Madras High Court
State Bank Of India As Successor ... vs The Assistant Commissioner on 23 August, 2021
W.P.No.12534 of 2017
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 23.08.2021
CORAM
THE HONOURABLE MR.JUSTICE S.M.SUBRAMANIAM
W.P.No.12534 of 2017
and
W.M.P.No.13323 of 2017
State Bank of India as successor Bank to
State Bank of Hyderabad
Greams Road Branch,
Greams Road, Chennai – 6. ...Petitioner
Vs
1.The Assistant Commissioner,
Commercial Tax,
Office of the Commercial Tax,
Vellore (North)
2.Mr.Kishore N.Patel
3.The Sub-Registrar,
Pallikonda, Vellore District. ...Respondents
PRAYER : Writ Petition filed Under Article 226 of the Constitution of
India, to issue a Writ of Mandamus, direction to the first respondent to
remove the attachment effected with the office of the third respondent in
respect of the mortgaged property of the second respondent situate at
Kalanipakkam Village, Vellore Taluk and District, comprised in old survey
No.455/2B, Re Survey No.455/2B1 measuring an extent of 2.08 Acre and
1/26
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Old Survey No.455/2B, Re Survey No.455/2B2 measuring an extent of 1.00
Acre in the light of amended Section 26E of SARFAESI Act so as to enable
the petitioner bank or its successors to register the sale certificate/sale deed
in favour of auction purchaser/third party(s) in accordance with law.
For Petitioner : Mr.M.L.Ganesh
For Respondents : Mr.V.Veluchamy
Government Advocate
[For R1 & R3]
R2 – No appearance
ORDER
The Writ of Mandamus is filed, directing the first respondent to
remove the to remove the attachment effected with the office of the third
respondent in respect of the mortgaged property of the second respondent
situate at Kalanipakkam Village, Vellore Taluk and District, comprised in
old survey No.455/2B, Re Survey No.455/2B1 measuring an extent of 2.08
Acre and Old Survey No.455/2B, Re Survey No.455/2B2 measuring an
extent of 1.00 Acre in the light of amended Section 26E of SARFAESI Act
so as to enable the petitioner bank or its successors to register the sale
certificate/sale deed in favour of auction purchaser/third party(s).
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2. The petitioner Bank states that credit facilities were extended to the
second respondent by State Bank of India, Hyderabad, which was merged
with State Bank of India pursuant to the Notification dated 22.02.2017
passed by the Central Government under Section 35 of the SBI Act, 1955
with effect from 01.04.2017.
3. The Borrower M/s.Nashika Industries Private Limited had availed
the various credit facilities to the tune of Rs.1400.00 Lakhs from the
petitioner Bank and the second respondent as guarantor had mortgaged the
secured property on 19.03.2010 and executed MOD on 20.07.2011 in the
office of SRO, Vellore to secure the repayment of aforesaid loan amount.
Since one of the properties is falling within the jurisdiction of SRO, Vellore,
the 2nd respondent had registered MOD on 20.07.2011 at SRO Vellore
though the other properties are falling within the jurisdiction of the 3rd
respondent. The Borrower company had committed default in repaying the
loan amount, the loan accounts were classified as NPA by the petitioner
bank as per the prudential norms of the Reserve bank of India. Actions were
initiated under the provisions of the SARFAESI Act to recover the
outstanding loan amount from the borrower company.
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4. In this backdrop, question arises, whether the petitioner is entitled
to claim priority over the claims made by the Commercial Tax Department
regarding the tax arrears to be recovered. The petitioner Bank claims that
under Section 26E of the SARFAESI Act, the priority has been conferred to
the secured creditors, so also Section 31B of RDDB & FI Act, priority is
granted to the secured creditors. Parliament, in its wisdom, has granted
priority to the secured creditors and therefore, the petitioners are entitled for
the relief.
