_____________________________________________________________________________________________ WPC 337/2011 Page 1 of 22 * IN THE HIGH COURT OF DELHI AT NEW DELHI Reserved on : 11.05.2011 % Date of decision : 03.06.2011 + WP (C) No.337/2011 IFCI Ltd. … … … … …PETITIONER Through : Mr.Dinkar Singh, Advocate - V E R S U S - COMMERCIAL TAXES OFFICER & ANR..… RESPONDENTS Through : Mr.Arunav Patnaik and Mr.D.B.Ray, Advocates for R-1. Mr.Shahzad Khan, Advocate for R-2. CORAM: HON'BLE MR. JUSTICE SANJAY KISHAN KAUL HON‟BLE MS. JUSTICE RAJIV SHAKDHER Whether the Reporters of local papers may be allowed to see the judgment? Yes To be referred to Reporter or not? Yes Whether the judgment should be Yes reported in the Digest? SANJAY KISHAN KAUL, J. 1. The petitioner seeks to raise a question of law as to whether by virtue of the deeming provisions contained in Section 9(2) of the Central Sales Tax Act, 1956 („the CST Act‟ for short), there is any first charge on the _____________________________________________________________________________________________ WPC 337/2011 Page 2 of 22 property of the dealer. The petitioner being a financial institution holding a decree against the dealer claims absence of such first charge in view of there being no specific provision in the CST Act though the petitioner does not dispute such first charge in respect of the amount due under the Rajasthan Sales Tax Act, 1994 („the RST Act‟ for short). 2. The petitioner is a public financial institution incorporated under the Companies Act, 1956 which had advanced loan facilities to M/s West Indian Gas Products Limited guaranteed by certain guarantors. The said entity also took loans from other banks and financial institutions, but failed to maintain financial discipline. The petitioner along with ICICI filed an OA before the DRT, Jaipur and in those proceedings a recovery certificate was issued for an amount of Rs.44,78,65,444/- on 20.12.2000. The said certificate was thereafter sought to be executed. It is during the pendency of the execution proceedings that the respondent, Commercial Taxes Officer, Special Circle, Udaipur filed an application dated 01.06.2004 before the Recovery Officer seeking right of first appropriation from the amounts released by sale of assets of the debtor towards discharge of statutory liability of Rs.60,86,172/- under the RST Act and _____________________________________________________________________________________________ WPC 337/2011 Page 3 of 22 Rs.44,04,415/- under the CST Act totaling to Rs.1,08,73,587/- and interest due thereon. 3. Such a right of first appropriation insofar as the dues under the RST Act are concerned, was claimed on the basis of Section 50 of the RST Act, which reads as under: “50. LIABILITY UNDER THIS ACT TO BE THE FIRST CHARGE. Notwithstanding anything to the contrary contained in any law for the time being in force, any amount of tax and any other sum payable by a dealer or any other person under this Act, shall be the first charge on the property of such dealer or person.” 4. Similarly, the right of first appropriation insofar as the dues under the CST Act are concerned, was sought to be exercised in view of the provisions of Section 9(2) of the said Act, which reads as under: “LEVY AND COLLECTION OF TAX AND PENALTIES … …. (2) Subject to the other provisions of this Act and the rules made thereunder, the authorities for the time being empowered to assess, re-assess, collect and enforce payment of any tax under general sales tax law of the appropriate State shall, on behalf of the Government of India, assess, re- assess, collect and enforce payment of tax, including any interest or penalty, payable by a dealer under this Act as if the tax or interest or penalty payable by such a dealer under this Act is a tax or interest or penalty payable under general sales tax law of the State; and for this purpose they may exercise all or any of the powers they have under the general sales tax law of the State; _____________________________________________________________________________________________ WPC 337/2011 Page 4 of 22 and the provisions of such law, including provisions relating to returns, provisional assessment, advance payment of tax registration of the transferee of any business, imposition of the tax liability of a person carrying on business on the transferee of, or successor to, such business, transfer of liability of any firm or Hindu undivided family to pay tax in the event of the dissolution of such firm or partition of such family, recovery of tax from third parties, appeals, reviews, revisions, references, refunds, rebates, penalties, charging or payment of interest, compounding of offences and treatment of documents furnished by a dealer as confidential, shall apply accordingly: Provided that if in any State or part thereof there is no general sales tax law in force, the Central Government may, by rules made in this behalf make necessary provisions for all or any of the matters specified in this sub- section.” 