Crown’s preferential right of recovery of debts does not extend to secured creditors

Mankind Life Sciences Private Limited Vs State of Himachal Pradesh & Anr (Himachal Pradesh High Court)

The legal landscape surrounding the priority of dues in cases involving secured creditors and government departments has been a matter of judicial scrutiny. A recent case, Mankind Life Sciences Private Limited Vs State of Himachal Pradesh & Anr, heard in the Himachal Pradesh High Court, delves into the intricate interplay between the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and other relevant statutes.

Background: The primary issue under consideration was whether the dues of secured creditors under the SARFAESI Act should take precedence over the dues of the Central Excise Department. The court referred to the judgment in Punjab National Bank vs. Union of India & Ors (2022) 7 SCC 260, where the Supreme Court held that secured creditors have the first charge on secured assets, and the provisions of the SARFAESI Act override those of other laws.

Precedents and Legal Analysis

1. Dena Bank vs Bhikhabhai Prabhu Dass Parikh & Anr. [(2000) 5 SCC 694]: The court referred to this case to establish that the Crown’s preferential right of recovery of debts does not extend to secured creditors. The judgment highlighted that the principles of common law do not grant the Crown preferential rights over a mortgagee or pledgee of goods or a secured creditor.

2. Central Bank of India Vs. Siriguppa Sugars & Chemicals Ltd. & Ors. (2007) 8 SCC 353: In a similar matter, the court held that the rights of a bank over pawned goods had precedence over the claims of government authorities. The court emphasized that the rights of the secured creditor cannot be affected by the orders of government authorities if the goods were validly pawned.

3. Union of India vs SICOM Ltd. & Anr. (2009) 2 SCC 121:The Supreme Court dismissed an SLP against a judgment, reiterating that secured debts have priority over Crown debt (debts due to the state or the king). The court emphasized that the SARFAESI Act’s provisions would prevail over common law principles.

4. Recent Himachal Pradesh High Court Judgments: The Himachal Pradesh High Court cited its own precedents in cases like PNB Versus State of Himachal Pradesh and State Bank of India Versus State of H.P., reinforcing the priority of secured creditors over government dues under the SARFAESI Act.

Key Findings

i. Priority of Secured Creditors: The court affirmed that, according to Section 26E of the SARFAESI Act, debts due to secured creditors shall be paid in priority over all other debts, revenues, taxes, and other rates payable to the government.

ii. Overriding Effect of SARFAESI Act: The court reiterated that the SARFAESI Act’s provisions have an overriding effect on all other laws, as stipulated in Section 35 of the Act.

iii. Effect of Section 11E in the Central Excise Act: The court clarified that, even after the insertion of Section 11E in the Central Excise Act, the provisions of the SARFAESI Act will prevail, and the dues of secured creditors will have priority.

iv. Impact on Government Actions: The court declared that attempts by government departments to confiscate properties or invoke powers without considering the rights of secured creditors under the SARFAESI Act are illegal and unsustainable.

Conclusion: The judgment in Mankind Life Sciences Private Limited Vs State of Himachal Pradesh & Anr reaffirms the primacy of secured creditors under the SARFAESI Act and establishes a consistent legal position. It underscores the importance of recognizing the rights of secured creditors in financial transactions and ensures that government actions are in accordance with statutory provisions. This legal analysis provides clarity on the hierarchy of debts and the overarching authority of the SARFAESI Act in matters of secured assets.

FULL TEXT OF THE JUDGMENT/ORDER OF HIMACHAL PRADESH HIGH COURT

The petitioner, Mankind Life Sciences Private Limited, being the auction purchaser has come up before this Court for the following reliefs:-

(i) Issue a writ of Certiorari or any other appropriate writ, order or direction quashing Condition No 7 contained in the Impugned Order i.e. letter No. DIC /IA/PTA /Plot-1, 2 to 7/1158 dated 13.12.2022 issued by the Respondent No.1, as being ex-facie and manifestly arbitrary, wholly illegal, irrational and unsustainable.

(ii) Issue a writ, order or direction in the nature of mandamus or any other appropriate writ, order or direction directing the Respondents to effect transfer of the leasehold rights of Plot Nos. 1 to 7 in Phase-III of Industrial Area, Gondpur, Poanta Sahib, District Sirmaur, Himachal Pradesh (measuring 14,846 square meter) in favour of the petitioner.

2. FACTUAL MATRIX:

2(i). M/s Jaimurthy Minerals & Chemicals Pvt Ltd (hereinafter referred to as the Original Lessee), entered into two lease deeds on 17th October, 2003 and 23rd August, 2004, Annexure P-1 and Annexure P-2, with the State Government, through General Manager, District Industries Centre, Nahan, District Sirmaur for leasing out its Industrial Plots No 1 to 7, in Unit-II, measuring 14846 square meters, in Phase-III, Industrial Area, Gondpur, Poanta Sahib, District Sirmaur, Himachal Pradesh. Consequent upon the execution of lease deeds, the Original Lessee decided to raise finances from Bank of Baroda, for which he deposited both these lease deeds and mortgaged these Industrial Plots with the Bank. Thereafter the Bank-secured creditor advanced loan to the borrower-Original Lessee as aforesaid.

2(ii). Due to the default in payment of loan by the Original Lessee, the secured creditor i.e. the Bank of Baroda, Zonal Stressed Asset Recovery Branch, Meher Chamber, Ballard, Estate Mumbai, issued a Sale Notice on 10.12.2021, Annexure P-3, under the Security Interest (Enforcement) Rules, 2002 to the general public, the borrowers as well as the guarantors intending to sell the aforesaid immoveable property through E-auction platform. In the sale notice, the Bank prescribed the eligibility for E-auction, other conditions for bidders and also fixed the reserve price for all these seven Industrial Plots, in Unit-II, at Rs 408.71 Lakh (Four Crore Eight Lakh Seventy One Thousand Only). It was specifically mentioned in the sale notice, Annexure P-3, that “no encumbrance known to Bank existed”, which were recoverable from the original lessee. The learned counsel submits that before participating in E-auction, the petitioner made the required inquiries from the revenue/other authorities and was apprised of the fact that no encumbrances-dues, in terms of the mandate of Section 26 B of the SARFAESI Act {which came into force w.e.f. 20.1.2020} were registered. Accordingly, the petitioner being a bonafide purchaser participated in the E-auction and consequently, the petitioner, Mankind Life Sciences Private Limited was declared as the successful bidder at Rs. 4, 09, 71,000/-(Four Crore Nine Lakh Seventy Five Thousand Only) on 30.12.2021, Annexure P-4, subject to depositing 25% of bid amount immediately and the remaining 75% of bid amount was to be deposited within 15 days from the date of issuance of this letter, failing which, the sale price or any amount so deposited was to be forfeited and property was to be resold. However, it was clearly stated that the sale certificate will be issued by the Bank after compliance of all the terms and conditions of E-auction as set out in the sale notice.

2(iii). Incompliance to the letter dated 30.12.2021, Annexure P-4 supra, the petitioner deposited the total bid amount of Rs 4, 09, 71,000/-(Four Crore Nine Lakh and Seventy One Thousand only) with the Bank and thereafter the Bank issued the Sale Certificate in favour of the petitioner on 1.1.2022, Annexure P-5, and also handed over the possession of the scheduled property i.e. all seven Industrial Plots to the petitioner-auction purchaser. However, the Bank wrote a letter to the respondent No 1 on 4.1.2022, Annexure P-6, returning the original lease deeds with the request to issue the No Objection Certificate and to transfer the lease hold rights in favour of the petitioner. In response to Annexure P-6, the Respondent No 1, gave a reply to the petitioner on 7/11.10.2022, Annexure P-7, enclosing a copy of the letter dated 7.10.2022, directing the petitioner to deposit an additional sum amounting to Rs. 46,06,175/-(Fourty Six Lakh Six Thousand One Hundred Seventy Five Only) and GST @ 18% of Rs. 8,29,112/- on account of the unearned premium i.e. the differential amount of Industrial Plot which existed at the time of execution of initial lease deed vis-à-vis the market value existing on the date of auction/ sale. Surprisingly, in this letter, a condition No 7 was inserted for the first time whereby, the permission for transfer of Lease Holds Rights of these plots was given in favour of petitioner-auction purchaser without prejudice to the rights of the State Excise and Taxation Department (H.P) to recover its outstanding dues either from the secured creditor or from successful auction purchaser or from original lessee who had mortgaged the lease holds rights in favour of the Bank-secured creditor. In compliance to Annexure P-7, the petitioner deposited the demanded unearned premium/differential cost through cheque on 18.10.2022, including the GST through RTGS on 14.10.2022, Annexure P-8, respectively.

2(iv). As a sequel to Annexure P-7 supra, the respondent No.1 issued another communication on 13.12.2022, Annexure P-9, whereby condition No. 7 was reiterated.

2(v). Feeling aggrieved, against the imposition of condition No. 7 in Annexure P-7 and Annexure P-9, the petitioner-auction purchaser submitted a representation to the respondent No 1 on 10.4.2023, Annexure P-10, requesting that the aforesaid condition may be either withdrawn or he may be exempted from the liability of the Original Lease Holder-M/s Jaimurthy Minerals & Chemicals Pvt. Ltd. as the same cannot be fastened -imposed on him being arbitrary and illegal. This representation was forwarded by respondent No 1 to Director of Industries on 17.04.2023, Annexure P-11, on which Principal Secretary (Industries) took a decision on 17.06.2023 as reflected in the communication dated 23.06.2023, Annexure P-12, refusing to withdraw the condition contained in Annexure P-7 and Annexure P-9 (supra). It is against this refusal that the petitioner-auction purchaser has filed the instant petition.

3. STAND OF RESPONDENTS IN REPLY:

3(i). Respondents-State has filed a reply on the affidavit of Director of Industries Himachal Pradesh. As per the reply, the respondents have prayed for the dismissal of the writ petition on the grounds that (i) once the petitioner has deposited the differential cost of unearned premium of Rs 46,06,175/- in terms of the letter dated 7/11.10.2022 (Annexure P-7) therefore, the petitioner cannot assail the condition No 7 which is contained in letters dated 7/11.10.2022 Annexure P-7 and dated 13.12.2022 Annexure P-9 ; (ii) the petitioner was not diligent and was negligent by not resorting to discreet independent inquiry from the Government functionaries for ascertaining the encumbrances, lien, charge, statutory dues, taxes etc which were outstanding towards the Government in view of the condition no 16 of the sale notice dated 10.12.2021, Annexure P-3;

(iii) the Hon’ble Apex Court in the matter of Kotak Mahindra versus DIC, SLP (C) 10919 of 2021 has dismissed the claim whereby an auction purchaser has failed to undertake the requisite discreet inquiry ;

(iii)  the claim for the withdrawal or for exemption of condition No 7 was not tenable in view of Clause 2(vi)(a) of the lease deed when, the petitioner having stepped into the shoes of the Original Lessee-M/s Jaimurthy Minerals & Chemicals Pvt. Ltd, who had an outstanding tax liability of Rs. 17,19,96,478/- i.e. (Seventeen Crore Nineteen Lakh Ninety Six Thousand and Four Hundred Seventy Eight Only) towards the State Excise and Taxation Department as mentioned in the communication dated 24.05.2019 Annexure R-5 and Annexure R-6 and the petitioner cannot escape the liability; and (v) the writ petition was stated to be not maintainable for non-joinder of necessary parties. In this background, the respondents have prayed for the dismissal of the writ petition.

4. We have heard Ms. Shilpa Sood, learned counsel for the petitioner and Mr. Anup Rattan, learned Advocate General assisted by Mr. I.N. Mehta, learned Senior Additional Advocate General for the respondent-State and have perused the pleadings.

5. The following questions arise for determination in this case:-

(i) Whether the petitioner being bonafide auction purchaser of the secured assets {Industrial Plots} under SARFAESI Act could be fastened with the liability of State taxes which had accrued and were solely attributable to the business of the Original Lessee ?

(ii)  Whether the Condition no 7 in letters dated 11.10.2022 and 13.12.2022 vide Annexure P-7 and Annexure P-9, could be imposed on the petitioner when, the outstanding business liability of the Original Lessee was not disclosed in the Sale Notice dated 10.12.2021, Annexure P-3, as mandated by Rule 8 (7) (a) of the Security Interests (Enforcement) Rules 2002 ?

(iii) Whether adversial condition, in Question No (ii), can be enforced against the petitioner when, Respondents-State Tax Authorities have failed to recover its outstanding encumbrances-tax liability, which was attributable to the business of the Original Lessee or its Directors in-accordance with the Himachal Pradesh Value Added Tax Act, 2005 ?

6. ANALYSIS OF OBJECTIONS OF RESPONDENTS IN REPLY : 

Before adverting to the questions involved, we proceed to analyse the objections so raised by the respondents in the reply as under:-

6(i). The first objection in the reply that once the petitioner had deposited the differential cost of the unearned premium of Rs. 46, 06, 175/- in terms of the letter dated 7/11.10.2022, Annexure P-7, therefore, the petitioner cannot assail the condition No.7 imposed in the said letter is untenable.

In this context, a close scrutiny of the paper book reveals that after the E-auction was held on 30.12.2021, the petitioner being the successful bidder deposited the total bid amount and thereafter the Bank confirmed the sale by issuing the Sale Certificate on 1.1.2022, Annexure P-5 and the Bank delivered the possession to the petitioner -auction purchaser. On issuance of the sale certificate vide Annexure P-5 supra, the petitioner acquired a right in the scheduled immoveable property free from all encumbrances but surprisingly, the Respondents have issued a letter on 7.10.2022 imposing a condition no 7, for the first time whereby, the business liability of the Original Lessee, which had accrued and was solely attributable to state taxes/dues has been fastened on the petitioner and this action amounts to curtailing, frustrating, defeating, taking away, extinguishing the rights which had accrued/vested in the petitioner-auction purchaser on issuance of the sale certificate on 1.1.2022 under the SARFAESI Act and Rule 9(6) of the Security Interest (Enforcement) Rules, 2002. Notably, once the Bank had specifically represented to the general public that “no encumbrances known to the bank existed” then, any post-sale confirmation encumbrance, cannot be fastened or enforced against the petitioner.

