1999 (7) TMI 678 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Recovery of dues by the plaintiff bank from the defendants.
2. Validity of payment made by the 6th defendant to the 7th defendant under Section 26 of the Tamil Nadu General Sales Tax Act, 1959.
3. Priority of state debt over other debts.
4. Equitable assignment through power of attorney.

Detailed Analysis:

1. Recovery of dues by the plaintiff bank from the defendants:
The plaintiff, a nationalized bank, filed a suit for recovery of Rs. 71,047.34 with interest at 16.5% per annum from the defendants. The bank had provided a bill purchasing facility to the first defendant firm, with the second to fourth defendants as partners. The first defendant executed a power of attorney in favor of the plaintiff, allowing the bank to collect proceeds directly from drawees, including the 6th defendant. The trial court directed the 6th defendant to pay Rs. 57,044.34 to the plaintiff and held defendants 1 to 5 liable for the same amount. The court also ruled that if defendants 1 to 5 did not pay Rs. 21,000, the 6th defendant would be liable to pay this sum to the plaintiff.

2. Validity of payment made by the 6th defendant to the 7th defendant under Section 26 of the Tamil Nadu General Sales Tax Act, 1959:
The 6th defendant contended that payments made to the 7th defendant (Commercial Tax Officer) were valid under Section 26 of the Tamil Nadu General Sales Tax Act, 1959, which allows the state to recover sales tax arrears from any person holding money for the dealer. The 7th defendant had issued a demand notice to the 6th defendant for sales tax arrears of Rs. 62,098. The trial court found that the 6th defendant should have paid the amount to the plaintiff bank instead of the Sales Tax Department.

3. Priority of state debt over other debts:
The trial court's decision was challenged on the grounds that state debt has priority over other debts. The appellant argued that under Section 26 of the Tamil Nadu General Sales Tax Act, 1959, the state has a statutory charge on the dealer's properties for unpaid sales tax, which takes precedence over other claims. The court cited various Supreme Court judgments, including the State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling Corporation, which held that statutory charges have priority over existing mortgages and other debts.

4. Equitable assignment through power of attorney:
The trial court had concluded that the power of attorney executed by the first defendant in favor of the plaintiff amounted to an equitable assignment, making the plaintiff the owner of the amount owed by the 6th defendant. However, the appellate court noted that while the power of attorney created an agency with interest, it did not transfer ownership of the funds to the bank. The court emphasized that the statutory charge created by the Sales Tax Act takes precedence over the equitable assignment.

Conclusion:
The appellate court set aside the trial court's decree, declaring that the 7th defendant (state) has priority over the amounts due and that any payment made by the 6th defendant to the 7th defendant pursuant to the demand notice amounts to a valid discharge of liability. The appeal was allowed, and the 6th defendant was not held liable to pay the amount again to the plaintiff bank. The court ruled without any order as to costs.