sale, the State would be entitled to recover the sale proceeds from whoever has received the amount from the court by filing a suit. Section 73(3) read with 73(2) CPC contemplate such a relief being granted in a suit. ..." ".... The prior attachment effected by the State similarly fastens itself to the sale proceeds taken away by the decree holder. The State is, therefore, entitled to recover the amount from the decree holder who has taken away the amount. ... " 23. In P.E. Ramakrishnan vs. The Assistant Commissioner of Agricultural Income Tax, Madurai [1999 (1) CTC 166], one of us (P.Sathasivam,J.) while considering the dues to the Government under Tamil Nadu Agricultural Income-tax Act, held that dues to Government will have priority over other debts. 24. All the decisions relied on by Mr. V.T. Gopalan, clearly show that the Government is entitled to claim its dues/taxes/duties in preference to other ordinary debts. In all those cases there is no provision as found in SARFAESI Act or a specific provision claiming to have "first charge" as provided in Rajasthan Sales Tax Act in State Bank of Bikaner Ja ..... X X X X Extracts X X X X X X X X Extracts X X X X
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