SCA/28784/2007 1/42 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 28784 of 2007 For Approval and Signature: HONOURABLE MR.JUSTICE S.R.BRAHMBHATT ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= PANCHMAHAL STEEL LIMITED - Petitioner Versus THE BANK OF BARODA & 10 - Respondents ========================================================= Appearance : MS MEGHA JANI for Petitioner: RULE SERVED for Respondents : 1 - 2. MR KI SHAH for Respondent : 1, MR DHARMESH J GURJAR for Respondents : 3 - 10. RULE NOT RECD BACK for Respondent : 11, ========================================================= CORAM : HONOURABLE MR.JUSTICE S.R.BRAHMBHATT Date : 25/04/2008 CAV JUDGMENT 1.The petitioner, a Company incorporated under the Companies Act, 1956, has approached this Court SCA/28784/2007 2/42 JUDGMENT under Article 226 of the Constitution of India, challenging:- (i)The order dated 1/11/2007 passed by the Debts Recovery Appellate Tribunal, Bombay; in Misc. Appeal No. 217 of 2007 (ii) The Order dated 29/10/2007 passed by Debts Recovery Tribunal, Ahmedabad in Appeal No. 18/A of 2007 to the extent it held that the appeal was not maintainable against the order of Learned Recovery Officer till the attachment / seizure of the movables takes place; (iii)The Order dated 22/10/2007 passed by learned Recovery Officer, Debts Recovery Tribunal – II, Ahmedabad in the Recovery Proceedings No. 1503 as perverse, unjust, improper, bad in law and requires to be quashed and set aside. 2. The Respondent No.1 is a nationalized Bank and a certificate holder against Respondent No.2 to 10. Respondents Nos. 3 to 10 are guarantors to Respondent no.1. Respondent No.11 is another creditor to certificate debtor Nos. 2 to 10. 3.The facts in brief leading to filing this petition deserves to be set out as under. (i) The Respondent no.1 filed Original Application No. 77 of 1997 against Respondent Nos. 2 to 10, which came to be allowed by Debts Recovery Tribunal, Ahmedabad [“DRT Ahmedabad” SCA/28784/2007 3/42 JUDGMENT for brevity], vide its order dated 7/1/2003. Pursuant thereto recovery proceedings bearing No. 1503 has been initiated by the Recovery Officer. In the said recovery proceedings No. 1503, Respondent no.1 on 16.05.2007 filed an application for attachment and sale of Nickel from 3rd party i.e. petitioner on the ground that said Nickel was Hypothecated by Respondent no.2, the Certificate debtor to the Respondent No.1 Certificate Holder Bank and it was allegedly lent by Respondent Certificate debtor to the petitioner in the year 1986 contrary to the provisions of Export and Import Policy and orders then prevalent. Respondent no.1 claimed that at the relevant time on account of hypothecation agreement between Respondent No.1 Bank and Respondent No.2 it could not have lent the same to present petitioner in the year 1986 as it was under it’s charge and otherwise also it’s transfer was regulated by Import Export Policy and restrictive orders made there under. The Respondent No.1 has stated in the application for attachment that as the nickel was not available in the market the petitioner approached Respondent No.2 and demanded nickel on loan basis and promised that as and when the petitioner would receive their quota of nickel petitioner would return the same quantity of nickel to Respondent no.2. It has been claimed by the Respondent no.1 that said nickel is in possession of the petitioner not as owner but for & on behalf of Respondent No.2 as an agent of Respondent no.2, and that the petitioner is SCA/28784/2007 4/42 JUDGMENT not the owner of the said nickel as the petitioner has not purchased and Respondent no.2 has not sold the same. It is alleged that the petitioner has no ownership right on the said nickel and therefore the petitioner has no right to possess the same. The Recovery Officer, DRT Ahmedabad vide its order dated 18/5/2007 issued show cause notice under Section 25 (a) of the Recovery Of Debts Due To Bank And Financial Institutions Act 1993 (here-in-after referred to as the “Recovery Act” for short) to the petitioner as to why the movable being nickel should not be attached and sold to recover the certified dues of Respondent No.1 within a period of 30 days thereafter. Respondent No. 4 to 7, 9 and 10 inter alia filed their affidavits-in-reply to the said notice. The petitioner was neither a party to the Original Application nor any averments were made in the said application against the petitioner. In this view of the matter the petitioner was a third party, therefore entitled to file objection which had been filed on 20/6/2007 for recalling the show cause notice issued under Section 25(a) of the Recovery Act. The petitioner also filed application-seeking direction to the Respondent no.1 to produce documents