Case Law Details
Ambica Buildcon Vs Recovery Officer I (Gujarat High Court)
Gujarat High Court held that the debts due to Bank – a secured creditor shall be paid in priority over other debts/taxes payable to the State Government.
Facts- The petitioner purchased the said property in the said public e-auction conducted by respondent no.1 for a sale consideration of Rs.13,75,00,000/- and the respondent no.1 issued a sale certificate in favour of the petitioner.
The petitioner was made aware by respondents No.1 and 2 that the claim of the banks dues are prior to the State dues as per Section 31-B of the RDDBI Act. Thereafter, on 31.05.2022, respondent No.1 issued sale certificate.
There is a revenue entry being Entry No.6209 of the year 2018 which pertains to the charge created by the State Tax Department qua the land in question.
The petitioner therefore requested respondent No.1 – Recovery Officer of the Debt Recovery Tribunal for deciding the priority of charge between the bank and the VAT Department which was incorporated vide Entry No.6209.
Respondent No.1 had passed order dated 31.05.2022, clarifying that the bank had got priority. The Sub-Registrar office refused to execute the sale deed duly to State liability duly registered with it.
Therefore, the petitioner, by way of this petition, seeks to hold that the petitioner is an absolute owner of the property in question with legal and valid title.
Conclusion- Held that it is an undisputed fact that respondent No.2 – Bank of Baroda is a secured creditor. Therefore, the Bank has valid first charge over the property in question by way of mortgage and has first right to sell the same in view of priority under Section 31B of the RDDBI Act, so also Section 26E of the SARFAESI Act and recovered its dues from it. The petitioner is a bona fide purchaser, purchased the property in question from the public e-auction held by the Recovery Officer and paid full and total sale consideration and the Recovery Officer has issued sale certificate in favour of the petitioner. The debts due to Bank – a secured creditor shall be paid in priority over other debts/taxes payable to the State Government. The petitioner has no concern with the dues of the State Authorities.
FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT
1. The petitioner is before this Court seeking quashment of the attachment in revenue record by respondent No.4 vide Revenue Entry No.6209 dated 20.09.2018, which is certified on 25.10.2018 and further seeking direction by holding that the petitioner is an absolute owner of the property in question with legal and valid title as once purchased under the public auction.
2. The brief facts of the case are epitomized as under :
2.1 The property in question, being a ‘secured asset’ was put for the public e-auction on 27.04.2022 by the respondent no.1- The Recovery Officer-I, DEBT Recovery Tribunal-II, Ahmedabad due to the default committed by the borrower/mortgagor, after taking the possession of the property, under the Recovery of debts due to Banks and Financial Institutions Act, 1993 (hereinafter referred to as “RDDBI Act”) Act.
2.2 The petitioner purchased the said property in the said public e-auction conducted by respondent no.1 for a sale consideration of Rs.13,75,00,000/- and the respondent no.1 issued a sale certificate in favour of the petitioner.
2.3 The petitioner was made aware by respondents No.1 and 2 that the claim of the banks dues are prior to the State dues as per Section 31-B of the RDDBI Act.
2.4 Thereafter, on 31.05.2022, respondent No.1 issued sale certificate.
2.5 There is a revenue entry being Entry No.6209 of the year 2018 which pertains to the charge created by the State Tax Department qua the land in question.
2.6 The petitioner therefore requested respondent No.1 – Recovery Officer of the Debt Recovery Tribunal for deciding the priority of charge between the bank and the VAT Department which was incorporated vide Entry No.6209.
2.7 Respondent No.1 had passed order dated 31.05.2022, clarifying that the bank had got priority.
2.8 The Sub-Registrar office refused to execute the sale deed duly to State liability duly registered with it.
2.9 Therefore, the petitioner, by way of this petition, seeks to hold that the petitioner is a absolute owner of the property in question with legal and valid title.
3. Heard learned advocate Mr.Vijay H Patel for the petitioner, learned Bhaskar Sharma for respondent No.2 – Bank of Baroda and learned AGP Mr. Trupesh Kathiriya for respondents No.3 and 4.
