TaxTMI 
TaxTMI 
2009 (10) TMI 825
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.... Letters Patent Appeal No.28/2004. 3. We shall first notice the facts from the record of the appeal arising out of S.L.P.(C ) No.15243/2007. 4. During crushing season 2000-2001, the appellant advanced loan of Rs.4000 lacs to Kannad Sahakari Sakhar Karkhana Limited (hereinafter described as 'the Sugar Mill'). For securing repayment of the loan and interest, the management of the Sugar Mill executed necessary documents including deed of pledge dated 5.3.2001, the relevant portions of which are extracted below:- "We, the undersigned, Kannad Sahakari Sakhar Karkhana Ltd., Tal. Kannad, Aurangabad, member of Maharashtra State Co-operative Bank Limited (Incorporating the Vidarbha Co-operative Bank Ltd.) hereinafter referred to as "the said Bank" agree to take a loan from the said Bank on the pledge of stocks/goods/commodities on the following terms and conditions. The credit limit will be Rs.400000000 and its period will be upto 31.10.2001. 1. The stocks/goods/commodities which we have at present placed in the custody of the said Bank as security or which we might so place from time to time will remain in the sole custody of the said Bank and whatever action the said Bank will....
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....of breach of the aforesaid conditions and or if we fail to repay the loan within 24 hours, if so required by the said Bank, it shall have the full right to recover its amount by sale of the stocks goods commodities by public auction or private treaty (though the said Bank is not bound so to sell the stocks/goods/commodities). On receipt of the Account of sale under the signature of the Manager, Accountant or other officer of the said Bank duly authorized we shall acknowledge its correctness. If the proceeds of the sale do not fully meet the loan due by us interest or other expenses, we undertake to pay the balance so remaining with interest." 5. On the same day i.e., 5.3.2001, the management of the Sugar Mill also executed promissory note for payment of Rs.40 crores with interest @ 15.50% with half yearly rests. 6. Though, the appellant has not given the details of the dues of provident fund payable by the employer, a reading of the document marked Ex. A (pages 119-122 of the SLP paper book) shows that the Assistant Provident Fund Commissioner, Aurangabad (for short 'the Assistant Commissioner') passed order dated 29.9.2003 under Section 7A of the Act whereby he held the empl....
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....ount is deposited with the Registrar of this Court, liberty to apply for withdrawal of the said amount." 8. In compliance of the aforementioned order, the sugar bags lying in the godowns of the Sugar Mill were auctioned for a sum of Rs.9,24,08,254/-. Thereafter, the Assistant Commissioner filed Civil Application No.1680/2007 for permission to withdraw a sum of Rs.7,77,46,511/- towards the dues of provident fund etc. by asserting that in addition to Rs.1,75,10,477/- payable under Section 7A with interest @ 12%, the employer is liable to pay Rs.6,02,36,034/- in terms of order dated 27.3.2007 passed under Section 14B read with Section 7Q of the Act. 9. It appears that during the pendency of the litigation, the Assistant Commissioner passed another order whereby he attached the bank account and movable and immovable properties of the Sugar Mill along with 69,000 sugar bags. Therefore, the management of the Sugar Mill filed Civil Application No.1681/2007 with the prayer that attachment effected by the Assistant Commissioner may be vacated. 10. By the impugned order, the High Court disposed of both the applications and issued various directions including the following:- "(....
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....ree promissory notes were executed for payment of the amounts specified therein with interest at the rate of 13.5 per cent per annum with half yearly rests. The terms and conditions of these deeds are similar to deed of pledge dated 5.3.2001 executed by the management of Kannad Sahakari Sakhar Karkhana Ltd. On account of failure of the employer to pay the dues of provident fund etc., the competent authority passed orders under Sections 7A, 7Q and 14B of the Act and held it liable to pay total sum of Rs.9,11,72,892/- towards the dues of provident fund, interest and damages. After some time, the Assistant Commissioner issued warrant of attachment dated 15.9.2003 which was duly executed by the Enforcement Officer on 22.9.2003. 13. The appellant challenged the warrant of attachment in Writ Petition No. 3656/2003, which was dismissed by the learned Single Judge of the High Court (Aurangabad Bench) vide his order dated 3.10.2003 by relying upon the judgments of the Kerala High Court in Recovery Officer and Assistant Provident Fund Commissioner v. Kerala Financial Corporation (2002) 3 LLJ 643 Kerala and of this Court in A.P. State Financial Corporation v. Official Liquidator (2000) 7 S....
