2004 (1) TMI 653 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Priority of State's claim for sales tax dues over equitable mortgages created in favor of banks.
2. The effect of statutory provisions on pre-existing mortgage decrees.

Detailed Analysis:

1. Priority of State's Claim for Sales Tax Dues Over Equitable Mortgages Created in Favor of Banks:

Facts and Arguments:
- Multiple writ petitions were filed by various banks (State Bank of Travancore, Vijaya Bank, Alleppey District Co-operative Bank Ltd., and Allahabad Bank) challenging the priority of the State of Kerala's claim for sales tax dues over the equitable mortgages created by defaulters in favor of these banks.
- The banks argued that the State cannot claim priority over debts due to them, especially when the equitable mortgages were created before the liability to the State arose and when decrees had been obtained based on these mortgages.

Legal Provisions and Case Law:
- The banks relied on the Supreme Court decisions in *Dena Bank v. Bhikhabhai Prabhudas Parekh & Co.* [2000] 120 STC 610 and *Bank of Bihar v. State of Bihar* AIR 1971 SC 1210, arguing that the State's claim should not override pre-existing equitable mortgages.
- The State, represented by the Special Government Pleader, cited Supreme Court decisions in *State of Madhya Pradesh v. State Bank of Indore* [2002] 126 STC 1 and *State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling Corporation* [1995] 96 STC 612, which upheld the priority of State claims for tax dues over other debts, including those secured by mortgages.

Judgment:
- The court referenced Section 26B of the Kerala General Sales Tax Act, 1963, which states: "Notwithstanding anything to the contrary contained in any other law for the time being in force, any amount of tax, penalty, interest, and any other amount, if any, payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer, or such person."
- The court also discussed similar provisions in other states' sales tax acts and their interpretation by the Supreme Court, notably in *State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling Corporation* and *State of Madhya Pradesh v. State Bank of Indore*, which supported the State's priority claim.

Conclusion:
- The court concluded that the State's claim for sales tax dues has priority over equitable mortgages created in favor of banks, even if the mortgages were created before the liability to the State arose. This is due to the statutory first charge created by Section 26B of the Kerala General Sales Tax Act, 1963.

2. The Effect of Statutory Provisions on Pre-existing Mortgage Decrees:

Facts and Arguments:
- The banks contended that Section 26B, inserted by the Finance Act, 1999, should not have retrospective effect and should not affect decrees obtained based on equitable mortgages created before the section's enactment.
- They argued that the statutory charge should not override judicial decrees obtained before the statutory provision came into effect.

Legal Provisions and Case Law:
- The court referred to the Supreme Court's interpretation of similar statutory provisions in *Dena Bank v. Bhikhabhai Prabhudas Parekh & Co.* and *State of Madhya Pradesh v. State Bank of Indore*, which held that statutory charges for tax dues have precedence over other claims, including those secured by mortgages, irrespective of the timing of the mortgage or decree.

Judgment:
- The court noted that the Supreme Court in *State Bank of Indore* had upheld the priority of statutory charges over pre-existing mortgage decrees, emphasizing that the statutory first charge created by Section 26B operates on the entire property, not just the equity of redemption.

Conclusion:
- The court held that the statutory first charge for sales tax dues under Section 26B of the Kerala General Sales Tax Act, 1963, takes precedence over pre-existing mortgage decrees. The statutory charge operates on the entire property and overrides any prior claims, including those secured by judicial decrees.

Final Outcome:
- The writ petitions filed by the banks were dismissed, affirming the State's priority in recovering sales tax dues over the claims of the banks based on equitable mortgages and judicial decrees.