4.1 Learned advocate Mr.Patel for the petitioner has submitted that the petitioner has purchased the subject property in public e-auction conducted by respondent no.1-Recovery Officer of the Debt Recovery Tribunal. He has submitted the charge of respondent no.4 – State Tax Department is subsequent of the creation of mortgage by respondent No.2 – Bank. He has submitted that the erstwhile owner/mortgagor had created security interest over the property in question and therefore, the entry registered before the revenue records are nullity. He has further submitted that the petitioner has asked for clarification about the charge of the State Tax Department and the Authority concerned has clarified the same and stated that the Bank has first right over the property in question as per the statue. He has submitted that irrespective of any charge, the bank being a secured creditor has first right over the property / mortgaged property and the bank can recover its dues by selling the same.
4.2 He has further submitted that the petitioner is the absolute owner of the property once purchased under public auction and cannot be held liable for any unpaid dues of either parties. He has submitted that there is a priority under Section 31-B of the RDDBI Act, which suggests that the secured creditor – in the present case, the Bank – shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to Central Government, State Government or local authority. He has submitted that the priority has been given for the recovery of bank dues by way of enactment of central legislation. He has submitted that the State Tax dues under VAT Act shall not have priority over the debt of the bank.
4.3 In support of this submission, he has relied upon the decision in the case of Pattech Fitwell Tube Components versus State of Gujarat – Special Civil Application No.16352 of 2021 dated 30.03.2022 and has submitted that the issue is no more res integra.
4.4 He has further relied upon the following decisions in support of his submissions :
(i) Special Civil Application No.15298 of 2020 – Bank of Baroda versus State of Gujarat
(ii) Special Civil Application No.16855 of 2020 dated 29.06.2021 – The lakshmi Vilas Bank Ltd. Versus State of Gujarat
(ii) Special Civil Application No.17891 of 2018 – Kalupur Commercial Co-operative Bank Ltd., versus State of Gujarat
(iii) Special Civil Application No.17567 of 2022 – Dineshkumar Maneklal Patel versus Bank of Baroda, dated 12.01.2023
4.5 He has submitted that this petition may be allowed.
5. Learned AGP Mr. Kathiriya for respondents – State Authorities has submitted that there is a charge of the Government and the same may be taken care of by this Court. He has submitted that this petition may be dismissed.
6. The issue involved in this petition is as to whether the dues of secured financial institution will have priority over State tax dues or not.
7. We have heard learned advocates for the respective parties. The picture which has emerged before this Court is as under :
7.1 The Recovery Officer – respondent No.1 has issued public e-auction notice for recovery of dues of respondent No.2 – Bank of Baroda.
7.2 The petitioner has paid total sale consideration of Rs.13,75,00,000/- in the said auction. The Authority has issued sale certificate in favour of the petitioner.
7.3 Pursuant to the query raised by the petitioner regarding the priority of dues, respondent No.1 officer has clarified vide his letter dated 31.05.2022 that the bank has priority than VAT department qua the charge / dues to be recovered.
7.4 The petitioner has requested the the sale deed.
7.5 The Sub-Registrar concerned has refused to register the sale deed due to registered liability of the State Tax Department.
8.1 The petitioner is a bona fide purchaser. He has purchased the property in question in the auction process.
8.2 It is a settled position of law that the debts due to any secured creditor shall be paid in priority over all other debits and all revenues, taxes, cesses and other rates payable to the Central Government or state Government or local authority.
8.3 At this stage, reference is made to Section 31B of the RDDBI Act as under :
“31B. Priority to secured creditors.-Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise 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.
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.”
8.4 Reference in this regard is made to the decision of this Court in the case of Kalupur Commercial Cooperative Bank Ltd., versus State of Gujarat – Special Civil Application No.17891 of 2018 dated 23.09.2019. Relevant paragraphs 9 to 14, 27, 29 to 35 and 48 to 55 are as under
“ 9. The Value Added Tax Act, 2003, came into force from 1st April 2006 in the State of Gujarat. The Act was enacted to consolidate and amend the laws relating to the levy and collection 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 have and exercise all the powers and perform all the duties of the Collector under the Bombay Land Revenue Code, 1879.
(ii) The Deputy Commissioners and Assistant
Commissioner shall have and exercise all the powers (except the powers of arrest and confinement of a defaulter in a civil jail) and perform all the duties the assistant Collector or Deputy Collector under the said Code.
