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TMI Blog2004 (1) TMI 653X X X X Extracts X X X X X X X X Extracts X X X X ..... machineries as securities towards the advances made. The third respondent committed default in repaying the loan. The petitioner then filed a Civil Suit, O.S. No. 363 before the Sub-Court, Manjeri on November 20, 1993 for recovery of a sum of Rs. 1,39,56,017 with interest. The suit was later transferred to the Debt Recovery Tribunal, Chennai and later numbered as T.A. No. 1103 of 1997. While so, the hypothecated properties were attached by the second respondent for realisation of arrears of sales tax due from the third respondent. The petitioner then approached the first respondent for stay of the proceedings. The first respondent informed the petitioner that there is no stay against the proceedings and that the State has prior charge over the items. Hence the writ petition. 4.. The second respondent filed a counter-affidavit. He had mentioned therein three RRC Nos. 1999 and 2000 and the amount due shown at Rs. 1,37,762. Besides, 8 requisitions from the District Labour Officer, Malappuram on which the District Collector directed recovery by revenue recovery proceedings. The movables were attached and kept in safe custody. This Court by way of interim order stayed further proceedi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings for realisation of arrears of sales tax against the defaulter-assessee by attaching the decree schedule properties. According to the petitioner section 26B of the Kerala General Sales Tax Act, 1963 cannot frustrate a decree and the statutory charge on the property is subject only to the prior charge created in favour of the bank. 9.. In W.P. (C) No. 36313 of 2000 the third respondent availed a loan from the bank after creating equitable mortgage of his properties besides other guarantees. The third respondent committed default. Petitioner filed a suit, O.S. No. 516 of 1992 before the Sub-court, Palakkad and obtained a decree on January 28, 1993 for a sum of Rs. 5,55,555.72 with future interest. As per order dated April 8, 1994 in I.A. No. 1767 of 1993 a final decree was also passed permitting sale of the mortgaged properties. The amount due to the petitioner came to Rs. 8.5 lakhs. The second respondent attached the said properties for the alleged sales tax dues of the third and fourth respondents and the property was fixed for sale on December 23, 2000. In the counter-affidavit filed by the State, it was contended that a sum of Rs. 10,21,938 + interest is due from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion No. 33352 of 2003. 13.. Shri Raju Joseph, learned Special Government Pleader appearing for the State, submits that the question involved in these cases is squarely covered by the decisions of the Supreme Court in State of Madhya Pradesh v. State Bank of Indore [2002] 126 STC 1 (para 5); (2002) 10 KTR 366 (Para 5), State Bank of Bikaner Jaipur v. National Iron Steel Rolling Corporation [1995] 96 STC 612 and also in Delhi Auto and General Finance Pvt. Ltd. v. Tax Recovery Officer [1999] 114 STC 273 rendered even prior to the insertion of section 26B to the Act. Special Government Pleader also relied on the decision of the Madras High Court in Central Bank of India v. State of Tamil Nadu [1999] 113 STC 145 (para 11) and submits that there is no repugnancy with reference to the Transfer of Property Act. Special Government Pleader finally relied on the decision of a division Bench of this Court in Indian Bank's case (W.A. No. 74 of 2003). 14.. The priority of crown debts over other debts (secured or unsecured) in the context of the provisions of section 23(1) of the Kerala General Sales Tax Act was considered by a two-Judge Bench of the Supreme Court in Delhi Auto and Genera ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15.. Section 26B was subsequently inserted in the Act by the Finance Act, 1999 with effect from April 1, 1999 which reads as follows: "26-B. Tax payable to be first charge on the property. Notwithstanding anything to the contrary contained in any other law for the time being in force, any amount of tax, penalty, interest and any other amount, if any, payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer, or such person." 16.. A similar provision section 11-AAAA of the Rajasthan Sales Tax Act, 1954 which creates a first charge on the property of a dealer under the said Act came up for consideration before a threeJudge Bench of the Supreme Court in State Bank of Bikaner Jaipur v. National Iron Steel Rolling Corporation [1995] 96 STC 612. The brief facts are: The appellant-Bank financed a partnership firm. The firm and the partners created mortgage of the factory by a deed of mortgage dated October 18, 1977. The partners created a pledge of the plant and machinery installed. For default in repayment of the loan amounts the bank filed a suit. During the pendency of the suit the Commercial Tax Officer, Bharatpur got him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the only property which was possessed by the dealer and/or person liable to pay tax or other dues under the Rajasthan Sales Tax Act, was equity of redemption in respect of that property. In other words, the contention was that the first charge would operate only on the equity of redemption. This contention was not accepted by the Supreme Court. The Supreme Court observed thus: "..........Where a mortgage is created in respect of any property, undoubtedly, an interest in the property is carved out in favour of the mortgagee. The mortgagor is entitled to redeem his property on payment of the mortgage dues. This does not, however, mean that the property ceases to be the property of the mortgagor. The title to the property remains with the mortgagor. Therefore, when a statutory first charge is created on the property of the dealer, the property subjected to the first charge is the entire property of the dealer. The interest of the mortgagee is not excluded from the first charge. The first charge, therefore, which is created under section 11-AAAA of the Rajasthan Sales Tax Act will operate on the property as a whole and not only on the equity of redemption as urged by Mr. