S.J.MUKHOPADHAYA, J.
The petitioner has challenged the auction notice Na. Ka. No.A3/626/01 dated 5th Feb., 2007, issued by the respondent for auction sale of the land in question. While the petitioner has questioned the auction sale on the ground that the land has already been sold and transferred in his favour, the stand taken by the respondents is that the respondents having first charge over the property, they have the right to sell the property.
2. One Jay Flash Ceramics Ltd., (hereinafter referred to as the 'company'), borrowed huge amounts from a consortium headed by the Indian Bank (hereinafter referred to as the 'Bank') in the year 1990 and mortgaged the property measuring 12.92 acres on 1st Aug., 1990 in Ongur village and Kambur village, Tindivanam, in favour of the Bank. The mortgage was created by the company along with its Directors giving personal guarantee. The company, having failed to discharge its liability, the bank proceeded against it for recovery of debt in O.A. No.1568/98 before the Debts Recovery Tribunal (hereinafter referred to as the 'Tribunal') under the Recovery of Debts due to Banks and Financial Institutions Act, 1993 (hereinafter referred to as the 'DRT Act') and the case was decreed in favour of the Bank on 30th Sept., 2004. Pursuant to the decree, a recovery certificate was issued in DRC No.191/04 and mortgaged properties were brought to sale by public auction notice dated 9th Nov., 2005. One, K.O.P. Enterprises carrying on business at Chennai, represented by its proprietor, P.K.Peer Mohammed, was the successful bidder in favour of whom a sale certificate vide Document No.537/06 dated 9th May, 2006, was issued, followed by mutation in his name. Later on, the said Peer Mohammed sold the land in favour of the petitioner vide Document No.279/07 dated 24th Jan., 2007, who also mutated the land in his name.
In regard to the same very land, the notice having been issued, the petitioner, a subsequent purchaser, has preferred the writ petition against the auction sale notice.
3. The case of the respondents is that the company was an assessee on the file of the Commercial Tax Officer, Porur Assessment Circle, Chennai. The assessee was eligible for interest free sales, which was deferred by eligibility certificate dated 5th Sept., 1993 under which the assessee was entitled to full benefit of sales tax deferral up to a ceiling limit of Rs.239.98 lakhs for the period 1st Feb., 1993 to 31st Jan., 2002. The schedule for repayment of deferred tax commenced from 1st Feb., 2002 ending with 31st Jan., 2011. The assessee availed the benefit to the extent of Rs.1,27,93,113/=. The registration certificate under the Tamil Nadu General Sales Tax Act, 1959 (hereinafter referred to as the 'GST Act') as well as the Central Sales Tax Act, 1956 (hereinafter referred to as the 'CST Act') were cancelled w.e.f. 1st April, 2000, due to non-renewal. As per clause 3 of the deferral agreement, in case of default in payment of deferred tax, the assessee undertakes that the movable and immovable properties of the company and that of the Directors shall be liable to be attached/proceeded towards realisation of deferred tax instalments and the term 'movables' shall include cash/shares/debentures/bank balance. As per clause 4 of the deferral agreement, the assessee shall not alienate, dispose, encumber the fixed assets nor shall it remove the fixed assets from the unit premises until deferred tax is fully repaid.
4. Further case of the respondent is that u/s 24 (1) of the GST Act, tax assessed shall be paid in such manner and in such instalment and within such time as may be specified in the notice not being less than 21 days from the date of service of notice. In the case of the assessee, assessment falling under sub-section (2) to Section 13 of GST Act shall be paid without any notice on demand. Any default of such payment, the whole of the amount outstanding on the date of default shall become immediately due and shall be charged on the properties of the person or persons liable to pay the tax or interest under the GST Act. Sub-section (2) of Section 24 of the GST Act provides that if any tax assessed or has become payable or any other amount due under the Act shall have priority over all other claims against the property of the dealer or person subject to claim of the Government in respect of land revenue and the claim of Land Development Bank in regard to property mortgaged to it u/s 28 (2) of the Tamil Nadu Cooperative Development Bank Act, 1934 and the same may, without prejudice to any other known mode of collection be recovered as --
a) Land revenue ; or
b) on application to any Magistrate as if it were a fine imposed by such Magistrate.
