TaxTMI 
TaxTMI 
2023 (1) TMI 734
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....S., ASG Of India Mansoor. B.H. Sri. S. Easwaran Sri. T. Rajesh Sri. A. Balagopalan SRI. P. Binny Joseph Sri. M.N. Manmadan Shri. Basil Mathew Sri. M.S. Imthiyaz Ahammed Smt. P. Seena Anju Mohan Sri. B. Ramachandran, CGC By Adv. Sri. P. Paulochan Antony By Advs. Adarsh Kumar K. M. Aneesh By Advs Ravi Krishnan Retheesh Na By Adv Sergi Joseph Thomas, By Adv L. Rajesh Narayan By Adv Madhu Radhakrishnan JUDGMENT Shaji P. Chaly J. The captioned writ appeals are filed by the State and its officials challenging the common judgment of the learned Single Judge in W.P. (C) Nos. 28316 of 2016 and other connected matters dated 30.07.2019, whereby the writ petitions filed by the financial institutions guided by the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act, 2002) are allowed; and held that a secured creditor under Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act, 1993) obtains priority over the right claimed by the Revenue, both in proceeding against the properties in question, or in recovering the secured debt, and accordingly quashed the ....
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....mitha R. Chandran for the appellant State and its officials, Sri. S. Easwaran, learned counsel for the State Bank of India, Sri. P. Paulochan Antony, learned counsel for Dewan Housing Finance Corporation Ltd., Sri. Adarsh Kumar and Sri. K. M. Aneesh, learned counsel for the Bank of Baroda, Sri. Mohan Jacob George, learned counsel for M/s. Indiabulls Asset Reconstruction Company Ltd., Sri. Sergi Joseph Thomas, learned counsel for M/s Arams Tourism Private Ltd., Smt. Renee Joshua and Sri. Saiju Sathyapalan, Sri. L. Rajesh Narayanan, learned counsel for Smt. Laija Nawabuddin and Sri. Madhu Radhakrishnan, learned counsel for M/s. Asset Reconstruction Company (India) Ltd. and perused the pleadings and material on record. 6. Section 26E contained under Chapter IV-A of the SARFAESI Act 2002 was brought into force with effect from 01.09.2016. The said provision specifies that notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or ....
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....ions of Chapter IV and Chapter IV-A, the claim of such secured creditor or other creditor holding attachment order shall have priority over any security interest created upon such property and any transfer by way of sale, lease or assignment or license of such property or attachment order subsequent to such registration, shall be subject to such claim. 13. Section 31B of the RDB Act, 1993 which deals with priority to secured creditors states that notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realize secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority. 14. Therefore, on an analysis of the aforesaid provisions, it can be seen that there are certain modalities prescribed for registration of other attachments etc taken against the properties mortgaged by the loanees before the financial institutions. However, Section 26E only specifies that the secured creditor shall b....
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.... the property is to be sold; (c) reserve price of the immovable secured assets below which the property may not be sold; (d) time and place of the public auction or the time after which sale by any other mode shall be completed; (e) deposit of earnest money as may be stipulated by the secured creditor; and (f) any other terms and conditions, which the authorized officer considers it necessary for a purchaser to know the nature and value of the property. 19. Rule 9 (1) stipulates that no sale of immovable property under the Rules 2002, in first instance shall take place before the expiry of 30 days from the date on which the public notice of sale is published in newspapers as referred to in the proviso to sub-rule (6) of Rule 8 or notice of sale has been served to the borrower. 20. Sub-rule (2) of Rule 9 states that the sale shall be confirmed in favour of the purchaser who has offered the highest sale price in his bid or tender or quotation or offer to the authorized officer and shall be subject to confirmation by the secured creditor. Other rules are provided thereto to deal with the payment to be effected by the purchaser. 21. Sub-rule....