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....ed that the term "assets" used in Section 11(2) of the Act means unencumbered property of the establishment and argued that as the sugar bags pledged with the appellant-bank had become its property, the Recovery Officer was not entitled to attach the same for realizing the dues of provident fund etc. In support of this argument, Shri Desai placed reliance on paragraphs 67 and 73 of the judgment of this Court in Transcore v. Union of India (2008) 1 SCC 125. Another argument of the learned senior counsel is that, at best, the amount determined under Section 7A can be treated as first charge on the assets of the establishment but the interest payable under Section 7Q and damages levied under Section 14B cannot be recovered by invoking Section 11(2) of the Act. 15. Shri R.C. Kalra and Ms. Malvika Trivedi, learned counsel for the respondents argued that notwithstanding execution of the deeds of pledge by the management of Sugar Mills in favour of the appellant-bank, the sugar bags continued to be the property of the Sugar Mills and the same could be sold for realization of the dues of provident fund. Learned counsel submitted that the expression 'any amount due' appearing in Section ....
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....all inform all the institutions of national life. Clause (2) of Article 38 mandates the State to strive to minimize the inequalities in income, and endeavour to eliminate inequalities in status, facilities and opportunities, not only amongst individuals but also amongst groups of people residing in different areas or engaged in different avocations. Article 43 casts a duty on the State to make efforts to secure by suitable legislation or economic organization or in any other way, to all workers, agricultural, industrial or otherwise, work, a living wage, conditions of work ensuring a decent standard of life and full enjoyment of leisure and social and cultural opportunities, and, in particular, social opportunities. The State is also required to make special endeavour to promote cottage industries on an individual or cooperative basis in rural areas. 17. Soon after enforcement of the Constitution, the Government of India promulgated the Employees Provident Funds Ordinance on 15.11.1951, which was replaced by the Act, which belongs to the family of legislations enacted by the Parliament in furtherance of the mandate of Articles 38 and 43 of the Constitution and is intended to giv....
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....f the Pension Scheme, a pension fund to which a specified sum should be paid from the employer's contribution under Section 6. Section 6C(1) postulates framing of Employees' Deposit-linked Insurance Scheme for the purpose of providing life insurance benefits to the employees of any establishment or class of establishments to which the Act applies. Section 6C(2) provides for establishment of a Deposit-linked Insurance Fund into which the employer is required to pay a specified amount in respect of every employee. Section 7A empowers the competent authority to decide dispute regarding applicability of the Act to an establishment as also the amount due from any employer under the provisions of the Act, the Scheme or the Pension Scheme or the Insurance Scheme, as the case may be. Section 7Q declares that the employer shall be liable to pay simple interest at the rate of twelve per cent per annum or at such higher rate as may be specified in the Scheme on any amount due from him under the Act from the date on which the amount has become so due till the date of its actual payment. Proviso to this Section lays down that higher rate of interest specified in the Scheme shall not exceed the ....
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....arrest of the employer and his detention in prison; (c) appointing a receiver for the management of the movable or immovable properties of the establishment or, as the case may be, the employer: Provided that the attachment and sale of any property under this section shall first be effected against the properties of the establishment and where such attachment and sale is insufficient for recovering the whole of the amount of arrears specified in the certificate, the Recovery Officer may take such proceedings against the property of the employer for recovery of the whole or any part of such arrears. (2) The authorised officer may issue a certificate under sub-section (1), notwithstanding that proceedings for recovery of the arrears by any other mode have been taken. 8F. Other modes of recovery. (1) Notwithstanding the issue of a certificate to the Recovery Officer under section 8B, the Central Provident Fund Commissioner or any other officer authorised by the Central Board may recover the amount by any one or more of the modes provided in this section. (2) xxx xxx xxx xxx (3)(i) to (ix) xxx xxx xxx (x) If the person to whom a notice under this sub-section is ....
