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TMI Blog2023 (1) TMI 734X X X X Extracts X X X X X X X X Extracts X X X X ..... S. Easwaran Sri. T. Rajesh Sri. A. Balagopalan SRI. P. Binny Joseph Sri. M.N. Manmadan Shri. Basil Mathew Sri. M.S. Imthiyaz Ahammed Smt. P. Seena Anju Mohan Sri. B. Ramachandran, CGC By Adv. Sri. P. Paulochan Antony By Advs. Adarsh Kumar K. M. Aneesh By Advs Ravi Krishnan Retheesh Na By Adv Sergi Joseph Thomas, By Adv L. Rajesh Narayan By Adv Madhu Radhakrishnan JUDGMENT Shaji P. Chaly J. The captioned writ appeals are filed by the State and its officials challenging the common judgment of the learned Single Judge in W.P. (C) Nos. 28316 of 2016 and other connected matters dated 30.07.2019, whereby the writ petitions filed by the financial institutions guided by the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002) are allowed; and held that a secured creditor under Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act, 1993) obtains priority over the right claimed by the Revenue, both in proceeding against the properties in question, or in recovering the secured debt, and accordingly quashed the proceedings initiated by the sales tax aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... officials, Sri. S. Easwaran, learned counsel for the State Bank of India, Sri. P. Paulochan Antony, learned counsel for Dewan Housing Finance Corporation Ltd., Sri. Adarsh Kumar and Sri. K. M. Aneesh, learned counsel for the Bank of Baroda, Sri. Mohan Jacob George, learned counsel for M/s. Indiabulls Asset Reconstruction Company Ltd., Sri. Sergi Joseph Thomas, learned counsel for M/s Arams Tourism Private Ltd., Smt. Renee Joshua and Sri. Saiju Sathyapalan, Sri. L. Rajesh Narayanan, learned counsel for Smt. Laija Nawabuddin and Sri. Madhu Radhakrishnan, learned counsel for M/s. Asset Reconstruction Company (India) Ltd. and perused the pleadings and material on record. 6. Section 26E contained under Chapter IV-A of the SARFAESI Act 2002 was brought into force with effect from 01.09.2016. The said provision specifies that notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority. 7. Section 26B deals with registra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reditor or other creditor holding attachment order shall have priority over any security interest created upon such property and any transfer by way of sale, lease or assignment or license of such property or attachment order subsequent to such registration, shall be subject to such claim. 13. Section 31B of the RDB Act, 1993 which deals with priority to secured creditors states that notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realize 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. 14. Therefore, on an analysis of the aforesaid provisions, it can be seen that there are certain modalities prescribed for registration of other attachments etc taken against the properties mortgaged by the loanees before the financial institutions. However, Section 26E only specifies that the secured creditor shall be paid in priority over all other debts and all revenues, taxes, ces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be sold; (d) time and place of the public auction or the time after which sale by any other mode shall be completed; (e) deposit of earnest money as may be stipulated by the secured creditor; and (f) any other terms and conditions, which the authorized officer considers it necessary for a purchaser to know the nature and value of the property. 19. Rule 9 (1) stipulates that no sale of immovable property under the Rules 2002, in first instance shall take place before the expiry of 30 days from the date on which the public notice of sale is published in newspapers as referred to in the proviso to sub-rule (6) of Rule 8 or notice of sale has been served to the borrower. 20. Sub-rule (2) of Rule 9 states that the sale shall be confirmed in favour of the purchaser who has offered the highest sale price in his bid or tender or quotation or offer to the authorized officer and shall be subject to confirmation by the secured creditor. Other rules are provided thereto to deal with the payment to be effected by the purchaser. 21. Sub-rule (6) of Rule 9 dealing with confirmation of sale states that 'on confirmation of sale by the secured creditor and if the terms of the payment hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is that the Rules discussed above are in violation of Section 26E since Section 26E creates a priority to the secured creditors. However, in respect of the same, the State Government contents that there is only priority to the secured creditors for payment of the debts due over all other debts, revenues, taxes etc., and therefore, merely because the financial institutions have exercised their priority even by sale of the property, the first charge created in favour of the Government as per the statutes said above would not be eliminated. 29. In order to proceed further, we are of the view that the concerned provisions of the KGST Act, 1963 and the KVAT Act, 2003 are to be discussed. 30. Section 26B of KGST Act, 1963 enumerates that tax payable under the said Act to be first charge on the property. The said provision reads that notwithstanding anything to the contrary contained in any other law for the time being in force, any amount of tax, penalty, interest and any other amount, if any, payable by a dealer or any other person under the Act shall be the first charge on the property of the dealer or such person. 31. Likewise, Section 38 of the KVAT Act, 2003 dealing with the tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... posed by him. 36. Therefore according to the State Government, purchase of an immovable property made by any person in a sale conducted by a financial institution as per the provisions of SARFAESI Act, 2002 and the RDB Act, 1993 are liable to pay the amounts due in order to secure a sale certificate free of encumbrances. 