on the basis whereof the claim against the petitioner had been made. (ii) The petitioner denied claim of the Respondent No.1 with regard to ownership of the nickel. It was further contention of the petitioner that the petitioner gave amount/value SCA/28784/2007 5/42 JUDGMENT against the nickel and the said amount was deposited in the advance account of the respondent no.2 with the respondent no.1 bank. This fact clearly show that the transaction between petitioner and Respondent no.1 was not of loan as alleged by Respondent No.1. The Respondent No.1 after having received money equivalent to the price of the nickel alleged to have been taken on loan, for the reasons best known to it and as the price of nickel had gone up in the market requested the petitioner to return the quantity of Nickel lent to them and filed civil suit being Civil Suit No. 260 of 1988 against the petitioner before the Learned Civil Judge (SD) Vadodara valued at Rs.22.20 lacs for recovering the said material. The petitioner contested the suit on various grounds that the entire transaction was void ab initio and it was governed by Import Export Management, Orders, Rules, & Regulations etc. Learned Civil Judge, Vadodara heard the matter and passed the order that the petitioner should maintain stock of 27 M.T. Of nickel till final disposal of the suit and further directed the petitioner to submit affidavit every month in the Court. 4. Being aggrieved by the said order, petitioner preferred Appeal From Order before this Court being A.O. No: 500 of 1988 wherein this Court on 3/7/1989 modified the order and directed the petitioner to maintain stock of 13.5 M.T. Nickel in Ferro Nickel contents and also directed to file affidavit every month disclosing the same. The petitioner is SCA/28784/2007 6/42 JUDGMENT complying with the said direction. 5.The Recovery Officer rejected petitioner's objection vide his order dated October 22, 2007 and issued Order of Attachment for attaching and selling movable property from the present petitioner being nickel lying at Kalol, district Panchmahal. Petitioner challenged the said order of learned Recovery Officer by way of filing Appeal under Section 30 of the Recovery Act before DRT, Ahmedabad which registered the appeal as Appeal No. 18/A of 2007. In terms of paragraph no.7 of the aforesaid appeal, the petitioner prayed for staying operation, implementation and enforcement of the impugned order dated October 22, 2007. The said appeal was taken up for hearing on 26/10/2007 and the DRT, Ahmedabad vide its order dated 29/10/2007 issued show cause notice upon Respondents and made the same returnable on 5/11/2007. The DRT, Ahmedabad did not grant ex-parte relief in terms of para 7 (b) of the appeal memo. Being aggrieved with the said order of 29/10/2007 passed by the DRT, Ahmedabad, refusing to grant interim relief, petitioner filed Appeal under Section 20 of the Recovery Act before the Debts Recovery Appellate Tribunal, Mumbai on 30/10/2007. Said appeal was heard on the same day and the Debts Recovery Appellate Tribunal, Mumbai [“DRAT” Mumbai for brevity] was pleased to grant ad-interim stay. The DRAT, Mumbai disposed of Misc. Appeal No. 217 of 2007 observing that ad-interim relief order of not taking possession shall be continued up to 5/11/2007, but in the meantime petitioner shall SCA/28784/2007 7/42 JUDGMENT allow Respondent no.1 to take inventory of the property and attach the nickel. Being aggrieved and dissatisfied with the aforesaid order present petition is filed under Article 226 of the Constitution of India. 6. This Court [Coram: R.M.Doshit J] on 05.11.2007 issued Rule and granted ad-interim stay against the attachment of the quantity of Nickel in question on condition that the petitioner Company will continue to maintain stock of 13.5 MT of Nickel as directed by this court on 3rd, July 1989. 7.Learned counsel for the petitioner submitted that the Recovery Officer DRT Ahmedabad ought to have accepted their submissions and recalled the notice dated 22.05.2007. The Recovery Officer, DRT Ahmedabad ought to have appreciated that the goods in question i.e. Nickel in the possession of present petitioner cannot be said to be property of respondent no.2 only on the strength of the contention and few correspondence indicating it to be the loan transactions. The Recovery Officer, DRT Ahmedabad ought to have appreciated the fact that the Certificate Holder Bank i.e. present respondent no.1 cannot have better claim than the Respondent no.2 the Certificate Debtor company against the third party against whom the Respondent no.2 has already filed Special Civil Suit no.260 of 1988 and wherein the Civil Court had passed order of maintaining 27 MT of which was challenged by the petitioner by preferring A.O. 500 of 1988 wherein the Court on mutual agreement of the parties SCA/28784/2007 8/42 JUDGMENT modified it vide it’s order dated 3.07.1989 and ordered that the petitioner to maintained 13.5 MT of Nickel. In view of this the Nickel sought to be attached cannot be said to be property of the Respondent no.2 so as to be amenable to attachment. 