6(ii). The second objection that petitioner-auction purchaser had been negligent as he had not shown diligence and had not made discreet inquiry from the Government functionaries regarding encumbrances, lien, charge, dues, taxes etc. as per condition No 16 of sale notice dated 10.12.2021, Annexure P-3, is without any substance.

In this context, it is pertinent to note that firstly, once the Bank had clearly represented in the sale-notice dated 10.12.2021, Annexure P-3, that “there were no encumbrances known to bank” as per mandate of Rule 8(7)(a) of the Security Interest (Enforcement) Rules, 2002 then, the condition No 16 mentioned in sale notice cannot be applied/invoked in such a situation, as in the instant case ; secondly, the condition No 16 could only operate in a situation where the Bank was not aware of the encumbrances i.e. lien, charges dues, taxes etc over the scheduled property ; thirdly, the condition No 16 in sale notice cannot be read in isolation so as to defeat, curtail, restrict, abridge or take away the rights acquired by the auction purchaser on issuance of sale certificate on dated 1.1.2022, Annexure P-5 under the SARFAESI Act and Rule 9(6) of the Security Interest (Enforcement) Rules, 2002 ; fourthly, condition No 16 cannot override the provision of Rule 8(7)(a) which came into force w.e.f. 18.10.2018 in the Security Interest (Enforcement) Rules, 2002 ; fifthly, the aforesaid condition has to be subservient to the Rules so as to advance the object of the Act and to safeguard the rights of the bonafide auction-purchaser alike the petitioner, when, no such liability was made known to him as required under Rule 8(7)(a) of the Security Interest (Enforcement) Rules; and lastly, the submission of learned counsel for the petitioner that once the petitioner had made required inquiries from the state revenue and other authorities which revealed the State Government had neither got its claims registered nor obtained any attachment orders from the Court or competent authority and not got it registered with CERSAI as per the mandate of Section 26 B (4) of the SARFAESI Act, which came into force w.e.f. 24.1.2020 therefore, neither any such condition nor any liability could be fastened on the petitioner, a bonafide auction purchaser and in view of the above discussion, the impugned action of the respondents is not tenable.

6(iii). The third objection in the reply based on the judgment of the Hon’ble Apex Court in the case of Kotak Mahindra Bank Limited versus District Industries Centre (D.I.C) i.e. SLP (C) No. 10919/2021, is in our considered view is distinguishable on facts, as stated herein below.

Noticeably, the Writ Petition No 7971 of 2019, titled as Medineutrina Pvt. Ltd versus DIC, which became the subject matter of SLP(C) No 10919 of 2021 and was decided along with Civil Appeal No. 6350 of 2021, in the case of Kotak Mahindra Bank (supra) is distinguishable on facts. Firstly, in the aforesaid case, the State Tax Authorities of Maharashtra had created a charge and also issued the attachment order in the year 2015 prior to the issuance of sale notice on 14.3.2017, even before issuance of the sale certificate on 22.3.2017 ; secondly, in the aforesaid matter(s), the factum of creation of charge, issuance of attachment order was made known to the original allottee prior to the issuance of the sale certificate ; thirdly, in the aforesaid matter(s), auction purchaser had executed agreement that they shall bear the past liability of encumbrances, dues, taxes, etc. which factors are absent in the present writ petition; fourthly, in the aforesaid matters, the State of Maharashtra had also informed the secured creditor-Bank about the creation of charge, passing of attachment orders, outstanding encumbrances and these facts were reflected in the sale notice and in sale certificate whereas all these material aspects are absent in the instant petition; fifthly, the condition No 16 can neither be attracted nor invoked dehors the mandate of Rule 8(7)(a) which came into force w.e.f. 18.10.2018 in the Security Interests (Enforcement) Rules, 2002 ; sixthly, this condition cannot apply or operate to the disadvantage of petitioner ; seventhly, in the aforesaid matter, the provision of Section 26 B (4) of SARFAESI Act which came into force w.e.f. 24.1.2020 was not in issue ; and in view of the above discussion, the plea of the respondents in the reply is not tenable on facts and in law.

6(iv). The fourth objection in the reply that as per Clause 2(vi)(a) of the lease deed(s) since the petitioner had stepped into the shoes of the original lease holder therefore, the petitioner was liable ; is not at all tenable in view of the discussion made herein below. At the very outset, we are of the view that Clause 2 (vi) applied in a different situation altogether; where, the original lessee intended to sell, transfer, assign or otherwise part with the possession of the whole or any part of the industrial plot and in such a case the previous consent in writing of the lessor-department of Industries was required. The object of Clause 2(vi) was to enable the lessor to safeguard its interests and to get higher lease money or unearned premium by way of differential cost of industrial plot which existed at the time of original lease deed vis-à-vis the present intended sale, transfer, assignment or parting of possession at specified rates. Even clause 2 (vi) of the lease deed nowhere expressly mandates that the petitioner-auction purchaser would be liable for the outstanding dues or debts, arising out of or which had accrued and were connected with and solely attributable to the business of original lessee.

Another plea in the reply, that as per Annexure R-5, dated 30.5.2019, the Member Secretary, Single Window Clearance Agency, Poanta Sahib, District Sirmaur has sent a communication to the Bank of Baroda pointing out an outstanding tax liability of Rs 17,19,96,478/-of the original lessee towards the Himachal Pradesh State Taxes and Excise Department, for which the petitioner was liable as he had stepped into the shoes of the Original Lessee, is not tenable on facts and in law ; when, firstly, once the Bank was having knowledge about the encumbrances or outstanding dues-taxes recoverable from the Original Lessee then, the Bank was bound to disclose and reflect such liability-encumbrance in the sale notice dated 10.12.2021, Annexure P-3, as per the mandate of Rule 8(vii)(a) of Security Interest (Enforcement) Rules, 2002 but the Bank has failed to disclose these material facts in the sale notice on the basis of which the E-auction was held and the proceedings were finalized by issuing the sale certificate on 1.1.2022, Annexure P-5; secondly, even a perusal of Annexure R-5 and R-6 reveals that the tax liability standing in the name of original lessee had accrued and were connected with and solely attributable to the business of the original lessee for the period from 2012 to 2015; thirdly, there was no express covenant in original lease deed(s) that the transferee of secured assets-Industrial Plots will bear the “liability arising out of or accruing from and connected with and solely attributable to the business of the original lessee”; fourthly, the petitioner-auction purchaser had purchased the immovable property i.e. Industrial plots and not the business concern of the original lessee M/s Jaimurthy Minerals & Chemicals Pvt. Ltd. In view of the above discussion, the respondents cannot fasten the business liability of original lease on the petitioner -auction purchaser and the condition No 7 imposing the liability of the original leasee on the petitioner does not conforms to law and is otherwise also unreasonable and arbitrary is set aside qua the petitioner.

6(v). The fifth objection in the reply that the petition is bad for non-joinder of parties is without merit, when the petitioner being the dominus litis has challenged the imposition of condition No.7 as contained in the letter(s) dated 11.10.2022, Annexure P-7 and dated 13.12.2022, Annexure P-9, issued by respondents state, including respondents No. 1 and 2 herein.

6(vi). In the backdrop of the discussion made here-in-above, and as per the mandate of law which is discussed hereinafter, we are of the view that the rights acquired by the petitioner, a bonafide auction purchaser on issuance of the sale certificate cannot be nullified, defeated, obstructed, frustrated, restricted, curtailed nor can it be whittled down or extinguished either by the secured creditor-Bank or the Respondents -State, qua the secured asset i.e. scheduled property purchased and acquired by the petitioner in E-auction under the SARFAESI Act and the Rules issued there under. The benefits acquired by an auction purchaser can be questioned only on the ground of fraud or collusion, which factors are absent in the instant case.

7. LEGAL POSITION:

7(i). In order to appreciate the rival claims of the parties, it would be in the fitness of things to have a recap of the relevant provisions of Section 26E and Section 35 of the SARFAESI Act, which are reproduced here-in-below:-

“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.

Explanation- For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency of bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower.

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.”

7(ii). LEGAL POSITION : OVERRIDING EFFECT OF SARFAESI ACT:

While dealing with the scope of MSMED Act, 2006 vis-à-vis SARFAESI Act, 2002 and validity of the order of attaching of mortgaged secured assets, in view of recoverable dues, the Hon’ble Apex Court has categorically held in the case of Kotak Mahindra Bank Ltd. vs. Girnar Corrugators Private Limited and Others, (2023) 3 SCC 210, that the non-obstante clause in Section 26E of SARFAESI Act shall prevail over the MSMED Act and even in case a non-obstante provision exists in two enactments then also, keeping in view the object of the SARFAESI Act, the non-obstante clause in the subsequent enactment would prevail over the earlier enactments in view of Section 35 of the SARFAESI Act. That being so, the dues of secured creditors shall prevail over the dues, taxes or cesses payable to the Central government or the State Government or local authority. In this background, the Hon’ble Apex Court has held as under:-

“26. The short question which is posed for the consideration of this Court is whether the MSMED Act would prevail over the SARFAESI Act? The question is whether recovery proceedings / recoveries under the MSMED Act would prevail over the recoveries made / recovery proceedings under provisions of the SARFAESI Act?

27. It is the case on behalf of respondent No.1 that in view of Section 24 of the MSMED Act which provides that the provisions of Sections 15 to 23 of the MSMED Act would have overriding effect and shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force and in view of the fact that the MSMED Act being a later enactment, then the SARFAESI Act, the MSMED Act would prevail over the SARFAESI Act.

28. While appreciating the above submissions, it is required to be appreciated that Sections 15 to 23 of the MSMED Act only provide for special mechanism for adjudication of the dispute along with enforcing certain other contractual and business terms on the parties such as time limit for payments and interest in case of delayed payments. In the entire MSMED Act, there is no specific express provision giving ‘priority’ for payments under the MSMED Act over the dues of the secured creditors or over any taxes or cesses payable to Central Government or State Government or Local Authority as the case may be.

29.  In sharp contrast to this, Section 26E of the SARFAESI Act which has been inserted vide Amendment in 2016, it provides that notwithstanding  anything inconsistent therewith 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 revenue taxes and cesses and other rates payable to the Central Government or State Government or Local Authority. However, the priority to secured creditors in payment of debt as per Section 26E of the SARFAESI Act shall be subject to the provisions of the IBC. Therefore, such dues vis-a-vis dues under the MSMED Act, as per the decree or order passed by the Facilitation Council debts due to the secured creditor shall have a priority in view of Section 26E of the SARFAESI Act which is later enactment in point of time than the MSMED Act.

30.  At this stage, it is required to be noted Section 26E of the SARFAESI Act which is inserted in 2016 is also having a non-obstante clause. Even as per the submission on behalf of respondent No.1, two enactments have competing non-obstante provision and nothing repugnant, then the non-obstante clause of the subsequent statute would prevail over the earlier enactments. As per the settle position of law, if the legislature confers the later enactment with a non-obstante clause, it means the legislature wanted the subsequent /later enactment to prevail. Thus, a ‘priority’ conferred / provided under Section 26E of the SARFAESI Act would prevail over the recovery mechanism of the MSMED Act. The aforesaid is to be considered along with the fact that under provisions of the MSMED Act, more particularly Sections 15 to 23, no ‘priority’ is provided with respect to the dues under the MSMED Act, like Section 26E of the SARFAESI Act.

32. At this stage, the object and purpose of the enactment of SARFAESI Act 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 would be defeating the provision of Section 26 E of the SARFAESI Act and also the object and purpose of the SARFAESI Act.

33. Even otherwise the Naib Tehsildar was not at all justified in not taking possession of the secured assets / properties as per order dated 24.09.2014 passed by the District Magistrate under Section 14 of the SARFAESI Act. The order passed by the Naib Tehsildar refusing to take possession of the secured assets / properties despite the order passed under Section 14 of the SARFAESI Act on the ground that recovery certificates issued by respondent No.1 for recovery of the orders passed by the Facilitation Council are pending, is wholly without jurisdiction. While exercising power under Section 14 of the SARFAESI Act, even the District Magistrate has no jurisdiction and/or District Magistrate and /or even the Chief Metropolitan Magistrate has no jurisdiction to adjudicate the dispute between secured creditor and debtor.

35. Therefore, the order passed by the Naib Tehsildar refusing to take the possession pursuant to the order passed by the District Magistrate under Section 14 of the SARFAESI Act was wholly without jurisdiction and therefore also the same was liable to be set aside.”

(Underlining ours)

7(iii). While dealing with the issue as to whether the dues of secured creditor under SARFAESI Act shall have priority over the dues of Central Excise Department has been answered by the Hon’ble Apex Court, in Punjab National Bank vs. Union of India & Ors (2022) 7 SCC 260, by recording a finding that secured creditor will have a first charge on secured assets and the provisions of SARFAESI Act shall have overriding effect on the provisions of Central Excise Act 1944 or on all other laws, in view of Section 35 of the SARFAESI Act, which reads as under:-

42. “Secondly,  coming to the issue of priority of secured creditor’s debt over that of the Excise Department, the High Court in the impugned judgment has held that  “In view of the matter, the question of first charge or second charge over the properties would not arise.” In this context, we are of the opinion that the High Court has misinterpreted the issue to state that the question of first charge or second charge over the properties, would not arise.

46. This Court, in Dena Bank vs Bhikhabhai Prabhu Dass Parikh & Anr. [(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 over a mortgagee or pledgee of goods or a Secured Creditor.”

47. Further, in Central Bank of India Vs. Siriguppa Sugars & Chemicals Ltd. & Ors. (2007) 8 SCC 353, while adjudicating a similar matter, this Court has held as under:

“18. Thus, going by the principles governing the matter, propounded by this Court there cannot  be any doubt that the rights of the appellant-bank over the pawned sugar had precedence over the claims of the Cane Commissioner and that of the workmen. The High Court was, therefore, in error in passing an interim order to pay parts of the proceeds to the Cane Commissioner and to the Labour Commissioner for  disbursal to the cane growers and to the employees. There is no dispute that the sugar was pledged with the appellant bank for securing a loan of the first respondent and the loan had not been repaid. The goods were forcibly taken possession of at the instance of the revenue recovery authority from the custody of the pawnee, the appellant bank. In view of the fact that the goods were validly pawned to the appellant bank, the rights of the appellant bank as pawnee cannot be affected by the orders of the Cane Commissioner or the demands made by him or the demands made on behalf of the workmen. Both the Cane Commissioner and the workmen in the absence of a liquidation, stand only as unsecured creditors and their rights cannot prevail over the rights of the pawnee of the goods.”

