9911796707
TMI Blog1993 (3) TMI 332X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 0.45 lakhs. On the said application, the plaintiff-bank sanctioned the loan facility to the defendants on different items with conditions specified in the sanction letter. The first defendant-company resolved to accept the terms and conditions contained in the sanction letter dated March 26, 1974 and offer the securities as mentioned in the said sanction letter sanctioning the facilities by the bank. It was further resolved that the facilities will be secured by floating charge on all other assets of the company in favour of the bank and irrevocable joint and several personal guarantee of defendants 2 to 7. Under the said agreement, the first defendant-company had taken different loans and the same were not repaid. Therefore, the bank filed the suit for recovery of Rs. 7,09,296.72. There was also hypothecation of some of the assets of the first defendant-company. After filing the suit, the bank has filed a petition for appointment of a receiver for sale of the properties hypothecated and accordingly the court below ordered for sale of the hypothecated properties. The properties were sold and the amount realised was deposited to the credit of the suit. The State Government r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment notice to the first defendantcompany, nor had it served any demand notice. Hence, any assessment made by the State Government is illegal and void. As per the Sales Tax Act, unless the first defendant is being heard, no assessment can be made and the State Government has not followed the procedure laid down under the Act. Unless these things are complied with, the State Government cannot claim any amount from the first defendant-company. Under these circumstances, the State Government has no right to attach the amount lying to the credit of the suit. The lower court, after hearing the rival contentions of the parties and considering the material placed before it, passed an order directing payment of the amount to the State Government as stated supra. Aggrieved by that order, the present revision is filed by the plaintiff-bank. The learned counsel for the petitioner-bank contended that the bank filed the suit for recovery of the amount, and that the properties in question are hypothecated to the petitioner-bank by the first defendant-company. Though the suit is filed for simple recovery of money, it is actually based on hypothecation of properties by the first defendan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 979 was filed by the plaintiff-bank for the sale of hypothecated properties by appointing a receiver on August 11, 1980 and the properties were sold on June 7, 1980. It is further contended that the plaintiffbank filed the suit for simple money and no charge is claimed on the hypothecated properties in the suit. As per section 16(4) of the A.P. General Sales Tax Act, 1957, right to recover the arrears of sales tax as a land revenue accrues to the State Government when a defaulter fails to pay the amount under demand under the Revenue Recovery Act. Therefore, the State debt has got priority over all other debts of the creditors. The court below has rightly allowed the interlocutory application ordering payment of the arrears from out of the amount which is to the credit of the suit. In view of the above rival contentions of both the learned counsel, the point that arises for consideration is whether the State debt or Crown debt has got priority over the secured debt of the other creditors. There is no dispute that the first defendant is a defaulter for payment of the sales tax and the arrears of Rs. 33,648 have to be recovered by the Sales Tax Department, i.e., the State, from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ildings upon it and its products, shall be regarded as the security of the public revenue." Section 3 provides for mode of payment for land revenue. Section 4 says what is arrears of revenue which reads thus: "When the whole or portion of a kist shall not be so paid, the amount of the kist or of its unpaid portion shall be deemed to be an arrear of revenue." Section 5 envisages as to how the arrear of revenue is recovered. It reads thus: "Whenever revenue may be in arrear, it shall be lawful for the Collector, or other officer empowered by the Collector in that behalf, to proceed to recover the arrear, together with interest and costs of process, by the sale of defaulter's movable and immovable property, or by execution against the person of the defaulter in manner hereinafter provided." Section 8 provides rules for seizure and seal of movable property. Section 9 provides for procedure when defaulter neglects to pay after notice. Section 17 deals with claims to property distrained and sold-Revenue to be the first charge. Section 22 provides for proclamation of sale. Section 52 provides for similar process in case of other species of revenue, advances, fees, cesses, etc. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount borrowed by the first defendant-company is secured by the hypothecation of properties. Thus the loans are secured by the charge of hypothecation on the movable properties hypothecated to the bank. Therefore, they are secured debts when compared to the sales tax arrears to be recovered by the State which is unsecured debt. The learned Government Pleader appearing for the first respondent contended that there is no dispute that the first defendant-company has to pay the arrears of sales tax amount to the State Government and as per the provisions of the A.P. General Sales Tax Act and the Revenue Recovery Act, the State can recover the same as arrears of land revenue. Thus, the State has correctly filed the interlocutory application and the lower court rightly allowed the same. He further contended that the hypothecation is not equal to pledge. In the case of hypothecation, the property and possession will remain with the owner. Therefore, no security is created on the said property. In case of pledge, though ownership will remain with the owner, the possession will pass on to the other person with whom the pledge is made. Therefore, the amount to be recovered by the ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Contract Act. Hypothecation is only extended idea of pledge, the creditor permitting the debtor to retain possession either on behalf of or in trust for himself." Thus, "hypothecation" is only an extended idea of pledge and a right is created in favour of the creditor to realise the amount by sale of the hypothecated property. It is nextly contended that though "hypothecation" is created, the same does not confer any right to the creditor as no statutory right is created in favour of the creditor. There is no doubt, that, no statutory right is provided to realise the amount by sale of hypothecated property. But the said right has been recognised by the judicial pronouncements from time to time following the rule of Common Law of England. Thus, it has been treated as a "law in force" in the country within the meaning of article 372 of the Constitution of India. This question arose for consideration in the decision in Builders Supply Corporation v. Union of India [1965] 56 ITR 91 (SC); AIR 1965 SC 1061 and their Lordships considering the concept of "law in force" as contained in article 372(1) of the Constitution, laid down the principle as follows: "It is fairly well-sett ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reas in case of a pledge a special interest and not special property is transferred to the pledgee who is impliedly authorised to sell the goods pledged in case of default in accordance with the provisions of the Contract Act. In case of mortgage, however, a general but limited property is transferred to the creditor, but the possession may or may not be transferred to the mortgagee.' " Thus, there is a right to the creditor to recover the amount by sale of the hypothecated properties. It is thirdly contended that though the creditor has got a right to recover the amount by sale of the hypothecated property by filing a suit, the said right is subject to the right of the State to recover any dues from the said debtor who is in arrears to the State. This is called in the Common Law as the doctrine of priority of the Crown debt. Thus, the principle of the doctrine is that the Crown debt will prevail over all other debts and the State has got a right to recover as priority to other creditors. This aspect has been considered in Collector of Tiruchirappalli v. Trinity Bank Ltd. [1962] 44 ITR 189 (Mad.) [FB]; AIR 1962 Mad. 59 (FB) wherein it is held as follows: "The Collector was en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preference to other simple money creditors of his debtor. In this view of the matter any debt due by the debtor to the Crown will of course have priority over the claims of all the other creditors of the debtor inclusive of the creditor who made the properties custodia legis by the appointment of a receiver in enforcement of a mortgage or charge over the corpus of the properties. But if it were to be held that a receiver appointed at the instance of a mortgagee or charge-holder in the course of his realisation of any amount due under a mortgage or charge functions only for the benefit of the mortgagee or charge-holder and that the rents and profits emanating from the hypotheca and the charged property are also stamped with security in favour of the creditor he alone will be entitled to appropriate and adjust them towards his dues even in preference to a Crown debt, as the Crown has no priority over the secured claim against the debtor." Thus, the Full Bench of the Madras High Court held that the Crown has no priority over the secured claim against the debtor. In Satyam v. Krishna Murthy AIR 1969 AP 237 it is held that the sale for recovery of arrears of income-tax subsequent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in payment of the assessed amount after receipt of the notice within the specified time, there is no right to the department to recover the same as arrears of land revenue and the said right to recover the assessed tax as arrears of land revenue under section 16(4) accrues to the State or the department only in default of the assessee to pay the tax demanded and this default was committed by the assessee after passing the assessment orders for the years 1977 and 1978 respectively, whereas the first hypothecation was made on March 26, 1974 and the second hypothecation on October 25, 1976. Thus the hypothecation of the movable properties of the first defendant in favour of the plaintiff-bank is much earlier to the right to recover tax as arrears of land revenue accrued to the State. Therefore, though the obligation is created on the part of the assessee to pay the tax on the date of the transaction of the sale/purchase, the same will not, as such, create a right in favour of the State to recover the said amount as arrears of land revenue. Thus, there is no doubt with regard to the principles laid down by the Supreme Court, but the same will not apply to the facts of the present cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Department will have no right to recover the amount of tax due and defaulted in payment, on priority basis, under the doctrine of "priority of the Crown-debt", as against the "secured debt" of the plaintiff pursuant to the hypothecation of the properties, which in fact were brought to sale and the proceeds thereof lying to the credit of the suit instituted by the revision-petitioner, inasmuch as the tax due defaulted is not a secured debt (reasons as to how it is not a secured debt would presently follow). It is also relevant here to note that, as per section 2 of the A.P. Revenue Recovery Act, the land, the buildings upon it, and its products, shall be regarded as the security of the public revenue. Public revenue is defined in section 1 as follows: "Public revenue due on land shall, for the purposes of this Act, be taken to include cesses or other dues payable to the State Government on account of water supplied for irrigation." Thus, the public revenue is only the land revenue plus other cesses, etc., payable to the Government on account of water supply for irrigation. It is not equated to other debts or dues to the Government under any other enactment. Therefore, to th ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
