Central Bank of India vs State of Tamil Nadu and another

D. Raju, J.—The above writ appeal has been filed against the decision of a learned single judge of this court dated November 22, 1989, in

W.P. No. 14976 of 1989, whereunder the learned judge dismissed the writ petition filed by the appellant-bank, seeking for the issue of a writ of

mandamus, directing the respondents to forbear from bringing the properties of M/s. Mettur Textile Industries Limited for sale under the Tamil

Nadu Revenue Recovery Act, 1864, for recovery of sales tax said to be due by the company in purported exercise of powers u/s 24(2) of the

Tamil Nadu General Sales Tax Act, 1959, pursuant to Form No. 5 and Form No. 7A notices dated April 17, 1989, published in the Salem

District Gazette, dated May 21, 1989, or otherwise.

The averments of the appellant in the affidavit filed in support of the writ petition are that M/s. Mettur Textile Industries Limited, having its

registered office at Silaiman, P.O., Madurai-625 201, availed of for purposes of its business activities several credit facilities/loans from the

appellant-bank at its Coimbatore and Salem branches and on April 22, 1983, an equitable mortgage was created in favour of the appellant-bank

in respect of the land and buildings at Mettur including plant, machinery, spares and stores of the company for the several credit facilities and loans

said to have been granted to the tune of Rs. 215 lakhs; that on February 14, 1984, the equitable mortgage was confirmed in favour of the

appellant-bank for an enhanced sum of Rs. 660 lakhs and ultimately the same was confirmed in a sum of Rs. 669.16 lakhs, by deposit of title

deeds. It is further claimed that the said charges have been duly registered in accordance with the provisions of the Companies Act, 1956, and

certificates of registration were said to have been granted by the Registrar of Companies, Tamil Nadu, on January 16, 1985, and August 26,

1986. Deeds of hypothecation of the raw materials and finished and unfinished goods and book debts and agreement of pledge of goods were also

said to have been executed by the company as security for the amounts, so claimed to have been advanced. Even according to the appellant-bank,

the affairs of the company started deteriorating and the operations of the various accounts of the company with the bank became irregular and mills

were closed from July, 1985, necessitating the appellant-bank to recall the loans and advances granted by a legal notice dated September 1, 1986.

Since, despite all this the mills failed to settle their claims, the appellant-bank was said to have filed a suit, O.S. No. 60 of 1987 on the file of the

sub-court, Sankari, for the recovery of Rs. 6,50,40,605.12 with subsequent interest at 19.5 per cent. per annum in enforcement of the mortgages

noticed above and other securities and the suit was said to be pending at the relevant point of time.

While matters stood thus, the second respondent issued a notice dated March 27, 1989, to the bank, informing them that M/s. Mettur Textile

Industries Limited were in arrears of sales tax and additional sales tax to the tune of Rs. 3,68,790 for the assessment year 1983-84 and having

come to know that the property tax in respect of the properties of the mills were paid by the bank to the Tahsildar, Mettur and Mettur Township

Authorities, the second respondent would like to know about the hold of the bank over the properties of the mills. This was followed by a notice in

Form No. 5 u/s 27 of the Revenue Recovery Act of attachment of the properties and also a notice of public auction in Form No. 7 u/s 36 of the

Revenue Recovery Act, dated April 17, 1989, fixing the date of sale as June 27, 1989. The notices were also duly got published in the Salem

District Gazette, dated May 21, 1989, in the meanwhile, by a letter dated April 20, 1989, the appellant-bank sent a reply to the second

respondent informing about the filing of the suit, certain subsequent claims in all a sum of Rs. 6,54,67,367.03 and the fact that by virtue of the

orders of this court in C.M.P. No. 3225 of 1980, in C.R.P. No. 606 of 1988, the properties of the mills were being guarded by security agency

appointed by the bank. The bank also informed the second respondent that in view of such large claims of the bank as secured creditor and also

the pendency of legal proceedings, no steps need be taken to the prejudice of the rights of the bank. After the publication and services of notices

as above by the second respondent, the bank seems to have issued a further letter dated June 26, 1989 to the second respondent about the

mortgage said to have been created on April 22, 1983, and reiterating the other particulars and claims of the bank against the properties and

calling upon the second respondent not to proceed with the proposed sale under the Revenue Recovery Act. This was also followed up by a

further letter dated August 22, 1989. At this stage the second respondent issued a notice dated August 25, 1989, informing the appellant-bank that

the Government dues will be given top priority as per section 24 of the Tamil Nadu General Sales Tax Act, 1959, in order to realise the arrears of

sales tax to the State exchequer and that the next date of auction will be intimated to them. The second respondent, by his proceedings dated

September 28, 1989, informed that the attached properties will be brought to sale in public auction once again on November 23, 1989, at 11 a.m.

