TaxTMI 
TaxTMI 
2024 (9) TMI 1771
X X X X Extracts X X X X
X X X X Extracts X X X X
....ous facilities to the respondent No. 3 and for securing the same, the property situated at Gondal Revenue Survey No. 416/1 paikiee, Binkheti Land A. 3-33 G. Known as Shstri Nagar Paikee, Binkheti Plot No. 29, Paikee Residential House on land Sq. Yrds., 120-3 sq. mtrs., 100.65 of Gondal City Survey Ward No. 2, Sheet No. 150, City Survey No. 2967/23 Street No. 2 Shashtri Nagar, Off Yogiraj Pan main Road, Jetpur Road, Gondal Tal. Gondal Dist. Rajkot came to be mortgaged by the petitioner bank, the copy of the said mortgage deed is duly produced at Annexure-A. 3.2 As the respondent No. 3 defaulted in repaying the aforesaid credit facility, the applicant bank classified the said account as NPA (Non-Performing Asset) on 30.03.2018, in accordance with the Reserve Bank of India directives and guidelines. 3.3 In spite of the bank's repeated requests and reminders, the borrower did not repay the dues of the petitioner bank and in view thereof, the petitioner bank issued notice under Section 13(2) of the SARFAESI Act, 2002 to the Borrowers/Mortgagers/Guarantor and thereby demanded an amount of Rs. 2,80,86,457/-. The possession of the property....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion 48 of the VAT Act. (C) During the Pendency and till final disposal of this petition, YOUR LORDSHIP be further pleased stay the operation and implementation of the impugned attachment order and charge recorded in the revenue record vide Entry no. 1749 by the respondent no. 2 at ANNEXURE-"F". (D) Pending admission, hearing and final disposal of this Special Civil Application, Your Lordships may be pleased to restrain the respondent no. 2 from taking any further steps in relation to the properties mortgaged by the Respondent no. 3 to 6 as security with the petitioner bank, and in view of the provisions under Section 26-E of the SARFAESI Act, 2002 for the reasons stated in the Memo of Petition and in the interest of justice; (E) The Hon'ble Court may kindly be pleased to grant such other relief(s) as deemed fit in the facts and circumstances of the case and in the interest of justice." 4. Mr. Sandip Bhatt, learned advocate appearing for the writ applicant submitted that the petitioner bank herein is a secured creditor of the property as referred to above; having sold the property to auction purchaser under SARFAESI Act. When the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....placed reliance on ratio laid down in case of Indian Overseas Bank V/s. Deputy Commissioner of State Tax; State Tax Officer; Savair Energy Ltd; Maharashtra Industrial Development Corporation; State of Maharashtra reported in 2024 Law Suit (Bom) 558 and in case of State of Gujarat & Anr V/s. Pra Realities LLP & Anr reported in 2024 Law Suit (Guj) 697. 4.6 Placing reliance on the aforesaid, it is submitted that the Hon'ble Division Bench has also held that the mere Entry in the revenue record creating charge over the property by the State Department would not amount to any encumbrance on the immovable property, which has been sold in the public auction, more so when there is no attachment order of the property-in-question. 5. Ms. Nidhi Vyas, learned AGP appearing for the respondent No. 1 and 2 relied on the affidavit-in-reply, which is duly placed on record at page 46 and has submitted that the respondent State has been vigilant with respect to the amount that is payable by one M/s. Rohini Oil Mill which was a registered tax payer under the Gujarat Value Added Tax Act, 2003 and Central Sales Tax Act, 1956 and assessment order under Section 34 of the Gujarat Value Added Tax....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er the SARFAESI Act, 2002. 7. In light of the aforesaid undisputed facts as referred above, it is apposite to refer to Section 26E of the SARFAESI Act, 2002, which reads thus: "Section 26E: Priority to secured creditors. - 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 local authority." 7.1. Section 26E of the SARFAESI Act, 2002, as referred above, has an overriding effect on any other provision of any other law for the time being in force. The aforesaid section provides that the benefit of compliance of the provisions of Chapter IVA and declares that after the registration of security interest, the debts due to any secured creditor shall be paid in priority over; (a) all other debts (b) revenues (c) cesses, and; (d) other rates, payable to the (i) Central Government; (ii) State Government, or (iii) any local authority. The section has carved out an exception to the common law principle that a sovereign....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ection of tax on the value added basis in respect of the sale of goods in the State of Gujarat. Section 48 of the Act, 2003, is with regard to the charge on the property. Section 48 reads as under : "48. Tax to be first charge on property.- Notwithstanding anything to the contrary contained in any law for the time being in force, any amount payable by a dealer or any other person on account of tax, interest or penalty for which he is liable to pay to the Government shall be a first charge on the property of such dealer, or as the case may be, such person." 10. Section 46 of the VAT Act is with regard to the special powers of the tax authorities for recovery of tax as arrears of land revenue. Section 46 of the VAT Act reads as under : "46. Special powers of tax authorities for recovery of tax as arrears of land revenue. (1) For the purposes of effecting recovery of the amount of tax, penalty or interest due from any dealer or other person by or under the provisions of this Act or under any earlier law, as arrears of land revenue. - (i) The Commissioner, the special Commissioner, Additional Commissioner and the joint Commissioners shall ha....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dia Act, 1984 (62 of 1984) [the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and the Small Industries Development Bank of India Act, 1989 (39 of 1989)." 12. Sections 26E, 35 and 37 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, read as under : "26-E. Priority to secured creditors.