2009 (1) TMI 794 - HC - VAT and Sales Tax

Proceedings in respect of the tax dues from a defaulter for the period 1993-94 to 1997-98 seeked to be quashed - Held that - All that the provision contemplates is that tax assessed on or has become payable by, or any other amount due under this Act from a dealer or person and any fee due from him under the Act, shall be subject to the claim of the Government in respect of land revenue and the claim of the Land Development Bank in regard to the property mortgaged to it under section 28(2) of the Tamil Nadu Co-operative Land Development Banks Act, 1934 (Tamil Nadu Act X of 1934), and it will have priority over all other claims against the property of the said dealer or person to be recovered as land revenue. By so holding, the provision, by itself, does not create the first charge as in the other enactments and the claim of the State has to subserve the claim of the secured creditor, who, by the anterior charge created in his favour, has the first claim over even the State claim. On the admitted fact position as regards the date of the passing of the assessment orders as stated in the counter in paragraph 4, have no hesitation in accepting the plea of the petitioner.The provisions of the Tamil Nadu Act cannot stand the comparison of the Rajasthan Act or the Bombay Act to have the decisions of the Supreme Court applied in favour of the respondent s claim. Appeal allowed of petitioner.

Issues Involved:
1. Validity of the notice issued by the Commercial Tax Officer for the recovery of tax dues.
2. Priority of the State's claim over the bank's secured mortgage.
3. Applicability of the Tamil Nadu General Sales Tax Act, 1959, in relation to the mortgage created by the bank.
4. Relevance of precedents and judicial decisions cited by both parties.

Detailed Analysis:

1. Validity of the Notice Issued by the Commercial Tax Officer:
The petitioner sought a writ of certiorari to quash the proceedings dated July 18, 2008, by the Commercial Tax Officer, Madurai, concerning tax dues from a defaulter for the period 1993-94 to 1997-98. The respondent issued a notice in Form IV under the Revenue Recovery Act, 1864, and attached the property of the assessee. The attachment was published in the District Gazette on December 8, 2000, and a notice to bring the property for sale was published in the newspaper on March 4, 2001. The respondent issued a notice to the petitioner in Form B6, calling upon the petitioner to remit the amount realized by the bank towards its dues by auction sale, along with interest, as per section 24(3) of the Tamil Nadu General Sales Tax Act, 1959.

2. Priority of the State's Claim Over the Bank's Secured Mortgage:
The petitioner contended that the mortgage in favor of the bank was created much earlier (October 29, 1993) than the tax demand raised by the respondent. The petitioner relied on the Supreme Court decision in Dena Bank v. Bhikhabhai Prabhudas Parekh & Co., which held that the priority of the State's charge cannot supersede the commercial transactions under which the property had already been subjected to a charge in favor of the bank. The respondent, however, argued that the State had a preferential right over the petitioner-bank based on section 24(1) and (2) of the Tamil Nadu General Sales Tax Act and various judicial precedents.

3. Applicability of the Tamil Nadu General Sales Tax Act, 1959:
The court examined the provisions of section 24(2) of the Tamil Nadu General Sales Tax Act, which states that any tax assessed or payable by a dealer shall have priority over all other claims against the property of the dealer, subject to the claims of the Government in respect of land revenue and the Land Development Bank. The court noted that the provision does not create a first charge as in other enactments like the Rajasthan Sales Tax Act or the Bombay Sales Tax Act. Therefore, the claim of the State has to subserve the claim of the secured creditor (the bank), who had an anterior charge created in its favor.

4. Relevance of Precedents and Judicial Decisions:
The court analyzed several judicial decisions cited by both parties:
- Dena Bank v. Bhikhabhai Prabhudas Parekh & Co.: The Supreme Court held that the Crown's preferential right for recovery of debts is confined to ordinary or unsecured creditors and does not extend to secured private debts.
- State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling Corporation: The Supreme Court held that when a first charge is created by operation of law, it will have precedence over an existing mortgage.
- Central Bank of India v. State of Tamil Nadu: This court held that the State's claim as a first-charge holder supersedes claims of existing mortgagees.
- Thane Janata Sahakari Bank Ltd. v. Commissioner of Sales Tax: The Bombay High Court held that the recovery of sales tax dues has priority over secured creditors under the Bombay Sales Tax Act.

The court concluded that the provisions of the Tamil Nadu General Sales Tax Act, 1959, do not create a first charge over the property, unlike the Rajasthan and Bombay Acts. Therefore, the mortgage created in favor of the bank, which was prior to the tax demand, takes precedence over the State's claim.

Conclusion:
The court allowed the writ petition, quashing the impugned proceedings by the Commercial Tax Officer. The court held that the bank's mortgage, created before the tax liability arose, supersedes the State's claim under the Tamil Nadu General Sales Tax Act, 1959. The connected miscellaneous petition was closed, and no costs were awarded.

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