37. In order to understand the true implication of a sale notice issued under Rule 8 of the Rules 2002, Appendix IV-A constituted as per Rule 8(6) is extracted hereunder:- "APPENDIX IV-A [See proviso to rule 8(6)] SALE NOTICE FOR SALE OF IMMOVABLE PROPERTIES E-Auction sale Notice for Sale of Immovable Assets under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 read with proviso to rule 8(6) of the Security Interest (Enforcement) Rules, 2002. Notice is hereby given to the public in general and in particular to the Borrower(s) and Guarantor(s) that the below described immovable property mortgaged/charged to the Secured Creditor, the constructive/physical ...... (whichever is applicable) possession of which has been taken by the Authorised Officer of ........ Secured Creditor, will be sold on "As is wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ...../Khasra No............................. within the registration Sub District ................... and District Bounded: On the North by On the South by On the East by On the West by ------------------------------------------------------------------------------- List of Encumbrances 1. 2. Sd/- Authorised Officer (Name of the Institution) Date: Place:" 39. On a reading of the sale notice, it is evident that the notice contained clear expressions and terminologies in order to ensure that the properties are sold 'as is where is', 'as is what is', and 'whatever there is' condition. We will come to the true implication of those expressions used in the sale notice at a later point of time. 40. According to the State Government, when such a notice is issued by the financial institutions to sell off the secured asset making it clear that the properties offered for sale is in whatever condition it remains, a purchaser participating in a sale proceeding of whatever nature, is duty bound to make due enquiries in order to identify and find out whether any encumbrance is created on the properties offered for sale. 41. It is also to be noted that the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... harge'. 46. Therefore, according to the Government, as per the provisions of the KGST Act, 1963 and the KVAT Act, 2003 discussed above, the security for the payment of money to the State Government is created by operation of law. 47. In fact, the State Government has produced several documents along with I. A. No. 3 of 2022 and I.A No 2 of 2022 in W. A. Nos. 620 and 652 of 2022 in order to establish that amounts are due from the dealers who have mortgaged properties with the Bank, before the mortgage was created with the Bank. So also, the notices issued under the Kerala Revenue Recovery Act, 1968 attaching the properties are produced to show that a charge was created to the State Government on the failure of the dealer / mortgagor failing to pay the amount of tax which has fallen due in terms of the provisions of the KGST Act, 1963 as well as the KVAT Act, 2003. 48. Learned Special Government Pleader has invited our attention to a Division Bench judgment of this Court in Hamsa v. Assistant Commissioner [2008 (3) KLT 180] to canvas a preposition that to attract Section 26A of the KGST Act, 1963 dealing with certain transfers to be void, that it is not necessary that the assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our for payment of its dues, the bank must inform all the Central/State/Local Authorities regarding creation of such security interest, including the Sub-Registrar of documents and City Survey office concerned; (e) the bank/secured creditor, should before any property is attached and auctioned: (i) enquire with the Central/State/Local authorities regarding any dues on the property sought to be auctioned and in case such dues are found, to mention the same in the public notice to be published Inviting bids, so that the bidder, is made aware of the liability and encumbrance, which the property carries with it. (ii) where the secured creditor, has taken symbolic possession and is not in physical possession of the property, the public notice must indicate the nature of such possession and if the Secured creditor is unable to secure actual possession, the reason for not getting such possession (whether there is a tenant/licensee/family member/encroacher etc in occupation of the property, so that the bidder, is consciously made aware of the situation in which the property is and makes a conscious offer/bid. (iii) Where the secured creditor, is aware of Statutory dues the payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter. 44. Thus even in the present case, the dues as claimed by the respondent No.2, being a charge on the property, under Section 37(1) of MVAT Act, 2002, and the property having stood attached by the respondent No.2, before the auction, the petitioner, would be liable to pay the same to the respondent No.2, in order to obtain a clear and marketable title to the property, having purchased the same on 'As is where is and whatever there is basis'. In case the petitioner discharges the aforesaid dues of the respondent No.2, it would then be entitled to a no dues certificate from the respondent No.2." 51. Therefore on a perusal of the judgment of the Bombay High Court, it is categoric and clear that in unequivocal terms, it is held that the dues being a charge on the property as per the provisions of the Maharashtra Value Added Tax Act, 2002 and the property having stood attached by the revenue authorities before the auction, the purchaser of the property would be liable to pay the amount due under the encumbrance so as to secure a clear and marketable title to the property. 