2009 (2) TMI 451 - SC - VAT and Sales Tax

SALES TAX RECOVERY OF TAX BANKS AND FINANCIAL INSTITUTIONS RECOVERY OF DEBTS PRIORITY AS BETWEEN SALES TAX DUES AND DUES OWED TO BANKS AND FINANCIAL INSTITUTIONS

Issues Involved:
1. Whether Section 38C of the Bombay Sales Tax Act, 1959, and Section 26B of the Kerala General Sales Tax Act, 1963, are inconsistent with the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (DRT Act), and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Securitisation Act)?
2. Whether the non obstante clauses in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act give these Central legislations primacy over State legislations?

Detailed Analysis:

1. Inconsistency Between State and Central Legislations:
The court examined whether the provisions creating a first charge in favor of the State for sales tax dues under the Bombay and Kerala Acts are inconsistent with the DRT Act and the Securitisation Act. The court noted that both the DRT Act and the Securitisation Act were enacted to expedite the recovery of dues by banks and financial institutions. However, neither Act explicitly creates a first charge in favor of banks or financial institutions over the property of the borrower.

The court referenced the legislative history and objectives of both the DRT Act and the Securitisation Act, emphasizing that these Acts facilitate the recovery of dues through specialized tribunals and empower secured creditors to enforce their security interests without court intervention. Despite these powers, the Acts do not establish a first charge over the debtor's property, unlike the provisions in the State Acts which explicitly create a first charge in favor of the State for sales tax dues.

2. Primacy of Non Obstante Clauses:
The court analyzed the non obstante clauses in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act, which state that the provisions of these Acts shall have effect notwithstanding anything inconsistent contained in any other law. The court concluded that these clauses do not override the first charge created by State legislations, as the DRT Act and the Securitisation Act do not contain provisions creating a first charge in favor of banks and financial institutions.

The court further examined the non obstante clauses in the State Acts, which give statutory recognition to the priority of the State's charge over other debts. The court held that these clauses create a first charge on the property of the dealer or any other person liable to pay sales tax, and this charge has overriding effect over other laws, including the DRT Act and the Securitisation Act.

Individual Cases Analysis:

C.A. No. 95 of 2005 - Central Bank of India v. State of Kerala:
The Kerala High Court's decision that the State's first charge under Section 26B of the Kerala Act has priority over the bank's dues was upheld. The court found no inconsistency between the State and Central legislations.

C.A. No. 2811 of 2006 - Thane Janata Sahakari Bank Ltd. v. Commissioner of Sales Tax:
The Bombay High Court's decision that the first charge created under Section 38C of the Bombay Act prevails over the bank's claim was upheld. The court confirmed that Section 35 of the Securitisation Act does not override the State's first charge.

C.A. No. 3549 of 2006 - Indian Overseas Bank v. Kerala State:
The court upheld the Kerala High Court's decision that the State's first charge under Section 26B of the Kerala Act has priority over the bank's mortgage.

C.A. No. 3973 of 2006 - Bank of Baroda v. State of Kerala:
The Kerala High Court's decision that the State's first charge under Section 26B of the Kerala Act has priority over the bank's mortgage was upheld.

C.A. No. 4174 of 2006 - Ahmad Koya, Kollam v. District Collector, Kollam:
The court upheld the Kerala High Court's decision that the State's first charge under Section 26B of the Kerala Act has priority over the bank's mortgage and that the auction conducted by the Recovery Officer without notice to the Revenue Officer was illegal.

C.A. No. 4909 of 2006 - Central Bank of India v. Deputy Tehsildar:
The Kerala High Court's decision that the Tehsildar was entitled to enforce the State's first charge under Section 26B of the Kerala Act was upheld.

C.A. No. 1288 of 2007 - UCO Bank v. State of Kerala:
The court upheld the Kerala High Court's decision that the State's first charge under Section 26B of the Kerala Act has priority over the bank's mortgage.

C.A. No. 1318 of 2009 - South Indian Bank Ltd., Trichur-1 v. State of Kerala:
The Kerala High Court's decision that the State's first charge under Section 26B of the Kerala Act has priority over the bank's mortgage was upheld.

Conclusion:
The appeals were dismissed, affirming the priority of the State's first charge under the respective State Sales Tax Acts over the claims of banks and financial institutions. The court clarified that the DRT Act and the Securitisation Act do not create a first charge in favor of banks and financial institutions, and the non obstante clauses in these Acts do not override the first charge created by State legislations.

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