5. The recovery officer, however, dismissed the application filed by the respondent against which an appeal was preferred by the respondent before the DRT, Jaipur. This appeal was allowed giving first appropriation right vide order dated 20.12.2000. Now the petitioner being aggrieved preferred an appeal before the DRAT. It is during the said proceedings that an affidavit is stated to have been filed by the respondent averring that the original demand under the RST Act was Rs.9,02,321/- and under the CST Act was RS.40,07,415/- totaling to Rs.49,09,736/-. The interest due thereon under the RST Act was quantified at Rs.15,30,062/- and under the CST Act, as _____________________________________________________________________________________________ WPC 337/2011 Page 5 of 22 Rs.53,75,563/-, totaling to Rs.1,18,15,353/- inclusive of interest outstanding against the company. 6. The petitioner in the proceedings before the DRAT conceded the right of first appropriation insofar as the dues under the RST Act were concerned in view of the provisions of Section 50 of RST Act, but sought to raise the issue in view of what was claimed to be the absence of any provision for such appropriation under the CST Act. The petitioner claimed that the provisions of Section 9(2) of the CST Act could not give priority to the respondent over the claim of secured creditors. This plea was, however, not accepted by the DRAT in terms of the impugned order dated 04.11.2010. It is in view of this factual matrix that the question of law as referred to aforesaid arises for consideration. 7. The reasoning of the DRAT is predicated on a harmonious construction of the RST Act and the CST Act. The CST Act stipulates that tax is payable by a dealer under that Act as if it was a tax or interest or penalty payable under the general sales tax law of that State and for that purpose they may exercise all or any of the powers they have under the general sales tax law of that State. It was thus concluded that no distinction could be made between the State sales tax legislation and the CST insofar as recovery of tax is concerned. The DRAT thus observed that the Court _____________________________________________________________________________________________ WPC 337/2011 Page 6 of 22 would give effect to the will of the legislature as discernible from the object and scheme of the enactment and the language employed therein. This is the sole discussion in the impugned judgment. 8. The submission of learned counsel for the petitioner before us was that in the absence of any specific provision in the CST Act, creating such priority of claim for the amount payable under that Act, the vested legal right of a secured creditor, who always has a priority of claim on a mortgaged debt, would prevail. The CST Act did not contain any specific provision akin to Section 50 of the RST Act and Section 9(2) of the CST Act was claimed to be not specific to create liability under the CST Act to be first charge on the property of the dealer. This sub-Section, it was submitted, merely contained provisions for levy & collection of tax and penalty and could not be read to be pari materia to provisions of Section 50 of the RST Act. It was the submission of learned counsel for the petitioner that Section 9(2) of the CST Act had a limited scope. It empowered the State authorities to have all the powers for purposes of assessment, re- assessment, collection and enforcement of payment of tax payable by the dealer under the CST Act. On the other hand, the RST Act contains specific provisions for assessment, re-assessment in Chapter (IV) while _____________________________________________________________________________________________ WPC 337/2011 Page 7 of 22 Chapter (V) deals with tax liability, recovery and refund. Sections 52 and 53 of the RST Act fall in Chapter (V) which provides for general and special modes of recovery and enforcement of tax. Chapter (VI) empowers the State tax authorities to impose penalties and to institute prosecution against the dealer. It was, thus, submitted that the words „assessment‟, „re-assessment‟, „collection‟ and „enforcement of tax‟ cannot be expanded to include within the ambit the effect of Section 50 of the RST Act which creates an established right of precedence in favour of the State sales tax authorities for the amount due under that Act. 9. Learned counsel for the petitioner referred to Section 52 of the RST Act, which reads as under: “52 GENERAL MODES OF RECOVERY. Without prejudice to other provisions