49. An SLP (No. 12462/2008) against the above judgment 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 debt would prevail over the right of a subject. Crown debt means the debts due to the State or the king; debts which a prerogative entitles the Crown to claim priority for before all other creditors. [See Advanced Law Lexicon by P. Ramanatha Aiyear (3rd Edn.) p. 1147]. Such creditors, however, must be held to mean unsecured creditors. Principle  of Crown debt as such pertains to the common law principle. A common law which is a law within the meaning of Article 13 of the Constitution is saved in terms of Article 372 thereof. Those principles of common law, thus, which were existing at the time of coming into force of the Constitution of India are saved by reason of the aforementioned provision. A debt which is secured or which by reason of the provisions of a statute becomes the first charge over the property having regard to the plain meaning of Article 372 of the Constitution of India must be held to prevail over the Crown debt which is an unsecured one.

50. In view of the above, we are of the firm opinion that the arguments of the learned counsel for the Appellant, on the second issue, hold merit. Evidently, prior to insertion of Section 11E in the Central Excise Act, 1944 w.e.f. 08.04.2011, there was no provision in the Act of 1944 inter alia, providing for First Charge on the property of the Assessee or any person under the Act of 1944. Therefore, in the event like in the present case, where the land, building, plant machinery, etc. have been mortgaged/hypothecated to a secured creditor, having regard to the provisions contained in section 2(zc) to (zf) of SARFAESI Act,2002, read with provisions contained in Section 13 of the SARFAESI Act, 2002, the Secured Creditor will have a First Charge on the Secured Assets. Moreover, section 35 of the SARFAESI Act, 2002 inter alia, provides that the provisions of the SARFAESI Act, shall have overriding effect on all other laws. It is further pertinent to note that even the provisions contained  in Section 11E of the Central Excise Act, 1944 are subject to the provisions contained in the SARFAESI Act, 2002.

51. Thus, as has been authoritatively established by the aforementioned cases in general and Union of India vs SICOM Ltd. (supra) in particular, the provisions contained in the SARFAESI Act, 2002, even after insertion of Section 11 E in the Central Excise Act, 1944 w.e.f. 08.04.2011, will have an overriding effect on the provisions of the Act of 1944.

54. To conclude, the Commissioner of Customs and Central Excise could not have invoked the powers under Rule 173Q (2) of the Central Excise Rules, 1944 on 26.03.2007 and 29.03.2007 for confiscation of land, buildings etc., when on such date, the said Rule 173Q(2) was not in the Statute books, having been omitted by a notification dated 12.05.2000. Secondly, the dues of the secured creditor, i.e. the Appellant bank, will have priority over the dues of the Central Excise Department, as even after insertion of  Section 11E in the  Central Excise Act, 1944 w.e.f. 08.04.2011, and the provisions contained in the  SARFAESI Act, 2002 will have an overriding effect on the provisions of the  Central Excise Act of 1944”.

(Underlining Ours)

7(iv). LEGAL POSITION: PRECEDENTS OF THIS HIGH COURT ON OVERIDING EFFECT OF SARFAESI ACT:

While deciding an issue regarding the overriding effect of Section 26-E (came into force w.e.f. 1.9.2016) of the SARFAESI Act vis-a-vis the provision of Section 26 of the HP VAT Act 2005, this Court held in CWP No 1638 of 2017, titled as PNB Versus State of Himachal Pradesh and others, decided on 19.05.2021, that the provisions of Section 26 E of the Act shall override the rights of others to recover the outstanding liability of taxes dues etc on the mortgaged/charged property from the original owner etc. The relevant Paras are reproduced here-in-below :-

“24. This entire aspect has been dealt with at length by the Hon’ble High Court of Kerala while deciding an issue akin to the one involved in this petition in State Bank of India Vs. State of Kerala and others, WP (C) No. 28316 of 2016 and other connected matters, decided on 30th July, 2019, relevant portions of which judgment are quoted herein below in extensio:

“37. That so said, the next question that arises is whether Section 26E of the SARFAESI Act and Section 31B of the RDB Act 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 Revenues 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, reproduced as under:

“126. While enacting the DRT Act and the Securitization Act, Parliament was aware of the law laid down by this Court wherein priority of the State dues was recognised. If Parliament intended to create first charge in favour of banks, financial institutions or other secured creditors on the property of the borrower, then it would have incorporated a provision like Section 529 A of the Companies Act or Section 11(2) of the EPF Act and ensured that notwithstanding series of judicial pronouncements, dues of banks, financial institutions and other secured creditors should have priority over the States statutory first charge in the matter of recovery of the dues of sales tax, etc. However, the fact of the matter is that no such provision has been incorporated in either of these enactments despite conferment of extraordinary power upon the secured creditors to take possession and dispose of the secured assets without the intervention of the court or Tribunal. The reason for this omission appears to be that the new legal regime envisages transfer of secured assets to private companies.

129. If Parliament intended to give priority to the dues of banks, financial institutions and other secured creditors over the first charge created under State legislations then provisions similar to those contained in Section 14¬A of the Workmen’s Compensation Act, 1923, Section 11(2) of the EPF Act, Section 74(1) of the Estate Duty Act, 1953, Section 25(2) of the Mines and Minerals (Regulation and Development) Act, 1957, Section 30 of the Gift Tax Act, and Section 529 A of the Companies Act, 1956 would have been  incorporated in the DRT Act and the Securitization Act.

130. Undisputedly, the two enactments do not contain provision similar to the Workmen’s Compensation Act, etc. In the absence of any specific provision to that effect, it is not possible to read any conflict or inconsistency or overlapping between the provisions of the DRT Act and the Securitization Act on the one hand and Section 38 of the Bombay Act and Section 26B of the Kerala Act on the other and the non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act cannot be invoked for declaring that the first charge created under the State legislation will not operate qua or affect the proceedings initiated by banks, financial institutions and other secured creditors for recovery of their dues or enforcement of security interest, as the case may be.”

38. 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 with the same as a simple mortgagee would be entitled to. Obviously, therefore, the contention of the Revenue built on a claim of right over properties fails, without any further requirement for expatiation; corollarily, enjoining me to consider if the provisions of the KGST Act/KVAT Act would still grant to the Revenue the First Right to proceed against it for recovery of the tax arrears.

40. It is here that the specific provisions of Section 26E of the SARFAESI Act and Section 31B of the RDB Act become necessary for a detailed evaluation.

41. As has been extracted above, Section 26E of the SARFAESI Act provides that the debts due to any secured creditor shall be paid in priority over all other debts and all revenue, taxes, cesses and other rates payable to the Central Government or State Government or Local Authority. Section 31B of the RDB Act takes this one step forward and elevates the right of the secured creditors to realise their debts, by sale of the secured assets, to enjoy priority and then re-affirms that such debts will be paid in priority over the revenue, taxes, cesses and other rates
payable to the Central Government or State Government or Local Authority. It is thus irrefragable and in fact, expressly conceded to by the learned Additional Advocate General that the Banks /Financial Institutions have the First Right to have their debts extinguished; but, as has been recorded above, the Revenue merely claims that they have right to sell the property first. This argument again is flawed because the First Charge creating no right over the property, the Revenue cannot claim a First Right to proceed against it either in the face of the provisions of the SARFESI Act or RDB Act with which we are dealing in this case. In fact, on a closer look and in the ultimate analysis, the concept of First Charge and debt being paid in priority are fraternal twin provisions which virtually means the same-both giving the holder such rights, the benefit of selling the property and recovering their dues before any other.

42. A further test of the afore proposition, if so necessary, is not different because the principles of priority in payment of dues in the context of the Companies Act have been considered by the Hon’ble Supreme Court in several judgments and many of them have been cited by the learned 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.

47. The above cited judgments certainly support my views as afore and it axiomatically becomes justified for me to hold that Section 26E of the SARFAESI Act and Section 31B of the RDB Act create a First Charge by way of a priority to the Banks / Financial Institutions to recover and satisfy their debts, notwith-standing any statutory First Charge in favour of the Revenue under the KGST Act/KVAT Act. It is so declared.

25. At this stage, it is necessary to quote the provisions of Section 38 of the Kerala Value Added Tax Act, 2003 (KVAT Act), which read as under:

26. “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.”

A perusal of the provisions of Section 38 of the KVAT Act and Section 26 of the HP VAT Act demonstrates that these provisions are almost pari materia. This Court concurs with the reasoning of the Hon’ble High Court of Kerala that after coming into force of Section 31B of the RDB Act read with Section 26E of the SARFAESI Act, the first charge is created by way of priority in favour of the Banks / Financial Institutions to recover and satisfy their debts, notwithstanding any local statutory “first charge” in favour of the Revenue.

26. It is also necessary to take note of one fact that though Section 26E of the SARFAESI Act has come into force from 24.01.2020, yet the same will not have any effect on the issue of the Banks/Financial Institutions having first charge on the property of the dealer, as the provisions of Section 31B of the RDB Act shall override the provisions of Section 26 of the HP VAT Act, 2005, especially in view of the observations contained in the judgment of Hon’ble Supreme Court in Central Bank of India’s case (supra).

36. Therefore, this Court has no hesitation in holding that the petitioners being “Secured Creditors” have preference over the respondent-State with regard to the debts due from respondent No. 4. Accordingly, this writ petition is allowed by quashing Annexure P-10, dated 24.06.2017 and by holding that the respondent Department cannot claim first charge over secured assets of the petitioners belonging to the private respondent-Company, as the petitioners have first charge over the secured assets in view of the provisions of the SARFAESI Act 2002 and Recovery of Debts and Bankruptcy Act, 1993, as amended from time to time. It is further held that the provisions of Section 26 of the H.P. VAT Act, 2005 shall have to give way to the provisions of Section 26E of the SARFAESI Act 2002 and Section 31B RDB Act, 1993….”

7(v). In addition to the above, this Court has decided a similar issue in the case of State of H.P. & ors versus State Bank of India, in LPA No.156 of 2021, decided on 12.04.2023. The relevant paras of the judgment read as under:

“2. Admittedly, the issue involved in the present appeals is as to whether the State (Excise Department) will have priority over the secured creditor’s debt.

 3. Learned counsel for the respondents have submitted that the issue involved in the present appeals is no longer res integra and has been settled by the Hon’ble Supreme Court in Civil Appeal No. 2196 of 2012, titled Punjab National Bank vs. Union of India and others, decided on 24th February, 2022.

4. The relevant portion of the order dated 24th February, 2022 reads as under:-

“37. Secondly, coming to the issue of priority of secured creditor’s debt over that of the Excise Department, the High court in the impugned judgment has held that “In view of the matter, the question of first charge of second charge over the properties would not arise.”

In this context, we are of the opinion that the High Court has misinterpreted the issue to state that the question of first charge or second charge over the properties, would not arise.

43. In view of the above, we are of the firm opinion that the arguments of the learned counsel for the Appellant, on the second issue, hold merit. Evidently, prior to insertion of Section 11E in the Central Excise Act, 1944, w.e.f. 08.04.2011, there was no provision in the Act of 1944 inter alia, providing for First Charge on the property of the Assessee or any person under the Act of 1944. Therefore, in the event like in the present case, where the land building, plant machinery, etc have been mortgaged/hypothecated to a secured creditor, having regard to the provision contained in Section 2(zc) to (zf) of SARFAESI Act, 2002, read with provisions contained in Section 13 of the SARFAESI ACT, 2002, the Secured Creditor will have a First Charge on the Secured Assets. Moreover, Section 35 of the SARFAESI Act, 2002 inter alia, provides that the provisions of the SARFAESI Act, shall have overriding effect on all other laws. It is further pertinent to note that even the provisions contained in Section 11E of the Central Excise Act, 1944 are subject to the provisions contained in the SARFAESI Act, 2002.

47. To conclude, the Commissioner of Customs and Central Excise could not have invoked the powers under Rule 173 Q(2) of the Central Excise Rules, 1944 on 26.03.2007 and 29.03.2007 for confiscation of land, buildings etc., when on such date, the said Rule 173Q(2) was not in the Statute books, having been omitted by a notification dated 12.05.2000. Secondly, the dues of the secured creditor, i.e. the Appellant-bank, will have priority over the dues of the Central Excise Department, as even after insertion of Section 11E in the Central Excise Act, 1944 w.e.f. 08.04.2011, and the provisions contained in the SARFAESI Act, 2002 will have an overriding effect on the provisions of the Central Excise Act of 1944.

5. Learned Additional Advocate General has failed to controvert the factual aspect of the submissions made by learned counsel for the respondents.

6. Since the question involved in the present appeal is no longer res integra and has been settled by the Hon’ble Supreme Court in Punjab National Bank’s case supra, all the Letters Patent Appeals are dismissed….”

7(vi). This Court in CWP No 678 of 2023, titled as M/s Nugenix Pharma Pvt. Ltd. Versus Indian Bank and others, decided on 05.07.2023, has directed the respondents to remove the red entry in the revenue records and to permit the petitioner-auction purchaser therein to exercise its rights on the property acquired by way of public auction for all intents and purposes. The relevant paras are reproduced here-in-below:-

“The moot question in this petition is as to whether the different departments of State including Excise & Revenue will have priority over the secured creditor’s debt?

2. The issue in question is no longer res-integra in view of the authoritative judgment of the Hon’ble Supreme Court reported in (2022) 7 Supreme Court Cases 260, titled as, ‘Punjab National Bank Vs. Union of India & Ors.’ decided on 24.02.2022. It will be apt to reproduce the relevant paras of the judgment, which read as under:

“37. Coming to the issue of priority of secured creditor’s debt over that of the Excise Department, the High court in the impugned judgment has held that “In view of the matter, the question of first charge or second charge over the properties would not arise.” In this context, we are of the opinion that the High Court has misinterpreted the issue to state that the question of first charge or second charge
over the properties, would not arise.