It is at this stage, the appellant-bank filed the above writ petition for the reliefs noticed supra.

Before the learned single judge, as could be seen from the order of the learned single judge, it was contended for the appellant-bank that section

24 of the Tamil Nadu General Sales Tax Act, 1959, as amended by the Tamil Nadu Act 78 of 1986 is unconstitutional and invalid and reliance

appears to have been placed in support therefore on the decisions in G.N. Venkataswamy Vs. Tamil Nadu Small Industries Development

Corporation Ltd., and Collector of Aurangabad and Another Vs. Central Bank of India and Another, . The learned single judge was not inclined

to accept the submission of the appellant on the challenge made to the constitutional validity of the provisions in question and ultimately came to the

conclusion that the appellant-bank, having filed a suit on the mortgage is entitled to and is at liberty to implead all the persons, who claim a charge

over the properties-whether as a prior charge or subsequent charge, after noticing the provisions contained in Order 34, rule 1 of the CPC and

vindicate their rights in the pending suit filed by the bank. The plea on behalf of the appellant-bank that the filing of a suit is no bar to approach this

court invoking article 226 of the Constitution of India has also been rejected by the learned single judge relying upon the decisions in Assistant

Collector of Central Excise Vs. Jainson Hosiery Industries, . Hence, the above writ appeal by the bank.

Mr. T. R. Mani, learned senior counsel appearing for the appellant, vehemently contended that the amendments to section 24(2) of the Tamil

Nadu General Sales Tax Act, 1959, as introduced by the provisions of the Tamil Nadu Act 78 of 1986 are unconstitutional and invalid in so far as

it affects the priority of secured creditors-secured under a Central Act, viz., the Transfer of Property Act, 1882, and if the amendment is allowed

to stand, no title will be safe. On the scope of the provisions introduced by the Tamil Nadu Act 78 of 1986, the learned senior counsel contended

that the amendment does not itself create any charge and the charge created must be construed to be one next or subsequent to any prior charge in

force and at any rate, inasmuch as the amended provisions in sections 24(2) and 26(6) of the Tamil Nadu General Sales Tax Act are not

comprehensive or complete enough to deprive an earlier charge holder of his rights, the rights of the appellant-bank cannot be in any manner

interfered with as the first and prior charge holder. In support of the claims so made, the learned senior counsel placed reliance upon the decisions

in Builders Supply Corporation Vs. The Union of India (UOI) Represented by the Commissioner of Income Tax, West Bengal and Others, ,

Jayaram Mudaliar Vs. Ayyaswami and Others, , Collector of Aurangabad and Another Vs. Central Bank of India and Another, , The Bank of

Bihar Vs. The State of Bihar and Others, , State of Andhra Pradesh and Another Vs. Andhra Bank Ltd. and Others, and S.K. Subbiah Pillai Vs.

Radhakrishnan, Special Officer for Salaimangalam Co-operative Stores Limited and Another, .

Per contra. the learned Government Advocate (Taxes) with equal force contended that there are no merits whatsoever in the submissions on

behalf of the appellant, that the charge created under the special enactment is, wider than the mortgage and that so far as the case on hand is

concerned, even the moment the return has been filed admitting the taxable turnover, the charge became attracted for the amount of tax due but not

paid, and there is no infirmity or constitutional invalidity in the provisions enacted by way of amendment to sections 24(2) and 26(6) of the Tamil

Nadu General Sales Tax Act, 1959, by the Tamil Nadu Act 78 of 1986. In support of his submissions, the learned Government advocate placed

reliance upon the decision in State Bank of Bikaner and Jaipur Vs. National Iron and Steel Rolling Corporation and Others, .