8.The Recovery Officer, DRT Ahmedabad ought to have appreciated the facts that when the competent Civil Court was examining the very title of the goods he could not have issued notice for attachment and sell as it did vide its order dated 22.10.2007. 9. The Learned Counsel for the petitioner further submitted that DRT Ahmedabad erred in not granting ad-interim relief to the petitioner as the order of the Recovery Officer,DRT Ahmedabad was ex facie erroneous and untenable. The impugned order passed by DRT Ahmedabad on 29.10.2007 in Appeal No. 18-A of 2007 is erroneous and untenable in so far as it does not grant ad interim relief and it observes about maintainability of very appeal. It was contended that DRT Ahmedabad erred in concluding pending appeal that no appeal could be filed till the time the actual attachment is over. Under provisions of Section 30 of the Recovery Act any person aggrieved by an order of Recovery Officer can maintain appeal against the same. The Counsel contended that while issuing the process the DRT passed an order about the maintainability rendering issuance of notice to other side a mere formality only. Hence the impugned order deserves to be quashed and set aside in so far as it holds that the appeal is not maintainable against the order of SCA/28784/2007 9/42 JUDGMENT the Recovery Officer till the attachment /seizure of the moveable takes place. 10. The DRAT Mumbai and DRT Ahmedabad failed in appreciating the fact that under the order of this Court the petitioners were in fact maintaining the stocks of 13.5 MT of Nickel and the interest of the Bank was thus fully protected. The nickel lying with the petitioner if attached then manufacturing activities of the petitioner would come to a grinding halt. 11.The DRAT Mumbai and DRT Ahmedabad failed in appreciating that the Recovery Officer, by passing impugned order in fact decided the suit pending in the Court of Civil Judge (SD) at Vodadara without proper adjudication. 12. The Counsel for the petitioner also contended that the DRAT Mumbai and DRT Ahmedabad failed in appreciating that Respondent No. 4 to 7, 9,and 10 have stated that sale proceeds of the Nickel have been deposited by the Respondent No.2 to the Respondent No.1 Bank. The Counsel for the petitioner relied upon the following decisions of Apex Court as well as various High Courts in support of his submissions; (1) 1973 (Vol.91) Income Tax Reports 630 State Bank of Patiala Vs. union of India and others wherein the Punjab High Court has held that under Rule 11 of the Second schedule of the Income Tax Act 1961 the Recovery Officer erred in proceeding to decide the objection petition of the petitioner-bank in spite of the SCA/28784/2007 10/42 JUDGMENT fact that it was brought to his notice that a civil suit in the same matter was pending. The impugned order was liable to be quashed and set aside. (2) 1998 (vol.234) Income Tax Reports 188, Tax Recovery Officer Vs. Gangadhar Vishwanath Rande the Apex Court held that under Rule 11 of the Second Schedule of the Income Tax Act 1961 the Recovery Officer has no powers to declare any transfer of property to be void. (3) AIR 1990 Allahabad 47 Sultan Ahmed (deceased by L.R.’s) Vs. Rashid Ahmed the Allahabad High Court relying upon the principle of pari delicto that transaction is fraudulently entered into by both parties knowing it to be so then both the parties being pari delicto cannot take advantage thereof. 13.The petitioner’s Counsel further submitted that in the light of the provisions of the Recovery Act it could well be said that provisions of the Income Tax Act 1961 are to apply with appropriate modifications bearing in mind the facts and circumstances of each case only otherwise it would create quite an anomalous situation and would cause great hardship to the third parties and would result into exercise of powers by Recovery Officer not actually vested in him. 14. The counsel for the petitioner made elaborate submissions on the powers of Recovery Officer to take possession of certificate debtor’s moveable property from the third party. He heavily relied upon the provisions of Section 28 of the Recovery Act in support of his submissions that the very SCA/28784/2007 11/42 JUDGMENT notice under Section 25(a) of the Recovery act itself was invalid and hence the resultant order of attachment ought to have been stayed. 