38-42. ….xxx…xxx…

43. In view of the above, we are of the firm opinion that the arguments of the learned counsel for the Appellant, on the second issue, hold merit. Evidently, prior to insertion of Section 11E in the Central Excise Act, 1944, w.e.f. 08.04.2011, there was no provision in the Act of 1944 inter alia, providing for First Charge on the property of the Assessee or any person under the Act of 1944. Therefore, in the event like in the present case, where the land building, plant machinery, etc. have been mortgaged/hypothecated to a secured creditor, having regard to the provision contained in Section 2(zc) to (zf) of SARFAESI Act, 2002, read with provisions contained in Section 13 of the SARFAESI ACT, 2002, the Secured Creditor will have a First Charge on the Secured Assets. Moreover, Section 35 of the SARFAESI Act, 2002 inter alia, provides that the provisions of the SARFAESI Act, shall have overriding effect on all other laws. It is further pertinent to note that even the provisions contained in Section 11E of the Central Excise Act, 1944 are subject to the provisions contained in the SARFAESI Act, 2002.

44-46…xxx…xxx…

47. To conclude, the Commissioner of Customs and Central Excise could not have invoked the powers under Rule 173 Q(2) of the Central Excise Rules, 1944 on 26.03.2007 and 29.03.2007 for confiscation of land, buildings etc., when on such date, the said Rule 173Q(2) was not in the Statute books, having been omitted by a notification dated 12.05.2000. Secondly, the dues of the secured creditor, i.e. the Appellant bank, will have priority over the dues of the Central Excise Department, as even after insertion of Section 11E in the Central Excise Act, 1944 w.e.f. 08.04.2011, and the provisions contained in the SARFAESI Act, 2002 will have an overriding effect on the provisions of the Central Excise Act of 1944….”

3. In view of the legal position, set out here*in-above, this Court is left with no other option, but to allow this petition by directing respondents No.4 and 5 to attest mutation of sale deed dated 18.9.2021 (Annexure P-5) issued by the Indian Bank, in favour of the petitioners and further respondents No.4 and 5 are directed to enter the names of the petitioners as owner of the property in question in the revenue records having been purchased by them in an auction conducted by the Indian Bank under the provisions of SARFAESI Act and respondents No.2 to 5 are further directed to remove the red entries made in the revenue record/jamabandi of the property in question. Ordered accordingly.”

7(vii). Recently, after taking note of the judgment passed by the Hon’ble Apex Court in (2003) 3 SCC 210, titled as Kotak Mahindra Bank Ltd. Versus Girnar Corrugators Private Limited and Others, and the judgement in the case of Punjab National Bank vs. Union of India & Ors (2022) 7 SCC 260, this Court has decided a similar issue in CWP No.4751 of 2023, titled as Central Bank of India Versus State of Himachal Pradesh & Ors., decided on 16.08.2023 and the operative Para reads as under:-

“4(vi). It is worth mentioning that respondent No.2, Excise & Taxation Department cannot raise a priority claim over and above the Petitioner-Bank, when, as per Section 26E of SARFASEI Act introduced by amendment carried in 2016, the Petitioner-Bank has first charge over the properties being secured creditor in priority over all Other Debts, Revenues, Taxes, Cesses and Other Rates payable to the Central or State Government or Legal Authority and that too when, there is nothing on record to show (even by way of reply or by instructions) that the Respondent No.2 i.e. H.P. Excise and Taxation Department has resorted to assessment of liability; determination of liability and has issued notice of such determination /liability under the statute (i.e. under H.P. Vat Act or other corresponding statutes, if any). In absence of any assessment and the resultant determination of liability, the action of the Respondents in inserting red entry marks in Annexure P-4 and Annexure P-5, in revenue records and the resultant action of Respondent No. 3, in refusing to register the Sale Certificate dated 15.01.2021, Annexure P-3, and to carry out the Mutation thereof, in favour of Respondent No. 6-Auction Purchaser, amounts to not only frustrating the statutory provisions of Section 26E of SARFAESI Act, enacted in the year 2016 but also amounts to curtailing or defeating the rights accruing to the Auction Purchaser-Respondent No.6 herein, under the SARFASEI Act and the dictum of law laid down by the Hon’ble Apex Court, in case of Punjab National Bank and Kotak Mahindra Bank (supra) and the judgment of the Coordinate Bench of this Court in LPA No. 156 of 2021 (supra), and, therefore, the impugned order(s) passed by the State Authorities in disallowing registration of Sale Certificate and the consequential mutation etc. being dehors the provisions of SARFAESI Act and the mandate of law, referred to above, are illegal and unsustainable.”

8. LEGAL POSITION: RIGHTS OF BONAFIDE AUCTION PURCHASER UNDER SARFAESI

While dealing with the rights of an auction purchaser in the context of the object and regime of the SARFAESI Act and Rules issued thereunder, the Hon’ble Apex Court has held in Authorised Officer, State Bank of India vs. C. Natarajan & Anr, Civil Appeal No.2545 of 2023, decided on 10.04.2023 and Paras 23 and 27 read as under:-

“23. That apart, significantly, section 35 of the SARFAESI Act mandates that the provisions there of would have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any other instrument having effect by virtue of any such law. At the same time, section 37 of the SARFAESI Act postulates that provisions thereof or the rules made there under shall be in addition to and not in derogation of the enumerated enactments or any other law for the time being in force. What is of importance  is that the non-obstante clause in section 35  of the SARFAESI Act is not subject to section  37 thereof ; however, a plain reading of the latter  provision would suggest that rights, liabilities,  obligations, remedies, etc. created / imposed/  provided by the SARFAESI Act and the Rules  are preserved, irrespective of what is provided in the stated enactments or any other law for the time being in force. The regime under the SARFAESI Act is altogether different and sections 35 and 37 are intended to extend a cover to the secured creditor if it abides by the governing law, which cannot be subject to any other provision of a general law like the Contract Act. Since section 35 overrides other laws in  the same or related field and having regard to  the scheme of the SARFAESI Act and the  dominant purpose sought to be achieved, as  noted above, none can and should be allowed  to take the auctions conducted there under  lightly. No court ought to countenance a bidder entering and exiting the process at his sweet will without any real intent to take it to fruition. The provisions of the SARFAESI Act as well as the Rules are to be interpreted positively and purposefully in the context of a given case to give meaning to sub rule (5) of rule 9. Besides, we have no hesitation to hold that in case of any seeming conflict or inconsistency between the general law, i.e., the Contract Act and the special law, i.e. the SARFAESI Act, it is the latter that would prevail.

37. The question under consideration can also be addressed from a different perspective. In the present case, the Authorized Officer had adhered to statutory rules. If by such adherence any amount is required to be forfeited as a consequence, the same cannot be scrutinized wearing the glasses of misplaced sympathy. Law is well settled that a result flowing from a statutory provision is never an evil and that a court has no power to ignore that provision to relieve what it considers a distress resulting from its operation. The statute must, of course, be given effect to whether a court likes the result or not. This is the statement of law in the decision of this Court in Martin Burn Ltd vs The Corporation of Calcutta…”.

(Underlining ours)

8(i). The issue of sanctity of public auctions and the rights of an auction purchaser which had fructified on issuance of the sale certificate cannot be nullified, defeated, obstructed, frustrated, restricted nor curtailed, whittled down or extinguished in any manner has been approved by the Hon’ble Apex Court in the case of K. Kumara Gupta v. Sri Markendaya and Sri Omkareswara Swamy Temple & Ors, (2002) 5 SCC 710. The relevant observations are reproduced below:

“14. Once the appellant was found to be the highest bidder in a public auction in which 45 persons had participated and thereafter when the sale was confirmed in his favour and even the sale deed was executed, unless and until it was found that there was any material irregularity and/or illegality in holding the public auction and/or auction-sale was vitiated by any fraud or collusion, it is not open to set aside the auction or sale in favour of a highest bidder on the basis of some representations made by third parties, who did not even participate in the auction proceedings and did not make any offer.

16. It is also required to be noted that the sale was confirmed in favour of the appellant by the Commissioner, Endowments Department after obtaining the report of the Assistant Commissioner. Therefore, we are of the opinion that in the aforesaid facts and circumstances of the case, the High Court ought not to have ordered re-auction of the land in question after a period of 23 years of confirmation of the sale and execution of the sale deed in favour of the auction-purchaser by observing that the value of the property might have been much more, otherwise, the object and purpose of holding the public auction and the sanctity of the public auction will be frustrated. Unless there is concrete material and it is established that there was  any fraud and/or collusion or the land in question was sold at a throwaway price, the sale pursuant to the public auction cannot be set aside at the instance of strangers to the auction proceeding.

17. The sale pursuant to the public auction can be set aside in an eventuality where it is found on the basis of material on record that the property had been sold away at a throwaway price and/or on a wholly inadequate consideration because of the fraud and/or collusion and/or after any material irregularity and/or illegality is found in conducting/holding the public auction. After the public auction is held and the highest bid is received and the property is sold in a public auction in favour of a highest bidder, such a sale cannot be set aside on the basis of some offer made by  third parties subsequently and that too when they did not participate in the auction proceedings and made any offer and/ or the offer is made only for the sake of making it and without any serious intent. In the present case, as observed hereinabove, though Shri Jagat Kumar immediately after finalizing the auction stated that he is ready and willing to pay a higher price, however, subsequently, he hacked out. If the auction- sale pursuant to the public auction is set aside on the basis of such frivolous and irresponsible representations made by such persons then the sanctity of a public auction would be frustrated and the rights of a genuine bidder would be adversely affected.”

(Emphasis supplied)

8(ii). The Hon’ble Apex Court in Shakena & Anr versus Bank of India & Ors, (2019) 11 SCALE 59, has been held that after incorporation of amended Section 13(8) of the SARFAESI Act, 2002 w.e.f. 1.9.2016 that the rights of an auction purchaser crystallize on issuance of sale certificate and registration of such certificate is not essential and the borrower can only redeem its mortgaged property before the date of the publication of sale notice by depositing amount and such right was not available thereafter when the rights title and interest of the auction purchaser-subsequent purchaser have matured. Paras 5, 6, 24 and 29 are reads as under:-

“5. The highest bidder (respondent No 3) in the meantime had complied with all the terms and conditions of sale as a result of which the sale was confirmed in his favour. In that, he paid the entire sale consideration of Rs. 42,51,000/ (Rupees Forty Two Lacs Fifty One Thousand Only) by 4th January, 2006. On payment of sale consideration, the respondent bank credited a sum of Rs 12,40,000/ (Rupees Twelve Lacs Forty Thousand Only) in the loan account of appellant No.2 herein and a sum of Rs 12,52, 350/- (Rupees Twelve Lacs Fifty Two Thousand Three Hundred Fifty Only) in the loan account of appellant No.1 herein and closed both the loan accounts.

6. On 6th January, 2006, the respondent bank issued a sale certificate in favour of respondent No.3. According to the respondent bank upon issue of sale certificate, the sale had become final.

24. After cogitating over the factual matrix and perusing the relevant records, it is seen that the ground of challenge considered by the High Court at the behest of the appellants in the impugned judgment, in our opinion, has become unavailable. In that, the matter proceeded before the High Court for setting aside the entire auction process on the premise that the sale certificate was yet to be registered in favour of the highest bidder (respondent No.3); and the appellants had made (unsuccessful) attempts to exercise their right of redemption by offering the outstanding dues to the respondent bank. It was argued by the appellants that only upon registration of the sale certificate, the right of the borrower to redeem the mortgage would get extinguished and obliterated.

29. A fortiorari, it must follow that the appellants have failed to exercise their right of redemption in the manner known to law, much less until the registration of the sale certificate on 18th September, 2007. In that view of the matter no relief can be granted to the appellants, assuming that the appellants are right in contending that as per the applicable provision at the relevant time (unamended Section 13(8) of the 2002 Act), they could have exercised their right of redemption until the registration of the sale certificate which, indisputably, has already happened on 18th September, 2007. Therefore, it is not possible to countenance the plea of the appellants to reopen the entire auction process. This is more so because, the narrative of the appellants that they had made a valid tender towards the subject loan accounts before registration of the sale certificate, has been found to be tenuous. Thus understood, their right of redemption in any case stood obliterated on 18th September, 2007. Further, the amended Section 13 (8) of the 2002 Act which has come into force w.e.f. 1st September, 2016, will now stare at the face of the appellants. As per the amended provision, stringent condition has been stipulated that the tender of dues to the secured creditor together with all costs, charges and expenses incurred by him shall be at any time before the “date of publication of notice” for public auction or inviting quotations or tender from public or private deed for  transfer by way of lease assessment or sale of the secured assets. That event happened  before the institution of the subject writ petitions by the appellants.”

8(iii). The deprivation or curtailment of rights and benefits which have accrued to an auction purchaser has been deprecated by the Hon’ble Apex Court in Sadashiv Prasad Singh vs. Harender Singh & Ors, (2014) 1 SCALE 230, and the relevant paras read as under:-

 12. Learned counsel for the auction purchaser Sadashiv Prasad Singh, in the first instance vehemently contended, that in terms of the law declared by this Court, property purchased by a third party auction purchaser, in compliance of a court order, cannot be interfered with on the basis of the success or failure of parties to a proceeding, if auction purchaser had bonafidely purchased the property. In order to substantiate his aforesaid contention, learned counsel representing Sadashiv Prasad Singh placed emphatic reliance, firstly, on a judgment rendered by this Court in Ashwin S. Mehta & Anr. vs. Custodian & Ors, (2006) 2 SCC 385. Our attention was drawn to the following observations recorded therein:

“In that view of the matter, evidently, creation of any third-party interest is no longer in dispute nor the same is subject to any order of this Court. In any event, ordinarily, a bona fide purchaser for value in an auction-sale is treated differently than a decree-holder purchasing such properties. In the former event,  even if such a decree is set aside, the interest of the bonafide purchaser in an  auction-sale is saved. (See Nawab Zain-ul-Abdin Khan v. Mohd. Asghar Ali  Khan (1887) 15 IA 12) The said decision has been affirmed by this Court in Gurjoginder Singh v. Jaswant Kaur (1994) 2 SCC 368 ).”