5. Though various judgments are delivered by the High Courts,
granting priority based on Section 26E of SARFAESI Act and 31B of
RDDB & FI Act, the Hon'ble three Judges Bench of the Hon'ble Supreme
Court of India considered the issue of priority and delivered a judgment,
which will prevail over all other judgments of the High Court in the matter
of following the judicial precedents, as laid down by the Constitution Bench
of the Hon'ble Supreme Court of India in the case of National Insurance
Co. Ltd vs Pranay Sethi and Others, reported in [2017 (2) TNMAC
609(SC)]
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6. Under these circumstances, this Court considered the provisions of
the Tamil Nadu Value Added Tax Act, 2006 and the claim made by the
petitioner and in yet another case, the similar priority provision under the
Income Tax Act was also considered by this Court elaborately and based on
the two judgments of this Court in W.P.No.15437 of 2014 dated 19.07.2021
and W.P.No.15938 of 2009 dated 12.08.2021, the present case is also to be
decided as the issues are one and the same and the factual aspects are also
almost on the same line. The relevant paragraphs of the judgment dated
12.08.2021 in W.P.No.15938 of 2009 are extracted hereunder:
“6. The issue of priority over the charge with reference
to various enactments are elaborately considered by this Court
and judgment was delivered on 19.07.2021 in W.P.No.15437 of
2014. In the said writ petition, the priority over charge
claimed by the Income Tax Department was considered.
However, the provisions of TNVAT Act also contains a similar
provision that of the Income Tax Act and the provisions in
TNVAT Act, are in pari materia with the provisions in the
Income Tax Act. However, this Court has to consider the
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provisions of the TNVAT Act, for the purpose of deciding the
present writ petition.
7. Section 40 of the TNVAT Act, 2006 stipulates
collection of tax. Section 41 deals with forfeiture of tax
collected. Section 42 contemplates payment of recovery of tax,
penalty, etc. and sub section 2 to Section 42 reads as under.
(2) Any tax assessed on or has become payable by, or any other
amount due under this Act from a dealer or person and any fee due from
him under this Act, shall, subject to the claim of the Government in respect
of land revenue and the claim of the Agriculture and Rural Development
Bank in regard to the property mortgaged to it under sub-section (2) of
section 28 of the Tamil Nadu Co-operative Societies Act, 1983 (Tamil
Nadu Act 30 of 1983), have priority over all other claims against the
property of the said dealer or person and the same may without prejudice
to any other mode of collection be recovered, --
(a) as land revenue, or
(b) on application to any Magistrate, by such Magistrate as if it
were a fine imposed by him:
Provided that no proceedings for such recovery shall be taken or continued
as long as he has, in regard to the payment of such tax, other amount or
fee, as the case may be, complied with an order by any of the authorities to
whom the dealer or person has appealed or applied for revision, under
sections 51,52,54,57,58,59 or 60.”
8. The above sub section 2 enumerates that any other
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amount due under the TNVAT Act from a dealer or person or
any fee due from him under the Act, have priority over all other
claims of the such dealer or person.
9. Section 43 denotes transfers to defraud revenue void
and the said provision reads as under:
“43.Transfers to defraud revenue void.-- Where, during the
pendency of any proceedings under this Act or after the completion
thereof, any dealer creates, a charge on, or parts with the possession by
way of sale, mortgage, gift, exchange or any other mode of transfer
whatsoever of any of his assets in favour of any other person, with the
intention to defraud the revenue, such charge or transfer shall be void as
against any claim in respect of any tax, or any other sum payable by the
dealer as a result of the completion of the said proceeding or otherwise:
Provided that, such charge or transfer shall not be void if it is made
-
(a) for adequate consideration and without notice of the pendency
of such proceeding under this Act or, as the case may be, without notice of
such tax or other sum payable by the dealer; or
(b) with the previous permission of the assessing authority.”
10. The above section 43 clearly stipulates that if during
the pendency of any proceedings under the TNVAT Act or after
the completion thereof, any dealer creates a charge on, or
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parts with the possession by way of sale, mortgage, gift,
exchange or any other mode of transfer whatsoever of any of
his assets in favour of any other person with the intention to
defraud the revenue, such charge or transfer shall be void as
against any claim in respect of any tax, or any other sum
payable by the dealer, as a result of the completion of the said
proceedings or otherwise.
11. The proviso clause states that such charge or
transfer shall not be void, if it is made with the previous
permission of the authority or for adequate consideration and
without notice of the pendency of such proceedings under the
Act or, as the case may be without notice of such tax or other
sum payable by the dealer.
12. Perusal of the above provisions would reveal that the
TNVAT Act also contemplates priority regarding recovery of
tax arrears. SARFAESI Act as well as DRT Act also promises
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priority. This being the conflicting provisions under various
enactments in respect of one claim, this Court has elaborately
considered it in the judgment dated 19.07.2021 made in WP
No.15437 of 2014, and the issues as well as the facts are
similar. Thus, it is useful to extract the relevant paragraphs of
the said judgment.