-- 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 local authority. Explanation.- For the purposes 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 assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code." "35. The provisions of this Act to override other laws -- The provisions of this Act shal....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002 was promulgated on the 21st June, 2002 to regulate securitisition and reconstruction of financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. The provisions of the Ordinance would enable the banks and financial institutions to realize long-term assets, manage problem of liquidity, asset liability mismatches and improve recovery by exercising powers to take possession of securities, sell them and reduce non-performing assets by adopting measures for recovery or reconstruction. It is now proposed to replace the Ordinance by a Bill, which, inter alia, contains provisions of the Ordinance to provide for - (a) Registration and regulation of securitisation companies or reconstruction companies by the Reserve Bank of India; (b) facilitating securitisation of financial assets of banks and financial institutions with or without the benefit of underlying securities (c) Facilitating easy transferability of financial assets by the securitisation company or reconstruction company to acquire fin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The Bill seeks to achieve the above objects." 14. We may also quote the statement of objects and reasons specified in The Recovery of Debts Due to Banks & Financial Institutions Act, 1993 The same read thus; "THE RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993 STATEMENT OF OBJECTS AND REASONS Banks and financial institutions at present experience considerable difficulties in recovering loans and enforcement of securities charged with them. The existing procedure for recovery of debts due to the banks and financial institutions has blocked a significant portion of their funds in unproductive assets, the value of which deteriorates with the passage of time. The Committee on the Financial System headed by Shri M. Narasimham has considered the setting up of the Special Tribunals with special powers for adjudication of such matters and speedy recovery as critical to the successful implementation of the financial sector reforms. An urgent need was, therefore, felt to work out a suitable mechanism through which the dues to the banks and financial institutions could be realized without delay. In 1981, a Committee under the Chairmanship of Shri T....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... that the Act shall prevail over the other statutes 29. The principles of law discernible from the decision of the Supreme Court in the case of Solidaire India Ltd. (supra) are that, if there is a conflict between the two special Acts, the later Act must prevail. To put it in other words, when there are two special statutes which contain the non-obstante clauses, the later statute must prevail. This is because at the time of enactment of the later statute, the legislature could be said to be aware of the earlier legislation and its non-obstante clause. If the legislature still confers the later enactment with a non-obstante clause, it means that the legislature wanted that enactment to prevail. 30. We are conscious of the fact that in the case on hand there is no conflict between two special statutes enacted by the Parliament. The conflict is with the State Act and the Central Act. We are trying to understand the true purport and effect of Section 26E of the SARFAESI Act which came to be enacted later in point of time and also the effect of Section 31B of the RDB Act which came to be enacted later in point of time. In other words, what necessitated the introductio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....under Entries I and II of the Schedule and not of the Concurrent List. The amendment made by the Parliament is to give priority to the secured creditors vis-a-vis the State dues without speaking about the first charge. This aspect was duly considered by the Supreme Court in the case of Central Bank of India (supra). The amended provision, i.e. Section 26E of the SARFAESI Act and Section 31B of the RDB Act, would have been different as indicated by the Apex Court in the case of Central Bank of India (supra). 35. While it is true that the Bank has taken over the possession of the assets of the defaulter under the SARFAESI Act and not under the RDB Act, Section 31B of the RDB Act, being a substantive provision giving priority to the "secured creditors", the same will be applicable irrespective of the procedure through which the recovery is sought to be made. This is particularly because Section 2(la) of the RDB Act defines the phrase "secured creditors" to have the same meaning as assigned to it under the SARFAESI Act. Moreover, Section 37 of the SARFAESI Act clearly provides that the provisions of the SARFAESI Act shall be in addition to, and not in derogation of inter-alia ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....5 SCC 694 (para 19) held that Government dues only have priority over unsecured debts and in so holding the Court referred to a judgment in Giles v. Grover (1832) (131) English Reports 563 in which it has been held that the Crown has no precedence over a pledgee of goods. In the present case, the common law of England qua Crown debts became applicable by virtue of Article 372 of the Constitution which states that all laws in force in the territory of India immediately before the commencement of the Constitution shall continue in force until altered or repealed by a competent legislature or other competent authority. In fact, in Collector of Aurangabad v. Central Bank of India [1967] 3 SCR 855 after referring to various authorities held that the claim of the Government to priority for arrears of income tax dues stems from the English common law doctrine of priority of Crown debts and has been given judicial recognition in British India prior to 1950 and was therefore "law in force" in the territory of India before the Constitution and was continued by Article 372 of the Constitution (at page 861, 