IN THE HIGH COURT OF HIMACHAL PRADESH AT SHIMLA CWP No. 306 of 2007 Reserved on : 6th August, 2007 Date of Decision: 7th September, 2007. M/s A.J.Infrastructures Petitioner Versus State of H.P. and others Respondents Coram The Hon’ble Mr. Justice V.K.Gupta, C.J. The Hon’ble Mr. Justice Sanjay Karol,J. Whether approved for reporting1? Yes. For the petitioner: Mr.Deepak Kaushal, Advocate. For the respondents: Mr.M.S.Chandel, Advocate General, with Mr.J.K.Verma, Dy. Advocate General for respondents No.1 to 5. Mr.G.C.Gupta, Senior Advocate, with Mr. Mohinder Gautam, Advocate, for respondent No.6. Sanjay Karol, J. Petitioners are auction purchasers and have assailed the order dated 22.12.2006 whereby their application for getting the auctioned property mutated in their name in the revenue record has been rejected and an entry of demand of arrears of sales tax dues of erstwhile owners has been entered into the revenue record. Petitioner is a private limited company. Respondent No.1 is the State of Himachal Pradesh, respondent No.2 is Deputy Commissioner, Sirmaur District at Nahan, respondent No.3 is Tehsildar, Whether the reporters of Local Papers are allowed to see the Judgment? 2 Nahan, respondent No.4 is Secretary (Excise and Taxation), Govt. of H.P., respondent No.5 is Excise and Taxation Officer, Nahan and respondent No.6 is State Bank of Patiala (hereinafter referred to as the Bank). Brief facts necessary for adjudicating the controversy in the present writ petition are as under:- For various loans/advances received from respondent No.6- Bank, M/s Eastman Rubber and M/s Eastman Tread (hereinafter referred to as borrower) mortgaged their property comprising Khasra No. 254/2/1, Khatauni No. 7 min, 13 min, measuring 3 bighas 7 biswas, situated at Mauza Moginand, Tehsil Nahan, District Sirmaur, HP. (hereinafter referred to as the property). Due to various defaults on account of repayments the Bank classified their account as Non-Performing Asset (NPA) in its books and in terms of Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Interest Act, 2002 (hereinafter referred to as the Act) served a notice asking the borrower to make good the payment and regularize the account. Further, another notice under Section 13(4) of the Act, intending to take over the property, was issued to the borrower and the possession of the assets i.e. the property was in fact taken over on 7.10.2004. In exercise of its rights and powers under the Act, the Bank put the property to auction vide public notice dated 17.12.2004 and in an open auction held on 18.1.2005, petitioner being the highest bidder for a sum of Rs.50,01,000-00 was declared as a successful auction purchaser on which date itself part payment was made and the bid was accepted. The entire bid amount was also paid within the stipulated period of time. In accordance with the provisions of Rule 9(6) and (10) of the Security Interest (Enforcement) 3 Rules, 2002 (hereinafter referred to Rules), sale certificate was issued on 21.7.2005 to the following effect:- “receipt of the sale price in full and handed over the delivery and possession of the scheduled property. The sale of the scheduled property was made free from all encumbrances known to the secured creditor listed below on deposit of the money demanded by the undersigned.” (Emphasis supplied) On 24.2.2006 itself the Bank informed all the concerned authorities including the Superintending Engineer, HPSEB, District Sirmaur at Nahan; Labour Inspector, District Sirmaur at Nahan; office of the respondent No.4; AETC and Excise and Taxation Department, Nahan, Sales Tax Officer, District Sirmaur at Nahan; the Deputy Commissioner, District Sirmaur at Nahan, the Assistant Collector (Tehsildar)-respondent No.3, Land Revenue Department, District Sirmaur at Nahan, about the sale of the property to the petitioner to the following effect:- “In accordance with the provisions of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (Second) Ordinance, 2002 (No. sic) and in the exercise of powers conferred under section 13 read with Rule 9 of the Security Interest (Enforcement) Rules of the abovementioned property was subsequently sold by Bank through tendering process to M/s A.J. Infrastructure Pvt. Ltd. on receipt Bank and final payment from them vide Sale Certificate ARB/879 dated July 21, 2005. The property mentioned above was sold free from all the encumbrances.” (Emphasis supplied) Vide letter dated 7.3.2006, petitioner also requested the respondent No.3, to transfer the property in its name to enable them to establish their industrial unit. 4 That due to the statutory bar, in spite of the sale certificate the sale deed could not be executed and registered, therefore, in accordance with provisions of Section 118 of the H.P. Tenancy and Land Reforms Act, 1972 (hereinafter referred to Tenancy Act), petitioner sought permission from respondent No.1 to effect the transfer of the property in its name by getting the sale deed executed. The State of H.P., after collecting information required from the District Collector and various departments and fully satisfying itself with regard to petitioner’s requirement of the property, accorded permission vide order dated 17.8.2006 and consequently petitioner was able to get the sale deed executed and registered on 6.9.2006, inter alia, containing the following clause:- “And it is thereby further declared that the said land building and machinery etc. is free from all encumbrances, charge and demands.” “And that he, the