“30.Let us now consider the scope of Section 281 of the Income
Tax Act. Chapter XXIII Section 281 of the Income Tax Act contemplates
certain transfers to be void. Sub~clause (1) enumerates that ?where,
during the pendency of any proceeding under this Act or after the
completion thereof, but before the service of notice under rule 2 of the
Second Schedule, any assessee creates a charge on, or parts with the
possession (by way of sale, mortgage, gift, exchange or any other mode of
transfer whatsoever) of, any of his assets in favour of any other person,
such charge or transfer shall be void as against any claim in respect of any
tax or any other sum payable by the assessee as a result of the completion
of the said proceeding or otherwise“. A close reading of the above
provision would reveal that where during the pendency of any proceedings
under this Act or after the completion thereof, but before service of notice
under rule 2 of the Second Schedule, if any charge is created by an
assessee in favour of any other person shall be void as against any claim in
respect of any tax or any other some payable by the assessee. Therefore, it
is unambiguous that, during pendency of the proceedings if any charge is
created, then such charge created by way of sale, mortgage, gift, exchange
or any other mode of transfer whatsoever shall be void.
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31.Schedule II Rule 11 of the Income Tax Act which contemplates
investigation by Tax Recovery Officer. Sub~Clause (1) to Rule 11 states
that “where any claim is preferred to, or any objection is made to the
attachment or sale of, any property in execution of a certificate, on the
ground that such property is not liable to such attachment or sale, the Tax
Recovery Officer shall proceed to investigate the claim or objection“.
32.Sub~clauses (5) and (6) to Rule 11 of the Income Tax Act reads
as under:
(5) Where the Tax Recovery Officer is satisfied that the property
was, at the said date, in the possession of the defaulter as his own property
and not on account of any other person, or was in the possession of some
other person in trust for him, or in the occupancy of a tenant or other
person paying rent to him, the Tax Recovery Officer shall disallow the
claim.
(6) Where a claim or an objection is preferred, the party against
whom an order is made may institute a suit in a civil court to establish the
right which he claims to the property in dispute; but, subject, to the result
of such suit (if any), the order of the Tax Recovery Officer shall be
conclusive.
33.A perusal of the entire Rule would reveal that it is not an appeal
or Revision. It is an investigation by the Tax Recovery Officer, which is
contemplated. Therefore, any third person if involved in such transfer of
property, which is declared as void under Section 281 of the Income Tax
Act may submit an application for investigation by Tax Recovery Officer.
Therefore, the statute does not assume that every third person is liable
under the Income Tax Act. Schedule II Rule 11 of the Income Tax Act is a
beneficial provision in respect of the person, who was otherwise cheated
by any of the defaulter of tax arrears, who in turn can submit an application
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for further investigation in order to cull out the truth or genuinity with
reference to the transactions or transfers. Therefore, the Tax Recovery
Officer during the pendency found that the charge created in favour of the
petitioner Bank is valid, then he can pass appropriate orders withdrawing
the attachment made under the provisions of the Act. If the Tax Recovery
Officer is of an opinion that the attachment made under the provisions of
the Act was prior to the mortgage or otherwise, then he can pass
appropriate orders confirming the attachment. However, the said Rule is
not relatable to declaration or in the form of an appeal by any third person.
It is only an enabling provision for effective adjudication of the actual facts
and to find out the genuinity of certain transfers made during the pendency
of the Income tax proceedings and with reference to the provision under
Section 281 of the Income Tax Act.
34.Looking into the provisions of the SARFAESI Act, more
specifically, Section 26E, which contemplates priority to secured creditors
which reads that “notwithstanding anything contained in any other law for
the time being in force, after the registration of security interest, the debts
due to any Secured Creditor shall be paid in priority over all other debts
and all revenues, taxes, cesses and other rates payable to the Central
Government of State Government or local authority”.
35.Let us now consider Section 31B of the Recovery of Debts and
Bunkruptcy Act, 1993 and the said section Section 31B was inserted by
Act 44 of 2016 with effect from 01.09.2016. The said provision also deals
with priority to secured creditors, which reads that “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
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including revenues, taxes, cesses and rates due to the Central Government,
State Government or local authority“.
36.It is necessary to consider the conflicting provisions of the
Income Tax Act, SARFAESI Act and Recovery of Debts and Bunkruptcy
Act, 1993.