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.... of the KSGT Act, 1963 and the KVAT Act, 2003 would continue to run with the property. 28. Per contra, the contention advanced by the financial institutions is that the Rules discussed above are in violation of Section 26E since Section 26E creates a priority to the secured creditors. However, in respect of the same, the State Government contents that there is only priority to the secured creditors for payment of the debts due over all other debts, revenues, taxes etc., and therefore, merely because the financial institutions have exercised their priority even by sale of the property, the first charge created in favour of the Government as per the statutes said above would not be eliminated. 29. In order to proceed further, we are of the view that the concerned provisions of the KGST Act, 1963 and the KVAT Act, 2003 are to be discussed. 30. Section 26B of KGST Act, 1963 enumerates that tax payable under the said Act to be first charge on the property. The said provision reads that 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 othe....
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....udice to any other mode of recovery, be recovered; a) as if it were an arrear of land revenue; (b) on application to any magistrate, by such magistrate, if it were a fine imposed by him. 36. Therefore according to the State Government, purchase of an immovable property made by any person in a sale conducted by a financial institution as per the provisions of SARFAESI Act, 2002 and the RDB Act, 1993 are liable to pay the amounts due in order to secure a sale certificate free of encumbrances. 37. In order to understand the true implication of a sale notice issued under Rule 8 of the Rules 2002, Appendix IV-A constituted as per Rule 8(6) is extracted hereunder:- "APPENDIX IV-A [See proviso to rule 8(6)] SALE NOTICE FOR SALE OF IMMOVABLE PROPERTIES E-Auction sale Notice for Sale of Immovable Assets under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 read with proviso to rule 8(6) of the Security Interest (Enforcement) Rules, 2002. Notice is hereby given to the public in general and in particular to the Borrower(s) and Guarantor(s) that the below described immovable property mortgaged/charged to ....
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....---------- ------------------------------------------------------------------------------- All that part and parcel of the property consisting of Flat No................/Plot No....................... in Survey No. ................../City or Town Survey No......................../Khasra No............................. within the registration Sub District ................... and District Bounded: On the North by On the South by On the East by On the West by ------------------------------------------------------------------------------- List of Encumbrances 1. 2. Sd/- Authorised Officer (Name of the Institution) Date: Place:" 39. On a reading of the sale notice, it is evident that the notice contained clear expressions and terminologies in order to ensure that the properties are sold 'as is where is', 'as is what is', and 'whatever there is' condition. We will come to the true implication of those expressions used in the sale notice at a later point of time. 40. According to the State Government, when such a notice is issued by the fina....
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.... charges would be appropriate. It reads that 'where immovable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property; and all the provisions hereinbefore contained which apply to a single mortgage shall, so far as may be, apply to such charge'. 46. Therefore, according to the Government, as per the provisions of the KGST Act, 1963 and the KVAT Act, 2003 discussed above, the security for the payment of money to the State Government is created by operation of law. 47. In fact, the State Government has produced several documents along with I. A. No. 3 of 2022 and I.A No 2 of 2022 in W. A. Nos. 620 and 652 of 2022 in order to establish that amounts are due from the dealers who have mortgaged properties with the Bank, before the mortgage was created with the Bank. So also, the notices issued under the Kerala Revenue Recovery Act, 1968 attaching the properties are produced to show that a charge was created to the State Government on the failure of the dealer / mortgagor failing to pay the amount of tax which has fa....
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....e Court, within whose jurisdiction, the property is situated to ascertain, whether the same is the subject matter of any litigation and an affidavit from the borrowers that it is not so; (c) in all such cases, a valuation certificate, by a Government approved, at the penalty of cancellation of his licence, in case such certificate is found to be false, should be a must; (d) Immediately upon creation of security interest in its favour for payment of its dues, the bank must inform all the Central/State/Local Authorities regarding creation of such security interest, including the Sub-Registrar of documents and City Survey office concerned; (e) the bank/secured creditor, should before any property is attached and auctioned: (i) enquire with the Central/State/Local authorities regarding any dues on the property sought to be auctioned and in case such dues are found, to mention the same in the public notice to be published Inviting bids, so that the bidder, is made aware of the liability and encumbrance, which the property carries with it. (ii) where the secured creditor, has taken symbolic possession and is not in physical possession of the p....
