Indian Bankrep. by Authorised OfficerVellore Circle Office45-51, Katpadi RoadTamil Nadu 632 004 v. The Commercial Tax Officer Office of CTO Navalpur, Ranipet

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 16.7.2009CORAMTHE HON'BLE MR.JUSTICE S.J.MUKHOPADHAYAANDTHE HON'BLE MR.JUSTICE RAJA ELANGOWrit Appeal No.1360 of 2008Indian Bankrep. by Authorised OfficerVellore Circle Office45-51, Katpadi RoadTamil Nadu 632 004...Appellant/PetitionerVs.1. The Commercial Tax Officer Office of CTO Navalpur, Ranipet.2. Tajura Leathers, a Partnership firm, 29, Solai Amman Koil Street Chennai 600 007.3. Surya Leather Export No.4, 3rd Cross Street Sylvan Lodge Colony Kilpauk, Chennai 600 010...Respondents/Respondent-----Appeal against the order of the learned single Judge dated17.9.2008 made in W.P.No.18975 of 2007. Writ Petition praying toissue a writ of Certiorarified Mandamus calling for the recordsrelating to Tamil Nadu Government Gazatte No.01 dated 5.1.2007 andconsequential order bearing No.NK.A3.2310/2002 dated 16.3.2007 on thefile of the 1st respondent and quash the same in so far as it relatesto the property situated at Plot No.97 SIDCO Industrial Estate SIPCOTRanipet which is mortgaged to the petitioner bank and consequentlydirect the 1st respondent to stop all further proceedings forrecovering any arrears of sales tax payable by the 2nd respondentfrom and out of the sale proceeds which have been appropriated by thepetitioner payable to it.----- https://hcservices.ecourts.gov.in/hcservices/ For Appellant : Mr.Jayesh DoliaFor M/s. Aiyar and DoliaFor Respondent-1 : Mr.Haja Naziruddin Spl.G.P. (Taxes)For Respondent-3 : Mr.V.Sudhakar-----J U D G M E N T(Delivered by S.J.MUKHOPADHAYA,J.)Indian Bank (for brevity "Bank"), which is a secured creditorunder the Securitisation and Reconstruction of Financial Assets andEnforcement of Security Interest Act, 2002 (in short "SARFAESI Act,2002") has preferred this writ appeal against the judgment dated17.9.2008 passed by the learned single Judge in W.P.No.18975 of 2007.2. The said writ petition was preferred by the Bank against theTamil Nadu Government Gazette No.01 dated 5.1.2007 and consequentialorder bearing No.NK.A3.2310/2002 dated 16.3.2007, so far as itrelates to the property situated at Plot No.97, SIDCO IndustrialEstate, SIPCOT, Ranipet. By the aforesaid proceedings, the auctionconducted by the Bank in regard to the property in question was heldto be void on the ground that the State Government has priority overthe property for the owner having not paid the arrears of tax due tothe Government, which is outstanding and the said action has beeninitiated under Revenue Recovery Act for the purpose of recoveringthe arrears of tax.3. Similar matter, earlier, fell for consideration of a Divisionbench and the issue raised has already been decided. Hence, it isnot necessary to discuss all the facts except the relevant one.4. The second respondent, Tajura Leathers and Partnership Firm(hereinafter referred to as the "Company"), obtained creditfacilities from the Bank. As security for the dues, the Companyoffered its following immovable properties by availing equitablemortgage, apart from hypothecation of plant and machinery, viz.(1) (i) Plot No.97, SIDCO Idustrial Estate; and (ii) Mukuntharayapuram-2548 sq.ft. S.No.476/5B; and(2) S.Nos.114/4 and 114/5 situated at ManthangalVillage, Ranipet Town. https://hcservices.ecourts.gov.in/hcservices/ In addition to the above, three immovable properties of theguarantors were also mortgaged with the Bank. As the Companydefaulted, the Bank filed O.A.No.1275 of 1999 before the DebtRecovery Tribunal, Chennai for recovery of Rs.43,20,860/- as on10.12.1999. The said O.A. was pending. As there was enormous delay,the Bank took steps under SARFAESI Act, 2002 and issued notice underSection 13(2) on 1.8.2005. Subsequently, action was taken underSection 13(4) by taking possession of the mortgaged property. Afterpublication of notice in the newspaper on 15.2.2007, the auction tookplace on 5.3.2007 and immovable properties mortgaged with the Bankwere sold in public auction for a sum of Rs.62.91 lakhs andthereafter, the Bank issued sale certificate in favour of the auctionpurchaser. Similarly, the property comprised in S.No.476/5B was alsosold and registered in favour of a third party/purchaser.5. The third respondent purchased the property comprised in PlotNo.97, SIDCO Industrial Estate, SIPCOT, Ranipet, measuring to anextent of 19,520 sq.ft., together with shed, on 5.3.2007 for a sum ofRs.19.23 lakhs. A sale certificate was issued to the thirdrespondent. 