TaxTMI 
TaxTMI 
2019 (7) TMI 1684
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....nu G. Nath, Christine Mathew and S. Easwaran, Advs. JUDGMENT Devan Ramachandran, 1. These writ petitions, save five, have been filed by various Banks and Financial Institutions challenging the action of the State's Revenue Machinery ('the Revenue'), in taking possession of and attempting to sell certain properties for alleged arrears of Sales Tax and Value Added Tax from its respective owners, which are claimed by them to be their secured assets, consequent to equitable mortgages having been created over them in their favour towards security for financial facilities/assistance availed of by its owners. 2. Four among the afore writ petitions, namely W.P.(C) Nos. 31945/2017, 37543/2017, 37552/2017 and 34002/2018 have been filed by the auction purchasers of secured assets sold by the Banks/Financial Institutions and they seek that the sale certificates in their favour be directed to be registered by the Revenue authorities, who appear to be refusing to do so citing arrears of sales tax left due by the original owners; with consequential directions to effect the transfer of registry of the properties in their favour. 3. Finally, W.P.(C) No. 28962/2017 has bee....
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....an authority. Explanation.-For the purpose of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured asserts of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code." (c) Section 26B of the KGST Act: "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." (d) Section 38 of the KVAT Act: "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." 7. As is conspic....
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.... that they have a better right over the properties under the mandate of the KGST Act and the KVAT Act. 12. Sri. Renjith Thampan began by arguing that there is an unmistakable difference in the concept of 'First Charge' over a property vis-o?=-vis the 'priority of debts' charged on it. According to him, a 'First Charge' over a property is a right thereon, which can be extinguished only by a process of law or upon the Revenue bringing it to sale and in no other manner. His specific predication is that even if there are other debts charged on the property, which concededly may have to be paid in priority as per the SARFAESI Act or the RDB Act, the Revenue must still sell it first for the 'charge' to be extinguished and that its sale through any other mechanism, be that the SARFAESI Act or the RDB Act or even by a Civil Court under the Code of Civil Procedure, will cause its 'charge' over it to subsist in spite of such sale. He, however, in the same breath, concedes that since Section 26E of the SARFAESI Act and Section 31B of the RDB Act mandate that the secured debts must be paid in priority even over the taxes of the Central Government and ....
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.... expressly admits, without reservation, that out of the sale amount, the secured creditors' due will have to be paid in priority. 16. In further force of his afore submissions, the learned Additional Advocate General contends that, as per the SARFAESI Act and the RDB Act, the sale of a property under its provisions can only 'have the trappings of a court sale in execution of a Civil Court money decree' (sic). He then submits that, as is evident from Rule 8(6)(a) and Rules 9(7)(2) to 9(7)(10) of the Security Interest Enforcement Rules, 2002 ('the Enforcement Rules' for brevity), the proclamation of sale under the SARFAESI Act has to necessarily show the prior encumbrances over it and consequently that the sale can be completed only subject to such. He says that, contrary to this, the sale under the RR Act extinguishes all such encumbrances as is provided under Section 60 thereof and reiterates that even if the properties are sold by the Banks/Financial Institutions under the SARFAESI Act or RDB Act, the charge of the Revenue over it continues until the sale is conducted under the RR Act. 17. The learned Additional Advocate General concluded his submissions ....
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....e brought into effect, the earlier prescriptions in the KGST Act and KVAT Act, which are in conflict with them, are rendered non-est on account of Article 254 of the Constitution of India or, in any event, subservient to the former under the mandate of Article 246(1) of the Constitution. He relies on the judgments of the Hon'ble Supreme Court in State Bank of India v. Santosh Gupta and Another (2017) 2 SCC 538) and in Government of AP and Another v. J.B. Educational Society and another (2005) 3 SCC 212) in support of these submissions and adds that even assuming that the contention of the learned Additional Advocate General that Section 26E of the SARFAESI Act has not been notified is accepted, it would make no difference because, on the mere factum of the said provision being made by the Parliament, without it having to be notified, the principle of 'primacy of laws made by the Parliament' would fully apply, going by the judgment of the Hon'ble Supreme Court in State of Kerala v. Mar Appraem Kuri Company Limited and Another (2012) 7 SCC 106). 20. Sri. S. Easwaran then proceeds to answer the submission of the learned Additional Advocate General that the 'Firs....
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....f the Parliament and State Legislatures and insisted that the moment the Parliament steps in by enacting a law traceable to Entry 45 of List I of the Constitution of India, the State law, to the extent to which it is inconsistent with it, must give way. He says that, as has been indubitably declared by the Hon'ble Supreme Court in Santosh Gupta (supra), the dominant legislation being the parliamentary legislation, the State Legislations would be subservient to it and therefore, that the Banks/Financial Institutions will obtain the right to first proceed against the properties involved and only thereafter can the State, if there is any surplus, claim the same towards their dues. 22. Sri. Mohan Jacob George then treaded on the contours of 'First Charge' and 'priority of payment', relying on National Iron & Steel Rolling Corporation (supra) and State of M.P. and Another v. State Bank of Indore and Others (2002) 10 SCC 441) and asserted that, going by the ratio of these judgments, on account of the provisions of Section 26E of the SARFAESI Act and Section 31B of the RDB Act, the right of the Banks/Financial Institutions to proceed against the properties involved ....