We have carefully considered the submissions of learned counsel appearing on either side. The scope and applicability of what is generally

known as ""priority of Crown debts"", was the subject-matter of several judicial pronouncements of this court as also other High Courts and the

apex court and it was considered to be the outcome of the maxim salus populi supreme lex - regard for the public welfare is the highest law, and

that therefore, it was held to be natural that a debt due to the Crown, as representing the public at large should be preferred to the debt of a single

creditor. But, at the same time, the said principle of priority of the Crown cannot ordinarily rank as against a secured creditor so as to deprive him

of his security or to affect or injure his rights as such secured creditor. This court also on an earlier occasion took the view that the said principle

cannot be axiomatically extended so as to extinguish the rights of the secured creditors and prefer State debts, if any competition arises. A

difference has also been recognised between the arrears of land revenue or other taxes due on or in respect of the properties as such on the one

hand and other categories of taxes or dues to be recovered as if it is a land revenue, in respect of the effects that flow from such sale on the prior

encumbrances. The Supreme Court, in the decision in Builders Supply Corporation Vs. The Union of India (UOI) Represented by the

Commissioner of Income Tax, West Bengal and Others, , also held that the claim for priority of arrears of Income Tax to the Union Government

over the prior debts due to the creditor has to be sustained on the basis of the common law doctrine, which was not unknown in ancient India, and

which had been applied and upheld by judicial decisions in this country and the advent of the Constitution of India does not alter the applicability of

the common law doctrine of the priority of Crown debts over private debts. It was also held by the apex court that the well-recognised principle

that the State is entitled to raise money by taxation emphasises the necessity and the wisdom of conceding to the State the right to claim priority of

its tax dues. It was observed therein by the apex court as hereunder :

Similarly, the basic justification for the claim for priority made by respondent No. 1, 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 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 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.

In State Bank of Bikaner and Jaipur v. National Iron and Steel Rolling Corporation [1995] 96 STC 612, the apex court considered the scope

and effect of section 11AAAA of the Rajasthan Sales Tax Act, 1954, which created a first charge on the property of the dealer or any other

person for any amount of tax, penalty, interest or other sum payable by a dealer or other person under the Act, clearly giving priority to the

statutory charge over all other charges on the property including a mortgage. Their Lordships of the Supreme Court held as hereunder :

Under this section the amount of sales tax or any other sum due and payable by a dealer or any other person under the Rajasthan Sales Tax Act,

1954, is a first charge on the property of the dealer or of such person. It is on account of the provisions of this section that the Commercial Tax

Officer claimed priority for the recovery of the sales tax dues from the sale proceeds of the mortgaged property. The appellant, however,

contended that since the mortgage in their favour is prior in point of time, their claim will have precedence over the claim of the sales tax authorities.

It is, therefore, necessary to consider the effect of section 11AAAA of the Rajasthan Sales Tax Act, 1954, on an existing mortgage in respect of

the property of the dealer or the person liable to pay sales tax or other sums under the Rajasthan Sales Tax Act, 1954. Section 100 of the Transfer

of Property Act deals with charges on an immovable property which can be created either by an act of parties or by operation of law. It provides

that where immovable property of one person is made security for the payment of money to another, and the transaction does not amount to a

mortgage, a charge is created on the property and all the provisions in the Transfer of Property Act which apply to a simple mortgage shall, so far

as may be, apply to such charge. A mortgage, on the other hand, is defined u/s 58 of the Transfer of Property Act as a transfer of an interest in

specific immovable property for the purpose of securing the payment of money advanced or to be advanced as set out therein. The distinction

between a mortgage and a charge was considered by this court in the case of Dattatreya Shanker Mote and Others Vs. Anand Chintaman Datar

and Others, . The court has observed (pages 806-807) that a charge is a wider term as it includes also a mortgage, in that, every mortgage is a

charge, but every charge is not a mortgage. The court has then considered the application of the second part of section 100 of the Transfer of

Property Act which, inter alia, deals with a charge not being enforceable against a bona fide transferee of the property for value without notice of

the charge. It was held that the phrase ""transferee of property"" refers to the transferee of the entire interest in the property and it does not cover the

transfer of only an interest in the property by way of a mortgage.

