2007 (8) TMI 651 - SC - VAT and Sales Tax

Whether the pawnee, the pawnbroker, on sale could be considered to be a dealer, liable to pay sales tax under the Sales Tax Act? Held that - Going by the principles governing the matter, propounded by this Court there cannot be any doubt that the rights of the appellant-bank over the pawned sugar had precedence over the claims of the Cane Commissioner and that of the workmen. The High Court was, therefore, in error in passing an interim order to pay parts of the proceeds to the Cane Commissioner and to the Labour Commissioner for disbursal to the cane growers and to the employees. There is no dispute that the sugar was pledged with the appellant bank for securing a loan of the first respondent and the loan had not been repaid. The goods were forcibly taken possession of at the instance of the revenue recovery authority from the custody of the pawnee, the appellant-bank. In view of the fact that the goods were validly pawned to the appellant bank, the rights of the appellant-bank as pawnee cannot be affected by the orders of the Cane Commissioner or the demands made by him or the demands made on behalf of the workmen. Both the Cane Commissioner and the workmen in the absence of a liquidation, stand only as unsecured creditors and their rights cannot prevail over the rights of the pawnee of the goods. The High Court ought not to have passed such an interim order of consequence especially in the light of the legal principles settled by this Court. The order of the High Court, therefore, cannot be sustained and calls for interference. Appeal allowed.

Issues Involved:
1. Legality of the interim order passed by the High Court.
2. Rights of the appellant-bank as a pawnee.
3. Status of the Cane Commissioner and the Labour Commissioner as creditors.
4. Applicability of the Companies Act and the Sick Industrial Companies (Special Provisions) Act.
5. Precedence of claims in the absence of liquidation.

Detailed Analysis:

1. Legality of the Interim Order Passed by the High Court:
The appeals challenge the interim order of the High Court that directed disbursement of sale proceeds from sugar stocks pledged to the appellant-bank. The High Court ordered Rs. 43,00,000/- to the Labour Commissioner for employees, Rs. 60,00,000/- to the Cane Commissioner for sugarcane cultivators, and Rs. 20,00,000/- to the appellant-bank, with the balance kept in a fixed deposit. The appellant-bank contended that this order ignored its rights as a pawnee, which are well recognized by law, and argued that such an interim order should not have been passed pending final adjudication.

2. Rights of the Appellant-Bank as a Pawnee:
The appellant-bank asserted its rights as a pawnee under Sections 172 to 176 of the Contract Act, which entitle a pawnee to retain goods pledged for payment of debt and to sell the goods after reasonable notice if the debt is not repaid. The bank argued that its rights as a pawnee have precedence over the claims of unsecured creditors, including the Cane Commissioner and the Labour Commissioner. The Supreme Court reiterated that the pawnee has a special property or interest in the pledged goods, which cannot be overridden by other creditors without satisfying the pawnee's claim.

3. Status of the Cane Commissioner and the Labour Commissioner as Creditors:
The Cane Commissioner and the Labour Commissioner were deemed unsecured creditors. The Supreme Court emphasized that the Cane Commissioner, representing sugarcane growers, and the Labour Commissioner, representing workmen, do not have preferential rights over the pawnee in the absence of liquidation proceedings. The Court cited previous judgments, including Bank of Bihar vs. State of Bihar, to support the position that unsecured creditors cannot claim precedence over a secured creditor like the pawnee.

4. Applicability of the Companies Act and the Sick Industrial Companies (Special Provisions) Act:
The Court noted that there were no winding-up proceedings under the Companies Act for the first respondent company, which had only approached the Board for Industrial and Financial Reconstruction (BIFR) under the Sick Industrial Companies (Special Provisions) Act. The Court clarified that the preferential rights of workmen as secured creditors arise only in the context of liquidation under Section 529 of the Companies Act, which was not applicable in this case.

5. Precedence of Claims in the Absence of Liquidation:
The Supreme Court held that the rights of the appellant-bank as a pawnee take precedence over the claims of the Cane Commissioner and the Labour Commissioner in the absence of liquidation. The Court stated that the High Court erred in directing payments to unsecured creditors from the sale proceeds of pledged goods without first satisfying the debt owed to the pawnee.

Conclusion:
The Supreme Court allowed the appeals, set aside the High Court's interim order, and held that the appellant-bank, as the pawnee, is entitled to the sale proceeds to satisfy its debt. Only if there is a surplus after satisfying the bank's claim should the remaining amount be available for disbursal to the Cane Commissioner and the Labour Commissioner. The Court directed the parties to bear their respective costs.

← Previous Next →