IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE HARUN-UL-RASHID FRIDAY THE 24TH OCTOBER 2008/2ND KARTHIKA 1930 CRP.No. 777 of 2005() --------------------- AGAINST THE ORDER IN EA 578/96 IN EP 122/93 IN OS.469/1985 of SUB COURT, MUVATTUPUZHA .................... REVN. PETITIONER: ------------------ 1. KERALA STATE REPRESENTED BY DISTRICT COLLECTOR, ERNAKULAM. 2. TAHSILDAR, MUVATTUPUZHA. BY GOVERNMENT PLEADER SRI.SHYSON P. MANGUZHA RESPONDENTS: ----------------- 1. BANK OF INDIA, PANDAPPILLY BRANCH. 2. SUSEELA BHASKARAN, MARIYIL HOUSE, ARAKUZHA KARA, ARAKUZHA VILLAGE, MUVATTUPUZHA. 3. NARAYANAN VASU, S/O.NARAYANAN, MARIYIL HOUSE, ARAKUZHA VILLAGE, ARAKUZHA KARA. BY ADV. SRI.K.M.VARGHESE FOR R2 ,3 SRI.M.P.RAMACHANDRAN NAIR (SR.) FOR R1 SRI.DEVAN RAMACHANDRAN FOR R1 THIS CIVIL REVISION PETITION HAVING BEEN FINALLY HEARD ON 31/07/2008, THE COURT ON 24.10.2008 PASSED THE FOLLOWING: ORDER IN I.A.2235 OF 2005 IN C.R.P NO. 777 OF 2005 DISMISSED SD/- HARUN-UL-RASHID, JUDGE HARUN-UL-RASHID, J. C.R. ------------------------------------------ C.R.P No. 777 of 2005 ------------------------------------------- Dated this the 24th day of October 2008 ORDER An important question of law arises for decision in this revision petition is as to whether the abkari arrears due from a person who had suffered a mortgage decree in another suit is public revenue due on land as defined in Sections 2 (a) and 2(j) of the Kerala revenue Recovery Act. If so, whether such arrears shall be the first change on the mortgage property under Section 3 of the Act. In other words, can the State's right to realise abkari arrears could, take precedence over the Bank's right to enforce its security, the bank being a secured creditor. What is the impact of Section 2 (a) read with Section 3 of the said Act and whether the said provisions gives a statutory recognition to the doctrine of the State's priority for recovery of abkari arrears is the crux of the dispute. 2. The State of Kerala represented by the District Collector, Ernakulam and the Tahsildar Muvattupuzha are the revision petitioners. The order passed by the Subcourt Muvattupuzha dated 23.3.2005 in E.A. 578/1996 in E.P 122/1993 in O.S. 469/1985 is under challenge. The said E.A. was filed by the revision petitioners for a declaration that the property put to sale in execution belongs to the State of Kerala and therefore not liable to be sold in the execution proceedings . The prayer was declined by C.R.P No. 777 of 2005 2 the court below and hence this revision. 3. The decree holder /plaintiff namely Bank of India, Pandappilly Branch filed O.S. No. 469/1985 before the Sub Court, Muvattupuzha for realisation of money against the defendants . A decree was passed in favour of the decree holder- Bank. The decree holder-Bank filed E.P 122/1993 in O.S. 469/1985 for realsiation of the decree amount by sale of the property which is mortgaged in their favour. According to the State of Kerala which is not a party to the suit, the mortgaged property put to sale in execution of the decree in O.S. 469/1985 is under the State's custody and possession pursuant to a revenue recovery proceedings initiated against the 1st judgment debtor/1st defendant who is a defaulter of Abkari Arrears and therefore the State is entitled to the declaration prayed for in E.A. 578/1996. 4. The properties sought to be sold in execution were mortgaged to the decree holder Bank on 19.3.1983 and the bank obtained a decree on 26.8.1987 charging these properties. The 1st judgment debtor in the suit is the defaulter of Abkari arrears under Toddy workers welfare fund. The District Collector, Ernakulam issued a certificate under Section 69(3) of the Kerala Revenue Recovery Act, 1968 ( hereinafter referred to as the R.R.Act) to realise a sum of Rs.4,54,488/- with future interest on account of the aforesaid arrears which the 1st defendant is liable to pay in respect of toddy shop Nos. 26 and 37 of Muvattupuzha range during the period 1982 -93. For realisation of the aforesaid arrears, C.R.P No. 777 of 2005 3 an extent of 2.29 acres of land in Survey No 708/3-1, 708/1-2 and 708/3-3 of Arakkuzha Village belonging to the 1st judgment debtor was attached on 28.3.1984 and notice of attachment was served upon the 1st judgment debtor on 18.4.1984 and the property was notified for sale. The property was proposed to be sold on 27.9.1986. Finding that there was no bidders to participate in the auction, the sale was adjourned to 25.10.1986 and then to 