5. Learned counsel for the respondents further submitted that in the present case the assessee-company has submitted monthly returns under sub-section (2) of
Section 13 and the admitted tax dues payable as per the said return becomes a charge, created on the properties of the assessee. The actual payment stood postponed under the deferral scheme. The monthly return is filed as per Rule 18 of the TNGST Rules and the monthly return under sub-section (2) of
Section 13 has to be submitted on or before the 20th day of every succeeding month. On 10th May, 2000, notice was issued upon the assessee calling upon it to remit the sales tax arrears of Rs.1,48,01,177/= due under both the GST Act and the CST Act. Revenue proceeding u/s 24 of the GST Act were initiated on 29th Dec., 2000 by issuance of B-6 notice to Indian Bank, Egmore Branch, SIPCOT and TIIC. Form-30 requisition was issued on 28th Jan., 2001 and advertisement was published in The Indian Express on 14th Jan., 2001 by SIPCOT proposing to sell the land, building, plant and machinery owned by the defaulter in public auction. The SIPCOT was informed on 16th July, 2001 of the priority of charge u/s 24 (2). It followed by a notice dated 6th Aug., 2001, by which the defaulter was asked to pay the entire arrears enclosing the notice prior to attachment in Form-4 and Form-1 distraint order. A letter dated 19th Nov., 2001 was issued from SIPCOT informing that the auction sale for recovery will be subject to obtaining a clearance certificate from the sales tax department and on 7th March, 2002, the defaulter was asked for payment of arrears. SIPCOT was informed on 19th Nov., 2002 about the action taken under the Revenue Recovery Act. In reply, SIPCOT informed on 5th Dec., 2002 that possession of the mortgaged assets of the defaulter had already been taken by SIPCOT u/s 29 of the State Financial Corporation Act for recovery of term loan dues and that they are providing security incurring huge expenditure. It requested not to proceed with proposed auction sale by the sales tax department. However, a publication of auction sale notice was made in the District Gazette on 16th Dec., 2002 followed by auction sale notice dated 7th Jan., 2003.
6. It appears that SIPCOT vide its letter dated 22nd Jan., 2003, informed that TIIC and Indian bank are also having pari pasu first charge on the fixed assets. It also requested for remittance of the expenses incurred towards security and consent to take possession and also to share the sale proceeds on pro-rata basis. The Bank, by its letter dated 1st Dec., 2004, requested the respondents to give consent to share the sale proceeds with the secured creditors before proceeding with the auction sale. It followed by auction notice dated 11th Dec., 2004 fixing 20th Jan., 2005 as the date of auction.
7. On the other hand, in the meantime, the Debts Recovery Tribunal having decreed the case in favour of the Bank, recovery certificate was issued on 15th Dec., 2004, pursuant to which P.K.Peer Mohammed, being the highest bidder, the recovery officer , Debts Recovery Tribunal, issued auction notice and sold the land in favour of K.O.P. Enterprises represented through P.K.Peer Mohammed in whose favour the sale certificate was issued on 9th May, 2006. Later on, the land in question was transferred in favour of the petitioner by sale deed dated 24th Jan., 2007.
8. Learned counsel appearing on behalf of the petitioner submitted that the sale certificate having issued by the Tribunal u/r 65 of II Schedule of the Income Tax Act r/w
Section 29 of the DRT Act, without setting aside the sale, no action could be taken by the respondents. Further, according to him, the petitioner having obtained an encumbrance certificate in respect of the property and only after satisfying himself that there was no attachment, encumbrance or charges, he having purchased the property in good faith and his vendor having purchased the property pursuant to an auction sale, which was never challenged by any authority, the respondent cannot re-auction sale the very same property in question. There was no notice of any charge prior to auction sale and transfer issued by respondents nor there is any material to show that P.K.Peer Mohamed had notice of the alleged sales tax arrears. The petitioner has come across two notices on 5th Feb., 2007 and came to know that there was a failure on the part of the company to pay the amount due towards the alleged sales tax arrears.