15. Shri Shah Learned Counsel for the respondent no.1 bank vehemently submitted that the provisions of the Recovery Act make it a Special Act having overriding effect upon the provisions of general law and it must be construed accordingly. 16.The Learned Counsel for the Respondent Bank submitted that in view of the provisions of Section 18 of the Recovery Act no Court or any other authorities shall have or be entitled to exercise any jurisdiction, powers or authority (except the Supreme Court, and a High Court exercising jurisdiction under article 226 and 227 of the Constitution) in relation to the matters specified in section 17. 17.The Learned Counsel for the Respondent Bank submitted that the goods in question i.e. Nickel ordered to be attached by Recovery Officer in fact belonged to the Respondent No.2 Company and it was under Hypothecation with the Respondent No.1 Bank. As such the respondent Certificate debtor-company did not have any authority to lend it to the petitioner as it did in the year 1986. More over it may be noted that the Nickel being one of those commodities requiring special permission of the Authority for its transfer could not have been lent by the respondent no.2 the Certificate debtor. When the Loan Transaction itself was not permissible the SCA/28784/2007 12/42 JUDGMENT theory of purchasing canvassed by the petitioner deserves out right rejection. 18. The respondent no.2 has filed civil suit being Special Civil Suit No.260 of 1988 wherein the court had passed interim order directing the present petitioner to maintain quantity of 27 MT Nickel which later on came to be modified by this court on 3.07.1989 in A.O. 500 OF 1988. This also would go to show that the petitioner was liable to return the quantity of Nickel they received as loan from the respondent no.2 Certificate Debtor company which was under the agreement hypothecated to the respondent no.1 bank. 19. The Learned Counsel for the Respondent Bank submitted that Writ petition is not maintainable when the Recovery Officer has already passed an order after hearing the petitioner and when the Tribunal is already moved by the petitioner filing appeal against the order of Recovery Officer. 20. The Learned Counsel for the Respondent Bank submitted that close scrutiny of Rule 11 of the Second Schedule of the Income Tax Act 1961 would show that attachment precedes the investigation upon the objection and claim of any parties. As per the scheme of Rule 11 of the Second Schedule of the Income Tax Act 1961 the Recovery Officer on receipt of the validly issued Certificate proceed for recovery by attachment and only thereafter if he receives any objection or claims he may investigate into it and, if found genuine, shall release the SCA/28784/2007 13/42 JUDGMENT same from attachment. Therefore in the instant case the petitioner may file objection to the Recovery Officer if so advised for releasing the Nickel from attachment and or in alternative if the order dated 22.10.2007 is treated as an order after investigation as envisaged into the Rule 11 of the Second Schedule of the Income Tax Act 1961 then remedy of instituting civil suit is available to the petitioner which they could have availed instead of filing petition under Article 226 or 227 of the Constitution. 21.The other side counsel Shri K.I. Shah for the Bank submitted that none of the orders impugned by the petitioner can be said to be in any way illegal. The perusal of impugned orders on the face of it, it would show that they are absolutely just & proper and the writ petition would not be maintainable under Article 226 of the Constitution as the alternative efficacious remedy is available. He submitted that the nickel in question was under hypothecation of the Bank and Respondent No.2 did never have any right over the nickel. Hypothecation includes title to the property, without possession and Respondent no.2 did not have any right & title so as to pass it on validly to any one else. The title has not passed and therefore it would not be open to the Respondent even to give nickel on loan. Parties cannot be permitted to carry out transactions prohibited by law by calling it in different names as the nickel at the relevant time was prohibited to be transferred in any manner without the prior and appropriate permission of the SCA/28784/2007 14/42 JUDGMENT concerned authority. In the instant case the Bank is a public institution seeking to recover huge amount and nickel as ordered to be attached would help the bank in recovering part of its dues from the respondent no.2. In view of this the impugned judgment & order deserves to be upheld and the petition deserved to be dismissed. 