24.11.1986. Excluding 19 Cents as homestead and road portion, the remaining 2.10 acres was bid in favour of the Government for 10 paise on 24.11.1986. The sale was confirmed on 2.2.1987 after dismissal of the appeal filed by the defaulter. The land was taken into custody by the Government on 2.3.1987. The defaulter filed O.S. No. 112/1990 before the Sub court which was dismissed on 28.6.1993. The appeal filed as A.S. 237/1993 was also dismissed against which the defaulter filed Second Appeal No. 400/1995 before this Court. By judgment dated 13..8.2003 this Court in the said Second Appeal held that the proclamation of sale published by the State was not conducted in accordance with law, and therefore, the sale was set aside. This Court further ordered in the Second Appeal that the entire dues with 6% interest from the date of default till recovery shall be deposited within 4 months from the date of judgment, failing which the respondent State is authorised to put the property in auction in accordance with law. The State prays for a declaration that the property sought to be sold in the present suit absolutely belongs to the State and is not liable to be sold in execution proceedings. C.R.P No. 777 of 2005 4 5. In the objection filed by the decree holder bank it is contended interalia that the judgment debtors have created equitable mortgage with respect to these properties in favour of the bank as early as on 19.3.1983 by way of deposit of title deed and therefore, the proceedings initiated by the State for any other liability is not binding upon these properties. The decree in this case was passed on 26.8.1987 charging these properties and therefore the decree holder bank prays for a dismissal of the petition filed by the State. 6. The learned Government Pleader contended before this Court that the State has got priority over private debts and that consequently the decree holder bank cannot claim any manner of right over these properties which are sought to be sold. He placed reliance on the decision in Dena Bank Vs. Bhikhabhai Prabhudas Parekh & Co reported in (2000) 5 SCC 694 . 7. The decree holder- bank contended that the bank was a secured creditor, that State's right to realise the amount under the Abkari Act could not take precedence over the Bank's right to enforce its security. Citing the decision in Varkey Varkey Vs. N.M.Kurian and others reported in (AIR 1982 Kerala 222) the learned counsel for the Bank contended that all involuntary sales held by the Government are not sales free from any encumbrances . The Government or public authorities may be empowered to sell the properties for recovery of dues other than land revenue, such as abkari dues or rent dues under certain statutes etc. For those dues first charge on the property is not C.R.P No. 777 of 2005 5 available . According to the counsel, involuntary sales held by public authorities for recovery of such dues are not sales free from encumbrances; but they are sales subject to encumbrance. It is also submitted that if there is a prior charge or mortgage and if there is a prior suit pending on the basis of the charge or mortgage the sale held by the public authorities will be subject to such charge or litigation. 8. The first contention of the learned Government Pleader referring to Rule 5 (11) of Abkari Shops ( Disposal in Auction ) Rules 1974 is that in view of the provisions contained therein any encumbrance created of the assets of the defaulter will be deemed to be void to the extent of the sum due under the said contract. Thus, the contention of the State is that the mortgage created in favour of the Bank is subject to encumbrance created under Rule 5(11) of the abovesaid Rules. In other words, the moment he becomes a bidder, who is successful, the Rule envisages that he cannot create any encumbrance in respect of properties owned by him. According to the Government Pleader the property in question is an asset belonging to the 1st judgment debtor and so long as he bid in auction the right to vend liquor in terms of the Abkari Shops (Disposal in Auction) Rules,he cannot transfer or encumber any of his assets to the detriment of the amount that would become due under the Contract including due deposit under Section 5(11) of the Abkari Shops (Disposal in Auction ) Rules 1974 and therefore the banks claim for realisation of the decree amount is subject to the right of the Government to realise the arrears of the Abkari amount due from the defaulter /1st C.R.P No. 777 of 2005 6 judgment debtor. 