(iii) The Commercial Tax Officers shall have and exercise all the powers (except the powers of arrest and confinement of a defaulter in a civil jail) and perform all the duties of the Mamlatdar under the said Code.
(2) Every order passed in exercise of the powers conferred buy sub-section (1) shall, for the purpose of section 73, 75, 79, or 94, be deemed to be an order passed under this Act.”
11. Sections 31B and 34 of the Recovery of Debts and Bankruptcy Act, 1993, read as under :
“31B. Priority to secured creditors.-Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise 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.
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.”
“34. Act to have over-riding effect.-
(1) Save as provided under sub-section (2), the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.
(2) The provisions of this Act or the rules made thereunder shall be in addition to, and not in derogation of, the Industrial Finance Corporation Act, 1948 (15 of 1948), the State Financial Corporations Act, 1951 (63 of 1951), the Unit Trust of India Act, 1963 (52 of 1963), the Industrial Reconstruction Bank of India 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 shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”
“37. Application of other laws not barred.-The provisions of this Act or the rules made thereunder shall be in addition to, and not in derogation of, the Companies Act, 1956 (1 of 1956), the Securities Contracts (Regulation) Act, 1956 (42 of 1956), the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (51 of 1993) or any other law for the time being in force.”
13. The statement of objects and reasons for the two enactments read as under:
“THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002 (Act No.54 of 2002) STATEMENT OF OBJECTS AND REASONS
The financial sector has been one of the key drivers in India’s efforts to achieve success in rapidly developing its economy. While the banking industry in India is progressively complying with the international prudential norms and accounting practices, there are certain areas in which the banking and financial sector do not have a level playing field as compared to other participants in the financial markets in the world. There is no legal provision for facilitating securitisation of financial assets of banks and financial institutions. Further, unlike international banks, the banks and financial institutions in India do not have power to take possession of securities and sell them. Our existing legal framework relating to commercial transactions has not kept pace with the changing commercial practices and financial sector reforms. This has resulted in slow pace of recovery of defaulting loans and mounting levels of nonperforming assets of banks and financial institutions. Narasimham Committee I and II and Andhyarujina Committee constituted by the Central Government for the purpose of examining banking sector reforms have considered the need for changes in the legal system in respect of these areas. These Committees, inter alia, have suggested enactment of a new legislation for securitisation and empowering banks and financial institutions to take possession of the securities and to sell them without the intervention of the court. Acting on these suggestions, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002 was promulgated on the 21st June, 2002 to regulate securitisation 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 financial assets of banks and financial institutions by issue of debentures or bonds or any other security in the nature of a debenture;
(d) Empowering securitisation companies or reconstruction companies to raise funds by issue of security receipts to qualified institutional buyers;
(e) Facilitating reconstruction of financial assets acquired by exercising powers of enforcement of securities or change of management or other powers which are proposed to be conferred on the banks and financial institutions;
(f) Declaration of any securitisation company or reconstruction company registered with the Reserve Bank of India as a public financial institution for the purpose of section 4A of the Companies Act, 1956;
(g) Defining ‘security interest’ as any type of security including mortgage and change on immovable properties given for due repayment of any financial assistance given by any bank or financial institution;
(h) Empowering banks and financial institutions to take possession of securities given for financial assistance and sell or lease the same or takeover management in the event of default, i.e., classification of the borrower’s account as nonperforming asset in accordance with the directions given or under guidelines issued by the Reserve Bank of India from time to time;
(i) The rights of a secured creditor to be exercised by one or more of its officers authorized in this behalf in accordance with the rules made by the Central Government;
(j) An appeal against the action of any bank or financial institution to the concerned Debts Recovery Tribunal and a second appeal to the Appellate Debts Recovery Tribunal;
(k) Setting up or causing to be set up a Central Registry by the Central Government for the purpose of registration of transactions relating to securitisation, asset reconstruction and creation of security interest;
(l) Application of the proposed legislation initially to banks and financial institutions and empowerment of the Central Government to extend the application of the proposed legislation to non-banking financial companies and other entities;
(m) Non-application of the proposed legislation to security interests in agricultural lands, loans not exceeding rupees one lakh and cases where eighty per cent, of the loans are repaid by the borrower. 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 TO BANK AND FINANCIAL 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. Tiwari had examined the legal and other difficulties faced by the banks and financial institutions and suggested remedial measures including changes in law. The Tiwari Committee had also suggested setting up of Special Tribunals for recovery of dues of the banks and financial institutions by following a summary procedure. The setting up of Special Tribunals will not only fulfill a longfelt need, but also will be an important step in the implementation of the Report of Narasimham Committee. Whereas on 30th September, 1990 more than fifteen lakhs of cases filed by the public sector banks and about 304 cases filed by the financial institutions were pending in various courts, recovery of debts involved more than Rs.5622 crores in dues of Public Sector Banks and about Rs.391 crores of dues of the financial institutions. The locking up of such huge amount of public money in litigation prevents proper utilization and recycling of the funds for the development of the country. The Bill seeks to provide for the establishment of Tribunal and Appellate Tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions. Notes on clauses explain in detail the provisions of the Bill.