37.On the one hand, the Income Tax Act states that, where during
the pendency of any proceedings under the Income Tax Act or after
completion thereof, any assessee creates a charge on or parts with the
possession by way of mortgage, sale, etc. Shall be void against any claim
in respect of any tax. So also, the SARFAESI Act states that Section 26E
contemplates that the secured creditors shall be paid in priority over all
other debts and all revenues, taxes, cesses and other rates payable to the
Central Government of State Government or local authority. Therefore,
equal weightage is given in respect of the secured creditors. So also
Section 31B of Recovery of Debts and Bunkruptcy Act, 1993 states that
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.
38.Thus, conflicting provisions in these three independent statutes
are creating heart burning issues between the secured creditors as well as
the Tax Department. Some of the decisions are in favour of the Tax
Department and some of the decisions are in favour of the Banks. With
reference to Section 26E of the SARFAESI Act and Section 31B of the
Recovery of Debts and Bankruptcy Act, 1993, judgments are given in
favour of the Banks in view of the fact that the said provisions
contemplates priority over the Government dues is to be given to the
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Banks. The tenor of Section 281 of the Income Tax Act which
contemplates that any such transaction made during the pendency of any
proceedings under the Income Tax Act shall be void. Thus, the
understanding would be that if the proceedings under the Income Tax Act
are pending at the time of creating mortgage, sale, gift, etc., then Section
281 of the Income Tax Act would be pressed into operation. The next
question is at the time of creation of mortgage, sale, gift etc., the Income
Tax Proceedings are pending as contemplated under Section 281 of the
Income Tax Act, such transactions became void. Thus, it is unambiguous
that the transactions or transfers made during the pendency of the Income
tax proceedings are void. This being the purposive interpretation to be
adopted, all transfers, mortgages etc., made during the pendency of the
Income tax proceedings shall became void under Section 281 of the
Income Tax Act. Once Section 281 of the Income Tax Act was pressed
into service and the transactions or transfers became void, any mortgage,
transfer etc., thereafter would be of no validity. In other words, the transfer
or transactions made against the void transactions under the Income Tax
Act are invalid in the eye of law. Therefore, even before invoking the
provisions of the SARFAESI Act and DRT Act, Section 281 of the Income
Tax Act intervenes and declares the transactions or transfers as void, if any
such transactions or transfers are made during the pendency of the Income
Tax proceedings. In such circumstances, invoking the provisions of the
SARFAESI Act or DRT Act for the purpose of claiming priority would not
arise at all. Law expects that the parties to be prudent and careful. Before
mortgage, transfer or transactions, an enquiry is required by the respective
parties as the buyer must beware (caveat emptor) of the encumbrances or
the statutory implications or the genuinity of the title etc., Thus, the
principles of caveat emptor would be applicable in such circumstances,
where a transactions or transfers are made during the pendency of the
Income tax proceedings. In such cases, the Income tax proceedings are
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known only to the tax defaulter and not to the third party purchaser or the
mortgagee Bank or otherwise. Thus, the void transfers or transactions
made during the pendency of the Income tax proceedings cannot be the
subject matter for any mortgage or further transfers or transactions etc.,
This being the possible perceptions, the Courts are bound to consider,
which transaction will prevail over and which Act would be applicable
with reference to the facts and circumstances.
39.More elaborately the facts at the first instance to be considered
and then the application of law which is to be applied at the first instance
also to be considered. For instance in the case where the income tax
proceedings are pending under the Income Tax Act and if a mortgage is
entered into by the tax defaulter with any Bank, then it is the duty of the
Bank to ensure that no other proceedings are pending and it is the duty of
the person who is borrowing loan to inform the same to the Bankers.
Under these circumstances, the Income Tax Department is alien to the
transaction of mortgage between the bank and the tax defaulter and
therefore, the Act will automatically come to the rescue of the Income Tax
Department declaring such transfers as void under Section 281 of the
Income Tax Act.
40.Where the Bank entered into a mortgage well before the
pendency of proceedings under the Income Tax Act, then Section 26E of
the SARFAESI Act would be applicable and in such circumstances, the
Bank will hold priority over all other claim including the Government
dues. Even in such circumstances, this Court has to consider the other
principles which all are to be followed in such cases. Admittedly, the
SARFAESI Act and Recovery of Debts and Bunkruptcy Act, 1993
provides priority to the secured creditors and the Income Tax Act provides
priority to the tax arrears to be recovered. Under these circumstances, this
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Court is inclined to consider the common law Doctrine of priority of crown
debts.