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....reditor in view of the amendment brought into effect by virtue of Act No. 44 of 2016 thereby introducing section 26E providing for priority to secured creditor over all other debts and all taxes, cess and other rates payable to Central Government or the State Government or the Local Authority'. He finishes by asserting that the rights of a secured creditor having been thus statutorily protected, the Revenue cannot proceed against the properties, notwithstanding the 'First Charge' that they claim, since any such charge can only be subservient to Section 26E of the SARFAESI Act and Section 31B of the RDB Act. 25. Sri. P. Gopinath Menon, learned Senior Counsel, assisted by Sri. B.H. Mansoor, learned counsel appearing for the petitioner in W.P. (C) No. 27147/2018 and the various learned counsel appearing for the Banks/financial Institutions in other cases have also made arguments on the same lines as afore, touching on the nuances of the principles recorded above and suffice to say, their common contention is that the rights of their clients to proceed against the properties involved in these cases are protected against such attempt by the Revenue. He further submits tha....
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.... "Mortgage", "mortgagor", "mortgagee", "mortgage-money" and "mortgage-deed" defined.- (a) A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan, an existing or future debt, or the performance of an engagement which may give rise to a pecuniary liability. The transferor is called a mortgagor, the transferee a mortgagee; the principal money and interest of which payment is secured for the time being are called the mortgage-money, and the instrument (if any) by which the transfer is effected is called a mortgage-deed." 31. It is thus incontestable that a 'Charge' does not create any right over the property but allows the charge holder to deal with the property in the same manner as a simple mortgagee would be entitled to under the various Sections of the TP Act. I say this is uncontestable because Section 100 of the TP Act excludes Mortgage from the definition of a Charge but makes all the provisions applicable to a simple mortgage relevant to a Charge. Further, as is manifest from the second limb of Section 100, a Charge gets extinguished when the prope....
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....ntion is expressed or necessarily implied, a transfer of property passes forthwith to the transferee all the interest which the transferor is then capable of passing in the property, and in the legal incidents thereof. It then narrates all such incidents having regard to the land, debt, etc., etc. Chapter III of the Act deals specifically with sales of immoveable property, the sale in Section 54 be defined as transfer of ownership in exchange for a price paid or promised or part-paid and part-promised. Mortgages are dealt with in chapter IV where mortgage is defined in Section 58(a) as the transfer of an interest in specific immoveable property for the purpose of securing the payment of money advanced or to be advanced by way of loan. Different kinds of mortgages are also specified in that section of which clause (b) states what a simple mortgage is, namely, where, without delivering possession of the mortgaged property, the mortgagor binds himself personally to pay the mortgage-money and agrees, expressly or impliedly, that in the event of his failing to pay according to his contract, the mortgage shall have a right to cause the mortgaged property to be sold and the proceeds of sa....
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.... create an overriding and first right in favour of the Banks/Financial Institutions to recover their dues, over and above the rights of the Revenue created through the KGST Act/KVAT Act. In fact, this enquiry has been rendered relatively easy for this Court because, in Central Bank of India v. State of Kerala and Others (2009) 4 SCC 94), the Hon'ble Supreme Court considered the right of the Banks/Financial Institutions as regards recovery of their dues prior to the afore two provisions being introduced in the SARFAESI Act and in the RDB Act. The conclusions of the Hon'ble Supreme Court are unequivocally worded that, in the absence of these provisions in the respective Statutes, the Banks/Financial Institutions cannot claim any priority over the Revenue's First Charge on the properties concerned for recovery of dues of Sales Tax/Value Added Tax. The disposition of the Hon'ble Court in this area is lucid and available in paragraphs 126, 129 and 130 of the said judgment, which requires to be read in full and is, therefore, re-produced as under: "126. While enacting the DRT Act and the Securitisation Act, Parliament was aware of the law laid down by this Court ....
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....When one reads the afore opinion of the Hon'ble Supreme Court, it is left without any doubt that, but for Section 26E of the SARFAESI Act and Section 31B of the RDB Act, such Statutes do not, in any manner, operate to create a better right for recovery in favour of the Banks/Financial Institutions over that of the Revenue. However, these provisions were brought in and incorporated in the respective Statutes after this judgment, clearly with the intend to override this lacuna. Therefore, the resultant question is whether these provisions would create a better right in favour of the Banks/Financial Institutions, which is superior to that enjoyed by the Revenue under the KGST Act/KVAT Act. 39. The learned Additional Advocate General, as I have already seen above, has built his entire arguments on the assertion that the statutory First Charge 'creates a right' for the State over the properties and that such right can be extinguished only if the Revenue sells the property and in no other manner. However, as has already been held by me above, the 'First Charge' claimed by the Revenue does not and cannot create any right over the property but only enables it to deal....