in the Act, where any tax or other sum payable by a dealer or a person under this Act is not paid in accordance with the provisions of this Act or the rules made or notification issued thereunder, it shall be recoverable as an arrear of land revenue and the assessing authority or any other officer having jurisdiction for the time being over such dealer or person shall be empowered to recover such tax or other sum by attachment and sale of the movable or immovable property of such dealer or person and all the provisions of the Rajasthan Land Revenue Act, 1956 (Rajasthan Act No. 15 of 1956) read with the Rajasthan Land Revenue (Payments, Credits, Refunds and Recovery) Rules, 1958 shall mutatis mutandis apply.” _____________________________________________________________________________________________ WPC 337/2011 Page 8 of 22 10. The recovery of tax can, thus, take place by attachment and sale of moveable and immovable properties and the provisions of Rajasthan Land Revenue Act, 1956 and Rajasthan Land Revenue (Payments, Credits, Refunds and Recovery) Rules, 1958 apply mutatis mutandis. Learned counsel sought to refer to Section 256 of the Rajasthan Land Revenue Act, 1956 which deals with recovery of miscellaneous revenue and other monies. In M/s Builders Supply Corporation v. The Union of India and Ors.; AIR 1965 SC 1061, the Constitution Bench of the Supreme Court dealt with the Common Law Doctrine of priority of State debts. It was held that this Common Law Doctrine having been recognized by Indian High Courts prior to 1950, constitutes „law in force‟ within the meaning of Article 372(1) of the Constitution of India and continues to be in force. Section 46 of the Income Tax Act, 1922 was held to merely provide for the recovery of arrears of tax due from an assessee as it were an arrear of land revenue and thus the provision was held not to convert arrears of tax into arrears of land revenue to indicate that after receiving the certificate from the Income Tax Office, the Collector has to proceed to recover the arrears as if the arrears were arrears of land revenue. This section did not displace the application of the doctrine of the _____________________________________________________________________________________________ WPC 337/2011 Page 9 of 22 priority of Crown debts. Learned counsel also referred to the judgment of the Supreme Court in Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. and Ors.; (2000) 5 SCC 694, once again dealing with the doctrine of priority of State debt. It was held that Section 158(1) of the Karnataka Land Revenue Act, 1964 not only gives statutory recognition to the doctrine of the State‟s preferential right to recovery of debts, but extends its applicability even to private secured debts forming the subject-matter of mortgages, judgment- decrees, execution and attachment orders, etc. Section 190 of the Karnataka Land Revenue Act, 1964 r/w Section 13(3)(a) of the Karnataka Sales Tax Act, 1957 made the procedure for recovery of arrears of land revenue applicable to recovery of sale tax arrears. The priority or precedence of State debt in the form of sales tax was upheld in respect of the compromise amount between a financial institution and debtor. It was thus submitted that unless a specific provision is included, the principle of priority of Crown debt would not apply. 11. Learned counsel for the respondent on the other hand sought to emphasize the constitutional scheme and the subsequent enactment of CST Act in pursuance thereto. _____________________________________________________________________________________________ WPC 337/2011 Page 10 of 22 12. In order to appreciate this plea, it would be appropriate to reproduce some of the provisions, Articles 269 and 286, incorporated in Part XII of the Constitution of India, which have been referred to by the learned counsel for the respondent. “269. Taxes levied and collected by the Union but assigned to the States. (1) Taxes on the sale or purchase of goods and taxes on the consignment of goods shall be levied and collected by the Government of India but shall be assigned and shall be deemed to have been assigned to the States on or after the 1st day of April, 1996 in the manner provided in clause (2). Explanation-For the purposes of this clause, - (a) The expression "taxes on the sale or purchase of goods" shall mean taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce; (b) The expression "taxes on the consignment of goods" shall mean taxes on the consignment of goods (whether the consignment is to the person making it or to any other person), where such consignment takes place in the course of inter- State trade or commerce; (2) The net proceeds in any financial year of any such tax, except in so far as those proceeds represent proceeds attributable to Union territories, shall not form part of the Consolidated Fund of India, but shall be assigned to the State within which that tax is leviable in that year, and shall be distributed among those States in accordance with such principles of distribution as may be formulated by Parliament by law. _____________________________________________________________________________________________ WPC 337/2011 Page 11 of 22 (3) Parliament may by law formulate principles for determining when a sale or purchase of, or consignment of, goods takes place in the course of inter-State trade or commerce. 