41.The ?doctrine of constitutional priority? will have precedence
over the other priorities. If the priority clause is provided under various
enactments, the question arises as to which priority is to be held
precedence over the other priorities. The test of traceability and
recognition under the constitutional provisions would be the proper
procedure to form an opinion.
42.In the present scenario, the SARFAESI Act and the DRT Act
provides priority to secured creditors, i.e. the banks hold priority. The
Income Tax Act contemplates any such mortgage or sale during the
pendency of any proceedings under the Income Tax Act shall be void.
Thus, this Court has to test the supremacy on the basis of the constitutional
recognition, which is supreme than the statutes enacted under the
constitution. The taxation laws are constitutionally recognised with
reference to the sovereignty and the policies of the Government. Thus the
supremacy of the Constitution overtakes the statutes enacted and such
enactments constitutionally recognised directly takes precedence over the
other statutes.
43.The principles of -doctrine of constitutional priority- is to be
defined as, in the event of the similar provisions of priority under various
enactments, then the statute which is recognised directly by the
Constitution for the purpose of upholding the sovereignty and integrity of
the Nation is to be considered as holding precedence over the other statutes
providing priority.
44.The Constitutional Bench of the Hon-ble Supreme Court of
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India in the case of Builders Supply Corporation vs. Union of India [1965
AIR 1061] considered the principles laid down in the case of Kaka
Mohamed Ghouse Sahib and Co. vs. United Commercial Syndicate and
others [(1886) ILR 7 Mad. 434], wherein the Madras High Court has held
that it is a settled principle of constitutional law that as between creditors
of the same rank the Government is entitled to priority and the republican
character of the Constitution of India has not abrogated this general
doctrine of priority of State debts. In dealing with this question, Justice
Ramamurti has referred to the relevant decisions in relation to the arrears
of income tax due to the Government and has pointed out there is a
consensus of judicial opinion on the question that the arrears of tax due to
the State can claim priority over private debts. This position has not been
seriously disputed.
45.Similarly, the basic justification for the claim of priority made
by the Income Tax Department in the present case rests on the well
recognised principle that the State is entitled to raise money by taxation,
because unless adequate revenue is received by the State, it would not be
able to function as sovereign Government at all. It is essential that as a
sovereign the Sate should be able to discharge its primary governmental
functions and in order to able to discharge such functions efficiently, it
must be in possession of necessary funds and this consideration
emphasises the necessity and the wisdom of conceding to the State, the
right to claim priority in respect of its tax dues.
46.In this context, Part XII of the Constitution of India, more
specifically, Article 265 which states that tax not to be imposed save by
authority of law; Article 266 speaks about Consolidated funds and public
accounts of India and the States; Article 267 states Contingency fund;
Article 268 states Duties levied by the Union but collected and
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appropriated by the States; Article 268A denotes service tax levied by
Union and collected and appropriated by the Union and the States; Article
269 states taxes levied and collected by the Union but assigned to the
States; Article 269A denotes levy and collection of goods and service tax
in course of inter~state trade or commerce and Article 270 states that taxes
levied and distributed between the Union and the States. The chapter deals
with the taxes and its constitutional importance are to be considered by this
Court. Undoubtedly, tax is the backbone of our Nation-s economy and it
holds top priority. In this context, the tax collected goes to the welfare of
the people in general, however the mortgage or sale transaction between
the bank and the tax defaulter can be at no circumstances be compared
with the constitutional importance of tax being collected from the people
for the purpose of achieving the constitutional goals and perspectives.
Therefore, the provisions of various Acts if there are conflicting provisions
or grant of priority to various institutions, then the Constitution of India
will be the guiding factor to form an opinion and confer priority. The
nature of transaction, the implications, Constitutional importance and the
other principles enunciated under the Constitution of India are the principal
factors to be considered to form an opinion that, which claim shall be
given priority over the other claims as various statutes enacted by the
Parliament gives priority to such institutions irrespective of the fact that
the other Acts are also providing similar priority to other institutions.