6. While so, the first respondent/State issued the impugnedproceedings dated 16.3.2007 informing that since the owner of theproperty, viz. the second respondent has committed default in paymentof sales tax to the tune of Rs.37,09,966/-, the provisions of Section24 of the Tamil Nadu General Sales Tax Act (in short "TNGST Act") hasbeen invoked and requesting the Bank to remit to the first respondentthe defaulted sum of Rs.37,09,966/- from the sales proceeds, ascontemplated under section 24(3) of the TNGST Act. 7. Before the learned single Judge, the Bank took a plea thatthe State has no jurisdiction to invoke the provisions of Section 24of the TNGST Act, the property being mortgaged with the bank andhaving auction sold under SARFAESI Act, 2002. On behalf of theState, it was contended that as per Section 24(1) and (2) of theTNGST Act, in the event of default made by any dealer in respect oftaxes assessed under the Act, the outstanding amount shall becomeimmediately due and shall be a charge on the properties and anyamount due under the Act shall have priority over all other claimsover the property of the dealer. It was further submitted on behalfof the State that as per Section 24 of the TNGST Act, by operation oflaw, a statutory charge has been created on the property andtherefore, SARFAESI Act can have no overriding effect over suchstatutory charge. They rely on the provisions of law and numerousdecisions and after hearing the parties, the learned Judge held thatthe first respondent has statutory charge which is having priorityover all other claims over the property and therefore, the Bankcannot successfully challenge the proceedings of the first respondentand thereby, the Court dismissed the writ petition. https://hcservices.ecourts.gov.in/hcservices/

7. Similar plea was taken by the counsel for the Bank whoreferred to one or other provisions. The learned Special GovernmentPleader appearing for the State also brought to our notice differentprovisions as was referred to by the learned single Judge. But, asthe matter stands decided by the Division Bench decision inM.Nagarajan v. The Deputy Commercial Tax Officer, Tindivanam andanother [W.P.No.10246 of 2007 dated 12.6.2009 - unreported], we arenot repeating such submission as was taken before the learned singleJudge. 8. In the case of M.Nagarajan (supra), the Court noticed variousdecisions of the Supreme Court and this Court. DRT Act andSecuritisation Act do not create first charge in favour of the Bank.This was held by the Supreme Court in Central Bank of India v. Stateof Kerala & Others [JT 2009 (1) SC 216]. In the said case, theSupreme Court held that the provisions of Section 38C of the BombayAct and Section 26B of the Kerala Act are not inconsistent with theprovisions of the DRT Act and the Securitisation Act, so as toattract non obstante clauses contained in Section 34(1) of the DRTAct and Section 35 of the Securitisation Act. 9. When similar matter fell for consideration before the FullBench in UTI Bank Ltd. v. The Deputy Commissioner of Central Excise,Chennai-2 & Anr. [2007 (1) LW 50], the Full Bench held as under:“26. In the light of the above discussion, weconclude,“(i) Generally, the dues to Government, i.e.,tax, duties, etc. (Crown's debts) get priorityover ordinary debts.(ii) Only when there is a specific provisionin the statute claiming “first charge” over theproperty, the Crown's debt is entitled to havepriority over the claim of others.(iii) Since there is no specific provisionclaiming “first charge” in the Central ExciseAct and the Customs Act, the claim of theCentral Excise Department cannot have precedenceover the claim of secred creditor, viz., thepetitioner Bank.(iv) In the absence of such specific provisionin the Central Excise Act as well as in CustomsAct, we hold that the claim of secured creditorwill prevail over Crown's debts. ” https://hcservices.ecourts.gov.in/hcservices/ In view of our above conclusion, the petitioner UTIBank, being a secured creditor is entitled to havepreference over the claim of the Deputy Commissionerof Central Excise, first respondent herein.”10. In the case of Union of India & Ors. v. SICOM Ltd. & Anr.[JT 2009 (1) SC 87], the question fell for consideration is whetherrealisation of excise duty will have priority over secured debts onfinancial corporation. In the said case, the Supreme Court held thatCrown debts means debts due to the State or the King; debts which aprerogative entitles the Crown to claim priority for before all othercreditors, but the same must be held to mean unsecured creditor. Infact, the following observation was made by the Court in the saidcase.“10. Generally, the rights of the crown to recoverthe debt would prevail over the right of a subject.Crown debt means the debts due to the State or theking; debts which a prerogative entitles the Crown toclaim priority for before all other creditors. [SeeAdvanced Law Lexicon by P.Ramanatha Aiyear (3rd Edn.)p.1147]. Such creditors, however, must be held tomean unsecured creditors. Principle of Crown debt assuch pertains to the common law principle. A commonlaw which is a law within the meaning of Article 13of the Constitution is saved in terms of Article 372thereof. Those principles of common law, thus, whichwere existing at the time of coming into force of theConstitution of India are saved by reason of theaforementioned provision. A debt which is secured orwhich by reason of the provisions of a statutebecomes the first charge over the property havingregard to the plain meaning of Article 372 of theConstitution of India must be held to prevail overthe Crown debt which is an unsecured one. It istrite that when a Parliament or State Legislaturemakes an enactment, the same would prevail over thecommon law.”11. In the said case, the Supreme Court further observed asunder:“12. To achieve the same purpose, the Parliament asalso the State Legislatures inserted privisions invarious statutes some of which have been referred tohereinbefore providing that the statutory dues shallbe the first charge over the properties of the tax-payer. This aspect of the matter has been consideredby this Court in a series of judgments.” https://hcservices.ecourts.gov.in/hcservices/