286. Restrictions as to imposition of tax on the sale or purchase of goods. (1) No law of a State shall impose, or authorise the imposition of, a tax on the sale or purchase of goods where such sale or purchase takes place- (a) Outside the State; or (b) In the course of the import of the goods into, or export of the goods out of, the territory of India. (2) Parliament may by law formulate principles for determining when a sale or purchase of goods takes place in any of the ways mentioned in clause (1). (3) Any law of a State shall, in so for as it imposes, or authorises the imposition of, - (a) A tax on the sale or purchase of goods declared by Parliament by law to be of special importance in inter-State trade or commerce; or (b) A tax on the sale or purchase of goods, being a tax of the nature referred to in sub-clause (b), sub-clause (c) or sub-clause (d) of clause (29A) of article 366, Be subject to such restrictions and conditions in regard to the system of levy, rates and other incidents of the tax as Parliament may by law specify.” 13. A reading of the aforesaid shows that Article 269 of the Constitution of India provides for taxes on the sales or purchase of goods to be levied by Government of India, but for the benefit of the States, to whom it is to be assigned, such taxes are not to form part of the Consolidated Fund of India and the _____________________________________________________________________________________________ WPC 337/2011 Page 12 of 22 Parliament may by law formulate principles for determining inter-State trade or commerce. Simultaneously, Article 286 of the Constitution of India restricts imposition of tax on the sale or purchase of goods by any State in the process of inter-State trade or commerce and the law in this behalf formulating principles when a sale or purchase of goods takes place in any of the ways mentioned in clause (1) of Article 286 of the Constitution of India is vested in the Parliament in terms of clause (2) of the Constitution of India. 14. Thus, the constitutional provisions have the objective to ensure that individual States do not impose differential or competitive sales tax which would interfere with the inter-State trade and commerce and hinder the creation of a single economic unit across the country. It is, therefore, the Parliament which has been given the powers to define inter-State sale transactions and to levy taxes on them. In this regard, Entries 92A and 92B of the List I, which is the Union List, in Seventh Schedule to the Constitution of India, read as under: “92A Taxes on the sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce. 92B. Taxes on the consignment of goods (whether the consignment is to the person _____________________________________________________________________________________________ WPC 337/2011 Page 13 of 22 making it or to any other person), where such consignment takes place in the course of inter-State trade or commerce. 15. The collection made by the Central Government is to be the revenue of the States. Thus, it was contended that though the imposition of the Central sales tax on inter-State sales is within the domain of Parliament, the revenue from Central sales tax is of the State within which the tax is leviable. The CST Act was, thus, enacted by the Parliament formulating principles for determining when a sale or purchase of goods take place in the course of inter-State trade or commerce or outside the State and to levy taxes on such sale and determine the distribution of revenue so collected. This is stated to be apparent even from the Preamble of the CST Act, which reads as under: “An Act to formulate principles for determining when a sale or purchase of goods takes place in the course of inter-State trade or commerce or outside a State or in the course of import into or export from India, to provide for the levy, collection and distributions of taxes on sales of goods in the course of inter-State trade or commerce and to declared certain goods to be of special importance in inter-State trade or commerce and specify the restrictions and conditions to which laws imposing taxes on the sale or purchase of such goods of special importance shall be subject.” 