ACT 51 OF 1993
The Recovery of Debts Due to Banks and Financial Institutions Bill having been passed by both the Houses of Parliament received the assent of the President on 27th August 1993. It came on the Statute Book as THE RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993 (51 of 1993):)”
27. The principles discernible from the decision of the Supreme Court in the case of Kumaon Motor Owners’ Union Ltd. (supra) are that, if there is a conflict between the provisions of the two Acts and if there is nothing repugnant, the provisions in the later Act would prevail. The second principle discernible is that, while resolving the conflict, the court must look into the object behind the two statutes. To put it in other words, what necessitated the legislature to enact a particular provision, later in point of time, which may be in conflict with the provisions of the other Acts. The third principle discernible is that the court must look into the language of the provisions. If the language of a particular provision is found to be more emphatic, the same would be indicative of the intention of the legislature 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 introduction of the two provisions in the two enactments and what object the two provisions would subserve.
31. We may, at the outset, clarify that the Government of India, Ministry of Finance, notified the provisions of Section 26(E) on 1st September 2016. The copy of the Notification issued by the Government of India, published in the Official Gazette Part-II, Section 3, at Serial No.2142 dated 1st September 2016 has been placed on record. The Notification reads as under :
“MINISTRY OF FINANCE
(Department of Financial Services)
NOTIFICATION
New Delhi, the 1st September, 2016
S.O. 2831 (E).–In exercise of the powers conferred by sub-section (2) of section 1 of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016 (44 of 2016), the Central Government hereby appoints the 1st day of September, 2016 as the date on which the following provisions of the said Act shall come into force, namely :-
Sr. No. Sections
1 Sections 2 and 3 (both inclusive);
2 Sections 4 [except clause (xiii)];
3 Section 5 and 6 (both inclusive);
4 Sections 8 to 16 (both inclusive);
5 Sections 22 to 31 (both inclusive);
6 Sections 33 to 44 (both inclusive).
[F.No. 3/5/2016 DRT]
ANANDRAO VISHNU PATIL, Jt. Secy.”
32. Section 31B has been inserted in the Recovery of Debts and Bankruptcy Act, 1993 (herein after referred to as “the RDB Act”) by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, w.e.f. 1.9.2016, which contains a non-obsante clause and which expressly provides that the secured debts shall be paid in priority over all other debts and Government dues including the State taxes.
33. Apart from the fact that Section 31B of the RDB Act is a later enactment, the language of the said provision also clearly indicates the intention of the Parliament to give precedence even over the Government dues notwithstanding anything to the contrary in any other law.
34. We are sure of one thing that there exists no repugnancy in the two legislations. The intention of the Parliament could not be said to nullify the State enactment providing the first charge on the property. The legislations have been made by the Central Government and the State respectively 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 the RDB Act. As such, the SARFAESI Act was enacted only with the intention of allowing faster recovery of debts to the secured creditors without intervention of the court. This is apparent from the Statement of Objects and Reasons of the SARFAESI Act. Thus, an interpretation that, while the secured creditors will have priority in case they proceed under the RDB Act they will not have such priority if they proceed under the SARFAESI Act, will lead to an absurd situation and, in fact, would frustrate the object of the SARFAESI Act which is to enable fast recovery to the secured creditors.