52. Learned Special Government Pleader further invited our attention to the order of the Hon'ble Ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertained after submission of the online bid." Having agreed to these stipulations, it is too late in the day for the petitioner to contend that the petitioner would not be liable to pay the statutory dues so as to remove the charge on the property in question in that regard. The argument of the petitioner is that the charge is not in respect of the property as such, but is the consequence of the statutory dues. That makes no difference. The fact remains that there is first charge of the State on the property in respect of the statutory dues. Having agreed to the terms referred to above, it is not open for the petitioner to resile from the liability to discharge the same in connection with the first charge of the State on the property in question. Hence, this special leave petition is dismissed for the reasons mentioned above. Thus, we uphold the decision of High Court in rejecting writ petition and reliefs claimed by the petitioner. We accede to the request of the counsel for the petitioner that after the petitioner pays the sales tax dues, a fresh sale certificate be issued by the Bank in favour of the petitioner. That request be considered by the Bank appropriately." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect from 01.09.2016) vis-a-vis among others, Section 26B of the KGST Act, 1963. 57. After making a threadbare survey of the earlier judgments of the Hon'ble Apex Court and the various provisions of law, has held that what is more significant to be noted is that there is no provision either in the RDB Act, 1993 and the SARFAESI Act, 2002 by which first charge has been created in favour of Banks, financial institutions or secured creditors qua the property of the borrower. 58. According to the learned Special Government Pleader, irrespective of the amendment made to the SARFAESI Act, 2002 and the RDB Act 1993, and introduction of Section 26E and 31B respectively the findings rendered by the Hon'ble Apex Court as above in Central Bank of India (supra), would still hold the field. 59. In Central Bank of India (supra), the Hon'ble Apex Court further discussed and held that if the 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, 1952, S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Limited [(2020) 9 SCC 215]; and the Full Bench judgment of this Court in Pushpangadan v Federal Bank Ltd. [2011 (4) KLT 134 (FB) which dealt with the provisions of SARFAESI Act, 2002 and the Kerala Buildings (Lease and Rent Control) Act, 1965, and other judgments were relied upon. 65. Our attention was also drawn to the judgment of a Three Judge Bench of the Hon'ble Apex Court in Bank of Maharashtra v. Pandurang Keshav Gorwardkar and Others [(2013) 7 SCC 754] which considered the question of the RDB Act, 1993 and Section 529A and 529(1) etc. of the Indian Companies Act, 1956 and held that a cumulative reading of Section 529A and 529(1) proviso leads to an irresistible conclusion that where a company is in liquidation, a statutory charge is created in favour of workman in respect of their dues over the security of every secured creditor and this charge is in pari passu with that of the secured creditor; such statutory charge is to the extent of workman's portion in relation to the security held by the secured creditor of the company; the said position is equally applicable where the assets of the company have been sold in execution of the recovery certificate obtained by the Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ticle 141 of the Constitution. Secondly, other than the declaration of law, whatever is stated in the order are the findings recorded by the Supreme Court which would bind the parties thereto and also the court, tribunal or authority in any proceedings subsequent thereto by way of judicial discipline, the Supreme Court being the Apex Court of the country. But, this does not amount to saying that the order of the court, tribunal or authority below has stood merged in the order of the Supreme Court rejecting the special leave petition or that the order of the Supreme Court is the only order binding as res judicata in subsequent proceedings between the parties. (vi) Once leave to appeal has been granted and appellate jurisdiction of the Supreme Court has been invoked the order passed in appeal would attract the doctrine of merger; the order may be of reversal, modification or merely affirmation. (vii) On an appeal having been preferred or a petition seeking leave to appeal having been converted into an appeal before the Supreme Court the jurisdiction of the High Court to entertain a review petition is lost thereafter as provided by subrule (1) of Order 47 Rule 1 CPC." 68. In Kunh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons given are intended for purposes of Article 141. This is so done because in the event of merely dismissing the special leave petition, it is likely that an argument could be advanced in the High Court that the Supreme Court has to be understood as not to have differed in law with the High Court. ............ 31. In Supreme Court Employees Welfare Associations case (supra), this Court held :- "When Supreme Court gives reasons while dismissing a special leave petition under Article 136 the decision becomes one which attracts Article 141. But when no reason is given and the special leave petition is summarily dismissed, the Court does not lay down any law under Article 141. The effect of a nonspeaking order of dismissal of a special leave petition without anything more indicating the grounds or reasons of its dismissal must, by necessary implication, be taken to be that the Supreme Court had decided only that it was not a fit case where special leave petition should be granted." 69. It was held therein that the law stated or declared by the Hon'ble Apex Court in its order shall attract applicability of Article 141 of the Constitution. It was also held that the reasons assign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is first charge of the State on the property in respect of the statutory dues is a binding precedent and therefore the appeals have to be allowed on the said sole ground. 