16. It was submitted that Section 3 of the CST Act defines inter-State trade or commerce while Section 4 _____________________________________________________________________________________________ WPC 337/2011 Page 14 of 22 of the CST Act deals with when a sale or purchase of goods is stated to take place outside a State. The constitutional mandate is further fulfilled by Section 9(3) of the CST Act which assigns the proceeds collected under that Act to the State. Section 9(3) of the CST Act reads as under: “9. Levy and collection of tax and penalties:- ….. (3) The proceeds in any financial year of any tax, including any interest or penalty including any penalty, levied and collected under this Act in any State (other than a Union Territory) on behalf of the Government of India shall be assigned to that State and shall be retained by it; and the proceeds attributes to Union Territories shall form part of the Consolidated Funds of India.” 17. Since the Central sales tax revenue collected within a State forms part of the revenue of the State, the actual collection has been left to the relevant State in view of Section 9(1) of the CST Act, which reads as under: “9. Levy and collection of tax and penalties:- (1) The tax payable by any dealer under this Act on sales of goods effected by him in the course of inter-State trade or commerce, whether such sales fall within clause (a) or clause (b) of section 3, shall be levied by the Government of India and the tax so levied shall be collected by the Government in accordance with the provisions of sub-section (2), in the State from which the movement of the goods commenced. Provided that, in the case of a sale of goods during their movement from one State to another, being a sale subsequent to the first sale in respect of the same goods and being also a sale which does not fall within sub-section (2) of section 6, the tax shall be levied and collected _____________________________________________________________________________________________ WPC 337/2011 Page 15 of 22 a) where such subsequent sale has been effected by a registered dealer, in the State from which the registered dealer obtained or, as the case may be, could have obtained, the form prescribed for the purposes of clause (a) of sub-section (4) of section 8 in connection with the purchase of such goods, and, b) where such subsequent sale has been effected by an unregistered dealer in the State from which such subsequent sale has been effected.” 18. It is in view of the aforesaid constitutional scheme read with the provisions of CST Act that Section 9(2) of the CST Act makes a deeming provision that the assessment and collection under the CST Act is to be taken as tax, interest or penalty payable under the general sales tax law of the State. For this purpose, all powers as exist under the general sales tax law of the State would be available for collection of the Central sales tax. 19. Learned counsel proceeded to thereafter explain the provisions of the RST Act where Section 3 deals with the incidence of tax and Section 3(6) of the CST Act provides that a dealer registered under the CST Act, who was not liable to get registration and pay tax under Section 3(1) of the RST Act, was nevertheless liable to get registration and pay tax in accordance with the provisions of the RST Act whatever may be the amount or extent of his turnover. Section 4(1) of the RST Act provides for both the State sales tax and the Central sales tax payable by a dealer under the _____________________________________________________________________________________________ WPC 337/2011 Page 16 of 22 RST Act to be a single point in the series of sales by successive dealers. Section 50 of the RST Act gives the right of first charge to the tax to be collected under the RST Act. It was thus contended that the Central Sales Tax thus also becomes a tax under the RST Act and Section 50 of the RST Act is applicable to the collection of Central sales tax within the State of Rajasthan. 20. Learned counsel for the respondent referred to the judgment in Central Bank of India v. State of Kerala (2009) 4 SCC 94 where a similar provision in the Bombay and Kerala Sales Tax Acts were examined in the context of recovery of debts under the Recovery of Debts due to Banks and Financial Institutions Act, 1993 („RDDBFI Act‟ for short). It was held that where a secured creditor seeks to recover debts under the RDDBFI Act, precedence has to be given to dues owed to a State when there is a statutory provision creating first charge in favour of the State over the property of the assessee. The RDDBFI Act being a subsequent enactment, the Parliament is presumed to be aware of the statutory provisions creating