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....the provident fund or any insurance fund, any contribution payable by him towards the Pension Fund under sub-section (6) of section 17, damages recoverable under section 14B or any charges payable by him to the appropriate Government under any provision of this Act or under any of the conditions specified under section 17, shall, where the liability therefor has accrued before the order of adjudication or winding up is made, be deemed to be included among the debts which under section 49 of the Presidency-towns Insolvency Act, 1909 (3 of 1909), or under section 61 of the Provincial Insolvency Act, 1920 (5 of 1920) or under section 530 of the Companies Act, 1956 (1 of 1956) are to be paid in priority to all other debts in the distribution of the property of the insolvent or the assets of the company being wound up, as the case may be. Explanation: In this sub-section and in section 17, "insurance fund" means any fund established by an employer under any scheme for providing benefits in the nature of life insurance to employees, whether linked to their deposits in provident fund or not, without payment by the employees of any separate contribution or premium in that behalf. (2)....
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....4B, but also made comprehensive provisions for recovery of the dues by way of attachment and sale of movable or immovable property of the establishment or the employer, as the case may be. Section 8 lays down that if the amount is in arrear, the same can be recovered in the manner specified in Sections 8B to G. Section 8B provides for issue of certificate by the authorised officer in respect of the amount due to the Recovery Officer so as to enable him to recover the amount specified therein by attachment and sale of movable or immovable property of the establishment or the employer or by arrest of the employer and his detention in prison or by appointing a receiver for the management of the movable or immovable properties of the establishment or the employer, as the case may be. Section 8F specifies other modes of recovery of any amount due from the establishment or the employer. By Section 8G some of the provisions contained in Income-tax Act, 1961 and the Income-tax (Certificate Proceedings) Rules, 1962 have been made applicable to the arrears of the amount mentioned in Section 8. Section 11 gives statutory priority to the payment of contributions over other debts. The original ....
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.... the workers employed in factories and other establishments, it is imperative for the courts to give a purposive interpretation to the provisions contained therein keeping in view the Directive Principles of State Policy embodied in Articles 38 and 43 of the Constitution. In this context, we may usefully notice the following observations made by Krishna Iyer, J. in Organo Chemical Industries v. Union of India (1979) 4 SCC 573: "The pragmatics of the situation is that if the stream of contributions were frozen by employers' defaults after due deduction from the wages and diversion for their own purposes, the scheme would be damnified by traumatic starvation of the Fund, public frustration from the failure of the project and psychic demoralisation of the miserable beneficiaries whey they find their wages deducted and the employer get away with it even after default in his own contribution and malversation of the workers' share. "Damages" have a wider socially semantic connotation than pecuniary loss of interest on non-payment when a social welfare scheme suffers mayhem on account of the injury. Law expands concepts to embrace social needs so as to become functionally effectual. ....
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....pledge. Sub-section (2) was designedly inserted in the Act for ensuring that the provident fund dues of the workers are not defeated by prior claims of secured or unsecured creditors. This is the reason why the legislature took care to declare that irrespective of time when a debt is created in respect of the assets of the establishment, the dues payable under the Act would always remain first charge and shall be paid first out of the assets of the establishment notwithstanding anything contained in any other law for the time being in force. It is, therefore, reasonable to take the view that the statutory first charge created on the assets of the establishment by sub-section (2) of Section 11 and priority given to the payment of any amount due from an employer will operate against all types of debts. 21. The view we have taken on the interpretation of Section 11(2) is in tune with a series of decisions of this Court in which the provisions contained in different statutes giving priority to the dues of the State and workers have been interpreted. In the first place, we may refer to some decisions relating to dues of the State. In Builders Supply Corporation v. Union of India 1965....