9. Secondly ,the learned Government Pleader invited the attention of this Court to Section 2(a) of the Kerala Revenue Recovery Act 1968 which defines “the arrear of public revenue due on land” and 2( j) which defines “the public revenue due on land” and Section 3 of the Revenue Recovery Act which dealt with the “charge and security for public revenue” According to him the Abkari Kist amount due from the defaulter is public revenue due on land as defined under Section 2 (j) of the Act and hence the public revenue due on land shall be the first charge on that land . Section 2(j) of the Kerala Revenue Recovery Act 1968 defines public revenue due on land as” the land revenue charge on the land and includes all other taxes, fees, cesses on land, whether charged on land or not and all cesses or other dues payable to the Government on account of water used for purposes of irrigation”. Section 2(a) of the Revenue Recovery Act reads as follows: “arrear of public revenue due on land as the whole or any portion of any kist or instalment of such revenue not paid on the day on which it falls due according to the kistbandy or any engagement or usage”. Section 3 of the Revenue Recovery Act reads as follows: Charge and security for public revenue.--The public revenue due on any land shall be the first charge on that land, the buildings upon it and on the produce thereof. 10. Section 28 of the Abkari Act 1 of 1077 as amended reads as follows: C.R.P No. 777 of 2005 7 Recovery of duties: All duties, taxes, fines and fees payable to the (Government) direct under any of the foregoing provisions of this Act or of any license or permit issued under it, and all amounts due to the (Government) by any grantee of a privilege or by any farmer under this Act or by any person on account of any contract relating to the Abkari Revenue may be recovered from the person primarily liable to pay the same or from his surety (if any) as if they were arrears of Land Revenue, and, in case of default made by a grantee of a privilege or by a farmer, the (Commissioner) may take grant or farm under management at the risk of the defaulter or may declare the grant or farm forfeited and re-sell it at the risk and loss of the defaulter. When a grant or farm is under management under the Section, the (Commissioner) may recover any moneys due to the defaulter by any lessee or assignee as if they were arrears of Land Revenue. 11. Going by the provisions of the Revenue Recovery Act, the object is to recover not only public revenue due on land to which Section 3 is attracted, but also all other amounts declared to be recoverable under the Act. Amounts declared to be recoverable under the R.R. Act by virtue of the statutory provisions in other Acts are by fiction of law treated as if they are public revenue due on land or land revenue due on land. The distinction between public revenue due on land and other amounts which are not so deemed but recoverable under the R.R. Act appears to be that in respect of the former, a charge is automatically created by reason of Section 3, whereas in the case of the latter Section 3 is not attracted. But both are amounts recoverable under the R.R. Act. It has been held by this Court in the decision reported in Baby v. State of Kerala, 1981 K.L.T. 510 that money due under Section 9 of the Welfare Fund Act is not public C.R.P No. 777 of 2005 8 revenue due on land and Section 3 creating a charge under the R.R. Act is not attracted although the amount as such is recoverable as in the case of any other land revenue, which would mean that, land revenue being part of the definition of public revenue due on land, it is recoverable by any of the modes prescribed for recovery of the latter. 12. Section 2(b)of the Travancore-Cochin Revenue Recovery Act, 1951 defines arrear of public revenue due on land as the whole or any portion of any kist or instalment of such revenue not paid on the day on which it falls due according to the kistbandy or any engagement or usage. Referring to Section 36 A(1) and (2) of the Travancore-Cochin Revenue Recovery Act, 1951, a Division Bench of this Court in the decision reported in Tahsildar v. Thomas, 1969 K.L.T. 878 held that the property dealt with in Section 36 A(1) is only that in respect of which public revenue is in arrear. It follows, therefore, both from the plain language of the section and the scheme of the Act that Government can purchase land for a nominal amount under Section 