seller or any other person have not done anything whereby the said property may be subject to any attachment of liens of any person, court or banks etc.” Thereafter on 7.9.2006, the Bank again informed respondent No.3 of the auction sale and on petitioner’s another application for getting the property mutated in its name, an order of rejection was passed on 22.12.2006 for the reason that on the asking of respondent No.5, respondent No.3 had made entries (red entry) pertaining to demand of arrears of tax payable by M/s Regent Rubber and M/s Eastman Tread under the provisions of H.P. General Sales Tax Act, 1968 (hereinafter referred to as the Tax Act) On inquiry the petitioner discovered that on 11.10.1999 one M/s Regent Rubber Pvt. Ltd. had mortgaged the property with H.P. Financial Corporation and due to breach of terms of their agreement, the 5 property was taken over by the Corporation and sold by way of open auction on 8.6.2001 to M/s Eastman Rubber, the borrower of respondent No.6- Bank. At that time, there was no entry in the revenue record pertaining to any statutory demand of dues payable by M/s Regent Rubber Pvt. Ltd. In continuation of his earlier letters dated 8.7.2004 and 18.5.2006 (both not on record), vide letter dated 8.8.2006 respondent No.5 had asked respondent No.3 to make entries in the revenue record for the amounts due towards the sales tax/central tax liabilities of M/s Regent Rubber, Moginand and Eastman Rubber, Moginand, amounting to Rs.19,03,845/- and Rs.13,73,115/-, respectively, which was got done. Thus in this back ground, the request of the petitioner to mutate the property in its name was rejected. In the return filed by respondents No.1 to 3 the aforesaid factual position is admitted, however, it is clarified that no action as requested by respondent No.5 in terms of its letters dated 8.7.2004 and 18.5.2006 was taken and, therefore, disciplinary action against the erring officials has been initiated against the erring officials. Importantly, it is admitted that registration of the sale deed was executed and registered in due compliance of the codal formalities. The impugned action is justified as a legitimate exercise of their powers under the provisions of 35(5) of the H.P. Land Revenue Act. (hereinafter referred to Revenue Act). According to respondents No.4 and 5, the borrower company is a registered assessee under the provisions of Tax Act. Assessment proceedings, after issuance of notice dated 24.12.2004, were finalized when ex parte assessment order dated 18.1.2005 was passed in relation to the Assessment Years 1998-99, 1999-2000, 2000-2001 and 2001-02. Reliance has been placed on the provision of Section 16-B of 6 the Tax Act to contend that the liability of the State, being a Crown Debt, has 1st charge on the property. In its return filed by respondent No.6, the Bank has taken the stand that it was a mortgaged and secured creditor qua the property of borrower and the said borrower was classified as NPA in the books of the accounts of the Bank. The revenue record of rights relating to the property were not only silent but clearly established the unencumbered status of the property and the respondent-Bank accordingly accepted the property as security for securing the loans. It has been stated that respondents No.4 and 5 are acting arbitrarily, highhandedly and contrary to law in staking their claim to the property. The action of the said respondents is an act of colourable exercise of their official authority to deplete and curtail the exclusive first charge of the respondent-Bank over the property. Learned counsel for the petitioner has referred to the decisions in Solidaire India Ltd. vs. Fairgrowth Financial Services Ltd., reported in (2001) 3 SCC 71, Collector of Aurangabad and another vs. Central Bank of India and another, reported in AIR 1967 SC 1831, UTI Bank Ltd. vs. The Deputy Commissioner of Central Excise, Chennai and another, reported in AIR 2007 Mad. 118. Learned counsel for the Bank has relied upon Allahabad Bank v. Canara Bank and another, 2000(4) SCC 456. Learned Advocate General has relied upon the decisions in State Bank of Bikaner & Jaipur vs. National Iron & Steel Rolling corporation and others, reported in 1995(2) SCC 19, Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co., reported in (2000) 5 SCC 694, Solidaire India Ltd. v. Fairgrowth Financial Services Ltd. and others, reported in (2001) 3 SCC 71. He has referred to Section 16-B of the Tax 7 Act to contend that the State has a first charge on the property of the dealer and, therefore, the action of the respondent-State is totally justifiable in law. The point in controversy in the present writ petition is as to whether provisions of the Act would override the inconsistent provisions of the Tax Act and the Revenue Act and further as to whether in view of the provisions of Section 16-B of the Tax Act, the respondent-State would have first charge over and above the secured creditor whose right is protected under the Act. The Tax Act is a taxing statute enacted by the State of H.P. pursuant to its legislative powers under 7th Schedule, List II, (Item No.52) and the Act, a subsequent special legislation, has been enacted by the Central Government in exercise of its legislative powers under 7th Schedule, List-I, Items 45 and 92 of the Constitution of India. The relevant provisions of the relevant Acts necessary for the purpose of adjudicating the controversy are reproduced as under:- Securitization and Reconstruction of Financial Assets and Enforcement of Interest Act, 2002 The object of the Act is to enable the Banks and Financial Institutions to expeditiously recover the dues lying locked in unproductive assets the value of which was deteriorating with the passage of time. The Legislature, therefore, enacted the new Act providing for taking over the assets of the non-performing units. “2(1)(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) securitization company or reconstruction company; or 8 (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(1)(ze): "Secured Debt" means a debt which is secured by any security interest." “13. Enforcement of security interest.