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.... as a transfer of an interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced as set out therein. The distinction between a mortgage and a charge was considered by this Court in the case of Dattatreya Shanker Mote v. Anand Chintaman Datar (1974) 2 SCC 799. The Court has observed (at pages 806-807) that a charge is a wider term as it includes also a mortgage, in that, every mortgage is a charge, but every charge is not a mortgage. The Court has then considered the application of the second part of Section 100 of the Transfer of Property Act which inter alia deals with a charge not being enforceable against a bona fide transferee of the property for value without notice of the charge. It has held that the phrase "transferee of property" refers to the transferee of entire interest in the property and it does not cover the transfer of only an interest in the property by way of a mortgage. In the present case we have to consider whether the statutory first charge which is created under Section 11-AAAA of the Rajasthan Sales Tax Act over the property of the dealer or a person liable to pay sales tax and/or other dues under th....
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....would cover within its ambit a mortgage also. Therefore, when a first charge is created by operation of law over any property, that charge will have precedence over an existing mortgage." (emphasis supplied) 23. In Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. (2000) 5 SCC 694, a two-Judge Bench reiterated the principles enunciated in Builders Supply Corporation v. Union of India (supra) and proceeded to observe that Section 158(1) of the Karnataka Land Revenue Act not only gives a statutory recognition to the doctrine of State's priority for recovery of debts, but also extends its applicability over private debts forming the subject matter of mortgage, judgment, decree, execution or attachment of the like. 24. In State of M.P. v. State Bank of Indore (2002) 10 SCC 441, this Court considered whether statutory first charge created under Section 33-C of the M.P. General Sales Tax Act, 1958 would prevail over the bank's charge. The facts of that case were that for securing repayment of the loan obtained from the State Bank of Indore, the borrower executed a promissory note and pledged certain machinery. The bank sued the borrower for recovery of its dues. During the pendency....
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.... the State legislations by which first charge was created in favour of the State in the matter of recovery of the dues of sales tax. 26. We shall now notice some decisions in which statutes giving parity or priority to the workers claim have been interpreted. In UCO Bank v. Official Liquidator, High Court Bombay and another (1994) 5 SCC 1, this Court considered the scope of proviso to Section 529(1) of the Companies Act as inserted by the Companies (Amendment) Act, 1985. The Court noted that the object of the amendment was to protect the interest of the workers and to place them at par with secured creditors and held: "The proviso to sub-section (1) of Section 529 inserted by the Amending Act clearly provides that "the security of every secured creditor shall be deemed to be subject to a pari passu charge in favour of the workmen". The effect of the proviso is to create, by statute, a charge pari passu in favour of the workmen on every security available to the secured creditors of the employer company for recovery of their debts at the time when the amendment came into force. This expression is wide enough to apply to the security of every secured creditor which remained unr....
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....sation and also recovery of such financial assistance if it becomes bad and similarly the Companies Act deals with companies including winding up of such companies. The proviso to sub-section (1) of Section 529 and Section 529-A being a subsequent enactment, the non obstante clause in Section 529- A prevails over Section 29 of the Act of 1951 in view of the settled position of law. We are, therefore, of the opinion that the above proviso to sub-section (1) of Section 529 and Section 529- A will control Section 29 of the Act of 1951. In other words the statutory right to sell the property under Section 29 of the Act of 1951 has to be exercised with the rights of pari passu charge to the workmen created by the proviso to Section 529 of the Companies Act. Under the proviso to sub-section (1) of Section 529, the liquidator shall be entitled to represent the workmen and force (sic enforce) the above pari passu charge. Therefore, the Company Court was fully justified in imposing the above conditions to enable the Official Liquidator to discharge his function properly under the supervision of the Company Court as the new Section 529-A of the Companies Act confers upon a Company Court the ....
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....ed the action of the Recovery Officer by filing writ petition under Article 226 of the Constitution. A learned Single Judge of the High Court allowed the writ petition and declared that the company's land could not have been attached for recovery of dues payable under the Act because the same stood mortgaged in favour of the State Financial Corporation. The Division Bench reversed the order of the learned Single Judge and held: "... Sub-section (2) of Section 11 of the EPF and MP Act has two facets. First, it declares that the amount due from the employer towards contribution under the EPF and MP Act shall be deemed to be the first charge on the assets of the establishment. Second, it also declares that notwithstanding anything contained in any other law for the time being in force, such debt shall be paid in priority to all other debts. Both these provisions bring out the intention of Parliament to ensure the social benefit as contained in the legislation. There are other provisions in the Act rendering the amounts of provident fund immune from attachment of civil court's decree, which also indicate such intention of Parliament." The Division Bench of the High Court then con....