On the same subject, and to the same end,  learned  counsel placed reliance on another  judgment rendered by this Court in Janatha Textiles & Ors vs Tax Recovery Officer & Anr., (2008) 12 SCC 582, wherein the conclusions drawn in Ashwin S. Mehta’s case (supra) came to be reiterated. In the above judgment, this Court relied upon the decisions of the Privy Council and of this Court in Nawab Zain-Ul-Abdin Khan v. Mohd. Asghar Ali Khan, (1887-88) 15 IA 12; Janak Raj vs. Gurdial Singh, AIR 1967 SC 608; Gurjoginder Singh vs. Jaswant Kaur, (1994) 2 SCC; Padanathil Ruqmini Amma vs. P.K. Abdulla, (1996) 7 SCC 668, as also, on Ashwin S. Mehta (supra) in order to conclude, that it is an established principle of law, that a third party auction purchaser’s interest, in the auctioned property continues to be protected, notwithstanding that underlying decree is subsequently set aside or otherwise. It is, therefore, that this Court in its ultimate analysis observed as under:

“20. Law makes a clear distinction between a stranger who is a bonafide purchaser of the property at an auction-sale and a decree-holder purchaser at a court auction. The strangers to the decree are afforded protection by the court because they are not connected with the decree. Unless the protection is extended to them the court sales would not fetch market value or fair price of the property.”

(Emphasis is Ours)

15. At the time of hearing, we were thinking of remanding the matter to the Recovery Officer to investigate into the objection of Harender Singh under Rule 11 of the Second Schedule to the Income Tax Act, 1961. But considering the delay such a remand may cause, we have ourselves examined the objections of Harender Singh and reject the objections for a variety of reasons. Firstly, the contention raised at the hands of the respondents before the High Court, that the facts narrated by Harender Singh (the appellant in Special Leave Petition (C) No.26550 of 2010) were a total sham, as he was actually the brother of one of the judgment-debtors, namely, Jagmohan Singh. And that Harender Singh had created an unbelievable story with the connivance and help of his brother, so as to save the property in question. The claim of Harender Singh in his objection petition, was based on an unregistered agreement to sell dated 10.1.1991. Not only that such an agreement to sell would not vest any legal right in his favour; it is apparent that it may not have been difficult for him to have had the aforesaid agreement to sell notarized in connivance with his brother, for the purpose sought to be achieved. Secondly, it is apparent from the factual position depicted in the foregoing paragraphs that Harender Singh, despite his having filed objections before the Recovery Officer, had abandoned the contest raised by him by not appearing (and by not being represented) before the Recovery Officer after 26.10.2005, whereas, the Recovery Officer had passed the order of sale of the property by way of public auction more than two years  thereafter, only on 5.5.2008. Having abandoned his claim before the Recovery Officer, it was not open to him to have reagitated the same by filing a writ petition before the High Court ”

The High Court ought not to have interfered with in the matter agitated by Harender Singh in exercise of its writ jurisdiction. In fact, the learned Single Judge rightfully dismissed the writ petition filed by Harender Singh. Fourthly, Harender Singh could not be allowed to raise a challenge to the public auction held on 28.8.2008 because he had not raised any objection to the attachment of the property in question or the proclamations and notices issued in newspapers in connection with the auction thereof. All these facts cumulatively lead to the conclusion that after 26.10.2005, Harender Singh had lost all interest in the property in question and had therefore, remained a silent spectator to various orders which came to be passed from time to time. He had, therefore, no equitable right in his favour to assail the auction-purchase made by Sadashiv Prasad Sinha on 28.8.2008. Finally, the public auction under reference was held on 28.8.2008. Thereafter the same was confirmed on 22.09.2008 Possession of the property was handed over to the auction-purchaser Sadashiv Prasad Sinha on 11.3.2009. The auction-purchaser initiated mutation proceedings in respect of the property in question. Harender Singh did not raise any objections in the said mutation proceedings. The said mutation proceedings were also finalized in favour of Sadashiv Prasad Sinha. Harender Singh approached the High Court through CWJC No.16485 of 209 only on 27.11.2009. We are  of the view that the challenged raised by Harender Singh ought to have been rejected on the grounds of delay and latches, especially because  third party rights had emerged in the meantime. Moreso, because the auction purchaser was a bonafide purchaser  for consideration, having purchased the property in furtherance of a duly publicized public auction, interference by the High Court even on ground of equity was clearly uncalled for.

For the reasons recorded hereinabove, we are of the view that the impugned order dated 17.5.2010 passed by the High Court allowing Letters Patent Appeal No. 844 of 2010 deserved to be set aside. The same is accordingly set aside. The right of the appellant Sadashiv Prasad Sinha in Plot No.2722, Exhibition Road, P.S. Gandhi Maidan, patna, measuring 1289 sq.ft. is hereby confirmed. In the above view of the matter, while appeal preferred by Sadashiv Prasad Sinha stands allowed, the one filed by Harender Singh is hereby dismissed.”

(Underlining ours)

8(iv). LEGAL POSTION: EXTINGUISHING RIGHTS OF AUCTION PURCHASER ONLY IN EVENT OF COLLUSION OR FRAUD

While dealing with the rights of an auction Purchaser, who had purchased the assets of company in liquidation, it has been held that after issuance of the letter of confirmation of sale, the rights which accrue in favour of the auction-purchaser cannot be defeated, curtailed or extinguished except in case of fraud or collusion, as held by the Hon’ble Apex Court in Valji Khimji & Co versus Official Liquidator of Hindustan Nitro Produce (Gujraj) Limited & Ors, (2008) 9 SCC 299 and the operative Paras read as under:-

“11. It may be noted that the auction sale was done after adequate publicity in well-known newspapers. Hence, if any one wanted to make a bid in the auction he should have participated in the said auction and made his bid. Moreover even after the auction the sale was confirmed by the High Court only on 30.7.2003, and any objection to the sale could have been filed prior to that date. However, in our opinion, entertaining objections after the sale is confirmed should not ordinarily be allowed, except on very limited grounds like fraud, otherwise no auction sale will ever be complete.

12. It is not in dispute that the auction was an open auction after wide publicity in well-known newspapers. Hence, there was nothing to prevent M/s. Manibhadra Sales Corporation and M/s. Castwell Alloys Limited to have participated in the auction, but they did not do so. There is no allegation of fraud either in this case. Hence, in our opinion, there was no justification to set aside the confirmation of the sale.

30.  In the first case mentioned above i.e. where the auction is not subject to confirmation by any authority, the auction is complete on the fall of the hammer, and certain rights accrue in favour of the auction-purchaser. However, where the auction is subject to subsequent confirmation by some authority (under  a statute or terms of the auction) the auction is not complete and no rights accrue until the sale is confirmed by the said authority. Once, however,  the sale is confirmed by that authority, certain  rights accrue in favour of the auction-purchaser,  and these rights cannot be extinguished except in exceptional cases such as fraud.

31.  In the present case, the auction having been confirmed on 30.7.2003 by the Court it cannot be set aside unless some fraud or collusion has been proved. We are satisfied that no fraud or collusion has been established by anyone in this case.”

(Underlining ours)

9. Given in the background of the mandate of Law declared by the Hon’ble Apex Court and the law laid down by this Court as referred to above, we are of the considered view that the right, title or interest acquired by the petitioner-an auction purchaser on issuance of sale certificate, in the context of the scheduled immoveable property i.e. the industrial plots purchased by him in the E-auction under SARFAESI Act cannot be nullified, defeated, obstructed, frustrated, restricted, curtailed, tinkered with or extinguished in any manner either by the Bank or State Authorities and the petitioner has every right to get benefit of such property for all intends and purposes, by getting the said immoveable property entered in revenue records as lessee in the instant case {or as an owner in other cases, as the case may be}. Accordingly, the action of Respondents-State Authorities in imposing the condition no 7, in the impugned orders dated 11.10.2022 and 13.12.2022, Annexures P-7 and P-9, which extinguishes or curtails or restricts the accrued and vested rights, interests and benefits acquired by the petitioner auction purchaser amounts to defeating the object and sanctity of auction under the SARFAESI Act and the Rules and therefore, the impugned orders-action, in fastening the business liability of the Original Lessee (or the erstwhile owner as the case may be generally), does not stand the test of judicial scrutiny and these impugned are accordingly set-aside.

10. ANALYSIS OF QUESTION NO 1:

10(i). The first question as to whether the petitioner-auction purchaser of the secured assets-industrial plots under SARFAESI Act could be fastened with the liability of State taxes which had accrued and were connected with and were solely attributed to the business of the original lessee. In order to deal with this aspect, the pleadings of the parties reveal that the State Government through its General Manager (Industries), District Sirmaur (HP) executed two lease deeds with a Company, namely M/s Jaimurthy Minerals & Chemicals Pvt. Ltd. (hereinafter referred to as the original lessee on 17.10.2003 and 23.08.2004 for leasing out seven Industrial Plots, in Unit-II, measuring 14845 square meters, in Phase-III, Industrial Area, Gondpur, Poanta Sahib, District Sirmaur (HP). The original lessee created charge-mortgage by depositing both the lease deeds with the Bank of Baroda on 13.04.2007, against which original lessee raised loans but due to default in payment by the Original Lessee, these industrial plots were put to E-auction by the secured creditor-Bank of Baroda under SARFAESI Act. Consequently the Bank issued a sale notice on 10.12.2021, Annexure P-3, indicating terms of eligibility for bidders, the reserve price and other conditions. Thereafter, the E-auction was held on 30.12.2021 Annexure P-4, in which the petitioner was declared as the successful bidder. On depositing the total bid amount, the sale certificate was issued in favour of petitioner-auction purchaser on 1.1.2022 Annexure P-5.

10(ii). In order to deal with the Question No 1, a reference to Section 13 of the SARFAESI Act and the Security Interest (Enforcement Rules), 2002 (here-in-after referred to as the Enforcement Rules) gain significance. A bare perusal of the Enforcement Rules manifest that the legislature has carved out a clear distinction whereby the secured creditor-Bank could create its security interest i.e. right, title or interest of any kind upon property, be it on a moveable or immovable property by way of mortgage, charge, hypothecation, assignment or on any tangible asset or non tangible asset.

Notably, in case security interest was created upon an moveable asset then, the Enforcement Rules provide for the method and the procedure for its enforcement as per Rule 6 & 7 of Enforcement Rules 2002 whereas in case the security interest was created upon an immoveable asset then, the method and the procedure for its enforcement has been prescribed in Rule 8 & 9 of the Enforcement Rules. The provisions of Section 2(z)(c), Section 2(z)(f) of SARFAESI Act and Rules 6, 7, 8 and 9 of the Security Interest Enforcement Rules, read as under:-

Section 2(z)(c) of the Act:

“secured asset” means the property on which security interest created ;

Section 2(z)(c) of the Act:

“security interest” means right, title or interest of any kind, other than those specified in section 31 upon property created in favour of any secured creditor and includes.

6. Sale of movable secured assets:

(1) The authorized officer may sell the moveable secured assets taken possession under sub-rule (1) of rule 4 in one or more lots by adopting any of the following methods to secure maximum sale price for the assets, to be so sold :

(a) obtaining quotations from parties dealing in the secured assets or otherwise interested in buying such assets; or

(b) inviting tenders from the public; or

(c) holding public auction including through e-auction mode; or

(d) by private treaty.

(2) to (4) ….xxxx….

8. Sale of immovable secured assets:

(1) Where the secured asset is an immovable property, the authorized officer shall take or cause to be taken possession, by delivering a possession notice prepared as nearly as possible in Appendix IV to these rules, to the borrower and by affixing the possession notice on the outer door or at such conspicuous place of the property.

(2) The possession notice as referred to in sub-rule (1) shall also be published, as soon as possible but in any case not later than seven days from the date of taking possession, in two leading newspaper one in vernacular language having sufficient circulation in that locality, by the authorized officer.

(2A) All notices under these rules may also be served upon the borrower through electronic mode of service, in addition to the modes prescribed under sub-rule (1) and sub-rule (2) of rule 8.

(3) In the event of possession of immovable property is actually taken by the authorised officer, such property shall be kept in his own custody or in the custody of any person authorised or appointed by him, who shall take as much care of the property in his custody as a owner of ordinary prudence would, under the similar circumstances, take of such property.

(4) The authorized officer shall take steps for preservation and protection of secured assets and insure them, if necessary, till they are sold or otherwise disposed off.

(5) Before effecting sale of the immovable property referred to in sub-rule (1) of rule 9, the authorized officer shall obtain valuation of the property from an approved valuer and in consultation with the secured creditor, fix the reserve price of the property and may sell the whole or any part of such immovable secured asset by any of the following methods:-

(a) by obtaining quotations from the persons dealing with similar secured assets or otherwise interested in buying the such assets; or

(b) by inviting tenders from the public;

© by holding public auction including through e-auction mode ; or

(d) by private treaty.

Provided that if the sale of such secured asset is being effected by either inviting tenders from the public or by holding public auction, the secured creditor shall cause a public notice in the Form given in Appendix IV-A to be published in two leading newspapers including one in vernacular language having wide circulation in the locality.

(6)  xxx… xxx….xxx

(7) Every notice of sale shall be affixed on the conspicuous part of the immovable property and the authorized officer shall upload the detailed terms and conditions of the sale, on the web-site of the secured creditor, which shall include ;

(a) the description of the immovable property to be sold, including the details of the encumbrances known to the secured creditor;

(b) the secured debt for recovery of which 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 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;

(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.

(8) Sale by any methods other than public auction or public tender, shall be on such terms as may be settled between the secured creditors and the proposed purchaser in writing.

9. Time of sale, Issue of sale certificate and delivery of possession, etc.-

(1) No sale of immovable property under these rules, in first instance shall take place before the expiry of thirty 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:

Provided further that if sale of immovable property by any one of the methods specified by sub rule (5) of rule 8 fails and sale is required to be conducted again, the authorized officer shall serve, affix and publish notice of sale of not less than fifteen days to the borrower, for any subsequent sale.

(2) 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:

Provided that no sale under this rule shall be confirmed, if the amount offered by sale price is less than the reserve price, specified under sub-rule (5) of rule 8:

Provided further that if the authorized officer fails to obtain a price higher than the reserve price, he may, with the consent of the borrower and the secured creditor effect the sale at such price.