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.... proceeds, of the auction. The contention is misconceived, for the reason that in Babulal Lade (supra) the direction for the Bank to pay the employees dues, as per the recovery certificate issued by the Industrial Court, out of the sale proceeds from the auctioned property, was due to the stipulation as contained in the letter dated 8/3/2010, under which the Bank had undertaken the responsibility for employees dues and not otherwise. There is no such undertaking by the respondent No.3, in the present matter. 44. Thus even in the present case, the dues as claimed by the respondent No.2, being a charge on the property, under Section 37(1) of MVAT Act, 2002, and the property having stood attached by the respondent No.2, before the auction, the petitioner, would be liable to pay the same to the respondent No.2, in order to obtain a clear and marketable title to the property, having purchased the same on 'As is where is and whatever there is basis'. In case the petitioner discharges the aforesaid dues of the respondent No.2, it would then be entitled to a no dues certificate from the respondent No.2." 51. Therefore on a perusal of the judgment of the Bombay High Cour....
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....s to the Government or anyone else in respect of properties E-auction. The intending bidders should make discreet enquiries as regards to the property from any authorities besides the bank's charges and satisfy themselves about the title extent of the property, any of the bank's charges and satisfy themselves about the title extent of the property, any statutory liabilities, arrear of property tax before submitting the bid. No claim of whatsoever nature regarding the property put for sale, encumbrance over the property on any other matter will be entertained after submission of the online bid." Having agreed to these stipulations, it is too late in the day for the petitioner to contend that the petitioner would not be liable to pay the statutory dues so as to remove the charge on the property in question in that regard. The argument of the petitioner is that the charge is not in respect of the property as such, but is the consequence of the statutory dues. That makes no difference. The fact remains that there is first charge of the State on the property in respect of the statutory dues. Having agreed to the terms referred to above, it is not open for the ....
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....s a wider term than a mortgage and it would cover within its ambit a mortgage also; and therefore when a first charge is created by the operation of law over any property, that charge will have precedence over an existing mortgage. 56. Learned Special Government has also pressed into service the judgment of the Three Judge Bench of the Hon'ble Apex Court in Central Bank of India v. State of Kerala and Others [(2009) 4 SCC 94] which considered the unamended provisions of the RDB Act, 1993 and the SARFAESI Act, 2002, (before introduction of Chapter IV-A to the SARFAESI Act 2002 came into force with effect from 01.09.2016) vis-a-vis among others, Section 26B of the KGST Act, 1963. 57. After making a threadbare survey of the earlier judgments of the Hon'ble Apex Court and the various provisions of law, has held that what is more significant to be noted is that there is no provision either in the RDB Act, 1993 and the SARFAESI Act, 2002 by which first charge has been created in favour of Banks, financial institutions or secured creditors qua the property of the borrower. 58. According to the learned Special Government Pleader, irrespective of the amendment made to the SARFAESI ....
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....he learned Special Government Pleader as well as the learned Senior Government Pleader appearing for the revenue that there is no conflict by and between the provisions of the KGST Act, 1963 and the KVAT Act, 2003 with the provisions of the SARFAESI Act, 2002 and the RDB Act, 1993 and the Rules thereto. 64. In order to establish the said contention, the judgments of the Hon'ble Apex Court in Kerala State Electricity Board v. Indian Aluminum Co. Ltd. [(1976) 1 SCC 466]; Hoechst Pharmaceuticals Ltd. v. State of Bihar and Others [(1983) 4 SCC 45]; Pandurang Ganpati Chaugule v. Vishwasrao Patil Murgud Sahakari Bank Limited [(2020) 9 SCC 215]; and the Full Bench judgment of this Court in Pushpangadan v Federal Bank Ltd. [2011 (4) KLT 134 (FB) which dealt with the provisions of SARFAESI Act, 2002 and the Kerala Buildings (Lease and Rent Control) Act, 1965, and other judgments were relied upon. 65. Our attention was also drawn to the judgment of a Three Judge Bench of the Hon'ble Apex Court in Bank of Maharashtra v. Pandurang Keshav Gorwardkar and Others [(2013) 7 SCC 754] which considered the question of the RDB Act, 1993 and Section 529A and 529(1) etc. of the Indian Companies Act....