- (1) Notwithstanding anything contained in section 69 or section 69A of the Transfer of Property Act, 1882 (4 of 1882), any security interest created in favour of any secured creditor may be enforced, without the intervention of the court or tribunal, by such creditor in accordance with the provisions of this Act. (2) Where any borrower, who is under a liability to a secured creditor under a security agreement, makes any default in repayment of secured debt or any installment thereof, and his account in respect of such debt is classified by the secured creditor as non-performing asset, then, the secured creditor may require the borrower by notice in writing to discharge in full his liabilities to the secured creditor within sixty days from the date of notice failing which the secured creditor shall be entitled to exercise all or any of the rights under sub-section (4) …… (4) In case the borrower fails to discharge his liability in full within the period specified in sub-section (2), the secured creditor may take recourse to one or more of the following measures to recover his secured debt, namely:- (a) take possession of the secured assets of the borrower including the right to transfer by way of lease, assignment or sale for realizing the secured asset; ….. (6) Any transfer of secured asset after taking possession thereof or take over of management under sub-section (4), by the secured creditor or by the manager on behalf of the secured creditors shall vest in the transferee all rights in, or in relation to, the secured asset transferred as if the transfer had been made by the owner of such secured asset. (7) Where any action has been taken against a borrower under the provisions of sub-section (4), all costs, charges and expenses which, in the opinion of the secured creditor, have been properly incurred by him or any expenses incidental thereto, 9 shall be recoverable from the borrower and the money which is received by the secured creditor shall, in the absence of any contract to the contrary, be held by him in trust, to be applied, firstly, in payment of such costs, charges and expenses and secondly, in discharge of the dues of the secured creditor and the residue of the money so received shall be paid to the person entitled thereto in accordance with his rights and interests. (13) No borrower shall, after receipt of notice referred to in sub- section (2), transfer by way of sale, lease or otherwise (other than in the ordinary course of his business) any of his secured assets referred to in the notice, without prior written consent of the secured creditor." “35. The provisions of this Act to override other laws.- The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any other instrument having effect by virtue of any such law.” (Emphasis supplied) H.P. General Sales Tax Act “14. (1) If the Assessing Authority is satisfied without requiring the presence of dealer or the production by him of any evidence that the returns furnished in respect of any period are correct and complete, he shall assess the amount of tax due from the dealer on the basis of such returns. (2) If the assessing authority is not satisfied without requiring the presence of dealer who furnished the returns or production of evidence that the returns furnished in respect of any period are correct and complete, he shall serve him, on a date and at a place specified therein, either to attend in person or to produce or to cause to be produced any evidence on which such dealer may rely in support of such returns. (4) If a dealer, having furnished returns in respect of a period, fails to comply with the terms of a notice issued under sub-section (2), the Assessing Authority shall, within five years after the expiry of such period, proceed to assess to the best of his judgment and the amount of tax due from the dealer. (5) If a dealer does not furnish returns in respect of any period by the prescribed date, the Assessing Authority shall, within five 10 years after the expiry of such period, after giving the dealer a reasonable opportunity of being heard, proceed to assess, to the best of his judgment, the amount of tax, if any, due from the dealer. (7) The amount of any tax, penalty or interest payable under this Act shall be paid by the dealer in the manner prescribed by such date as may be specified in the notice issued by the assessing authority for the purpose and the date so specified shall not be less than fifteen days and not more than thirty days from the date of service of such notice: …….. (8) If the tax assessed under this Act or any instalment thereof is not paid by any dealer within the time specified therefore in the notice of assessment or in the order permitting payment in instalments, the Commissioner or any person appointed to assist him under sub-section (1) of section (3) may after giving