(3) On every sale of immovable property, the purchaser shall immediately, i.e. on the same day or not later than next working day, as the case may be, pay a deposit of twenty five per cent of the amount of the sale price, which is inclusive of earnest money deposited, if any, to the authorized officer conducting the sale and in default of such deposit, the property shall be sold again;

(4)  The balance amount of purchase price payable shall be paid by the purchaser to the authorized officer on or before the fifteenth day of confirmation of sale of the immovable property or such extended period as may be agreed upon in writing between the purchaser and the secured creditor, in any case not exceeding three months.

(5) In default of payment within the period mentioned in sub-rule (4), the deposit shall be forfeited to the secured creditor and the property shall be resold and the defaulting purchaser shall forfeit all claim to the property or to any part of the sum for which it may be subsequently sold.

(6) On confirmation of sale by the secured creditor and if the terms of payment have been complied with, the authorized officer exercising the power of sale shall issue a certificate of sale of the immovable property in favour of the purchaser in the Form given in Appendix V to these rules.

(7) Where the immovable property sold is subject to any encumbrances, the authorized officer may, if he thinks fit, allow the purchaser to deposit with him the money required to discharge the encumbrances and any interest due thereon together with such additional amount that may be sufficient to meet the contingencies or further cost, expenses and interest as may be determined by him.

Provided that if after meeting the cost of removing encumbrances and contingencies there is any surplus available out of money deposited by the purchaser such surplus shall be paid to the purchaser within fifteen day, from date of finalization of the sale.

(8) On such deposit of money for discharge of the encumbrances, the authorized officer shall issue or cause the purchaser to issue notices to the persons interested in or entitled to the money deposited with him and take steps to make, the payment accordingly.

(9) The authorized officer shall deliver the property to the purchaser free from encumbrances known to the secured creditor on deposit of money as specified in sub-rule (7) above.

(10) The certificate of sale issued under sub- rule (6) shall specifically mention that whether the purchaser has purchased the immovable secured asset free from any encumbrances known to the secured creditor or not.”

10 to 13 A …not relevant…

10(iii). Case file reveals that the secured creditor- Bank had created a charge only upon the Industrial Plots-Immoveable Properties, which were the subject matter of lease deeds dated 17.10.2003 and 29.4.2004 and such a charge-right, title or interest created on these immoveable properties, was enforceable but by resorting to the sale of immoveable property, after complying with the mandate of Rule 8 and 9 of the Security Interest (Enforcement) Rules 2002 as amended from time to time.

However, as per Annexure R-5 and Annexure R-6, dated 30.5.2019, the Member Secretary, Single Window Clearance Agency, District Sirmaur has sent a communication to the Bank of Baroda pointing out an outstanding tax liability of Rs 17,19,96,478/- of the Original Lessee towards the Himachal Pradesh State Taxes and Excise Department. Once this tax liability of the Original Lessee or its Directors had accrued and was connected with and was solely attributable to the business of Original lessee then, such business liability of others i.e. Original lessee cannot be fastened on the petitioner-auction purchaser, by inserting the Condition No 7 in the letters dated 11.10.2022 and 13.12.2022, vide Annexure P-7 & P-9 which is untenable, when ; firstly the Original Lessee had created a charge or right or interest etc. upon the Industrial Plots/Immovable Property in favour of the Bank and in the event of default of loan by the Original lessee, the Bank had put this secured asset to sale by way of sale notice dated 10.12.2021, Annexure P-3 issued under Rule 8(1), Rule 8(5) & Rule 8(7) of the Enforcement Rules ; secondly, while issuing the sale notice dated 10.12.2011, Annexure P-3, the bank had nowhere stipulated that the business liability of the Original Lessee accruing from business was put to sale under Rule 6 of the Enforcement Rules; thirdly, the Bank had neither created charge, right, title or interest on moveable property, including business of the original lessee nor was such business liability disclosed or made known to the bidders in the sale notice; fourthly, the petitioner had never purchased the business liability of the original lessee; fifthly, there was no express covenant in the lease deeds that the subsequent purchaser-petitioner will be liable for the outstanding liability of business intangible assets etc which had accrued and were connected with and were solely attributable to the business of original lessee; sixthly, the petitioner had nowhere participated in the E-auction for the sale of moveable assets of Original Lessee and lastly, when, the petitioner had only participated in the E-auction for the sale of scheduled assets-immoveable property as detailed in the sale notice issued by the Bank.

Thus, once the petitioner has only purchased the Industrial Plots-Immovable Properties, which had been leased out to the Original Lessee by department of industries and the petitioner has never purchased the past or ongoing business of the original lessee therefore, the petitioner-auction purchaser cannot be fastened with the liability of State taxes, which had accrued and were connected with and were solely attributable to the business of the original lessee only.

10(iv). LEGAL POSITION : WHETHER  BUSINESS LIABILITY (PAST OR ONGOING) OF ORIGINAL LESSEE (ERSTWHILE OWNER OF BUSINESS)  COULD BE FASTENED ON AN AUCTION PURCHASER

While dealing with the issue as to whether the business liability (past or ongoing) of the Original Lessee as in the instant case (or an erstwhile owner of business, as the case may be) could be fastened on an auction purchaser has been answered by the Hon’ble Apex Court in the case of Rana Girders Limited vs.  Union of India and others, (2013) 10 SCC 746, in the Paragraphs, which are reproduced hereinbelow:-

“20. Coming to the liability of the successor in interest, the Court clarified the legal position enunciated in M/s. Macson by observing that such a liability can be fastened on that person who had purchased the entire unit as an ongoing concern and not a person who had purchased land and building or the machinery of the erstwhile concern. This distinction is brought out and explained in paragraph 19 and it would be useful for us to reproduce herein below:

9. Reliance has also been placed by Ms. Rao on Macson Marbles Pvt. Ltd. wherein the dues under Central Excise Act was held to be recoverable from an auction purchaser, stating

10. We are not impressed with the argument that the State Act is a special enactment and the same would prevail over the Central Excise Act. Each of them is a special enactment and unless in the operation of the same any conflict arises this aspect need not be examined. In this case, no such conflict arises between the corporation and the Excise Department. Hence it is unnecessary to examine this aspect of the matter.

11.  The Department having initiated the proceedings under Section 11A of this Act adjudicated liability of respondent No.4 and held that respondent No.4 is also liable to pay penalty in a sum of Rs.3 lakhs while the Excise dues liable would be in the order of a lakh or so. It is difficult to conceive that the appellant had any opportunity to participate in the adjudication proceedings and contend against the levy of the penalty. Therefore, in the facts and circumstances of this case, we think it appropriate to direct that the said amount, if already paid, shall be refunded within a period of three months. In other respects, the order made by the High Court shall remain undisputed. The appeal is disposed of accordingly.’

The decision, therefore, was rendered in the facts of that case. The issue with which we are directly concerned did not arise for consideration therein. The Court also did not notice the binding precedent of Dena Bank as also other decisions referred to hereinbefore.”

21. A harmonious reading of the judgments in Macson and SICOM would tend us to conclude that it is only in those cases where the buyer had purchased the entire unit i.e. the entire business itself, that he would be responsible to discharge the liability of Central Excise as well. Otherwise, the subsequent purchaser cannot be fastened with the liability relating to the dues of the Government unless there is a specific provision in the Statute, claiming “first charge for the purchaser”. As far as Central Excise Act is concerned, there was no such specific provision as noticed in SICOM as well. Proviso to Section 11 is now added by way of amendment in the Act only w.e.f. 10.9.2004. Therefore, we are eschewing our discussion regarding this proviso as that is not applicable in so far a s present case is concerned. Accordingly, we thus, hold that in so far as legal position is concerned, UPFC being a secured creditor had priority over the excise dues. We further hold that since the appellant had not purchased the entire unit as a business, as per the statutory framework he was not liable for discharging the dues of the Excise Department ….xxx….

23. We may notice that in the first instance it was mentioned not only in the public notice but there is a specific clause inserted in the Sale Deed/Agreement as well, to the effect that the properties in question are being sold free from all encumbrances. At the same time, there is also a stipulation that “all these statutory liabilities arising out of the land shall be borne by purchaser in the sale deed” and “all these statutory liabilities arising out of the said properties shall be borne by the vendee and vendor shall not be held responsible in the Agreement of Sale.” As per the High Court, these statutory liabilities would include excise dues. We find that the High Court has missed the true intent and purport of this clause. The expressions in the Sale Deed as well as in the Agreement for purchase of plant and machinery talks of statutory liabilities “arising out of the land” or statutory liabilities “arising out of the said properties” (i.e. the machinery). Thus, it is only that statutory liability which arises out of the land and building or out of plant and machinery which is to be discharged by the purchaser. Excise dues are not the statutory liabilities which arise out of the land and building or the plant and machinery. Statutory liabilities arising out of the land and building could be in the form of the property tax or other types of cess relating to property etc. Likewise, statutory liability arising out of the plant and machinery could be the sales tax etc. payable on the said machinery. As far as dues of the Central Excise are concerned, they were not related to the said plant and machinery or the land and building and thus did not arise out of those properties. Dues of the Excise Department became payable on the manufacturing of excisable items by the erstwhile owner, therefore, these statutory dues are in respect of those items produced and not the plant and machinery which was used for the purposes of manufacture. This fine distinction is not taken note at all by the High Court.

10(v). While discussing the ambit of recovery of dues of the original lessee from the transferee dealer under the Karnataka Sales Tax Act, which is akin to Section 39 of the Himachal Pradesh Value Added Act, 2005, it has been held by Hon’ble Apex Court that the subsequent purchaser can be held liable if “the ownership of business is transferred to such auction purchaser and not otherwise, in view of the mandate laid down by the Honble Apex Court in the case of, State of Karnataka vs. Shreyas Papers (P) Ltd. & Ors, (2006) 1 SCC 615 and operative part reads as under:-

“15. A careful reading of Section 15(1) of the KST Act shows that the consequences contemplated therein, namely, foisting of the liabilities of the defaulting transferor on to the transferee,  would  come into effect only if the “ownership of the business” is transferred. Although, Mr. Hegde strenuously urged that “business” could not be separated from the assets of the business, we are unable to accept this contention. Business is an activity, directed with a certain purpose, more often towards producing income or profit. Ownership of assets is merely an incident rather than a characteristic of business. Hence, the mere transfer of one or more species of assets does not necessarily bring about the transfer of the “ownership of the business” for “ownership of a business” is much wider than mere ownership of discrete or individual assets. In fact, “ownership of business” is wider than the sum of the ownership of a business’ constituent assets. Above all, transfer of “ownership of business” requires that the business be sold as a going concern. In our view, therefore, Section 15(1) is intended to operate only when there is complete transfer of “ownership of business” so as to render the transferee as a successor-in-interest of the transferor. Only in such an eventuality does Section 15 (1) make the transferee liable for the transferor’s sales tax liabilities.

20. As the section itself unambiguously indicates a charge may not be enforced against a transferee if she has had no notice of the same, unless by law, the requirement of such notice has been waived. This position has long been accepted by this Court in Dattatreya Shanker Mote v. Anand Chitaman  Datar, and in Ahmedabad Municipal Corporation  of the City of Ahmedabad v. Haji Abdul Gafur  Haji Hussen bhai (hereinafter “Ahmedabad Municipal Corporation”). In this connection, we may refer to the latter judgment, which is particularly relevant for the present case.”

(Underlining ours)

10(vi). LEGAL POSITION : ENFORCEMENT OF CHARGE, DUES, TAXES ETC IF PRECONDITIONS IN SECTION 26-B (4) WEF 24.1.2020 COMPLIED

We may note that the legislature inserted Chapter IV-A by the Amendment Act of 2016, whereby the provisions of Section 26-B was introduced and was given effect w.e.f. 24.01.2020. The provisions of Section 26-B of the SARFAESI Act is reproduced herein below:-

“26-B. Registration by secured creditors and other creditors :

(1) The Central Government may by notification, extend the provisions of Chapter IV relating to Central Registry to all creditors other than secured creditors as defined in clause (zd) of sub -section (1) of Section 2, for creation, modification satisfaction of any security interest over any property of the borrower for the purpose of securing due repayment of any financial assistance granted by such creditor to the borrower.

(2) From the date of notification under sub-section (1), any creditor including the secured creditor may file particulars of transactions of creation, modification or satisfaction of any security interest with the Central Registry in such form and manner as may be prescribed.

(3) A creditor other than the secured creditor filing particulars of transactions of creation, modification and satisfaction of security interest over properties created in its favour shall not be entitled to exercise any right of enforcement of securities under this Act.

(4)  Every authority or officer of the Central Government or any State Government or local authority, entrusted with the function of recovery of tax or other Government dues and for issuing any order for attachment of any property of any person liable to pay the tax or Government dues, shall file with the Central Registry such attachment order with particulars of the assessee and details of tax or other Government dues from such date as may be notified by the Central Government, in such form and manner as may be prescribed.

(5) If any person, having any claim against any borrower, obtains orders for attachment of property from any court or other authority empowered to issue attachment order, such person may file particulars of such attachment orders with Central Registry in such form and manner on payment of such fee as may be prescribed.

10(vii). A perusal of Section 26-B (2) provides that from the date of issuance of the notification dated 24.01.2020 the transactions pertaining to the creation, modification and satisfaction of any security interest over properties was to be registered with the Central Registry i.e. CERSAI. It is mandatory that under Section 26-B(4) that every authority or officer of the Central Government or any other State Government or local authority entrusted with the function of recovery of taxes or other Government dues against any person shall have to file an attachment order with the Central Registry. There is nothing on record to indicate that the respondents-state tax authorities had registered their claim for recovery of taxes due from the original lessee after the date of enforcement of Section 26-B (4) of the Act w.e.f. 24.01.2020 till the date of issuance of sale notice on 10.12.2021 or even thereafter till the issuance of sale certificate on 1.1.2022 and even till the filing of the instant petition with the Central Registry-CERSAI nor sought, obtained the attachment order from the court or competent authority and the same has not been registered with CERSAI by the Respondents-State Tax Authorities and in such an eventuality, the State Government has neither any right nor any locus to fasten the recovery of any of the outstanding dues, taxes or liability which had accrued or was solely attributed to the business of the original lessee from the petitioner-auction purchaser and too after seven months after the date of issuance of sale certificate on 1.1.2022 Annexure P-5 supra. In these circumstances, once the State authorities were negligent and had slept over their claims, interests or rights in neither registering its recoverable claim with CERSAI nor have they obtained and registered the attachment orders with CERSAI in accordance with the mandate of Section 26B of the SARFAESI Act read with Enforcement Rules 2002 then, Respondents -State Authority cannot fasten the business liability of the original lessee on the petitioner. Moreover, the respondents cannot be permitted to penalize and prejudice the petitioner for inaction of the respondents in not resorting to the remedy available under Section 26B of SARFAESI w.e.f. 24.1.2020 and therefore, the condition so inserted to the disadvantage of petitioner is arbitrary and illegal.

