Central Bank of India vs Assistant Commercial Tax Officer and Another

S. Manikumar, J.—Auction notice, dated February 7, 2007, issued by the Assistant Commercial Tax Officer, Thiruppathur, Karaikudi has

been challenged, inter alia, on the ground that the Central Bank of India, Karaikudi Branch, the Petitioner herein has sanctioned loan to the second

Respondent to construct a factory and purchase of new and second hand machineries besides meeting out their working capital requirements.

According to the Petitioner, loan was sanctioned on various dates and as on May 17, 2001, the outstanding amount due and payable by the

second Respondent was Rs. 1,83,48,089.95. It is the further contention that as the second Respondent has failed to adhere to the terms and

conditions of the sanction and neglected to repay the amounts due under various facilities leaving a huge outstanding amount with overdue interest,

the Petitioner was constrained to move the Debts Recovery Tribunal II at Chennai in O. A. No. 1277 of 2001 for recovery of the said amount

along with pendenti lite and future interest at the rate of 16.50 per cent per annum with quarterly rest till the date of realisation of full. According to

them, as on the date of filing of the writ petition a sum of Els. 3,00,00,000 was pending. While that be so, the office of the Assistant Commercial

Tax Officer, has passed the impugned order dated February 7, 2007 stating that a sum of Rs. 1,43,52,703 along with two per cent penal interest

representing the arrears of tax and pendenti lite has to be paid by the second Respondent and that to recover the same, by way of public auction

would be conducted on March 3, 2007 for sale of the property in S. No. 626/1, Thirupathur Taluk, Thekkur Village. According to the Petitioner,

the second Respondent had already mortgaged the said property to the bank and therefore, it has the first charge over the property. It is the further

contention of the bank that the Assistant Commercial Tax Officer, the first Respondent herein, can proceed against the property of the borrower

only after satisfying the security debt of the writ Petitioner-bank. It is also the contention of the Petitioner that the commercial tax authority has not

initiated any assessment proceeding prior to the mortgage and therefore, the first Respondent cannot claim any charge over the property unless a

valid assessment has been made for the relevant period of time. In support of the contention that bank debts will have charge, over crown debt,

learned Counsel for the Petitioner relied upon the decisions of the Division Bench of this Court in Indian Bank Vs. The Commercial Tax Officer,

Tajura Leathers and Surya Leather Export, and in M. Nagarajan v. Deputy Commercial Tax Officer and State of Tamil Nadu rep. by Secretary,

Commercial Taxes Department reported in [2009] 25 VST 175 (Mad).

The learned Counsel for the Petitioner also brought to the notice of this Court that both the decisions of this Court stated supra, have been

confirmed on appeal by the honourable Supreme Court in S. L. P. Nos. 1838 and 1908 of 2010, respectively, dated February 11, 2010.

Though the writ petition is pending for nearly three years, the Respondents have not chosen to file any counter-affidavit. However, learned

Counsel for the State submitted that in the absence of proceedings against the property under SARFAESI Act, it is always open to the Assistant

Commercial Tax Officer, the first Respondent herein, to bring the property of the second Respondent for auction so as to realise the arrears of tax

and penalty. He submitted that there is no manifest illegality warranting any interference.

Heard the leermed counsel for the parties and perused the materials available on record.

The issue as to whether the bank debt will prevail over crown debt, is no longer res integra, in view of the decisions of this Court stated supra in

Indian Bank Vs. The Commercial Tax Officer, Tajura Leathers and Surya Leather Export, , rendered after considering the decision of the Full

Bench of this Court in UTI Bank Ltd. v. Deputy Commissioner of Central Excise, Chennai 2 reported in [2007] 1 LW 50 and another decision

reported in Union of India (UOI) and Others Vs. SICOM Ltd. and Another, and in M. Nagarajan Vs. The Deputy Commercial Tax Officer and

State of Tamil Nadu, and at paragraph Nos. 16, 17, 18 and 19 of MLJ (paragraphs 18 to 21 of 25 VST 187) of this Court held as follows:

It is not in dispute that the bank is a ''secured creditor'' within the meaning of Section 2(zd) of the SARFAESI Act, 2002. It has ''secured

interest'' over the secured asset. Section 2(zc) defines ''secured asset'' as property on which security interest is created. Security interest is defined

u/s 2(zf), as right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage,

charge, hypothecation, assignment other than those specified in Section 31. Security agreement is already existing between the bank and borrower,

as defined u/s 2(zb) which means an agreement, instrument or any other document or arrangement under which security interest is created in favour

of the secured creditor including the creation of mortgage by deposit of title deeds with the secured creditor.

