2000 (4) TMI 36 - SC - VAT and Sales Tax

Supreme Court affirms State's priority in tax arrears over bank claim, partners personally liable.

Dena Bank Versus Bhikhabhai Prabhudas Parekh And Co. And Others

The Supreme Court upheld the High Court's decision, affirming that the State's claim for sales tax arrears has precedence over the bank's secured claim. ... Whether Sri R.A. Mehta was empowered to file the present plaint for and on behalf of the plaintiff-bank for recovery of the amount claimed in the suit? Whether the sales tax arrears due from the first defendant partnership to the State of Karnataka can be recovered in preference to the suit claim of the plaintiff-bank. Whether the partners of the first defendant partnership firm are personally liable for the arrears of sales tax due from the first defendant partnership to the State of Karnataka. What decree or order? Held that:- The power of attorney was executed on June 19, 1963, by the managing director and one another director. It was notarised on July 7, 1966. Thus, the power of attorney came to be executed in favour of R.A. Mehta, who has filed the suit in question on April 13, 1972, on behalf of the plaintiff-bank. Therefore, we answer point No. (i) in the affirmative. Answer point No. (ii) in the affirmative and hold that having regard to the provisions contained in sections 156, 161 and 190(c) of the Land Revenue Act read with section 13(3)(a) of the Karnataka Sales Tax Act the arrears of sales tax and any other amount due under the Sales Tax Act to the State shall have precedence over the suit claim of the plaintiff and the same can be recovered by the State in preference to the suit claim. There was no change in the partnership and its partners. As the matter stood prior to introduction of sub-section (2A) of section 15 of the Act, there was no specific provision contained in the Act either excluding the partners or specifically making them personally liable for the sales tax arrears under the Act. As such, section 25 of the Partnership Act held the field. The insertion of sub-section (2A) in section 15 of the Sales Tax Act, is nothing but extension of the joint and several liability of a partner for all the acts of firm done while he is a partner as contained in section 25 of the Partnership Act to the sales tax arrears which otherwise existed. This position flows from the provisions contained in section 25 of the Partnership Act. Thus, we are of the view that Point No. (iii) has to be answered in the affirmative. While considering point No. 2, as already held that the sales tax arrears due to the State from the first respondent-partnership, shall have preference over the plaintiff’s claim. Therefore, we accept the compromise except clauses (7) and (8) and other terms which affect the preferential claim of the State to recover sales tax arrears by sale of the suit properties, and decree the suit of the plaintiff in terms of the compromise, subject to exception as stated above, and 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 to the State towards the sales tax arrears and the other amount due under the Sales Tax Act from the first respondent and its partners and thereafter the plaintiff is entitled to adjust the remaining amount towards the amount due under the decree. Appeal allowed. Issues Involved:1. Authority of R.A. Mehta to file the suit.2. Preference of sales tax arrears over the bank's secured claim.3. Personal liability of partners for sales tax arrears.4. Decree or order to be passed.Issue-wise Detailed Analysis:1. Authority of R.A. Mehta to File the Suit:The trial court dismissed the suit primarily because it found that R.A. Mehta was not authorized to file the suit on behalf of the bank. However, the High Court allowed the bank to produce additional evidence, including a power of attorney (Exhibit P-150), which confirmed R.A. Mehta's authority to file the suit. Consequently, this issue was resolved in favor of the plaintiff-bank, affirming that R.A. Mehta was duly empowered to file the suit.2. Preference of Sales Tax Arrears Over the Bank's Secured Claim:The High Court examined the provisions of the Karnataka Land Revenue Act and the Karnataka Sales Tax Act. Section 158 of the Land Revenue Act grants the State precedence over any other debt, including secured debts like mortgages. The court concluded that the arrears of sales tax, being recoverable as arrears of land revenue, have precedence over the bank's secured claim. This interpretation was supported by sections 13(3)(a) and 15(2A) of the Karnataka Sales Tax Act, which allow the State to recover sales tax arrears as if they were arrears of land revenue.3. Personal Liability of Partners for Sales Tax Arrears:The High Court held that under section 25 of the Indian Partnership Act, partners are jointly and severally liable for the debts of the firm. Additionally, section 15(2A) of the Karnataka Sales Tax Act explicitly makes partners personally liable for the firm's tax arrears. The court rejected the argument that this provision could not be applied retrospectively, clarifying that it does not create a new liability but merely extends the existing joint and several liability of partners to include sales tax arrears.4. Decree or Order to Be Passed:The High Court accepted the compromise between the bank and the contesting respondents, excluding clauses that affected the State's preferential claim. The decree was passed for Rs. 25 lakhs, with the condition that the sales tax arrears would be paid first from the proceeds of any sale of the mortgaged properties. The court directed that the bank could execute the decree within a specified period, prioritizing the State's claim for sales tax arrears.Supreme Court Judgment:The Supreme Court upheld the High Court's decision, affirming that the State's claim for sales tax arrears has precedence over the bank's secured claim. The court emphasized that the common law doctrine of priority of Crown debts applies, and statutory provisions in the Karnataka Land Revenue Act and the Karnataka Sales Tax Act support this precedence. The Supreme Court also clarified that section 15(2A) of the Karnataka Sales Tax Act does not operate retrospectively but applies to the recovery of existing arrears, making partners personally liable.Conclusion:The appeal was dismissed, and the High Court's decree was affirmed, prioritizing the State's claim for sales tax arrears over the bank's secured debt. The bank's right to recover its dues was acknowledged, but only after the State's claim was satisfied. The partners were held personally liable for the firm's tax arrears, aligning with the statutory provisions and the principles of partnership law.