10(viii). LEGAL POSITION: SECTION 26-E OF SARFAESI ACT AND SACTION 26 OF HP VAT ACT

Even as per Section 26E of the SARFAESI Act, which came into force w.e.f. 01.09.2016, the debts due to the Bank shall have priority over other debts, dues, taxes payable to the government. At the sake of repetition, the provision of Section 26E of the SARFAESI Act reads as under:-

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.

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.”

In contrast to Section 26E of the SARFAESI Act, the provisions of Section 26 of the H.P. Value Added Tax Act, 2005 read as under:

“26. Notwithstanding anything to the contrary contained in any law, any amount of tax and penalty including interest, if any, payable by a dealer or any other person under this Act shall be a first charge on the property of the dealer or such other person.”

10(ix). Reference to Section 26E of SARFAESI Act and Section 26 of HPVAT Act, reveals that the words ‘priority’ in Section 26E of the SARFAESI Act and “first charge” in Section 26 of the VAT Act are of utmost significance. As per the Black’s Dictionary, the word ‘priority’ in Section 26E of SARFAESI Act means ‘precedence’ or ‘going before’ meaning thereby, that the word ‘priority’ would mean right to enforce the claim in preference to others. That being so, the word ‘first charge’ in Section 26 of the HPVAT Act cannot take precedence over the word ‘priority’ in Section 26E of SARFAESI Act. Reading these provisions in the context of present case reveals that once the State Authorities have neither created a charge and have not made such charge known to the petitioner -auction purchaser nor have the respondents obtained the attachment orders under Section 26(B)(4) of the Act then, the outstanding tax liability of original lessee cannot be fastened on the petitioner.

10(x). In view of the above discussion, the Question No 1, is answered to the effect, that the petitioner-auction purchaser cannot be fastened with the outstanding liability of dues and taxes, which had accrued and were connected with and were solely attributable to the business of Original Lessee. Moreover, the outstanding liability of an Original Lessee cannot be fastened on the auction purchaser when, the Bank has nowhere stipulated in sale notice that the business liability of Original Lessee was put to sale under Rule 6 of Enforcement Rules. Such liability cannot be fastened when, the auction purchaser has never purchased the business liability of original lessee. Moreover, an auction purchaser cannot be made to bear the blunt of outstanding dues or tax liability of Original Lessee when, as mentioned in Para 6(iv) supra, there was no express covenant in the lease deeds that the subsequent purchaser-petitioner will be liable for the outstanding liability of business which had accrued and connected with and were solely attributable to the business of the original lessee. Unless an auction purchaser acquires the business of the original lessee-dealer in its name as per Section 39 of the HP VAT Act, 2005 then, the tax liability of erstwhile original lessee or erstwhile owner of business cannot be fastened on an auction purchaser. Further, once the Bank has not created any charge, right, title or interest on moveable property, including the business of the erstwhile Original Lessee then, his business liability cannot be fastened on an auction purchaser. Moreover, once the Bank has failed to disclose the known encumbrances of state taxes/dues of the original lessee in sale notice, despite knowledge, vide Annexure R-5 and R-6 and the Bank had acted contrary to Rule 8(7)(a) of the Security Interest

Enforcement Rules which came into force w.e.f.
18.10.2018 and had also not complied with Rule 8(7)(f) of the Security Interest (Enforcement) Rules then, any such undisclosed liability cannot be fastened on an auction purchaser.

Moreover, once the Respondents-State Tax Authorities have neither registered its recoverable claims/dues/taxes of outstanding dues, etc. nor obtained such attachment orders from the Court or other Competent Authority and got it registered with CERSAI against the erstwhile Original Lessee (or erstwhile owner as the case may be) in-accordance with the mandate of Section 26-B (4) of the SARFAESI Act, which came into force w.e.f. 24.01.2020 then, the Respondents, including the State Tax Authorities have neither any locus nor any right to fasten upon the business liability of the original lessee, on the auction purchaser, alike the petitioner. Moreover, the fastening of such liability amounts to penalizing, prejudicing and putting the auction purchaser (petitioner in instant case) to a disadvantageous position by acting in total defiance of the object and spirit of the SARFAESI Act. The rights, title or interest so acquired by the petitioner-auction purchaser in the scheduled immoveable property {i.e. on the industrial plots} after issuance of the sale certificate amounts to brushing aside the sanctity of public auction under the SARFAESI Act ; which could only be extinguished in the case of fraud or collusion as per the mandate of Law laid down by the Hon’ble Apex Court in the cases of C Natarajan ; Shakeena ; Sadashiv Prasad Singh; Rana Girders ; Shreyas Papers and Valji Khimji (supra).

Thus, we hold that the Respondents-State Authorities cannot nullify, defeat, obstruct, restrict, frustrate, curtail, take away or extinguish the rights, title and interest acquired by the auction purchaser after issuance of the Sale Certificate in his favour and such an auction purchaser has every right to get the benefit of the auctioned-scheduled immoveable property to be entered in the revenue records as lessee in the present case (or as owner as the case may be) and for all intends and purposes and in such an eventuality, any coercive or red entry, made by the revenue authorities on such auctioned property cannot operate to the disadvantage of the auction purchaser, alike the petitioner, in the instant case, in view of the discussion made above.

11. ANALYSIS OF QUESTION No 2

11(i). As regards Question No.2, the case file reveals that the State Tax Authorities i.e. Deputy

Commissioner State Taxes & Excise, District Sirmaur had pointed out an outstanding-recoverable tax liability of the sales tax dues, which had accrued, were connected with and were solely attributable to the business of M/s Jaimurthy Minerals and Chemicals (P) Ltd-Original Leasee for the period(s) from 20132014 and 2015-2016 vide its letter dated 24.5.2019, Annexure R-6 and the Respondent No.1 informed the Bank of the same on 30.5.2019, Annexure R-5, showing an outstanding liability of sales tax dues of Rs 17,19,96,478/-(Seventeen Crore Nineteen Lakh Ninety Six Thousand Four Hundred Seventy Eight Only) but despite the fact that the Bank had the knowledge of these outstanding/recoverable dues, the Bank has failed to disclose these known encumbrances in the sale notice dated 10.12.2021, Annexure P-3, as was mandatory required to be disclosed after the insertion of Rule 8 (7) (a) in the Security Interest (Enforcement) Rules applicable w.e.f. 18.10.2018. The Bank acted contrary to the Rules by remaining silent from date of knowledge of aforesaid liability in May 2019 till the issuance of the sale notice and till the issuance of the sale certificate on 1.1.2022 and therefore, the petitioner cannot be fastened with the liability or outstanding business dues of the original lessee, and any such condition will amount to giving a premium to the bank for its negligence, inaction or non-performance contrary to the Statute/Rules is impermissible.

11(ii). As a sequel to the discussion made while answering the Question no 1 supra, the Question No 2 is answered, to the effect that once the sale certificate was issued in favour of auction purchaser then, no liability could be fastened on him. In case the Bank had knowledge of any encumbrance of the original lessee (or owner as the case may be) then, it was mandatory on the Bank-secured creditor to disclose the same in the sale notice, after insertion of Rule 8(7)(a) of the Security Interest (Enforcement) Rules w.e.f. 18.10.2018. Moreover, the liability of state taxes which had accrued and were connected with and were solely attributable to the business of Original Lessee (or owner as the case may be) cannot be fastened on the auction purchaser unless the State Authorities-Respondents, get their claim for recovery of dues, taxes etc. registered and obtained an attachment order from the Court or competent authority and got it registered with CERSAI, under Section 26-B(4) of the SARFAESI Act w.e.f. 24.1.2020, which was not done in instant case. Further, unless the petitioner-auction purchaser gets the business of the Original Lessee (or owner as the case may be) transferred in his name in terms of Section 39 of the HPVAT Act, 2005 then, the Respondents-State Authorities cannot impose any condition (as in this case) so as to fasten the business liability of others on the auction purchaser, by prejudicing and putting an auction purchaser to a disadvantageous position, is in our considered view impermissible, so as to destroy the sanctity of auction and to extinguish the rights, title and interest acquired in law. Moreover, in absence of any express covenant in the lease deed that the auction purchaser/subsequent purchaser shall bear the past liability accruing from and connected with and attributable to the business of original lessee when, the business of the original lessee and the business of the auction purchaser-petitioner had no connection and were dissimilar, with different nomenclatures. Further, any condition imposed Annexure P-7 and Annexure P-9 after the issuance of the sale certificate cannot operate retrospectively so as to extinguish the rights acquired by an auction purchaser on issuance of the sale certificate under the SARFAESI Act and the Rules. Moreover, the debts of the secured creditor-Bank shall have priority over all other debts and all revenues, taxes, cesses and other rates payable to Central Government or State Government or local authority under Section 26-E of SARFAESI Act, which came into force w.e.f. 01.09.2016, vis-à-vis the dues or tax under the HPVAT Act, 2005.

In view of the above discussion, we are of the considered view that any adversial condition, imposed, after the date of the issuance of the sale certificate as in the impugned orders, cannot nullify, frustrate or extinguish the rights, title and interest acquired by the auction purchaser except in case of fraud or collusion of an auction purchaser, which are non-existent and not borne out from the facts of the instant case. Accordingly, the impugned order and the adversial condition so imposed against the petitioner-auction purchaser, being illegal and arbitrary is set-aside.

12. ANALYSIS OF QUESTION No 3:

12(i). In order to appreciate Question No 3, is as to whether adversial condition, as in Question No (ii) supra, could be enforced against the petitioner-auction purchaser, when the Respondent-State tax authorities have a remedy to recovery its outstanding tax liability, which had accrued and was connected with and was attributable solely to the business of the original lease holder in accordance with the provisions of the H.P. Value Added Tax Act, 2005. In this context, a reference to the communications dated 30.05.2019, Annexure R-5 and 24.05.2019, Annexure R-6 gains significance. Reference to these two letters reveal that the original lessee had failed to pay their tax liability pertaining to the year 2013-14 and 2015-16 under Himachal Pradesh Value Added Tax Act, 2005 (hereinafter referred to as VAT Act). Since the outstanding recovery of taxes originates from the HP VAT Act, therefore, it is relevant to take note of the provisions of Section 2 (c), 2(g), 2(k), 2(z) and Sections 6, 7, 16, 19, 25, 27, 50 and 53 of the Act, are reproduced here-in-below:-

“Section 2(c), business includes

(i) any trade, commerce, manufacture, any adventure or concern, in the nature of trade, commerce or manufacture, whether or not such trade, commerce, manufacture, adventure or concern is carried on with a motive to make profit and whether or not any profit accrues therefrom ; and

(ii) any transaction in connection with or ancillary to such trade, commerce, manufacture, adventure or concern;

2(g) “dealer” means any person who carries on (whether regularly or otherwise) the business of buying, selling, supplying or distributing goods, directly or indirectly, for cash, or for deferred payment, or for commission, remuneration or other valuable consideration, and includes,-

(i) a local authority, a body corporate, a company, a co-operative society or other society, club, firm, Hindu Undivided Family or other association of persons which carries on such business;

(ii)  a factor, broker, commission agent, a dealer‘s agent or any other mercantile agent, by whatever name called;

(iii) an auctioneer who carries on the business of selling or auctioning goods belonging to any principal, whether disclosed or not, and whether the offer of the intending purchaser is accepted by him or by the principal or a nominee of the principal;

(iv) every person engaged in the business of:-

(a) transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration;

(b) transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;

(c) delivery of goods on hire-purchase or any system of payment by instalments;

(d) transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;

(e) supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; and

(f) supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating) where such supply or service, is for cash, deferred payment or other valuable consideration ;

2(k) “goods” means every kind of movable property (other than news-papers, actionable claims, stocks and shares and securities) and includes live stock, all materials, commodities and articles and every kind of property (whether as goods or in some other form) involved in the execution of a works contract, and all growing crops, grass, trees or things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;

2(z) “tax” or “value added tax” means the tax on the sale or purchase of goods, levied under section 6 or 7;

6. Levy of tax

(1) Subject to the provisions of this Act, there shall be levied a tax:-

(a) at every point of sale in respect of the goods specified in the second column of Schedule ’A’,

(b) at the prescribed points of purchase in respect of goods specified in the second column of Schedule ‘C’, and

(c) at the first point of sale in respect of the goods specified in the second column of Schedule ‘D’,

(d)  at every point of sale in respect of the goods specified in the second column of Schedule ‘E’, on the taxable turnover of a dealer, at the rates as specified in the respective Schedules or at such rates not exceeding 100 paise in a rupee as the State Government may, by notification, direct:

Provided that the State Government may notify different rates in respect of different goods or classes of goods:

Provided further that the rate of tax in respect of declared goods shall not exceed the maximum rate of tax specified in clause (a) of section 15 of the Central Sales Tax Act, 1956:

Provided further that subject to furnishing of a declaration as may be prescribed, the Government may, by notification, reduce the rate of tax levied under sub-section

(1) upto 4% in respect of goods sold to the Government, not being a registered dealer, for captive use in telecommunication network, or in the generation or distribution of electricity or any other form of power.

(2) Notwithstanding anything contained in this section, where any goods are sold in container or are packed in any packing material, the rate of tax applicable to such container or packing material, shall, whether the price of the container or packing material is charged separately or not, be the same as is applicable to the goods, contained or packed therein and the turnover in respect of the container and packing material, shall be included in the turnover of such goods. Where the goods, sold in container or packed in packing material are tax free, the sale of such container or packing material shall also be tax free.