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....rned counsel for the respondents Banks/Financial Institutions. I will briefly deal with a few of them solely to confirm that my view as afore do not suffer from error. 43. In Textile Labour Association (supra), the provisions of Sections 529 and 529A of the Companies Act, 1956 were closely examined and the Hon'ble Supreme Court declared its ambit as under: "The effect of Sections 529 and 529-A is that the workmen of the company become secured creditors by operation of law to the extent of the workmen's dues provided there exists secured creditor by contract. If there is no secured creditor then the workmen of the company become unsecured preferential creditors under Section 529-A to the extent of the workmen's dues. The purpose of Section 529-A is to ensure that the workmen should not be deprived of their legitimate claims in the event of the liquidation of the company and the assets of the company would remain charged for the payment of the workers' dues and such charge will be pari passu with the charge of the secured creditors. There is no other statutory provision overriding the claim of the secured creditors except Section 529-A. This section overri....
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.... clause (c) of the proviso to sub-section (1) of Section 529 pari passu with the workmen's dues. The effect of the non obstante clause in the opening part of Section 529-A of the Companies Act, therefore, is that notwithstanding anything in the Companies Act and any other law including the Insolvency Act, workmen's dues and dues of the secured creditor which could not be realised because of the pari passu charge in favour of the workmen under the proviso to sub-section (1) of Section 529 and only to the extent such dues rank pari passu with the dues of the workmen under clause (c) of the said proviso are paid in priority over all other dues. 16.2. Over the security of every secured creditor, a statutory charge has been created in the first limb of the proviso to clause (c) of sub-section (1) of Section 529 of the Companies Act in favour of the workmen in respect of their dues from the company and this charge is pari passu with that of the secured creditor and is to the extent of the workmen's portion in relation to the security of any secured creditor of the company as stated in clause (c) of sub-section (3) of Section 529 of the Companies Act." 47. The abov....
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....amentary legislation will predominate, in the first, by virtue of non obstante clause in Article 246(1); in the second, by reason of Article 254(1). 59. Let us assume for the sake of argument that the State of Kerala were to obtain the assent of the President under Article 254(2) of the Constitution in respect of the insertion of Section 4(1)(a) by the Kerala Finance Act 7 of 2002. Now, Article 254(2) deals with the situation where State legislation is reserved and having obtained the President's assent, prevails in the State over the Central law. However, in view of the proviso to Article 254(2), Parliament could have brought a legislation even to override such assented-to State Finance Act 7 of 2002 without waiting for the Kerala Finance Act 7 of 2002 to be brought into force as the said proviso states that nothing in Article 254(2) shall prevent Parliament from enacting at any time, any law with respect to the same matter including a law adding to, amending, varying or repealing the law so made by the State Legislature [emphasis supplied]. 61. The entire above discussion on Articles 245, 246, 250 and 251 is only to indicate that the word "made" has....
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....s to the doctrine of harmonious construction, which is one of the paramount doctrines that is applied in interpreting all statures. Since neither Section 35 nor Section 37 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 is subject to the other, we think it is necessary to interpret the expression "or any other law for the time being in force" in Section 37. If a literal meaning is given to the said expression, Section 35 will become completely otiose as all other laws will then be in addition to and not in derogation of the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002. Obviously this could not have been the parliamentary intendment, after providing in Section 35 that the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 will prevail over all other laws that are inconsistent therewith. A middle ground has, therefore, necessarily to be taken. According to us, the two apparently conflicting sections can best be harmonised by giving meaning to both. This can only be done by limiting the scope of the expression "or a....
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....F Act and priority in payment of such dues under the Companies Act, concluding that the provisions of Section 11(2) of the EPF Act are only bolstered and supported by the provisions of Sections 529 and 529A of the Companies Act. This view certainly does not support the submissions of the learned Additional Advocate General, since arrears of tax revenue have not been, in any manner, protected either by the SARFAESI Act or by the RDB Act. 54. In the afore circumstances, it becomes needless to say that these writ petitions must succeed. Resultantly, (a) W.P.(C) No. 28316/2016 is allowed and Exhibits P8 to P10 are quashed, consequentially restraining respondents 1 to 3 from initiating any further action pursuant to these proceedings. (b) W.P.(C) No. 5899/2017 is allowed and the petitioner is at liberty to proceed against the property involved therein under the provisions of the SARFAESI Act and RDB Act, notwithstanding Exhibit P6 attachment order issued by the first respondent; with a further direction that once the property is sold by the petitioner, the said attachment will be effaced by the competent authority, subject to the right of respondents 1 to 3 to pr....