36 A(2) only if in respect of it, there is arrear of public revenue. In the same decision, referring to similar provisions under the R.R. Act, this Court held as follows: "........... Section 30(1) of the 1952 Act does ;not say that the loan can be recovered as if it is arrear of public revenue due on the property mortgaged. On the other hand, it only says that it can be recovered as if it was arrear of public or land revenue from the person aided. What it means is only that he can be treated as a defaulter under the 1951 Act. It only indicates that the same procedure is to be followed for C.R.P No. 777 of 2005 9 recovery of the arrears. If the person aided under the 1952 Act is treated as a defaulter under the 1951 Act, all his lands can be proceeded against for the arrears of public revenue but under Section 36 A of the 1951 Act, the Government can purchase a land for a nominal amount only if there is arrear of public revenue due in respect of it. 13. Quoting Section 2(b) of the 1951 Act as extracted above, the Division Bench held that a land in respect of which kist is not in arrear cannot be treated as one for which public revenue is in arrear from the mere fact that it is mortgaged for taking a loan under the 1952 Act and the person aided has defaulted to pay the amount taken on loan. Section 2(b) of the Travancore-Cochin Revenue Recovery Act, 1951 is exactly the same and ditto provision as Section 2(a) of the R.R. Act, 1968. In that case a land in respect of which kist is not in arrear cannot be treated as one for which public revenue is in arrear which means a land in respect of which kist is in arrear can be treated as one for which public revenue is in arrear. 14. Learned counsel appearing for the first respondent - Bank contended that amounts due under the Abkari Act are not public revenue due on land so as to attract Section 3 of the Revenue Recovery Act He referred to Section 28 of the Abkari Act and submitted that the money due under the said Act is not public revenue due on land. In the decision reported in Baby v. State of Kerala, 1981 K.L.T. 510, this Court considered the question as to whether arrears of amounts due under the Kerala Toddy Workers Welfare Fund Act, 1969 amounts to public revenue C.R.P No. 777 of 2005 10 due on land and as to whether the Recovering Officer can claim priority over other creditors. This Court examined the distinction between Section 9 of the Welfare Fund Act and Section 28 of the Abkari Act. Section 9 of the Welfare Fund Act reads as follows: "Mode of recovery of money due from employers:- Any amount due from the employer in pursuance of the provisions of this Act or the scheme may, if the amount is in arrear, be recovered in the same manner as an arrear of land revenue. 15. This provision may be contrasted with Section 28 of the Abkari Act, the relevant portion of which reads as follows: "All duties, taxes, fines and fees payable ........... may be recovered .........as if they were arrears of land revenue ......." 16. This Court held that there is distinction between Section 9 of the Welfare Fund Act and Section 28 of the Abkari Act. This Court after referring to Section 68(1) of the R.R. Act read with Sections 2(j) and 3 of the R.R. Act held that the items coming under Section 2(j) are public revenue due on land. This Court further held that amounts which are by fiction of law treated as if they are public revenue due on land or land revenue are also public revenue due on land. The distinction between public revenue due on land and other amounts which are not so deemed but recoverable under the R.R. Act appears to be that in respect of the former, a charge is automatically created by reason of Section 3, whereas in the case of the latter Section 3 is not attracted. This Court further held C.R.P No. 777 of 2005 11 that money due under Section 9 of the Welfare Fund Act is not public revenue due on land and Section 3 creating a charge under the R.R. Act is not attracted although the amount as such is recoverable as in the case of any other land revenue, which would mean that, land revenue being part of the definition of public revenue due on land, it is recoverable by any of the modes prescribed for recovery of the latter. 