47.In support of the said observation, this Court would like to draw
the attention with reference to the judgment of the Three Judges Bench of
the Hon-ble Supreme Court of India in the case of Central Bank of India
vs. State of Kerala and others [Civil Appeal No.95 of 2005 dated
27.02.2009], wherein the Apex Court considered the provisions of the
DRT Act and SARFAESI Act and the following observations are made:
?33.The non obstante clauses contained in Section 34(1) of the
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DRT Act and Section 35 of the Securitisation Act give overriding effect to
the provisions of those Acts only if there is anything inconsistent contained
in any other law or instrument having effect by virtue of any other law. In
other words, if there is no provision in the other enactments which are
inconsistent with the DRT Act or Securitisation Act, the provisions
contained in those Acts cannot override other legislations. Section 38C of
the Bombay Act and Section 26B of the Kerala Act also contain non
obstante clauses and give statutory recognition to the priority of State-s
charge over other debts, which was recognized by Indian High Courts even
before 1950. In other words, these sections and similar provisions
contained in other State legislations not only create first charge on the
property of the dealer or any other person liable to pay sales tax, etc. but
also give them overriding effect over other laws. In Builders Supply
Corporation v. Union of India [(1965) 2 SCR 289], the Constitution Bench
considered the question whether tax payable to the Union of India has
priority over other debts. After making a reference to the judgments of the
Bombay High Court in Bank of India v. John Bowman and Ors., [AIR
1955 Bom. 305], Madras High Court in Kaka Mohammad Ghouse Sahib &
Co. v. United Commercial Syndicate and others [(1963) 49 I.T.R. 25]
and Manickam Chettiar v. Income~tax Officer, Madura, [(1938) 6 ITR
180], the Court held :
(i) “The Common Law doctrine of the priority of Crown debts had
a wide sweep but the question in the present appeal was the narrow one
whether the Union of India was entitled to claim that the recovery of the
amount of tax due to it from a citizen must take precedence and priority
over unsecured debts due from the said citizen to his other private
creditors. The weight of authority in India was strongly in support of the
priority of tax dues.
(ii) The Common Law doctrine on which the Union of India based
its claim in the present proceedings had been applied and upheld in that
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part of India which was known as `British India- prior to the Constitution.
The rules of Common Law relating to substantive rights which had
been adopted by this country and enforced by judicial decisions, amount to
`law in force- in the territory of India at the relevant time within the
meaning of Art. 372(1). In that view of the matter, the contention of the
appellant that after the Constitution was adopted the position of the Union
of India in regard to its claim for priority in the present proceedings had
been alerted could not be upheld.
(iii) The basic justification for the claim for priority of Government
debts rests on the well~recognised principle that the State is entitled to
raise money by taxation, otherwise it will not be able to function as a
sovereign government at all. This consideration emphasizes the necessity
and wisdom of conceding to the State the right to claim priority in respect
of its tax dues.“
34. In State Bank of Bikaner and Jaipur v. National Iron and Steel
Rolling Corporation and others [(1995) 2 SCC 19], the Court again
recognized the priority of the State-s statutory first charge under Section
11~AAAA of the Rajasthan Sales Tax Act, 1954 vis~`~vis claim of the
bank to recover its dues from the borrower.
35. In Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. and
others [(2000) 5 SCC 694], the Court reviewed case law on the subject and
observed:
“The principle of priority of government debts is founded on the
rule of necessity and of public policy. The basic justification for the claim
for priority of State debts rests on the well~recognised principle that the
State is entitled to raise money by taxation because unless adequate
revenue is received by the State, it would not be able to function as a
sovereign Government at all. It is essential that as a sovereign, the State
should be able to discharge its primary governmental functions and in
order to be able to discharge such functions efficiently, it must be in
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possession of necessary funds and this consideration emphasises the
necessity and the wisdom of conceding to the State, the right to claim
priority in respect of its tax dues (see Builders Supply Corpn.). In the same
case the Constitution Bench has noticed a consensus of judicial opinion
that the arrears of tax due to the State can claim priority over private debts
and that this rule of common law amounts to law in force in the territory of
British India at the relevant time within the meaning of Article 372(1) of
the Constitution of India and therefore continues to be in force thereafter.
On the very principle on which the rule is founded, the priority would be
available only to such debts as are incurred by the subjects of the Crown by
reference to the State-s sovereign power of compulsory exaction and
would not extend to charges for commercial services or obligation incurred
by the subjects to the State pursuant to commercial transactions. Having
reviewed the available judicial pronouncements their Lordships have
summed up the law as under:
1. There is a consensus of judicial opinion that the arrears of tax
due to the State can claim priority over private debts.
2. The common law doctrine about priority of Crown debts which
was recognised by Indian High Courts prior to 1950 constitutes “law in
force“ within the meaning of Article 372(1) and continues to be in force.