such dealer an opportunity of being heard, impose on him a penalty not exceeding in amount the sum due from him. “16. The amount of any tax and penalty imposed or interest payable under this Act, which remains unpaid after the due date, shall be recoverable as arrears of land revenue.” “16-A. (1) Notwithstanding anything contained in section 16 or any law or contract to the contrary, Commissioner or any officer other than an Excise and Taxation Inspector, appointed under section 3 to assist the Commissioner, may, at any time or from time to time, by notice in writing, a copy of which shall be sent to the dealer at his last address known to the officer issuing the notice, require – (a) any person from whom any amount is due or may become due to a dealer who has failed to comply with a notice of demand for any amount due under this Act; (b) any person who holds or may subsequently hold any money for or on account of such dealer, to pay into the Government treasury in the manner specified in the notice issued under this sub-section, either forthwith or upon the money becoming due or being held, or at or within the time specified in the notice (not being before the money becomes due or 11 it is held), so much of the money as is sufficient to pay the amount due from the dealer in respect of the arrears of the tax, interest and penalty under this Act, or the whole of the money when it is equal to or less than that amount. ……….. (6) Any amount of money which a person is required to pay under sub-section (1), or for which he is personally liable to the State Government under sub-section (4) shall, if it remains unpaid, be recoverable as an arrear of land revenue, ………..” “16-B. Notwithstanding anything to the contrary contained in any law for the time being in force, any amount of tax and penalty including interest, if any, payable by a dealer or any other person under this Act shall be a first charge on the property of the dealer or such other person.” “36. Directors of defaulting companies to be liable to pay tax etc. – Where any tax assessed or penalty imposed under this Act on a company cannot be recovered by reason of the company having gone into liquidation or for any other reason, then every person, who was Director of such company at any time during the relevant period for which the tax is due or in respect of which the default for which the penalty is imposed was committed, shall be jointly and severally liable for the payment of such tax and penalty unless he proves that the non-payment or non-recovery cannot be attributed to any neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.” (Emphasis supplied) H.P. Land Revenue Act “35. Making of that part of the periodical record which relates to land owners, etc. assignees of revenue and occupancy tenants. – (1) to (4) …………………….. (5) A Revenue Officer shall from time to time inquire into the correctness of all entries in the register of mutations and into all 12 such acquisitions as aforesaid coming to his knowledge of which, under the foregoing sub-sections, report should have been made to the patwari and entry made in that register and shall in each case make such order as he thinks fit with respect to the entry in the periodical record of the right acquired.” “36. Making of that part of the periodical record which relates to other persons. – the acquisition of any interesting land other than a right referred to in sub-section (1) of the last foregoing section shall – (a) if it is undisputed, be recorded by the patwari in such manner as the Financial Commissioner may by rule in this behalf prescribe; and (b) if it is disputed, be entered by the patwari in the register of mutations and dealt with in the manner prescribed in sub-sections (5) and (6) of the last foregoing section.” Reading of these provisions would show that there is a conflict between the provisions of the State and the Central statutes. As to whether the State shall have the priority for recovery of its debt over and above the secured creditor has been considered by the Apex Court in Dena Bank (supra), and the relevant observations are reproduced hereinbelow:- “8… On the very principle on which the rule is founded, the priority would be available only to such debts as are incurred by the subjects of the Crown by reference to the States 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. 13 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 word, where 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.” “10. However, the Crowns 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 over a mortgagee or pledgee of goods or a secured creditor. It is only in cases where the Crowns right and that of the subject meet at one and the same time that the Crown is in general preferred. Where the right of the subject is complete and perfect before that of the King commences, the rule does not apply, for there is no point of time at which the two rights are at conflict, nor can there be a question which of the two ought to prevail in a case where one, that of the subject, has prevailed already. ….” The Court found that by virtue of provisions of Section 15 of the Karnataka Sales Tax Act, the State had right of recovery of its dues over and above the lender. The Court, however, was not dealing with any provision, which was in conflict with the Karnataka Sales Tax Act and was only deciding, based on the application and interpretation of Section 14 15 of the Karnataka Sales Tax Act, whether the State had a preferential