If the status of the State is looked into, it will be evident that it can claim priority of debt over others in regard to the arrears of tax due to the

State. As per the Supreme Court decision in Union of India (UOI) and Others Vs. SICOM Ltd. and Another, , for recovery of State debts, the

State can claim priority for before all other creditors, but such creditor must be held to mean ''unsecured creditor''. No such priority can be claimed

over a secured creditor.

The findings of the Division Bench in the case of M. Nagarajan v. Deputy Commercial Tax Officer, Tindivanam [2009] 25 VST 175 (Mad),

read as follows:

''15(i) to (iii)...

(iv) The doctrine of first charge/priority of the State over the property will prevail over the private debts, which is an unsecured debt, but such

doctrine of first charge/priority over the property cannot prevail over secured debts of a person. If the statute permits to have first charge/priority

over the property having regard to the plain meaning of Article 372 of the Constitution of India, then only the State can claim priority over an

unsecured debt.

This apart, the assets being secured assets with the bank, having its secured interest over the property, the bank being a secured creditor and

its debt being a secured debt, we hold that the principle of first charge/priority of State over the property will not be applicable in the present

case....

In this context, useful reference can be made to the decision of the Full Bench of this Court in UTI Bank Ltd. v. Deputy Commissioner of

Central Excise, Chennai 2 reported in [2007] 1 LW 50 wherein it has been held as follows:

In the light of the above discussion, we conclude,

''(i) Generally, the dues to Government, i.e., tax, duties, etc., (Crown''s debts) get priority over ordinary debts.

(ii) Only when there is a specific provision in the statute claiming ""first charge"" over the property, the Crown''s debt is entitled to have priority over

the claim of others.

(iii) Since there is no specific provision claiming ""first charge"" in the Central Excise Act and the Customs Act, the claim of the Central Excise

Department cannot have precedence over the claim of secured creditor, viz., the Petitioner-bank.

(iv) In the absence of such specific provision in the Central Excise Act as well as in Customs Act, we hold that the claim of secured creditor will

prevail over Crown''s debts.

In view of our above conclusion, the Petitioner-UTI Bank, being a secured creditor is entitled to have preference over the claim of the Deputy

Commissioner of Central Excise, first Respondent herein.

In yet another decision in M. Nagarajan v. Deputy Commercial Tax Officer and State of Tamil Nadu rep. by Secretary, Commercial Taxes

Department reported in [2009] 25 VST 175, this Court has held as follows (at page 184 of VST):

Having regard to the judicial pronouncements rendered by courts and noticed above, we may sum up the law as under:

(i) Arrears of tax due to the State can claim priority over unsecured debts.

(ii) The common law doctrine about priority of crown debts/State debts is recognised law in force within the meaning of Article 372(1) of the

Constitution of India.

(iii) The doctrine will not apply if first charge by way of priority is not claimed under the statute.

(iv) The doctrine of first charge/priority of the State over the property will prevail over the private debts, which is an unsecured debt, but such

doctrine of first charge/priority over the property cannot prevail over secured debts of a person. If the statute permits to have first charge/priority

over the property having regard to the plain meaning of Article 372 of the Constitution of India, then only the State can claim priority over an

unsecured debt.

It is seen from the order dated February 11, 2010 made in S. L. P. Nos. 1838 and 1908 of 2010 both the Division Bench judgments cited

supra were taken on appeal and that the honourable Supreme Court has dismissed the S. L. Ps.

In view of the legal pronouncements of the Division Bench of this Court and confirmed by the honourable Supreme Court, the bank is a

secured creditor"" within the meaning u/s 2(d) of the SARRAESI Act, 2002. The assets are secured assets with the bank and that the bank being a

secured creditor, has the first charge/priority over the property. In such circumstances, the auction notice is liable to be set aside. Accordingly it is

set aside. The writ petition is allowed. No costs. Consequently, connected miscellaneous petitions are closed.