HONOURABLE SRI JUSTICE P.NAVEEN RAO
&
HONOURABLE SRI JUSTICE J.SREENIVAS RAO
WRIT PETITION NO.16073 OF 2022
ORDER:
Heard Sri Vedula Srinivas, learned senior counsel appearing for Sri V.Aneesh learned counsel for petitioner and Sri Raji Reddy, learned standing counsel for Commercial Taxes, State of Telangana.
2. Petitioner extended credit facility to 3rd respondent vide sanction letter dated 29.08.2017 to a tune of 12,68,00,000/-. This facility was renewed from time to time and extended to a tune of 20,68,00,000/-. In addition to third party mortgagors, the 3rd respondent mortgaged land to an extent of Acs.62.2 located in Sy.No.156/Part and 148/Part, Chinna Revulapally village, Bibi Nagar Mandal, Yadadri-Bhuvanagiri District along with plant and machinery. As 3rd respondent defaulted in repayment, the account of the 3rd respondent was declared as Non-Performing Asset (NPA) on 28.02.2020 and the petitioner has taken recourse to the provisions of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, 'Act, 2002') to recover the dues. On 25.05.2020, Section 13(3) notice was issued. On 16.04.2021 the petitioner took symbolic possession. The petitioner filed O.A.No.347 of 2021 before the Debt Recovery Tribunal-II at Hyderabad to recover the amounts due. While so, alleging that the 3rd respondent defaulted in payment of commercial taxes, in exercise of powers vested under the PNR,J & JSR,J WP No.16073 of 2022 2 Telangana Value Added Tax Act, 2005, and the Telangana Revenue Recovery Act, 1864, Gazette Notification was issued, notifying attachment of land to an extent of Acs.3.17, which forms part of the land mortgaged with the petitioner by 3rd respondent. Challenging the same, this Writ Petition is filed.
3. Question for consideration is whether the 1st and 2nd respondents can attach secured asset mortgaged with the petitioner in the light of provision in Section 31-B1 of Recovery of Debts and Bankruptcy Act, 1993 and Sections 26-E2 and 353 of the Act, 2002.
4. Section 31-B assigns priority to the right of secured creditors to realize secured debts due and payable to them by sale of assets over which security interest is created and shall be paid in priority over all other debts and Government dues including revenues, taxes etc. Section 26-E of the Act, 2002 is also to the same affect. Section 35 of the Act, 2002 holds overriding effect to the provisions of the Act notwithstanding any other statute if inconsistent with the provisions of 1 S.31B. Priority to secured creditors.-- Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority.
Explanation.-- For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code. 2 S.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. 3 S.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.
PNR,J & JSR,J WP No.16073 of 2022 3 this act. The scope of these provisions was considered by the Hon'ble Supreme Court in Punjab National Bank vs. Union of India and others (Civil Appeal No.2196 of 2012 dated 24.02.2022).
5. In Punjab National Bank case, Rathi Ispat Ltd., (RIL) availed credit facilities and mortgaged/hypothecated all its movable and immovable properties for securing the loan. RIL defaulted in clearing the loan. The appellant being lead bank has taken recourse to Act, 2002. It has issued notices under Sections 13(2) and 13(4) of the Act, 2002.
6. At that stage, the Office of the Assistant Commissioner Customs and Central Excise Division, Union of India, informed the Bank that the property was already confiscated as RIL failed to pay excise duty and appeal was pending against confiscation. Litigation ensued leading to the instant appeal.
7. On construing the provisions in Central Excise Act, 1944 and Central Excise Rules, 1944, and the SARFAESI Act and on review of the law on the issue of first charge of a secured creditor on secured assets, the Hon'ble Supreme Court held as under:
"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 PNR,J & JSR,J WP No.16073 of 2022 4 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.
44. 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 11E 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.
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47. 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."
8. In W.P.No.20646 of 2020, similar issue was considered on claim of Commercial Tax Department of the State of Telangana. In the judgment dated 27.07.2021, the Division Bench held as under:
"26. Thus the above provision gives priority to claims of secured creditors like the petitioner Bank over the dues of the State such as Service Tax dues/ Income Tax dues and the non-obstante clause therein overrides the provisions of the Income Tax Act, 1961 and the Telangana VAT Act, 2005.
xxx PNR,J & JSR,J WP No.16073 of 2022 5
28. In our considered opinion, after introduction of Section 26-E of the SARFAESI Act, 2002 w.e.f. 24-01-2020, once the security interest created in favour of the Bank is registered with the Central Registry of Securitization Asset Reconstruction and Security Interest (CERSAI), the non-obstante clause contained in Section 26-E r/w Section 35 of the SARFAESI Act, 2002 will come into play and override the provision such as Section 26 of the Telangana VAT Act, 2005 (which give priority to VAT dues over any other claim) or the order of attachment dt.09.09.2016 issued by the Tax Recovery Officer under Rule 48 of the II Schedule to the Income Tax Act, 1961."
9. In view of the statutory scheme and law on the subject the impugned notice of attachment is illegal and unsustainable. It is accordingly set aside and the Writ Petition is allowed. We have only decided on maintainability of the decision of the Commercial Taxes Department, State of Telangana, in attaching land to an extent of Acs.3.17 which forms part of the land mortgaged by the 3rd respondent borrower, which is the secured asset on the credit facilities extended by the petitioner. There is no expression of opinion on claim of the Commercial taxes Department and it is open to the Commercial Taxes Department to take all steps as warranted by law to recover its dues. Pending miscellaneous applications if any shall stand closed.
_______________________ P.NAVEEN RAO,J _______________________ J.SREENIVAS RAO, J Date: 12.10.2022 Kkm PNR,J & JSR,J WP No.16073 of 2022 6 HONOURABLE SRI JUSTICE P.NAVEEN RAO & HONOURABLE SRI JUSTICE J.SREENIVAS RAO Writ Petition No.16073 OF 2022 Date: 12.10.2022 kkm