(3) In this Act, the expression-taxable turnover means that part of the dealer’s gross turnover during any period which remains after deducting there from-

(a) his turnover during that period on:-

(i) the sale of goods declared tax free under section 9;

(ii) sale or purchase of goods falling under section 58; and

(iii) such other sales or purchases as may be prescribed; and

(b) the amount of tax included in the gross turnover,

7. Levy of presumptive tax

Notwithstanding anything contained in this Act, every registered dealer, whose turnover in any year does not exceed such amount as may be prescribed, shall, in lieu of the tax payable under this Act, pay presumptive tax on the entire taxable turnover of sales or purchases, as the case may be, at such rates, not exceeding the rates specified in section 6, as the State Government may, by notification, direct, and subject to such conditions and restrictions and in such manner as may be prescribed:

Provided that no input tax credit shall be available to such dealer:

Provided further that a registered dealer who imports goods for sale shall pay tax on the sale of such goods imported from outside the State on actual basis i.e. as per tax applicable on the sale of such goods within the State.

16. Payment of tax and returns:

(1) Tax payable under the Act shall be paid in the manner hereinafter provided at such intervals as may be prescribed.

(2)  The State Government may, in public interest and subject to such conditions as it may deem fit, accept from any class of dealers in lieu of the amount of tax payable under this Act for any period, by way of composition, a lump sum to be determined and to be paid at such intervals and in such manner as may be prescribed, or the lump sum amount may be calculated at a fixed rate on the taxable turnover, as may be prescribed in respect of such class of dealers and for this purpose a simplified system of registration, maintenance of accounts, filing of returns may also be prescribed which shall remain in force during the period of such composition.

(3) Such dealers as may be required so to do by the Assessing Authority by notice served in the prescribed manner and every registered dealer shall furnish such returns manually of electronically by such dates and to such Authority as may be prescribed.

(3a) The State Government may, by notification, exempt any class of dealer from filling of return, subject to such restrictions and conditions, such limit of turnover and for such period, as may be prescribed, and tax, if any, deducted at source, shall be deemed to be final payment of tax and such dealer shall be liable to assessment for that period.

(4) Before a registered dealer furnishes the return required by sub-section (3), he shall, in the prescribed manner, pay manually or electronically into a Government Treasury or the Scheduled Bank which is a treasury bank, or at the office of the Assistant Excise and Taxation Commissioner or Excise and Taxation Officer – in-charge of the District, the full amount of tax due from him under the Act according to such  returns and shall furnish alongwith the returns a receipt from such treasury, bank or office of the Assistant Excise and Taxation Commissioner or Excise and Taxation Officer-in-charge of the District showing the payment of such amount:

xxx… xxx… xxx…

(5) If any dealer discovers any omission or other error in any return furnished by him, he may,-

(i) in the case of monthly and quarterly return, furnish a revised return before the date prescribed for filing of next return, and

(ii) in the case of annual return furnish a revised return within a period of sixty days from the last date prescribed for filing of annual return, and if the revised return shows a greater amount of tax to be due against the tax shown in the original return, it shall be accompanied with a receipt showing payment of extra amount in accordance with sub-section (4).

(6) If a dealer fails without sufficient cause to furnish the returns by the prescribed date as required under sub-section (3), dealer shall be liable to pay, by way of penalty, a sum equal to Rs. 200/-per day till the default counties, but such penalty shall not exceed Rs. 25000/.

Provided that where the dealer is filing monthly returns, a sum equal to Rs. 1000/- per day shall be charged as penalty till the default continues, but such penalty shall not exceed Rs. 50,000/-:

Provided further that where a dealer has closed down his business or has left the business without getting his Registration Certificate cancelled, the Assessing Authority shall suspend his Registration Certificate immediately, and thereafter no further incremental penalty as applicable shall be imposed.

(6-A). If a dealer fails without sufficient cause to furnish annual return by the prescribed date, he shall be liable to pay by way of penalty, a sum of Rs. 5000/-.

(7) If a dealer fails without sufficient cause to comply with the requirements of the provisions of sub-section (4), the Commissioner or any person appointed to assist him under subsection (1) of section 3 may, after giving such dealer a reasonable opportunity of being heard, direct him to pay by way of penalty, a sum:

(i) equal to ten percentum, for the delay upto fifteen days,

(ii) equal to twenty five percentum, for the delay exceeding fifteen days but not exceeding thirty days, and

(iii) equal to fifty percentum, for the delay exceeding thirty days, of the amount of tax to which he is assessed or is liable to be assessed under section 21, in addition to the amount of tax to which he is assessed or is liable to be assessed.

(8). If a dealer has maintained false or incorrect accounts with a view to suppressing his sales, purchases or stocks of goods, or has concealed any particulars of his sales or purchases or has furnished to, or produced before, any Authority under this Act or the rules made there under any account, return or information which is false or incorrect in any material particular, the Commissioner or any person appointed to assist him under sub section (1) of section 3 may, after affording such dealer a reasonable opportunity of being heard, direct him to pay by way of penalty in addition to the tax to which he is assessed or is liable to be assessed, an amount upto twice the amount of tax but which shall not be less than one hundred percentum of such tax amount to which he is assessed or is liable to be assessed.

19. Payment of Interest:

(1) If any dealer fails to pay the amount of tax due from him under this Act except to the extent mentioned in sub-section (2), he shall, in addition to the amount of tax, be liable to pay simple interest on the amount of tax due and payable by him at the rate of one percentum per month, from the date immediately following the last date on which the dealer should have either filed the return or paid the tax under this Act, for a period of one month and thereafter at the rate of one and a half per centum per month till the default continues.

(2) If the amount of tax or penalty due from a dealer is not paid by him within the period specified in the notice of demand or, if no period is specified within thirty days from the service of such notice, the dealer shall, in addition to the amount of tax or penalty, be liable to pay simple interest on such amount at the rate of one percentum per month from the date immediately following the date on which the period specified in the notice or the period of thirty days, as the case may be, expires, for a period of one month and thereafter at the rate of one and a half percentum per month till the default continues:

25. Tax and penalty recoverable as arrears of land revenue:

 The amount of any tax and penalty imposed or interest payable under this Act, which remains unpaid after the due date, shall be recoverable as arrears of land revenue.

27. Special mode of recovery :

(1) Notwithstanding anything contained in section 25 or any law or contract to the contrary, Commissioner, or any officer other than an Excise and Taxation Inspector, appointed under section 3 to assist the Commissioner, may, at any time or from time to time, by notice in writing (a copy of which shall be sent to the dealer at his last address known to the officer issuing the notice), require –

(a) any person from whom any amount is due or may become due to a dealer who has failed to comply with a notice of demand for any amount due under this Act;

(b) any person who holds or may subsequently hold any money for or on account of such dealer, to pay into the Government treasury in the manner specified in the notice issued under this sub-section, so much of the money as is sufficient to pay the amount due from the dealer in respect of the arrears of the tax, interest and penalty under this Act.

Explanation.– For the purposes of this sub-section, the amount due to a dealer or money held for or on account of a dealer by any person shall be computed after taking into account such claim, if any, as may have fallen due for payment by such dealer to such person and as may be lawfully subsisting.

 (2) The officer issuing a notice under subsection (1) may at any time or from time to time, amend or revoke any such notice or extend the time for making any payment in pursuance of the notice.

(3) Any person making any payment in compliance with a notice issued under subsection (1) shall be deemed to have made the payment under the Authority of the dealer and the treasury receipt for such payment shall constitute a good and sufficient discharge of the liability of such person to the extent of the amount specified in the receipt.

(4) Any person discharging any liability to the dealer after service on him of the notice issued under sub-section (1) shall be personally liable to the State Government to the extent of the liability discharged or to the extent of the liability of the dealer for tax, interest and penalty, whichever is less.

(6) Any amount of money which a person is required to pay under sub-section (1), for which he is personally liable to the State Government under sub-section (4) shall, if it remains unpaid, be recoverable as an arrear of land revenue.

(7) The provisions of this section shall be without prejudice to any action that may be taken for the recovery of the arrears of tax, interest and penalty, if any, due from the dealer.

50. Offences and Penalties

(1) Any person who-

(a) wilfully acts in contravention of the provisions of this Act or the rules made there under; or

(b) to (h) xxx

(i) makes any statement or declaration in any of the documents specified in section 34 or section 35, as the case may be, which statement or declaration he knows or, has reasons to believe to be false; or

(j) in any way is knowingly concerned in any fraudulent evasion or attempt at evasion or abetment of evasion of any tax payable in respect of the sale or purchase of any goods under this Act; or

(2) Whosoever contravenes or fails to comply with, any of the provisions of this Act or the rules made there under, or any order or direction made or given there under, shall, if no other penalty is provided either under sub-section (1) of this section or under any other provisions of this Act for such contravention or failure, be liable to imposition of a penalty, not exceeding five thousand rupees, and where such contravention or failure is continuing one, to a daily penalty not exceeding two hundred rupees during the period of the continuance of the contravention or failure.

(3) xxx… xxx… xxx…

53. Directors of defaulting companies to be liable to pay tax:

Notwithstanding anything contained in any other law, where any tax assessed or penalty imposed under this Act on a company cannot be recovered by reason of the company having gone into liquidation or for any other reason, then every person, who was Director of such company at any time during the relevant period for which the tax is due or in respect of which the default for which the penalty is imposed was committed, shall be jointly and severally liable for the payment of such tax and penalty unless he proves that the non-payment or non-recovery cannot be attributed to any neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.”

12(ii). In the above background, notably, once the original lessee, being a Company was the dealer, who carried on its business from these industrial plots then, the original lessee was bound in law to pay the taxes relatable to his business. In case the taxes or outstanding dues of taxes were not forthcoming from original lessee then, the State authorities were under an obligation to recover such taxes from the Company and its Directors as the arrears of land revenue under Section 25 and Section 53 of the VAT Act. In addition to this, the State Tax Authorities had another remedy of resorting to the special mode of recovery under Section 27 of the HP VAT Act. Section 39 of the HPVAT Act stipulates that the tax liability of a dealer which had accruing from business could be imposed on a transferee of business but in the instant case, this provision is not applicable when, the petitioner-auction purchaser has nowhere purchased the business liability of the original lessee.

Section 50 of HP VAT Act makes a dealer criminally liable who defaults in payments of taxes, interest and penalty imposed-levied on him under the Act if such dealer or businessman defaults or acts in contravention of the provisions of the HP VAT Act. In this background, in the present case, once the original lessee and its Directors had failed to file returns or has failed to pay the taxes, interest and penalty in terms of Section 16 and 19 of the HPVAT Act and had contravened the provision of Section 50 of HPVAT Act then, the State authorities were under an obligation to resort to the criminal prosecution of the Original Lessee-Company and its Directors but the inaction or negligence or non-performance of functions and legal obligations by the Respondents under the Statute cannot be the ground to fasten the liability of the outstanding state taxes, which had accrued, were connected with and solely attributable to the business of the Original Lessee-Company and its Directors under the HP VAT Act on the petitioner-auction purchaser. Moreover, the  business liability of the Original Leasee-Company cannot be fastened on the petitioner-auction purchaser when, the petitioner had nowhere purchased the business concern of the original lessee but had only purchased the secured scheduled immoveable assets-industrial plots.

In the above backdrop, we are of the considered view that the Respondents-State Authorities had slept over the matter, remained negligent and failed to perform its statutory functions in neither taking steps for recovery of outstanding taxes, interest and penalty, {as in Annexure R-5 and Annexure R-6}, and nor in resorting to the criminal action against the Original Leasee-M/s Jaimurthy minerals and Chemicals Pvt Ltd and its Directors, in-accordance with the mandate of HP VAT Act and in these circumstances, the adversial condition no 7, contained in the letters dated 7/11.10.2022, Annexure P-7, and the letter dated 13.12.2022, Annexure P-9, cannot be permitted to operate so as to fasten the business liability of the Original Leasee, as in the instant case (or owner, in general, as the case may be) on the petitioner-auction purchaser, after the issuance of sale certificate in his favour, under the SARFAESI Act. This condition no 7 cannot operate to the prejudice and disadvantage of the petitioner and this condition being arbitrary and illegal, in context of the petitioner is accordingly quashed and set-aside.

12(iii). In view of the above discussion, Question No 3 is answered to the effect that once the State Tax Authorities under the HPVAT Act have neither invoked, nor resorted to statutory remedial action for recovery of taxes, interest or penalty and arrears under VAT Act which had accrued and was connected with and was solely attributable to the business of the Original Lessee-Company and its Directors then, the inaction or negligence or non-performance on the part of the State Authorities cannot be the basis for prejudicing or putting the petitioner-auction purchaser to a disadvantage or position, by fastening the business liability of others, on the petitioner-auction purchaser is impermissible, on facts of this case, as discussed hereinabove.

13. CONCLUSION AND DIRECTION(S)

In view of the discussion, made hereinabove, the instant writ petition is allowed, with the following directions:-

(i) The condition no. 7, in the impugned letter(s) dated 7/11.10.2022 and 13.12.2022 vide Annexure P-7 and Annexure P-9, respectively and the communication dated 23.06.2023 vide Annexure P-12, so far it adversely affects the petitioner, is quashed and set-aside.

(ii)  The Respondents-State Authorities are directed to transfer the Industrial Plots -scheduled property as detailed in the Sale Certificate dated 01.01.2022 Annexure P-5, in favour of the petitioner-auction purchaser, as a Lessee for all intents and purposes ; and also to reflect the entries thereof in the revenue records forthwith.

(iii) The Respondents-State Authorities including the State Excise and Taxation Department, is at liberty to recover the outstanding dues, taxes etc. which had accrued and connected with and attributable to the business of Original Lessee-M/s Jaimurthy Minerals and Chemicals Pvt. Ltd or its Directors as in letter dated 7/11.10.2022 Annexure P-7 and letter dated 13.12.2022 Annexure P-9, in-accordance with law, if so desire.

The instant writ petition is allowed and disposed of in above terms, with no order as to costs. Pending application(s), if any, also stand disposed of.