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.... "(iv) An order refusing special leave to appeal may be a non-speaking order or a speaking one. In either case it does not attract the doctrine of merger. An order refusing special leave to appeal does not stand substituted in place of the order under challenge. All that means is that the Court was not inclined to exercise its discretion so as to allow the appeal being filed. (v) If the order refusing leave to appeal is a speaking order i.e. gives reasons for refusing the grant of leave, then the order has two implications. Firstly, the statement of law contained in the order is a declaration of law by the Supreme Court within the meaning of Article 141 of the Constitution. Secondly, other than the declaration of law, whatever is stated in the order are the findings recorded by the Supreme Court which would bind the parties thereto and also the court, tribunal or authority in any proceedings subsequent thereto by way of judicial discipline, the Supreme Court being the Apex Court of the country. But, this does not amount to saying that the order of the court, tribunal or authority below has stood merged in the order of the Supreme Court rejecting the special leave petitio....
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....his Court being the apex court of the country. No court or tribunal or parties would have the liberty of taking or canvassing any view contrary to the one expressed by this Court. The order of Supreme Court would mean that it has declared the law and in that light the case was considered not fit for grant of leave. The declaration of law will be governed by Article 141 but still, the case not being one where leave was granted, the doctrine of merger does not apply. The Court sometimes leaves the question of law open. Or it sometimes briefly lays down the principle, may be, contrary to the one laid down by the High Court and yet would dismiss the special leave petition. The reasons given are intended for purposes of Article 141. This is so done because in the event of merely dismissing the special leave petition, it is likely that an argument could be advanced in the High Court that the Supreme Court has to be understood as not to have differed in law with the High Court. ............ 31. In Supreme Court Employees Welfare Associations case (supra), this Court held :- "When Supreme Court gives reasons while dismissing a special leave petition under Article....
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....p Firm v. K. Santhakumaran, (1998) 7 SCC 386), and the issue was referred [Khoday Distilleries Ltd. v. Mahadeswara S.S.K. Ltd., (2012) 12 SCC 291: (2013) 4 SCC (Cri) 649 : (2013) 3 SCC (L&S) 450] to a larger Bench for an authoritative pronouncement, this Court has now clarified in Khoday Distilleries Ltd. v. Sri Mahadeshwara Sahakara Sakkare Karkhane Ltd. [Khoday Distilleries Ltd. v. Sri. Mahadeshwara Sahakara Karkhane Ltd., (2019) 4 SCC 376], that Kunhayammed [Kunhayammed v. State of Kerala, (2000) 6 SCC 359] lays down the correct law." 71. Accordingly, it is contended by the State that the declaration of law made by the Hon'ble Apex Court in the order in SLP (C) No. 10919 of 2021 dated 18.11.2021 that there is first charge of the State on the property in respect of the statutory dues is a binding precedent and therefore the appeals have to be allowed on the said sole ground. 72. On the other hand, learned counsel for the Bank / financial institutions submitted that the judgment of the Hon'ble Apex Court in Central Bank of India (supra) would not apply to the facts and circumstances of the case since the said judgment was rendered prior to the introduction of Chapter IV-A in....