48. In the case of Stock Exchange, Bombay v. V.S.Kandalgaonkar, reported in (2014)51 taxmann.com 246 (SC), it was held by the Bombay High Court that, “By virtue of lien on securities under rule 43 of Bombay Stock Exchange Rules, BSE being secured creditor of defaulting member would have priority over dues of Income – tax department.” While dealing with the tax recovery under Section 226 of the Incometax Act, 1961, read with Sections 8 and 9 of the Securities Contracts (Regulation) Act, 1956, it was held by the Apex Court that collection and recovery of tax has to be based on proper appreciation of facts of the case. While deciding Other modes of recovery (Priority over debts), the Apex Court duly considered the power of Central Government to direct rules to be made or to make rules and observed that a membership card is only a personal permission from Stock Exchange to exercise rights and privileges that may be given subject to Rules, Bye-Laws and Regulations of Exchange and moment a member is declared a defaulter, his right of nomination shall cease and vest in Exchange because even personal privilege given is at that point taken away from defaulting member. It therefore held that by virtue of rule 43 of Bombay Stock Exchange Rules security provided by a member shall be a first and paramount lien for any sum due to Stock Exchange. Thus, Bombay Stock Exchange being secured creditor would have priority over Govt. dues and if a member of BSE was declared a defaulter, Income-tax department would not have priority over all debts owned by defaulter member. The first thing to be noticed is that the Income Tax Act does not provide for any paramountancy of dues by way of income tax. This is why the Court in the case of Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. [2005] 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 Exchange makes it a secured creditor. That being the case, it is clear that whether the lien under Rule 43 is a statutory lien or is a lien arising out of agreement does not make much of a difference as the Stock Exchange, being a secured creditor, would have priority over Government dues.
49. The two decisions referred to above, one of the Supreme Court and another of the Bombay High Court, as such may not be helpful to the Bank because the principal issue in the case on hand is with regard to the statutory charge which is created by the State enactment. The Bombay High Court was dealing with a matter under the Income Tax Act and under the Income Tax Act, there is no provision analogous to Section 48 of the VAT Act which creates a statutory charge.
50. There is one another important argument of Mr. Sheth which is quite appealing and we are at one with Mr. Sheth on the same. Indisputably, the Bank put forward its claim over the secured assets of the Bank for the first time on 01.10.2016 and that too by way of provisional attachment of the properties under Section 45 of the VAT Act, keeping in mind the dues that may be determined in future. It is not in dispute that there were no crystallized dues as on 01.10.2016 and, therefore, there was no question of there being any charge under Section 48 of the VAT Act which could only be in respect of the actual dues. It is also not in dispute that prior to the dues being crystallized in the case of the defaulting dealer, the Bank had already taken over the possession of the properties of the dealer, and by that time, Section 31B of the RDB Act had already been enforced by the Central Government. It is preposterous to suggest that the charge over the property under Section 48 of the State Act would come into force from the assessment of the earlier financial years and what is relevant in the present case is that the dues and resultantly the charge under Section 48 of the VAT Act came into existence after the implementation of Section 31B of the RDB Act.
51. Section 48 of the VAT Act would come into play only when the liability is finally assessed and the amount becomes due and payable. It is only thereafter if there is any charge, the same would operate. The authority under the VAT Act passed the assessment order later in point of time.
52. The language of Section 48 of the VAT Act is plain 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, before a particular amount is determined and becomes due to be payable if there is any transfer of property of the dealer, such transfer would not be a void transfer. Therefore, the condition precedent is that the tax should become due and such tax which has become due shall be payable by a dealer. Once this part is over, then Section 48 of the VAT Act would come into play.
53. One of us, J.B. Pardiwala, J., sitting as a Single Judge, had the occasion to consider this issue in the case of Bank of Baroda, Through its Assistant General Manager Prem Narayan Sharma vs. State of Gujarat & Ors., Special Civil Application No.12995 of 2018, decided on 16.09.2019. We may quote the relevant observations made in the said judgment.
