2025 (4) TMI 425 - HC - VAT / Sales Tax

Recovery of dues - bank s lien on fixed deposits takes precedence over the statutory charge - stand of the bank is that it is the bank that holds priority of charge in respect of the fixed deposit - HELD THAT - In State Bank of Bikaner and Jaipur 1994 (12) TMI 72 - SUPREME COURT the appellant had accepted cash credit facilities and secured the facilities by a mortgage of the factory premises of the borrower. On defaults in repayment by the borrower a suit was filed seeking recovery of the outstandings and realization of mortgage security under Order 34 Rule 4 of the Code of Civil Procedure. Pending Suit a rival claim was raised by the Commercial Tax Officer Bharatpur relying on a prior claim in respect of the sales tax dues from the borrower. The sales tax officer argued that by virtue of the prior charge that the Commercial Taxes Department held it was entitled to realize the sales tax arrears by sale of the mortgaged property - The claim of the Commercial Taxes Officer rested on the provisions of Section 11AAAA of the Rajasthan Sales Tax Act 1954 in terms of which notwithstanding anything to the contrary contained in any law for the time being in force in respect of the outstandings of tax penalty interest or any other sum such outstandings constituted a first charge on the property of the defaulting assessee. While considering the priority of charge ie. whether the statutory first charge would hold priority over an existing prior mortgage the Court held that where a mortgage had been created in respect of a property and interest in that property had been carved out in favour of the mortgagee the redemption of the property by the mortgagor would only stand settled on payment of the mortgage dues. This principle operates notwithstanding that the title to the property remained with the mortgagor. In Dattatreya Shanker Mote V. Anand Chintaman Datar 1974 (10) TMI 99 - SUPREME COURT the Supreme Court observed while comparing a charge and a mortgage that a charge is wider as it also includes a mortgage. Put differently every mortgage is a charge but every charge is not a mortgage. The Supreme Court thus concluded that where a first charge is created by operation of law over a property such charge would have precedence over an existing mortgage. In the present case the dates of creation of charge are 30.04.2003 in respect of the periods 1997-98 to 2001-02 and 10.05.2004 in respect of the period 1996-97. Clearly the department has missed the bus and cannot now seek to impinge on the priority marked by the bank. In such view of the matter the impugned B-6 notice has no legs to stand. Coming to the submission in regard to pre-closure there are no legal relevance of the same in deciding this matter. It is true that the bank had proceeded to pre-close the fixed deposits towards the outstandings of packing credit even prior to the dates of maturity of the fixed deposits. However this could be viewed as the act of a prudent bank wishing to secure its interest in alignment with the lien created by it and nothing more. Hence this argument does not advance the case of the Commercial Taxes Department. The impugned notice is quashed and this writ petition is allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

• Whether the bank's lien on fixed deposits takes precedence over the statutory charge claimed by the Commercial Taxes Department under the Tamil Nadu General Sales Tax Act, 1959 (TNGST Act).
• Whether the actions of the bank in pre-closing the fixed deposits were justified and legally valid.
• Whether Section 24A of the TNGST Act, concerning transfers to defraud the revenue, applies to the present case.

ISSUE-WISE DETAILED ANALYSIS

Priority of Lien vs. Statutory Charge

• Relevant Legal Framework and Precedents: The case hinges on Section 24 of the TNGST Act, which outlines the priority of tax assessments and charges. The bank relied on precedents, including State Bank of Bikaner and Jaipur v. National Iron and Steel Rolling Corporation and Tamilnad Mercantile Bank Ltd. v. Commercial Tax Officer, which discuss the priority of secured creditors over statutory charges.
• Court's Interpretation and Reasoning: The Court emphasized that the lien marked by the bank on the fixed deposits was created before the assessment orders by the Commercial Taxes Department. The Court noted that Section 24 of the TNGST Act does not use the term "first charge," unlike Section 11AAAA of the Rajasthan Sales Tax Act, which was pivotal in the State Bank of Bikaner case.
• Key Evidence and Findings: The dates of lien creation (19.07.2002 and 01.08.2002) were anterior to the assessment orders (30.04.2003 and 10.05.2004). This chronological evidence was crucial in establishing the bank's priority.
• Application of Law to Facts: The Court applied the legal principle that a prior lien takes precedence over subsequent statutory charges, given the absence of a "first charge" designation in the TNGST Act.
• Treatment of Competing Arguments: The Department's argument that the bank's foreclosure of fixed deposits was hasty and unfair was dismissed, as the Court found the bank's actions aligned with securing its interests.
• Conclusions: The Court concluded that the bank's lien had priority over the Department's statutory charge, rendering the B-6 notice ineffective.

Pre-closure of Fixed Deposits

• Relevant Legal Framework: The Court considered the bank's fiduciary duty to secure its interests through pre-closure of fixed deposits.
• Court's Interpretation and Reasoning: The Court found no legal impropriety in the bank's pre-closure actions, viewing them as prudent measures to protect its lien.
• Conclusions: The argument regarding pre-closure did not advance the Department's case, as it was deemed irrelevant to the legal determination of lien priority.

Application of Section 24A of the TNGST Act

• Relevant Legal Framework: Section 24A addresses fraudulent transfers to evade tax liabilities.
• Court's Interpretation and Reasoning: The Court determined that Section 24A was inapplicable, as the lien was created before the assessment orders, negating any fraudulent intent.
• Conclusions: The invocation of Section 24A was dismissed as an afterthought, with no substantive basis in the case facts.

SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: The Court stated, "the dates of creation of lien (19.07.2002 and 01.08.2002) and the orders of assessment (30.05.2003 and 10.05.2004), it is clear that it is the lien that is anterior. It hence the lien that would take precedence."
• Core Principles Established: The judgment reinforced the principle that a prior lien by a secured creditor takes precedence over subsequent statutory charges in the absence of a legislative designation of "first charge."
• Final Determinations on Each Issue: The Court quashed the B-6 notice, upheld the bank's lien priority, and dismissed the applicability of Section 24A, allowing the writ petition in favor of the bank.