862). In the present case, as has been noted above, the lien possessed by the Stock Exc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....lain and simple and the phrase 'any amount payable by a dealer or any other person on account of tax, interest or penalty' therein assumes significance. The amount could be said to be payable by a dealer on account of tax, interest or penalty once the same is assessed in the assessment proceedings and the amount is determined accordingly by the authority concerned. Without any assessment proceedings, the amount cannot be determined, and if the amount is yet to be determined, then prior to such determination there cannot be any application of Section 48 of the VAT Act. We may also refer to Section 47 of the VAT Act. Section 47 of the VAT Act is with respect to transfer of property by the dealer to defraud the Revenue. According to Section 47, if a dealer creates a charge over his property by way of sale, mortgage, exchange or any other mode of transfer after the tax has become due, then such transfer would be a void transfer. The reason why we are referring to Section 47 is that the phrase therein 'after any tax has become due from him' assumes significance. The same is suggestive of the fact that before the assessment proceedings, or, to put it in other words, befor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tate, it would not be able to function as a sovereign government at all. It is essential that as a sovereign, the State should be able to discharge its primary governmental functions and in order to be able to discharge such functions efficiently, it must be in possession of necessary funds and this consideration emphasises the necessity and the wisdom of conceding to the State, the right to claim priority in respect of its tax dues. (See M/s. Builders Supply Corporation, Supra). In the same case the Constitution Bench has noticed a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts and that this rule of common law amounts to law in force in the territory of British India at the relevant time within the meaning of article 372 (1) of the Constitution of India and therefore continues to be in force thereafter. On the very principle on which the rule is founded, the priority would be available only to such debts as are incurred by the subjects of the Crown by reference to the States sovereign power of compulsory exaction and would not extend to charges for commercial services or obligation incurred by the subjects to the State ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....goods cannot be extinguished even by lawful seizure of goods by making money available to other creditors of the pawnor without the claim of the pawnee being first fully satisfied. Rashbehary Ghose states in Law of Mortgage (TLL, 7th Edn., p. 386) - "It seems a government debt in India is not entitled to precedence over a prior secured debt." (d). The Hon'ble Supreme Court in the case of Punjab National Bank v. Union of India and others (Supra), reported in 2022 (7) SCC 260, has observed in paragraphs 46 to 50 as under :- "46. This Court in Dena Bank v. Bhikhabhai Prabhu Dass Parikh and another, [(2000) 5 SCC 694], wherein the question raised was whether the recovery of sales tax dues (amounting to Crown debt) shall have precedence over the right of the bank to proceed against the property of the borrowers mortgaged in favour of the bank, observed as under :- "10. However, the Crowns preferential right of recovery of debts over other creditors is confined to ordinary or unsecured creditors. The common law of England or the principles of equity and good conscience (as applicable to India) do not accord the Crown a preferential right of recovery of its debts ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nnai - II has examined the issue in depth. The Court was pleased to hold that tax dues under the Customs Act and Central Excise Act, do not have priority of claim over the dues of a secured creditor as there is no specific provision either in the Central Excise Act or the Customs Act giving those dues first charge, and that the claims of the secured creditors will prevail over the claims of the State. Considering the law declared by the Apex Court in the matter of priority of state debts as already discussed and the provision of Section 35 of SARFAESI Act we are in respectful agreement with the view taken by the Madras High Court." (emphasis supplied) 49. An SLP (No. 12462/2008) against the above judgement of the Bombay High Court stands dismissed by this Court on 17.07.2009 by relying upon the judgement in the matter of Union of India vs SICOM Ltd. & Anr. Reported in [(2009) 2 SCC 121], wherein the question involved was "Whether realization of the duty under the Central Excise Act will have priority over the secured debts in terms of the State Financial Corporation Act, 1951" and this Court held as under :- "9. Generally, the rights of the crown to recover the de....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is required to be considered. SARFAESI Act has been enacted to regulate securitization and reconstruction of financial assets and enforcement of security interest and to provide for a central debts of security interest created on property rights, and for matters connected therewith or incidental thereto. Therefore, SARFAESI Act has been enacted providing specific mechanism / provision for the financial assets and security interest. It is a special legislation for enforcement of security interest which is created in favour of the secured creditor - financial institution. Therefore, in absence of any specific provision for priority of the dues under MSMED Act, if the submission on behalf of respondent No. 1 for the dues under MSMED Act would prevail over the SARFAESI Act, then in that case, not only the object and purpose of special enactment / SARFAESI Act would be frustrated, even the later enactment by way of insertion of Section 26E of the SARFAESI Act would be frustrated. If the submission on behalf of respondent No. 1 is accepted, then in that case, Section 26E of the SARFAESI Act would become nugatory and would become otiose and/or redundant. Any other contrary view....