Learned Special Government Pleader appearing on behalf of the respondents, while submitted that the respondents have first charge over the property and, thereby, sale, if any, made to be ignored, both the parties relied on recent Supreme Court decisions. Reliance was also placed on Section 24 of the GST Act, which is similar to the corresponding provisions of the CST Act.
9. We have heard the learned counsel for the parties and noticed the relevant facts.
10. The question that arise for determination in this case is :-
Whether the realisation of General Sales Tax and Central Sales Tax will have priority over the secured debts in terms of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act, 2002 (hereinafter referred to as 'NPA Act').
11. The question whether the State can claim priority over other debts for realisation of arrears of tax due to the State fell for consideration before the Supreme Court and other Courts from time to time. Such question being settled, we are referring only to certain case laws for the purpose of disposal of the present case. In Dena Bank Vs Bhikhabhai Prabhudas Parekh & Ors. (2005 (5) SCC 694), the Supreme Court, while noticed earlier case laws, observed :-
The principle of priority of government debts is founded on the rule of necessity and of public policy. The basic justification for the claim for priority of State debts rests on the well-recognised principle that the State is entitled to raise money by taxation because unless adequate revenue is received by the State, it would not be able to function as a sovereign Government at all. It is essential that as a sovereign, the State should be able to discharge its primary governmental functions and in order to be able to discharge such functions efficiently, it must be in possession of necessary funds and this consideration emphasises the necessity and the wisdom of conceding to the State, the right to claim priority in respect of its tax dues (see Builders Supply Corpn.). In the same case, the Constitution Bench has noticed a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts and that this rule of common law amounts to law in force in the territory of British India at the relevant time within the meaning of
Article 372 (1) of the Constitution of India and therefore continues to be in force thereafter. On the very principle on which the rule is founded, the priority would be available only to such debts as are incurred by the subject of the Crown by reference to the State's sovereign power of compulsory exaction and would not extend to charges for commercial services or obligation incurred by the subjects to the State pursuant to commercial transactions. Having reviewed the available judicial pronouncements their Lordships have summed up the law as under :
1)There is a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts.
2)The common law doctrine about priority of Crown debts which was recognised by Indian High Courts prior to 1950 constitutes law in force within the meaning of
Article 372 (1) and continues to be in force.
3)The basic justification for the claim 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. Similar view was expressed by Supreme Court in the case of Central Bank of India Vs State of Kerala & Ors. (JT 2009 (3) SC 216).
In the case of Union of India & Ors. - Vs SICOM Ltd. & Anr. (JT 2009 (1) SC 87), the question fell for consideration whether realisation of excise duty will have priority over secured debts of financial corporations. In the said case, Supreme Court, while held that Crown debts prevails over other debts only in relation to the unsecured debts, observed as follows :-
10. Generally, the rights of the crown to recover the debt would prevail over the right of a subject. Crown debt means the debts due to the State or the king; debts which a prerogative entitles the Crown to claim priority for before all other creditors. [See Advanced Law Lexicon by P.Ramanatha Aiyear (3rd Edn.) p.1147]. Such creditors, however, must be held to mean unsecured creditors. Principle of Crown debt as such pertains to the common law principle. A common law which is a law within the meaning of
Article 13 of the Constitution is saved in terms of
Article 372 thereof. Those principles of common law, thus, which were existing at the time of coming into force of the Constitution of India are saved by reason of the aforementioned provision. A debt which is secured or which by reason of the provisions of a statute becomes the first charge over the property having regard to the plain meaning of
Article 372 of the Constitution of India must be held to prevail over the Crown debt which is an unsecured one. It is trite that when a Parliament or State Legislature makes an enactment, the same would prevail over the common law. In the said case, the Supreme Court further observed as hereunder :-
12. To achieve the same purpose, the Parliament as also the State Legislatures inserted privisions in various statutes some of which have been referred to hereinbefore providing that the statutory dues shall be the first charge over the properties of the tax-payer. This aspect of the matter has been considered by this Court in a series of judgments.