“It is preposterous to suggest in the case on hand that as the assessment year was 2012-13, Section 48 could be said to apply from 2012-13 itself. Even in the absence of Section 26E of the SARFAESI Act or Section 31B of the RDB Act, Section 48 of the VAT Act would come into play only after the determination of the tax, interest or penalty liable to be paid to the Government. Only thereafter it could be said that the Government shall have the first charge on the property of the dealer.”
54. In view of the aforesaid discussion, We have no hesitation in coming to the conclusion that the first priority over the secured assets shall be of the Bank and not of the State Government by virtue of Section 48 of the VAT 2003.
55. In the result, this writ application succeeds and is hereby allowed. The impugned attachment notice dated 22.01.2018 (Annexure-A) and the impugned communication dated 19.04.2018 (Annexure-B) issued by the respondent No.2 is hereby quashed and set aside. It is hereby declared that the Bank has the first charge over the properties mortgaged from M/s. M. M. Traders by virtue of Section 26E of the SARFAESI Act.”
8.5 In the instant case, it is an undisputed fact that respondent No.2 – Bank of Baroda is a secured creditor. Therefore, the Bank has valid first charge over the property in question by way of mortgage and has first right to sell the same in view of priority under Section 31B of the RDDBI Act, so also Section 26E of the SARFAESI Act and recovered its dues from it. The petitioner is a bona fide purchaser, purchased the property in question from the public e-auction held by the Recovery Officer and paid full and total sale consideration and the Recovery Officer has issued sale certificate in favour of the petitioner. The debts due to Bank – a secured creditor shall be paid in priority over other debts/taxes payable to the State Government. The petitioner has no concern with the dues of the State Authorities. The petitioner has paid full and final sale consideration and if the State Authorities have dispute qua their dues, they can avail appropriate legal remedy before appropriate forum against the appropriate person/s. Any of the contesting respondent has no right to disturb the right, title and interest of the petitioner qua the property in question. Under these circumstances, the petitioner cannot be left in lurch. The petitioner therefore is required to be protected. Moreover, now it is well settled legal position that the mortgagor bank has priority to recover the dues against any charges of the State Government or Central Government, more particularly the mortgage is created prior to the registration of such charge by the Authority.
8.6 Keeping the above view in mind, it is held that the RDDBI Act is meant for enforcement of security interest which is created in favour of the secured creditor – financial institution, and provides specific mechanism / provision for the financial assets and security interest.
9. The petitioner does not press Prayer 14(D) at this stage, therefore, the prayers as prayed by the petitioner in this petition are as follows :
“14..
(A) Your lordships may be pleased to admit the said Petition,
(B) Your lordships may be pleased to issue a writ of mandamus/certiorari or any Other appropriate writ, order or direction in the nature of certiorari or mandamus by quashing the attachment in revenue record vide entry no 6209 by Respondent no 4 at Annexure-D for the reasons stated in memo of petition and in the interest of justice.
(C) Your lordships may be pleased to hold that the petitioner herein is the absolute owner or the property with legal and valid title of the property in question once purchased under public auction,
(D) Your lordships may be Pleased to hold that the respondents can claim their right over the auction amount being 13,75,00,000/- and nothing otherwise as petitioner have got absolute right over the ownership of the Property in question. (Not Pressed)
(E) Your lordships may be pleased to direct the sub-registrar to execute the sale deed at the earliest.
(F) That both the respondents may decide their claim for the auction money in accordance with law without disturbing/ harassing the possession or ownership of the property herein.
(G) Any other relief, order or direction which may be just, fit, proper and equitable in the facts and circumstances of the Petition.”
Therefore, this petition is considered for rest of the prayers as noted above.
10. In view of above, the following order is passed.
10.1 The present petition is allowed.
10.2 Revenue Entry No.6209 dated 20.09.2018, certified on 25.10.2018, pertains to registration of charge by the State Tax Authority on the property in question, is hereby quashed and set aside, by holding that the petitioner is a bona fide purchaser and is an absolute owner of the property in question with legal and valid title.
10.3 Consequently, the Revenue Authority concerned is directed to register the sale deed to be executed by and between the petitioner and Recovery Officer / Bank of Baroda.
10.4 Rule is made absolute to the aforesaid extent.
11. It is open for the State Tax Authority to initiate appropriate proceedings for recovery of its dues against appropriate person/s before appropriate forum, in accordance with law.
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