In the present case, we have to consider whether the statutory first charge which is created u/s 11AAAA of the Rajasthan Sales Tax over the

property of the dealer or a person liable to pay sales tax and/or other dues under the Rajasthan Sales Tax Act, is created in respect of the entire

interest in the property or only the mortgagor''s interest in the property when the dealer has created a mortgage on the property. In other words,

will the statutory first charge have priority over an earlier mortgage. It was urged by Mr. Tarkunde, learned counsel for the appellant-bank, that at

the time when the statutory first charge came into existence, there was already a mortgage in respect of the same property. Therefore, the only

property which was possessed by the dealer and/or person liable to pay tax or other dues under the Rajasthan Sales Tax Act, was equity of

redemption in respect of that property. The first charge would operate, therefore, only on the equity of redemption. The argument though

ingenious, will have to be rejected. Where a mortgage is created in respect of any property, undoubtedly, an interest in the property is carved out

in favour of the mortgagee. The mortgagor is entitled to redeem his property on payment of the mortgage dues. This does not, however, mean that

the property ceases to be the property of the mortgagor. The title to the property remains with the mortgagor. Therefore, when h statutory first

charge is created on the property of the dealer, the property subjected to the first charge is the entire property of the dealer. The interest of the

mortgagee is not excluded from the first charge. The first charge, therefore, which is created u/s 11AAAA of the Rajasthan Sales Tax Act will

operate on the property as a whole and not only on the equity of redemption as urged by Mr. Tarkunde.

We find support for this conclusion in the observations made in Fisher and Lightwood''s Law of Mortgage, 10th Edition at page 33, where the

statutory charges are discussed. In dealing with a statutory charge in favour of rating authorities in respect of rating surcharges for unused

commercial buildings under the General Rate Act, 1967, it is stated that ""a statutory charge has priority to, the interest of the mortgagee under a

mortgage existing when the charge arose"". In the case of Westminster City Council v. Haymarhet Publishing Ltd. [1981] 2 All ER 555 (CA), the

English Court of Appeals was required to consider whether a statutory charge on the property under the General Rate Act would have priority

over a legal mortgage on the property existing when the charge came into being. It was argued that the charge would be only on the mortgagor-

owner''s interest in the property, i.e., on the equity of redemption. The court negatived this contention. It held that ""charge on the land"" imposed for

an unpaid surcharge was not confined to a charge on the owner''s interest in the premises when the charge arose, but extended to a charge on all

the estates and interests in the premises existing when the charge arose. The rating authority''s charge would have priority over the bank''s interest

as a mortgagee.

In the present case, the section creates a first charge on the, property, thus clearly giving priority to the statutory charge over all other charges on

the property including a mortgage. The submission, therefore, that the statutory first charge credted by section 11AAAA of the Rajasthan Sales

Tax Act can operate only over the equity of redemption, cannot be accepted. The charge operates on the entire property of the dealer including

the interest of the mortgagee therein.

Looked at a little differently, the statute has created a first charge on the property of the dealer. What is meant by a first charge. Does it have

precedence over an earlier mortgage ? Now, as set out in Dattatreya Shanker Mote and Others Vs. Anand Chintaman Datar and Others, , a

charge is a wider term than a mortgage. It would cover within its ambit a mortgage also. Therefore, when a first charge is created by operation of

law over any property, that charge will have precedence over an existing mortgage.

Thus, with the above declaration of law by the highest court of the land the doubts or controversies or scope for raising any further disputes in

this regard must be held to have been set at rest, once and for all and the law so declared is very much binding upon every one in this country.

Learned counsel for the appellant-bank, apparently to get over such a hurdle, has chosen to challenge the constitutional validity of the

provisions of the Act and raise the further plea that the amendment has not really achieved its purpose and object, if it was to give priority to the

recovery of sales tax and the sum due under the Tamil Nadu General Sales Tax Act, even over and above existing secured creditors. That in the

teeth of a specific provision like the one introduced by the Tamil Nadu Act 78 of 1986, what consequences flow and the impact it has on the

secured creditors also has been laid down in unmistakable terms by the apex court and it is not therefore, any longer open to the appellant-bank to

contend that the amendments have not, achieved their purpose. The plea in this regard is bereft of any substance and as a matter of fact, sections

24(2) and 26(6) as amended by Tamil Nadu Act 78 of 1986, sufficiently safeguard and also enable the State to enforce the recovery of the taxes

and other dues under the Tamil Nadu General Sales Tax Act, 1959, as the first statutory charge holder in supersession of even the claims of an

existing mortgagee, who claims to be a secured creditor too and the contentions to the contrary are devoid of merit and are hereby rejected.