12. Learned counsel for the petitioner laid much stress on the decision of Supreme Court in SICOM case (JT 2009 (1) SC 87); in reply learned counsel for the respondents referred to the judgment of Supreme Court in Central Bank of India case (JT 2009 (3) SC 216) and submitted that the subsequent case has been decided later on by a larger Bench of three Hon'ble Judges, while the earlier one was decided only by Bench of two Hon'ble Judges. Such submission requires no deliberation as both the judgments have dealt on two different aspects, one not covering the other issue.
13. In Central Bank of India case (JT 2009 (3) SC 216), the Supreme Court, while noticed that, none of the earlier judgments held that by virtue of the provisions contained in the DRT Act or the Securitisation Act the first charge has been created in favour of the Bank/Financial Institutions, etc., the Supreme Court held as follows :-
48. On the basis of above discussion, we hold that the DRT Act and the Securitisation Act do not create first charge in favour of banks, financial institutions and other secured creditors and the provisions contained in Section 38C of the Bombay Act and Section 26B of the Kerala Act are not inconsistent with the provisions of the DRT Act and the Securitisation Act so as to attract non obstante clauses contained in
Section 34 (1) of the DRT Act or Section 35 of the Securitisation Act. On the other hand, in the SICOM case (JT 2009 (1) SC 87), the Supreme Court, while held that right of the Crown to recover the debt would prevail over the right of a subject; it further held that the Crown debts means the debts due to the State or the King; debts which as a prerogative entitles the Crown to claim priority before all other creditors. Such creditors must be held to mean unsecured creditors. Principle of Crown debt as such pertains to common law principle. A debt, which is secured or by which reason of the provisions of a statute, become the first charge over the property, having regard to the plain meaning of
Article 372 of the Constitution of India must be held to prevail over the Crown debts, which is an unsecured one.
14. In fact, similar case fell for consideration before a Full Bench of this Court in UTI Bank Ltd. - Vs The Deputy Commissioner of Central Excise, Chennai 2 & Anr. (2007 (1) LW 50). In the said case, while dealing with the Central Excise Act, 1949 and the Customs Act, 1962 vis a vis the NPA Act, the question fell before the Full Bench was whether the Crown debts, for which there is no priority or charge as created under the statute should have precedence over the secured creditors or not. The Full Bench, while taking into consideration the fact that in the said case the Bank had taken possession of the property u/s 13 of the NPA Act, noticed that there was no specific provision under the Central Excise Act or the Customs Act claiming first charge as provided under other enactments and held as follows :-
26. In the light of the above discussion, we conclude, (i) Generally, the dues to Government, i.e., tax, duties, etc. (Crown's debts) get priority over ordinary debts.
(ii) Only when there is a specific provision in the statute claiming first charge over the property, the Crown's debt is entitled to have priority over the claim of others.
(iii) Since there is no specific provision claiming first charge in the Central Excise Act and the Customs Act, the claim of the Central Excise Department cannot have precedence over the claim of secred creditor, viz., the petitioner Bank.
(iv) In the absence of such specific provision in the Central Excise Act as well as in Customs Act, we hold that the claim of secured creditor will prevail over Crown's debts. In view of our above conclusion, the petitioner UTI Bank, being a secured creditor is entitled to have preference over the claim of the Deputy Commissioner of Central Excise, first respondent herein.
15. Having regard to the judicial pronouncements rendered by Courts and noticed above, we may sum up the law as under :-
(i) Arrears of tax due to the State can claim priority over unsecured debts.
(ii) The common law doctrine about priority of Crown debts/State debts is recognised law in force within the meaning of
Article 372 (1) of the Constitution of India.
(iii) The doctrine will not apply if first charge by way of priority is not claimed under the statute.
(iv) The doctrine of first charge/priority of the State over the property will prevail over the private debts, which is an unsecured debt, but such doctrine of first charge/priority over the property cannot prevail over secured debts of a person. If the statute permits to have first charge/priority over the property having regard to the plain meaning of
Article 372 of the Constitution of India, then only the State can claim priority over an unsecured debt.