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....able by sale of assets over which security interest is created, would have priority over all Government debts and dues, including revenue and taxes due to the State Government. 77. However, on a reading of the said judgment, we are of the considered opinion that the Division Bench of the Gujarat High Court has only considered the question of the priority to realize the debt due at first in favour of the Bank by selling off the property. 78. So also, according to learned counsel Sri. S. Easwaran, the judgment of the Division bench of the Bombay High Court in Medineutrina (supra) may not be a good law in view of the full bench judgment of the Bombay High Court in W. P. (C) No. 2935 of 2018 dated 30.08.2022, Jalgaon Janta Sahakari Bank Ltd. and Another v. Joint Commissioner of Sales Tax, Nodal 9, Mumbai and Another; wherein the Full Bench of the Bombay High Court, after considering the issues elaborately, also taking into account the provisions of Chapter IV-A of the SARFAESI Act, 2002, has framed the following questions:- "44. Keeping in view the rival submissions, we have considered it appropriate to formulate the following substantial questions of law for answers: ....
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....uestions framed, it is clear that the Full Bench considered the question whether the statutory first charge under the State Legislation namely the Bombay Sales Tax Act, 1959, the Maharashtra Value Added Tax Act, 2002 and the Maharashtra General Sales Tax Act, would be displaced having regard to introduction of Chapter IV-A in the SARFAESI Act, 2002, and whether an auction purchaser of a secured asset would be liable to pay the dues of the department in order to obtain a clear and marketable title to the property having purchased the same on "As is where is", "As is what is" and "Whatever there is" condition. 80. After considering the intricate issues vis-a-vis the provisions of SARFAESI Act, 2002 and the State Legislations creating first charge framed as per questions 'f' and 'g', it is held as follows:- "161. We, therefore, answer this question by observing that notwithstanding the duty of the authorized officer to indicate in the sale advertisement inviting bids the encumbrance(s) attached to the immovable property, i.e., the secured asset, as known to the secured creditor, if at all any detail in regard to such encumbrance(s) is not indicated by the sale is expressly....
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....he minimum reserve price. Clause 24 reproduced aforesaid makes it clear that when the reference is to a sale on "as is where is, what is there is and without any recourse basis", the same is "in all respects and subject to statutory dues". This clause was further subject to another Clause 26, where the Authorised Officer carrying out the auction absolved himself of the liability for any charge, lien, encumbrance, property tax dues, electricity dues, etc. The purpose is to emphasise that a holistic reading of all these clauses left little in doubt that the auction notice provided for a reserve price, with a bid being made about Rs.10 lakh over and above that, and certain nature of charges, lien, encumbrances, including electricity dues were clearly beyond the sale consideration paid." 84. We have evaluated the rival submissions made across the bar. 85. Taking into account the provisions discussed above; the judgments in Central Bank of India (supra); the judgment of the Division Bench of Bombay High Court in Medineutrina (supra); the Full Bench decision of the Bombay High Court in Jalgaon Janta Sahakari Bank Ltd. and Another v. Joint Commissioner of Sales Tax, Nodal 9, Mumbai ....
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....anner of repugnancy vis-avis the provisions of the State enactments. Which thus means, even if the Bank sells the properties and adjusts the payment due to it first, even then, until the encumbrances consequent to the first charge created as per the statues referred to above is cleared, the charge runs with the property. 89. Moreover, Section 26E states only the nature of the priority for payment; whereas Rules 8 and 9 of Rules 2002 deals with the manner in which the sale of the secured assets to be carried out, and which makes it specific how a notice is to be issued; how an encumbrance is to be removed; how a delivery of the property is to be effected to the purchaser free from encumbrances known to the secured creditor; and how a sale certificate is to be issued free of encumbrances. 90. Even though contentions are advanced by learned counsel for the Bank / financial institutions that the said provisions of the Rules 2002 is in conflict with Section 26E, we are unable to agree with the same because the provisions of the Rules 2002 is intended to translate the true spirit of the SARFAESI Act, 2002 and to ensure that a purchaser coming forward to purchase a property offered ....