IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 16.7.2009 CORAM THE HON'BLE MR.JUSTICE S.J.MUKHOPADHAYA AND THE HON'BLE MR.JUSTICE RAJA ELANGO Writ Appeal No.1360 of 2008 Indian Bank rep. by Authorised Officer Vellore Circle Office 45-51, Katpadi Road Tamil Nadu 632 004. .. Appellant/Petitioner Vs. 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 dated 17.9.2008 made in W.P.No.18975 of 2007. Writ Petition praying to issue a writ of Certiorarified Mandamus calling for the records relating to Tamil Nadu Government Gazatte No.01 dated 5.1.2007 and consequential order bearing No.NK.A3.2310/2002 dated 16.3.2007 on the file of the 1st respondent and quash the same in so far as it relates to the property situated at Plot No.97 SIDCO Industrial Estate SIPCOT Ranipet which is mortgaged to the petitioner bank and consequently direct the 1st respondent to stop all further proceedings for recovering any arrears of sales tax payable by the 2nd respondent from and out of the sale proceeds which have been appropriated by the petitioner payable to it. ----- https://hcservices.ecourts.gov.in/hcservices/ For Appellant : Mr.Jayesh Dolia For M/s. Aiyar and Dolia For 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 creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (in short "SARFAESI Act, 2002") has preferred this writ appeal against the judgment dated 17.9.2008 passed by the learned single Judge in W.P.No.18975 of 2007. 2. The said writ petition was preferred by the Bank against the Tamil Nadu Government Gazette No.01 dated 5.1.2007 and consequential order bearing No.NK.A3.2310/2002 dated 16.3.2007, so far as it relates to the property situated at Plot No.97, SIDCO Industrial Estate, SIPCOT, Ranipet. By the aforesaid proceedings, the auction conducted by the Bank in regard to the property in question was held to be void on the ground that the State Government has priority over the property for the owner having not paid the arrears of tax due to the Government, which is outstanding and the said action has been initiated under Revenue Recovery Act for the purpose of recovering the arrears of tax. 3. Similar matter, earlier, fell for consideration of a Division bench and the issue raised has already been decided. Hence, it is not 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 credit facilities from the Bank. As security for the dues, the Company offered its following immovable properties by availing equitable mortgage, 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 Manthangal Village, Ranipet Town. https://hcservices.ecourts.gov.in/hcservices/ In addition to the above, three immovable properties of the guarantors were also mortgaged with the Bank. As the Company defaulted, the Bank filed O.A.No.1275 of 1999 before the Debt Recovery Tribunal, Chennai for recovery of Rs.43,20,860/- as on 10.12.1999. The said O.A. was pending. As there was enormous delay, the Bank took steps under SARFAESI Act, 2002 and issued notice under Section 13(2) on 1.8.2005. Subsequently, action was taken under Section 13(4) by taking possession of the mortgaged property. After publication of notice in the newspaper on 15.2.2007, the auction took place on 5.3.2007 and immovable properties mortgaged with the Bank were sold in public auction for a sum of Rs.62.91 lakhs and thereafter, the Bank issued sale certificate in favour of the auction purchaser. Similarly, the property comprised in S.No.476/5B was also sold and registered in favour of a third party/purchaser. 5. The third respondent purchased the property comprised in Plot No.97, SIDCO Industrial Estate, SIPCOT, Ranipet, measuring to an extent of 19,520 sq.ft., together with shed, on 5.3.2007 for a sum of Rs.19.23 lakhs. A sale certificate was issued to the third respondent. 6. While so, the first respondent/State issued the impugned proceedings dated 16.3.2007 informing that since the owner of the property, viz. the second respondent has committed default in payment of sales tax to the tune of Rs.37,09,966/-, the provisions of Section 24 of the Tamil Nadu General Sales Tax Act (in short "TNGST Act") has been invoked and requesting the Bank to remit to the first respondent the defaulted sum of Rs.37,09,966/- from the sales proceeds, as contemplated under section 24(3) of the TNGST Act. 7. Before the learned single Judge, the Bank took a plea that the State has no jurisdiction to invoke the provisions of Section 24 of the TNGST Act, the property being mortgaged with the bank and having auction sold under SARFAESI Act, 2002. On behalf of the State, it was contended that as per Section 24(1) and (2) of the TNGST Act, in the event of default made by any dealer in respect of taxes assessed under the Act, the outstanding amount shall become immediately due and shall be a charge on the properties and any amount due under the Act shall have priority over all other claims over the property of the dealer. It was further submitted on behalf of the State that as per Section 24 of the TNGST Act, by operation of law, a statutory charge has been created on the property and therefore, SARFAESI Act can have no overriding effect over such statutory charge. They rely on the provisions of law and numerous decisions and after hearing the parties, the learned Judge held that the first respondent has statutory charge which is having priority over all other claims over the property and therefore, the Bank cannot successfully challenge the proceedings of the first respondent and thereby, the Court dismissed the writ petition. https://hcservices.ecourts.gov.in/hcservices/ 7. Similar plea was taken by the counsel for the Bank who referred to one or other provisions. The learned Special Government Pleader appearing for the State also brought to our notice different provisions as was referred to by the learned single Judge. But, as the matter stands decided by the Division Bench decision in M.Nagarajan v. The Deputy Commercial Tax Officer, Tindivanam and another [W.P.No.10246 of 2007 dated 12.6.2009 - unreported], we are not repeating such submission as was taken before the learned single Judge. 