16. So far as the present case is concerned, the claim of the State is based on Section 24 of the GST Act, which reads as follows :-
24. Payment and recovery of tax. -
(1) ................
(2) Any tax assessed on or has become payable by, or any other amount due under this Act from a dealer or person and any fee due from him under this Act, shall, subject to the claim of the Government in respect of land revenue and the claim of the Land Development Bank in regard to the property mortgaged to it under
Section 28 (2) of the Tamil Nadu Co-operative Land Development Banks Act, 1934 (Tamil Nadu Act X of 1934) have priority over all other claims against the property of the said dealer or person and the same may without prejudice to any other mode of collection be recovered --
(a) as land revenue ; or
(b) on application to any magistrate, by such Magistrate as if it were a fine imposed by him;
Provided that no proceedings for such recovery shall be taken or continued as long as he has, in regard to the payment of such tax, other amount or fee, as the case may be, complied with an order by any of the authorities to whom the dealer or person has appealed or applied for revision, under
Sections 31,31-A,33,35,36,37 or 38.
17. The aforesaid provision fell for consideration before this Court in the case of Tamil Nadu Mercantile Bank Ltd. - Vs Commercial Tax Officer, South Aavani Moola Veedhi Circle, C.T.O. Complex, Madurai in W.P. (MD) No.10366/08. In the said case, the Court noticed that the provision of
Section 24 is in contrast to the other enactments, such as Bombay Sales Tax Act and the Rajasthan Sales Tax Act, where first charge was created.
It will be evident from the Bombay Sales Tax Act, Rajasthan Sales Tax Act and the Kerala General Sales Tax Act that in all those Acts it was specifically mentioned that notwithstanding anything contrary contained in any law for the time being in force, any amount of tax, etc., due from a dealer or person under these Acts shall be the first charge in the property of the dealer. The rights of the State under the GST Act has to be seen in the context of the statutory provisions. All that the provision contemplates is that the tax assessed on or has become payable by, or any other amount due under the said Act from a dealer or person or any due from him under the said Act, shall be subject to the claim of the Land Development Bank in regard to the property mortgaged to it u/s 28 (2) of the Tamil Nadu Cooperative Land Development Banks Act, 1934 and it will have priority over all other claims against the property of the said dealer or person to be recovered as land revenue. By so holding, the provision (Section 24 of GST Act) by itself does not create the first charge as under the other enactments and the claim of the State is to subserve the claim of the secured creditor, who, by the anterior charge created in its favour, has a superior claim over even the State's claim.
18. Apart from the aforesaid position of law, in the present case, it will be evident that the assessee (dealer M/s.Jay Flash Ceramics Ltd.) mortgaged the land in question in favour of Indian bank on 1st Aug., 1990. After promulgation of NPA Act, the Bank being the secured creditor and mortgaged property being a secured debt, the Bank had right to auction sell the property. The assessee (dealer M/s.Jay Flash Ceramics) becomes eligible for interest free sales tax on 5th July, 1993, i.e., much after the property was mortgaged. Sales tax deferment agreement was reached on 1st Sept., 1993 and 22nd April, 1996, i.e., much after the properties in question were mortgaged in favour of the Bank. In that view of the matter also, the State cannot claim first charge over the property in question nor can claim any priority over the debts due to the Bank.
19. In view of our findings aforesaid, we are of the view that the respondents had no jurisdiction to auction sell the property in question and the impugned auction notice dated 5th Feb., 2007 having issued for auction sale of the property, which was mortgaged with the Bank, which has already been auction sold in favour of one K.O.P. Enterprises and subsequently purchased by the petitioner, is fit to be set aside. It is accordingly set aside.
The writ petition is allowed. In the facts and circumstances there shall be no order as to costs.
GLN To
1. The Deputy Commercial Tax Officer O/o The Dy. Commercial Tax Officer Dindivanam.
2. The Secretary to Government Commercial Taxes Department Government of Tamil Nadu Fort St. George, Chennai 9