1. The basic justification for the claim for priority of State debts is the
rule of necessity and the wisdom of conceding to the State the right
to claim priority in respect of its tax dues.
4. The doctrine may not apply in respect of debts due to the State if
they are contracted by citizens in relation to commercial activities which
may be undertaken by the State for achieving socio~economic good. In
other words, where the welfare State enters into commercial fields which
cannot be regarded as an essential and integral part of the basic
government functions of the State and seeks to recover debts from its
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W.P.No.12534 of 2017
debtors arising out of such commercial activities the applicability of the
doctrine of priority shall be open for consideration.”
48.One of the principles, which is impressive in the judgment cited
supra is that the basic justification for the claim for priority of Government
dues rests on the well recognized principles that the State is entitled to
raise money by taxation otherwise it will not be able to function as
sovereign Government at all. This consideration emphasises the necessity
and wisdom of conceding to the State, the right to claim priority in respect
of its tax dues. The importance of the above reading is to be considered
regarding the present facts and circumstances.”
13. As far as the disputes raised in the present writ
petition is concerned, the petitioner in fact claims that they
hold priority over the charge as they are secured creditors.
The 1st respondent/revenue equally claims the priority over all
other charges as it is arrears of tax and State revenue.
Further, the 1st respondent-Commercial Tax department claims
that actions for recovery of arrears of tax was initiated long
back and during the pendency of the proceedings under the
taxation law, the bank has dealt with the property and
therefore, they cannot claim any priority over the property, as
far as the tax arrears are concerned.
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W.P.No.12534 of 2017
14. However, such disputed fact cannot be adjudicated
by the High Court in a writ petition under Article 226 of the
Constitution of India. Which are all the proceedings initiated
at the first instance and which proceedings has to be construed
as an initial proceedings, are the disputed facts which are all
to be adjudicated by scrutinising the original documents and
evidences made available. An enquiry has to be conducted in
this regard.
15. This being the factum and considering the judgment
of the Hon'ble three Judges bench of Hon'ble Supreme Court of
India, in the case of Central Bank of India (cited supra), this
Court is of the opinion that such disputes are to be adjudicated
before the competent appellate authority under the tax laws.
16. The TNVAT Act contemplates appeals to the
authority. The appellate authority under the said Act are
exercising the power of the Quasi judicial authorities.
Therefore, they have to adjudicate the issue, by affording
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W.P.No.12534 of 2017
opportunity to all the parties concerned and take a decision in
respect of such claims. As far as the tax laws are concerned,
both the assessee and the revenue are preferring appeal before
the appellate authorities and before the tribunal.
17. Similarly, the bank being aggrieved from and out of
the action initiated by the 1st respondent, Commercial Tax
department, is entitled to file an appeal before the appellate
authority for adjudication of complete facts and circumstances.
The appellate authorities are the final fact finding authority.
While deciding the issues, the principles laid down by this
Court in the cases cited supra are to be taken into
consideration and accordingly, the disputes are to be resolved.
This being the principles to be followed, this Court is inclined
to pass the following final orders.
“(i) The relief as such sought for in the present writ
petition stands rejected.
(ii) The petitioner is at liberty to approach the appellate
authorities as contemplated under the provisions of the TNVAT
Act, 2006, by filing an appropriate appeal. In the event of
filing any such appeal, the said appeal is to be entertained
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W.P.No.12534 of 2017
without reference to the ground of delay in filing and entertain
the appeal, dispose of the same on merits and in accordance
with law, by affording opportunity to all the parties. Such
exercise is directed to be done as expeditiously as possible.”
18. With these directions, the writ petition stands
disposed of. No Costs. Consequently, the connected
Miscellaneous Petitions are closed.”
7. In view of the judgment cited supra, the writ petition stands
disposed of. No costs. Consequently, connected miscellaneous petition is
closed.
23.08.2021
Speaking order/Non-speaking order
Internet: Yes/No
Index : Yes/No
Kak
To
1.The Assistant Commissioner,
Commercial Tax,
Office of the Commercial Tax,
Vellore (North)
2.The Sub-Registrar,
Pallikonda, Vellore District.
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W.P.No.12534 of 2017
S.M.SUBRAMANIAM, J.
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W.P.No.12534 of 2017
Kak
W.P.No.12534 of 2017
23.08.2021
https://www.mhc.tn.gov.in/judis/