8. In the case of M.Nagarajan (supra), the Court noticed various decisions of the Supreme Court and this Court. DRT Act and Securitisation Act do not create first charge in favour of the Bank. This was held by the Supreme Court in Central Bank of India v. State of Kerala & Others [JT 2009 (1) SC 216]. In the said case, the Supreme Court held that the provisions of 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 and Section 35 of the Securitisation Act. 9. When similar matter fell for consideration before the Full Bench 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, 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. ” https://hcservices.ecourts.gov.in/hcservices/ 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.” 10. In the case of Union of India & Ors. v. SICOM Ltd. & Anr. [JT 2009 (1) SC 87], the question fell for consideration is whether realisation of excise duty will have priority over secured debts on financial corporation. In the said case, the Supreme Court held that Crown debts means debts due to the State or the King; debts which a prerogative entitles the Crown to claim priority for before all other creditors, but the same must be held to mean unsecured creditor. In fact, the following observation was made by the Court in the said case. “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.” 11. In the said case, the Supreme Court further observed as under: “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.” 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 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.” 13. The learned counsel appearing on behalf of the State relied upon 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 that Section 26(6) creates a first charge on the property of the dealer and hence, the tax assessed under the Sales Tax Act will have priority over all other debts including a prior mortgage. 14. Reliance was also placed on another Bench decision of this Court in Central Bank of India v. State of Tamil Nadu [(1999) 113 STC 145]. 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's property, having priority over all other claims against property of the dealer. 15. Having gone through the aforesaid judgment, we are of the view that the aforesaid judgment is silent on the question whether the State Government can claim priority over another person, whose debt 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 the general law or the secured creditor has any secured interest over the secured asset. 16. It is not in dispute that the Bank is a secured creditor within the meaning of Section 2(zd) of the SARFAESI Act, 2002. It has "secured interest" over the secured asset. Section 2(zc) defines secured asset as property on which security interest is created. Security interest is defined under Section 2(zf), as right, title and interest of any kind whatsoever upon property, created in favour of any 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, instrument or any other document or arrangement under which security interest is created in favour of the secured creditor including the creation of mortgage by deposit of title deeds with the secured creditor. 17. If the status of the State is looked into, it will be evident that it can claim priority of debt over others in regard to the arrears of tax due to the State. As per the Supreme Court decision in Union of India & Ors. v. SICOM Ltd. & Anr. [JT 2009 (1) SC 87], for recovery of State debts, the State can claim priority for before all other creditors, but such creditor must be held to mean "unsecured creditor". No such priority can be claimed over a secured creditor. 18. The findings of the Division Bench in the case of M.Nagarajan (supra), reads as under: 15. (i) ... (ii) ... (iii) ... (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.” 19. This apart, the assets being secured assets with the Bank, having its secured interest over the property, the Bank being a secured creditor and its debt being a secured debt, we hold that the principle of first charge/priority of State over the property will not 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 single Judge made in W.P.No.18975 of 2007 and also the gazette notification No.01 dated 5.1.2007 and consequential order bearing No.NK.A3.2310/2002 dated 16.3.2007 so far as it relates to the land which were the secured assets of the bank and has already been sold. In the result, the writ appeal is allowed. There shall be no order as to costs. Sd/- Asst.Registrar /true copy/ Sub Asst.Registrar kpl To 1.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.31601 1 cc To The Government Pleader, SR.31817 W.A.No.1360 of 2008. GV {CO} TP/10.8.2009. https://hcservices.ecourts.gov.in/hcservices/