17. Public revenue due on any land shall be the first charge on that land. What is public revenue on land is defined under Section 2(j) and arrears of public revenue due on land is defined under Section 2(a) of the R.R. Act. From a reading of both the provisions, it is clear that public revenue due on land as defined under Section 2(j) and arrears of public revenue due on land as defined under Section 2(a) are in respect of which a charge is created under Section 3 of the R.R. Act. 18. Yet for another reason also, the State has got the first charge over the property in question. As per Rule 5(11) of the Abkari Shops (Disposal in Auction) Rules, 1974 any encumbrance created of the assets of the defaulter will be deemed to be void to the extent of the sum due under such contract. Chapter IV of the Abkari Shops (Disposal in Auction) Rules, 1974 deals with the general conditions applicable to the sale of toddy shops. Rule 5(11) of the said Rules is extracted below: Auction purchasers in whose names the sales of shops are declared by the auctioning officer at the time of auction shall not be permitted to transfer or encumber any of their C.R.P No. 777 of 2005 12 assets to the detriment of the amount that may become due under the contract including the deposit due from them and such transactions if any, notice shall be deemed void to the extent of the sum due under such contract. 19. In view of the provisions contained in Rule 5(11), any encumbrance created of the assets of the defaulter will be deemed to be void to the extent of the sum due under such contract. Thus, the contention of the Bank that the mortgage created in their favour is the first charge has to be repelled. Rule 5(11) refers to the assets belonging to the defaulter which is not permitted to be transferred or encumbered to the detriment of the amount that would become due under the contract. In the decision rendered by this Court in Kaduthuruthy Urban Co-op. Bank Ltd. v. State of Kerala, 2007(3) K.L.T. 957, this Court held that the amounts due under the Abkari Act are recoverable as if they are arrears of land revenue, that the liability to satisfy the dues arising out of a bid is enforceable under Section 28 of the Abkari Act quite apart from any contractual liability, that by virtue of Section 28 of the Abkari Act, the State is entitled to recover the abkari dues by putting Revenue Recovery Act in motion and that the abkari dues in arrears is a public revenue on land. This Court further held that Rule 5(11) prohibits transfer of any of the assets to the detriment of the amount that would become due under the contract and that the moment the defaulter becomes a bidder, the rule envisages that he cannot create any encumbrance on the property. The contention of the petitioner in that case that the mortgage created in their favour is the first charge was repelled by this Court. C.R.P No. 777 of 2005 13 20. Learned counsel for the Bank also relied on the decision of this Court reported in Varkey Varkey v. N.M. Kurian, A.I.R. 1982 Kerala 222 and contended that the Government or public authorities may be empowered to sell properties for recovery of dues other than land revenue, such as abkari dues or rent dues under certain statutes and for those dues first charge on the property is not available. According to counsel, involuntary sales held by public authorities for recovery of such dues are not sales free from encumbrances, but they are sales subject to encumbrance. If there is any prior charge or mortgage and if there is a prior suit pending on the basis of the charge or mortgage, the sale held by the public authorities will be subject to such charge or litigation. Counsel also relied on the decision of this Court reported in Gourikutty Amma v. District Collector, 1974 K.L.T. 103. quoting Section 2(j) of the R.R. Act held that Even reading S.28 and treating it as part of the Revenue Recovery Act it is difficult to accept the contention that the attachment was effected for any arrears of public revenue due on land. S.28 of Abkari Act, Act 1 of 1077 only enables abkari dues being recovered as if they were arrears of land revenue. This Section does not convert abkari dues into public revenue due on land. Only if the amounts claimed are arrears of public revenue due on land. S.44 will be attracted. 21. The aforesaid decision did not consider the applicability or impact of Section 2(a) of the R.R. Act Counsel for the Bank further submitted that Section 2(a) of the R.R. Act is not in respect of abkari dues and that the word kist or kistbandy does not refer to abkari arrears and C.R.P No. 777 of 2005 14 that the Abkari Act does not mention about those words and, therefore, Section 2(a) of the R.R. Act is not applicable.