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....Parliament the intention to override the earlier legislation also. It is, therefore, clear that Section 11(2) of the EPF and MP Act overrides all provisions of other enactments including Section 46-B of the SFC Act." 30. In the light of the above analysis of the relevant provisions of the Act and precedents, we shall now examine the tenability or otherwise of the argument of the learned senior counsel appearing on behalf of the appellant-bank that by virtue of the deeds of pledge executed by the Sugar Mills, his client had become owner of the sugar bags and the same could not have been attached and sold for realization of the amount due under the Act. 31. A careful reading of the deed of pledge dated 5.3.2001 executed by the management of Kannad Sahakari Sakhar Karkhana Ltd. (the terms of three deeds dated 2.1.2003, 6.2.2003 and 4.4.2003 executed by the management of the other Sugar Mill are substantially similar) shows that even though the sugar bags which were available with the Sugar Mills at the relevant time were placed in the custody of the appellant-bank as security for repayment of loan together with interest, the former continued to be owner thereof. To put it differ....
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....ansfer property for security only, then the Courts will hold the transaction a pledge, even though in form it may be a sale or other out-and-out transfer." In Mulla's Treaties on the Transfer of Property, the following description has been given to the term "pledge": "A pledge is a bailment of movable property by way of security. Possession is given and the transaction involves a transfer of special property in the subject of the security. A Pawnee has no right of foreclosure since he never had absolute ownership at law and his equitable title cannot exceed what is specifically granted by law. In a pledge the pledge is in possession of and has a special property in the goods which he is entitled to detain to secure repayment." (underlining is ours) 33. Under the common law a pawn or a pledge is a bailment of personal property as a security for some debt or engagement. A pawner is one who being liable to an engagement gives to the person to whom he is liable a thing to be held as security for payment of his debt or the fulfilment of his liability. The two ingredients of a pawn or a pledge are: (1) that it is essential to the contract of pawn that the property pledged sho....
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....nable to return the security against payment of the debt, the pawner has a good defence to the action. This being the position under the common law, it was observed in Trustees of the Property of Ellis & Co. v. Dixon-Johnson that if a creditor holding security sues for the debt, he is under an obligation on payment of the debt to hand over the security, and that if, having improperly made away with the security he is unable to return it to the debtor he cannot have judgment for the debt." (underlining is ours) The Court further observed that there is no difference between Common Law of England and the law with regard to the pledge, as codified in Sections 172 to 176 of the Contract Act and held: "Under Section 172 a pledge is a bailment of the goods as security for payment of a debt or performance of a promise. Section 173 entitles a pawnee to retain the goods pledged as security for payment of a debt and under Section 175 he is entitled to receive from the pawner any extraordinary expenses he incurs for the preservation of the goods pledged with him. Section 176 deals with the rights of a pawnee and provides that in case of default by the pawner the pawnee has (1) the rig....
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....er creditors and in particular the secured creditors of the company, could seize and sell the sugar which was already pledged with the appellant-bank as security for the advances made by it to the company. The appellant-bank sued the State of Bihar and others including the Cane Commissioner and the company for return of 1818 bags of 27D quality of sugar and, in the alternative, for recovery of Rs.1,81,700.93 with interest by way of damages or illegal removal and detention of sugar or price thereof. The trial Court decreed the suit. It held that even though the order of seizure of the stock of sugar was valid, the plaintiff's right as pledgee could not be extinguished by such seizure. The High Court allowed the appeal filed by the State of Bihar and others and held that the plaintiff-bank had not been wrongfully deprived of the sugar. In para 4 of the judgment, this Court noted that the Cane Commissioner did not have any right of priority over the other creditors of the company and, in particular, the secured creditors and reversed the judgment of the High Court by recording the following observations. "The pawnee has special property and a lien which is not of ordinary nature on th....