12. Having noticed the relevant provisions, the Division Bench,by aforesaid unreported judgment dated 12.6.2009 in M.Nagarajan(supra), held as under:15. Having regard to the judicial pronouncementsrendered by Courts and noticed above, we may sum up thelaw as under :-“(i) Arrears of tax due to the State can claimpriority over unsecured debts.(ii) The common law doctrine about priority of Crowndebts/State debts is recognised law in force withinthe meaning of Article 372 (1) of the Constitution ofIndia.(iii) The doctrine will not apply if first charge byway of priority is not claimed under the statute.(iv) The doctrine of first charge/priority of theState over the property will prevail over the privatedebts, which is an unsecured debt, but such doctrineof first charge/priority over the property cannotprevail over secured debts of a person. If thestatute permits to have first charge/priority overthe property having regard to the plain meaning ofArticle 372 of the Constitution of India, then onlythe State can claim priority over an unsecured debt.”13. The learned counsel appearing on behalf of the State reliedupon the Division Bench decision in Punjab National Bank v.Commercial Tax Officer II [(2006) 3 MLJ 919]. In the said case,having noticed Section 26(6) of the TNGST Act, it was held thatSection 26(6) creates a first charge on the property of the dealerand hence, the tax assessed under the Sales Tax Act will havepriority over all other debts including a prior mortgage.14. Reliance was also placed on another Bench decision of thisCourt in Central Bank of India v. State of Tamil Nadu [(1999) 113 STC145]. In the said case also, the Court held that under Section 26(6)of the TNGST Act, sales tax due shall be charged on the dealer'sproperty, having priority over all other claims against property ofthe dealer.15. Having gone through the aforesaid judgment, we are of theview that the aforesaid judgment is silent on the question whetherthe State Government can claim priority over another person, whosedebt is also a secured debt. In that case, it has not been https://hcservices.ecourts.gov.in/hcservices/ considered whether the mortgage of the property is only under thegeneral law or the secured creditor has any secured interest over thesecured asset.16. It is not in dispute that the Bank is a secured creditorwithin the meaning of Section 2(zd) of the SARFAESI Act, 2002. Ithas "secured interest" over the secured asset. Section 2(zc) definessecured asset as property on which security interest is created.Security interest is defined under Section 2(zf), as right, title andinterest of any kind whatsoever upon property, created in favour ofany secured creditor and includes any mortgage, charge,hypothecation, assignment other than those specified in Section 31.Security agreement is already existing between the bank and borrower,as defined under Section 2(zb) which means an agreement, instrumentor any other document or arrangement under which security interest iscreated in favour of the secured creditor including the creation ofmortgage by deposit of title deeds with the secured creditor. 17. If the status of the State is looked into, it will beevident that it can claim priority of debt over others in regard tothe arrears of tax due to the State. As per the Supreme Courtdecision in Union of India & Ors. v. SICOM Ltd. & Anr. [JT 2009 (1)SC 87], for recovery of State debts, the State can claim priority forbefore all other creditors, but such creditor must be held to mean"unsecured creditor". No such priority can be claimed over a securedcreditor. 18. The findings of the Division Bench in the case ofM.Nagarajan (supra), reads as under:15. (i) ... (ii) ...(iii) ... (iv) The doctrine of first charge/ priority of theState over the property will prevail over the privatedebts, which is an unsecured debt, but such doctrineof first charge/priority over the property cannotprevail over secured debts of a person. If thestatute permits to have first charge/priority overthe property having regard to the plain meaning ofArticle 372 of the Constitution of India, then onlythe State can claim priority over an unsecured debt.”19. This apart, the assets being secured assets with the Bank,having its secured interest over the property, the Bank being asecured creditor and its debt being a secured debt, we hold that theprinciple of first charge/priority of State over the property willnot be applicable in the present case. We, accordingly, set aside https://hcservices.ecourts.gov.in/hcservices/ the impugned judgment dated 17.9.2008 passed by the learned singleJudge made in W.P.No.18975 of 2007 and also the gazette notificationNo.01 dated 5.1.2007 and consequential order bearingNo.NK.A3.2310/2002 dated 16.3.2007 so far as it relates to the landwhich were the secured assets of the bank and has already been sold.In the result, the writ appeal is allowed. There shall be noorder as to costs. Sd/- Asst.Registrar/true copy/ Sub Asst.Registrar kplTo1.The Commercial Tax Officer Office of CTO Navalpur, Ranipet.2.The Authorised Officer, Indian Bank, Vellore Circle Office 45-51, Katpadi Road Tamil Nadu 632 004.+1 cc to M/s.Aiyar & Dolia, Advocate, SR.No.316011 cc To The Government Pleader, SR.31817W.A.No.1360 of 2008.GV {CO}TP/10.8.2009.