72. On the other hand, learned counsel for the Bank / financial institutions submitted that the judgment of the Hon'ble Apex Court in Central Bank of India (supra) would not apply to the facts and circumstances of the case since the said judgment was rendered prior to the introduction of Chapter IV-A in the SARFAESI Act, 2002. According to the learned counsel, the judgment rendered by the Division Bench of this Court in Travancore Devaswom Board (supra) of coequal strength is binding on this Court, and therefore, if there is any doubt with respect to the proposition of law laid down in the said judgment, the matter may be referred to a Larger Bench for consideration. 73. Furthermore, it is contended that the Rules 2002 would not reconcile with Section 26E of the SARFAESI Act, 2002, and therefore, reliance placed by the learned Special Government Pleader as well as learned Senior Government Pleader on Sections 8 and 9 to canvass the preposition that the rule makes it clear that without discharge of the encumbra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sahakari Bank Ltd. and Another v. Joint Commissioner of Sales Tax, Nodal 9, Mumbai and Another; wherein the Full Bench of the Bombay High Court, after considering the issues elaborately, also taking into account the provisions of Chapter IV-A of the SARFAESI Act, 2002, has framed the following questions:- "44. Keeping in view the rival submissions, we have considered it appropriate to formulate the following substantial questions of law for answers: a. Having regard to the statutory provisions under consideration, does a secured creditor (as defined in the SARFAESI Act and the RDDB Act) have a prior right over the relevant department of the Government [under the BST Act/MVAT Act/MGST Act] to appropriate the amount realized by the sale of a secured asset? b. Whether, despite section 26E in the SARFAESI Act or section 31B of the RDDB Act being attracted in a given case, dues accruing to a department of the Government ought to be repaid first by reason of 'first charge' created over any property by operation of law (viz. the legislation in force in Maharashtra) giving such dues precedence over the dues of a secured creditor? c. Are the provisions, inter alia, according 'prior ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is held as follows:- "161. We, therefore, answer this question by observing that notwithstanding the duty of the authorized officer to indicate in the sale advertisement inviting bids the encumbrance(s) attached to the immovable property, i.e., the secured asset, as known to the secured creditor, if at all any detail in regard to such encumbrance(s) is not indicated by the sale is expressly made on "as is where is, whatever there is basis", the transferee shall be duty bound to deposit money for discharge of the encumbrance(s) provided, of course, that such liability may be overcome if he is in a position to disprove the claim of the department that he had no constructive notice of the charge, far less actual notice." 81. Such a finding was rendered by the Bombay High Court also taking into account the mandatory requirements contained under the Rules 2002 and finding that the requirements contained under the Rules are to be scrupulously followed failing which, without terminating the encumbrances caused, an encumbrance free sale certificate cannot be issued. 82. That apart, priority is defined under the Black's Law Dictionary Sixth Edition as follows:- "Priority. Preceden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions made across the bar. 85. Taking into account the provisions discussed above; the judgments in Central Bank of India (supra); the judgment of the Division Bench of Bombay High Court in Medineutrina (supra); the Full Bench decision of the Bombay High Court in Jalgaon Janta Sahakari Bank Ltd. and Another v. Joint Commissioner of Sales Tax, Nodal 9, Mumbai and Another referred to above, to which we are in respectful agreement; and the dismissal of the Special Leave Petition filed from Medineutrina (supra) with the declaration that the State has the first charge over the property in respect of the statutory dues; we are of the considered opinion that the law as it stands today, the State has first charge over the property and the charge runs with the property irrespective of the sale conducted by the financial institutions as per the provisions of the SARFAESI Act, 2002 and the RDB Act, 1993 and the debts are adjusted in priority; in spite of the amendments made to the Acts above. True, the aforesaid acts being central legislations, and going by the rules in vogue, the financial institutions have the right to conduct sale of the secured assets in accordance with law and adj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by learned counsel for the Bank / financial institutions that the said provisions of the Rules 2002 is in conflict with Section 26E, we are unable to agree with the same because the provisions of the Rules 2002 is intended to translate the true spirit of the SARFAESI Act, 2002 and to ensure that a purchaser coming forward to purchase a property offered by the Banks / financial institutions, make due inquiries concerning any encumbrance created over the property and thereby protect his interest. 91. There is no case for the Banks / financial institutions that the notices were given by the Bank after making due enquiries with respect to any encumbrance or that the purchasers have come forward to purchase the property after making due enquiries with respect to any encumbrance on the property. 92. This is more so when Section 3 of the TP Act, 1882 discussed above makes it clear that any negligent act on the part of a purchaser of a property to make due enquiries would be deemed to be a proper notice in regard to the encumbrances against the property. 93. Moreover, we have gone through the parliamentary discussions about the amendment of the SARFAESI Act 2002 and the RDB Act 1993; ..... X X X X Extracts X X X X X X X X Extracts X X X X
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