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....ring for the appellant-bank. The question which fell for consideration in Karnataka Pawnbrokers' Association v. State of Karnataka (supra), was whether pawnbroker is a dealer and carries on business within the meaning of Tamil Nadu General Sales Tax Act, 1959 read with the Tamil Nadu Pawnbrokers Act, 1943 and Rules as also the Karnataka Sales Tax Act, 1957 read with Karnataka Pawnbrokers Act, 1961 and Rules, when it caused sale of unredeemed goods occasioned by the default of the pawnor. The Court referred to the decisions of the Division Benches of Karnataka and Madras High Courts and held: "It cannot be and it is not disputed that the pawnbroker has special property rights in the goods pledged, a right higher than a mere right of detention of goods but a right lesser than general property right in the goods. To put it differently, the pawnor at the time of the pledge not only transfers to the pawnee, the special right in the pledge but also passes on his right to transfer the general property right in the pledge in the event of the pledge remaining unredeemed resulting in the sale of the pledge by public auction through an approved auctioneer. The position being what is stated....
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....f the workmen. The High Court was, therefore, in error in passing an interim order to pay parts of the proceeds to the Cane Commissioner and to the Labour Commissioner for disbursal to the cane growers and to the employees. There is no dispute that the sugar was pledged with the appellant Bank for securing a loan of the first respondent and the loan had not been repaid. The goods were forcibly taken possession of at the instance of the revenue recovery authority from the custody of the pawnee, the appellant Bank. In view of the fact that the goods were validly pawned to the appellant Bank, the rights of the appellant Bank as pawnee cannot be affected by the orders of the Cane Commissioner or the demands made by him or the demands made on behalf of the workmen. Both the Cane Commissioner and the workmen in the absence of a liquidation, stand only as unsecured creditors and their rights cannot prevail over the rights of the pawnee of the goods." (underlining is ours) 39. The above referred judgments do not have any bearing on these appeals because in both the cases, the Court dealt with the right of unsecured creditors vis-à-vis secured creditors i.e., the bank in whose ....
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....ietary rights in personam being distinguished from it as the law of obligations. According to this usage a freehold or leasehold estate in land, or a patent or copyright, is property; but a debt or the benefit or a contract is not. Finally, in the narrowest use of the term, it includes nothing more than corporeal property - that is to say, the right of ownership in a material object, or that object itself. 43. In the light of the above dictionary and legal meanings of the word `assets' and jurisprudential concept of the word `property', it has to be seen whether the sugar bags pledged with the appellant-bank constituted assets of the establishment for the purpose of Section 11(2) of the Act. We have already held that even though symbolic custody of the sugar bags was given to the appellant-bank as security for repayment of loan etc., the Sugar Mills continued to be owner thereof. In other words, the sugar bags pledged with the appellant-bank continued to be movable property i.e. assets of the establishment, which could be attached and sold by the Recovery Officer in terms of Section 8B or by adopting alternative modes of recovery enumerated in Section 8F. 44. At the cost of r....
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....n relation to an establishment to which any Scheme or the Insurance Scheme applies in respect of any contribution payable to the Fund or, as the case may be, the Insurance Fund, damages recoverable under Section 14B, accumulations required to be transferred under Section 15(2) or any other charges payable by him under any other provision of this Act or of any provision of the Scheme or the Insurance Scheme. Clause (b) is applicable to cases where the amount is due from the employer in relation to exempted establishment in respect of any contribution to the provident fund or any insurance fund in so far it relates to exempted employees under the rules of provident fund or any insurance fund, any contribution payable by him towards the Pension Fund under Section 17(6), damages recoverable under Section 14B or any charges payable by him to the appropriate Government under the Act or under any of the conditions specified in Section 17. This sub-section then lays down that such amount shall be paid in priority to all other debts in the distribution of the property of the insolvent or the assets of the company being wound up. Sub-section (2) lays down that any amount due from the employe....