22. Heard learned counsels for the parties and perused the papers. Before adverting to the rival submissions of the parties it would be expedient to enlist most undisputable facts as they emerge from the record of this petition without any gloss by the counsels of the respective parties. (1)The respondent No.2 Certificate Debtor as well as petitioner was using ‘Nickel’ in ‘Ferro- Nickel’ content as an alloying element in manufacturing of Alloy steel and /or stainless steel as it is mentioned by respondent no.2 plaintiff in paragraph (3) of its plaint in Spl. Civil Suit No.260 of 1988. (2)The said material ‘Nickel’ used to be imported by its users under the “Open General License” known as OGL Scheme was not permitted to be sold without prior permission of Iron and Steel Controller, Calcutta. However importers use to lend and borrow it depending upon their requirements on their personal relations and utility need as mentioned in paragraph (3) of the plaint of the respondent no.2 herein above. SCA/28784/2007 15/42 JUDGMENT (3) It is also mentioned in paragraph (4) of the plaint of the respondent no.2 that plaintiff company (i.e. present respondent no.2 herein above)in and around June 1986 experienced total close of their production on account of the strike by employees for 42 days and it had in fact adversely affected manufacturing process even few weeks prior to the commencement of strike. The defendant company (i.e. present petitioner company) who was facing dire shortage of ‘Nickel’, had to borrow few tones of ‘Nickel’ in ferro-nickel content. The plaintiff company agreed to lend the agreed quantity of “Nickel” on loan basis to the defendant company against a deposit arrangement for the price of the material. Total 27 MT of Nickel against demand draft of Rs. 22,20,000 was sent to the defendant company. As it is mentioned in paragraph 9 of the plaint’s, requests made in 1987 for retuning it against return of deposit was not complied with by the defendants as by then prices of this material had gone up. (4)The respondent certificate debtor company had to file Special Civil Suit no.260 of 1988 in the Civil Court (SD) at Vadodara valued at Rs. 22,20,000 against defendant on 7.05.1988 praying that defendants be ordered to return “approximately 27 tons of Nickel in Ferro-Nickel from it stocks” or should be necessary from the next consignment of the defendant as the entire transaction was a mutual adjustment loan transaction against re-payment of Rs.22.20 lakhs SCA/28784/2007 16/42 JUDGMENT by the plaintiff. The plaintiff also filed exhibit 5 application for ad interim injunction under Order 39 Rule 1,2 and Section 151 of C.P.C praying that defendant be ordered to deliver 27 tons Nickel in Ferro Nickel contents from its stockyard or such quantity as the Court deemed fit. Or in alternative defendants to set aside and not use 27 tones of Nickel in Ferro Nickel contents and be restrained from using it into his production. Or direct the defendant to set aside 27 tons of Nickel from stocks to be arrived in future or from thestocks already ordered. (5) The defendant (present petitioner) in its written statement to the suit contended inter alia that the material in question was imported material controlled by the Actual users conditions prescribed for it’s import under OGL Scheme. The plaintiff and defendants were actual users of the said material. The Import-Export Procedure in the years between 1985 to 1988 prescribed that on account of actual users inability to use the imported material or is surplus to his needs then he may transfer or loan to any other actual user with written permission from the Sponsoring Authority concerned provided both the buyer and seller (actual users) were in the jurisdiction of the same Sponsoring Authority. The Iron and Steel Controller, Calcutta, was the Sponsoring Authority for both the parties at the relevant time. The plaintiff did not obtain any such SCA/28784/2007 17/42 JUDGMENT permission and hence committed serious illegality and such an agreement, which is contrary to law, or public policy cannot be enforced against the defendant. The transaction was sale as the defendant paid the prevalent market price of Nickel to the plaintiff. (6) The Civil Court appears to have ordered maintaining quantity of 27 tones of Nickel which came to be modified to 13.5 tones vide order dated 3.07.1989 passed in Appeal from Order No.500 of 1988 on mutual consent. (7)The said Special Civil Suit is pending in the civil court, awaiting its final adjudication. (8)There exists an agreement of hypothecation of goods, dated 4.03.1986 between Respondent no.1 Bank and Respondent no.2 certificate debtor company where under the respondent no.2 hypothecated and accepted charge of the bank upon company’s all present and future stocks of raw materials, goods in process, finished goods stores components Dies and tools (except claims such as