2014 (5) TMI 32 - HC - VAT and Sales Tax

Tax arrears trump secured debts: Court upholds first charge priority under APGST Act.

State Bank of India, Suryapet Branch, Nalgonda Versus The Deputy Commercial Tax Officer

The Court held that the statutory first charge under Section 16-C of the APGST Act takes precedence over the secured debt, affirming the priority of tax ... Priority of Charge u/s 16-C of A.P. General Sales Tax Act in re tax, penalty, interest and any other sum payable - whether the Revenue is entitled to have precedence over the secured debt created by co- respondent in favour of the Bank - whether Section 17-A operates as an exception to Section 16 - Held that:- Decision in State Bank Of Bikaner And Jaipur Versus National Iron And Steel Rolling Corporation And Others [1994 (12) TMI 72 - SUPREME Court] and State of Madhya Pradesh and another Versus State Bank of Indore and others [2001 (3) TMI 872 - SUPREME COURT OF INDIA] followed - The statutory first charge held by the State has been consistently upheld by the Courts - The policy justification for the impugned provision is the well entrenched common law doctrine of priority of Crown debts - The common law doctrine postulates that the State is entitled to claim, for the recovery of the amount of tax due to it from a citizen precedence and priority over unsecured debts due from the said citizen to his other private creditors - The basic justification for such claim of priority rests on the well recognized principle that the State is entitled to raise money by taxation, otherwise it will not be able to function as a sovereign Government at all - This consideration emphasizes the necessity and wisdom of conceding to the State the right to claim priority in respect of its tax dues. The object of insertion of Section 16-C as explained in the Statement of Objects and Reasons of Act 9 of 1999 - the property attached under Revenue Recovery Act could not be disposed of as it was hypothecated to either financial institutions or to others - In order to have a definite claim on the property, it is now proposed that the liability under the Sales Tax Act shall be the first charge on the property - Similar provision is available in the Rajasthan Sales Tax Act and it was upheld by the Court - It is no doubt true that Section 17-A appears to have diluted the absolute precedence given to the arrears of tax under Section 16-C - the principles of statutory interpretation require that the Court in such circumstances must have regard to consequences and has to reject a construction that results in hardship, absurdity or anomaly or which leads to inconsistency in the system which the Statute purports to regulate. - Decided against the petitioner bank. Issues Involved:1. Priority of tax arrears over secured debt.2. Validity of the auction conducted by the Deputy Commercial Tax Officer.3. Interpretation of Section 16-C in conjunction with Section 17-A of the APGST Act.Detailed Analysis:1. Priority of Tax Arrears Over Secured Debt:The primary issue was whether the 1st respondent (Deputy Commercial Tax Officer) had precedence over the secured debt created by the 3rd respondent in favor of the petitioner Bank. The Court noted that Section 16-C of the APGST Act provides that any amount of tax, penalty, interest, and any other sum payable by a dealer under the Act shall be the first charge on the property of the dealer. This statutory first charge was upheld by the Division Bench of the High Court in the case of Andhra Pradesh State Financial Corporation, Hyderabad & Others v. Government of Andhra Pradesh & Others, emphasizing the common law doctrine of priority of Crown debts. The Supreme Court in State of M.P. v. State Bank of Indore and State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling Corporation also upheld similar statutory first charges, affirming that the State's claim for tax dues takes precedence over secured debts such as mortgages.2. Validity of the Auction Conducted by the Deputy Commercial Tax Officer:The petitioner Bank challenged the legality of the auction conducted by the 1st respondent, arguing that the preliminary decree in its favor was passed before the property was attached by the tax authorities. The Court noted that the 3rd respondent's property was attached on 22.01.2008, and the auction was conducted on 26.03.2008, with the respondent No.4 emerging as the highest bidder. The auction proceedings were conducted following the Revenue Recovery Act, and the highest bid was accepted. The Court found no irregularities in the auction process, as it was conducted with proper notice and participation.3. Interpretation of Section 16-C in Conjunction with Section 17-A of the APGST Act:The petitioner Bank argued that Section 17-A of the APGST Act, which voids transfers made to defraud revenue, should be read as an exception to Section 16-C. However, the Court rejected this interpretation, stating that Section 16-C, introduced by Act 9 of 1999, provides absolute precedence to tax arrears. The Court emphasized that the non-obstante clause in Section 16-C is intended to exclude not only other statutes but also other provisions of the APGST Act. The Court cited Central Bank of India v. State of Kerala, where the Supreme Court held that statutory first charges created by state legislation would take precedence over other debts, including those of private creditors.Conclusion:The Court concluded that the statutory first charge held by the State under Section 16-C of the APGST Act has precedence over the secured debt created by the 3rd respondent in favor of the petitioner Bank. The auction conducted by the 1st respondent was valid and legal. The contention that Section 17-A should be read as an exception to Section 16-C was rejected. Consequently, the writ petition was dismissed, and the miscellaneous petitions pending in the writ petition were closed.