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that the State could not have attached and sold the said properties belonging to partners for recovery of sales tax dues against the firm. However, the suit was directed to be dismissed for technical reason. The bank preferred appeal before the High Court. During the course of hearing of the appeal on January 27, 1992 a compromise was entered into between the bank and the borrowers which provided for a mode of payment of the decretal amount as agreed upon between the parties. The State of Karnataka was not a party to the compromise and therefore it contested the appeal. However, the High Court recorded the compromise and passed a decree in terms thereof by judgment dated August 3, 1992. The operative portion of the judgment states that the sales tax arrears due to the State from the first respondent partnership, shall have preference over the plaintiff's claim and the suit was decreed subject to the condition that the sales tax arrears including the penalty, if any, due under the Sales Tax Act from the first respondent and its partners shall have preference over the plaintiff's claim, and the plaintiff shall have to first pay the amount recovered during the course of execution ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to claim priority in respect of its tax dues. [See Builders Supply Corporation [1965] 56 ITR 91 (SC); AIR 1965 SC 1061]. In the same case the Constitution Bench has noticed a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts and that this rule of common law amounts to law in force in the territory of British India at the relevant time within the meaning of article 372(1) of the Constitution of India and therefore continues to be in force thereafter. On the very principle on which the rule is founded, the priority would be available only to such debts as are incurred by the subjects of the Crown by reference to the State's sovereign power of compulsory exaction and would not extend to charges for commercial services or obligation incurred by the subjects to the State pursuant to commercial transactions. Having reviewed the available judicial pronouncements their Lordships have summed up the law as under: 1.. There is a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts. 2.. The common law doctrine about priority of Crown debts which was recognised by Indian High ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Government to any moneys recoverable under the provisions of this Chapter shall have precedence over any other debt, demand or claim whatsoever whether in respect of mortgage, judgment-decree, execution or attachment, or otherwise howsoever, against any land or the holder thereof. It further provided that in all cases the land revenue for the current revenue year, of land for agricultural purposes, if not otherwise discharged, shall be recoverable in preference to all other claims, from the crop of such land. Section 13(1) of the Karnataka Sales Tax Act, 1957 provided that "the tax or any other amount due under this Act shall be paid in such manner in such instalments, subject to such conditions, on payment of such interest and within such time, as may be prescribed". Sub-section (3) provided that "any tax assessed, or any other amount due under this Act from a dealer or any other person may without prejudice to any other mode of collection be recovered, as if it were an arrear of land revenue". 19.. It is seen that the Supreme Court has relied on the provisions of section 158 of the Karnataka Land Revenue Act, 1964 which clearly provides that the claim of the State Government to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... extracted the provisions of section 26B of the Act which is pari materia with the provisions of section 11-AAAA of the Rajasthan Sales Tax Act, 1954 considered by the Supreme Court in Bhikhabhai's case [2000] 120 STC 610; (2000) 5 SCC 694 discussed supra (sic) and therefore the said decision would squarely apply to the facts of the present cases. The decision of the Supreme Court in State Bank of Indore's case [2002] 126 STC 1 which considered an identical provision section 33-C in the Madhya Pradesh General Sales Tax Act is also to the same effect. 22.. It can be seen from the said judgment that the three-Judge Bench had relied on the two-Judge Bench decision in Dena Bank's case [2000] 120 STC 610 (SC); (2000) 5 SCC 694 discussed supra. The Supreme Court in Dena Bank's case [2000] 120 STC 610; (2000) 5 SCC 694 has clearly discussed the common law doctrine of priority of State's debts which has been followed by the courts in India including the Constitution Bench decision of the Supreme Court in Builders Supply Corporation's case [1965] 56 ITR 91; AIR 1965 SC 1061. Here it must be noted that the Supreme Court took the view that the State's debts has precedence over other debts s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd a rule of the court in terms of the compromise by its order dated November 24, 1970. Meanwhile the borrower had failed to pay the sales tax arrears due to the State of Kerala; on January 12, 1971, a demand notice was served upon the said defaulter as contemplated by section 23 of the Kerala General Sales Tax Act and the amount was not paid within twenty-one days of the service of the said notice. It was held that though the compromise decree used the word "charge" the decree did not really create a charge upon the properties as understood under the Transfer of Property Act, but merely continued the order of injunction restraining alienation. Upon failure by the defaulter to pay the sales tax arrears pursuant to the notice, a charge got automatically created upon the properties of the defaulter as provided by section 23(1). It is in these circumstances the Supreme Court held that the appellant did not have a priority for payment of the amount due to him over the sales tax amount due to the State from the borrower under the Kerala General Sales Tax Act. 24.. I have considered the rival submissions. The question involved is no longer res integra. The Supreme Court in clear te ..... X X X X Extracts X X X X X X X X Extracts X X X X
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