Consequently, it becomes only necessary for us to consider the question of the constitutionality of the amendments introduced by Tamil Nadu

Act 78 of 1986.

Section 24(2) of the Tamil Nadu General Sales Tax Act, as amended, reads as follows :

24.(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 Land Development Bank in regard to

the property mortgaged to it u/s 28(2) of the Tamil Nadu Co-operative Land Development Banks Act, 1934 (Tamil Nadu Act 10 of 1934), 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, u/s

31, 31A, 33, 35, 36, 37 or 38.

Section 26(6) of the Tamil Nadu General Sales Tax, 1959, as amended, reads thus :

26.(6) Any amount which a person is required to pay to the assessing authority or for which he is personally liable to the assessing authority under

this section shall, if it remains unpaid, be a charge on the properties of the said person and may. be recovered as if it were an arrear of land

revenue.

Explanation. - For the purposes of this 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 claims, if any, as may have fallen due for payment by such dealer to such person and as may be lawfully

subsisting.

The plea of unconstitutionality has been projected only on the ground that the amended provisions of sections 24(2) and 26(6) of the Tamil

Nadu General Sales Tax Act, 1959, in so far as they purport to be the first charge even over and above the secured creditors, who hold charge

under a mortgage are inconsistent with the provisions of the Transfer of Property Act, 1882, a Central Act and that in the absence of any consent

obtained for the Amendment Act from the President of India under article 254(2) of the Constitution of India, the same cannot prevail against the

Transfer of Property Act. First of all this submission, in our view, proceeds upon a misapprehension of the provisions relating to the recovery of tax

and the scope of the legislative powers to enact the same. Entry 6 of List Ill of the Seventh Schedule to the Constitution of India reads ""transfer of

property other than agricultural land; registration of deeds and documents"", and there is a separate entry altogether for recovery of taxes, viz., entry

43 of the Concurrent List, which reads, ""recovery in a State of claims in respect of taxes and other public demands, including arrears of land

revenue and sums recoverable as such arrears, arising outside the State"" and the topic of legislation relating to those two are distinct and separate

and there is no overlapping of these at all. Consequently, the plea of inconsistency prima facie does not hold good. The decision in State Bank of

Bikaner and Jaipur Vs. National Iron and Steel Rolling Corporation and Others, , as also the earlier decision relied upon therein and reported in

Dattatreya Shanker Mote and Others Vs. Anand Chintaman Datar and Others, in unmistakable terms declare also the position that there are vast

differences between ""charge"" and ""mortgage"", and that when a first charge is created by operation of law over any property, that charge will have

precedence over even an existing mortgage. As a matter of fact, section 100 of the Transfer of Property Act, 1882, postulates and categorically

envisages the creation of a charge by the ""operation of law"" and therefore, a law creating a charge by operation of such law cannot constitute any

inconsistency of the said law creating the charge with the general law relating to transfer of property, necessitating the obtaining of any consent of

the President under article 254(2) of the Constitution of India. Therefore, the fact that the Tamil Nadu Act 78 of 1986 has not been reserved for

the consideration of the President and has not received his assent has no significance whatsoever and the impugned provisions, therefore, cannot

be said to be violative of the Constitution of India. Taking into account the well-known rule of construction of entries and Lists relating to

distribution of legislative powers between Centre and State, in the Constitution of India, particularly known as the doctrine of ""pith and substance"",

also, the true character of the impugned legislation is one falling under entry 54 of List II and entry 43 of List III, and, therefore, it does not

encroach upon the powers of Parliament under entry 6 of List III, because each particular entry in the same List relates to a separate subject or

group of cognate subjects. Even assuming that the impugned legislation incidentally trenches on'' matters relating to transfer of property, it cannot

be held to be invalid at all, particularly in view of the further fact that even section 100 of the Transfer of Property Act, 1882, contemplates and

permits creation of charge by operation of law and once such creation of charge is effected by the operation of law certain inevitable consequences

flow from it even by the operations of the Transfer of Property Act itself as expounded in the decisions in Dattatreya Shanker Mote and Others

Vs. Anand Chintaman Datar and Others, and State Bank of Bikaner and Jaipur Vs. National Iron and Steel Rolling Corporation and Others, . The

Amendment Act and the amended sections 24(2) and 26(6) of the Tamil Nadu General Sales Tax Act have not been challenged on any other

ground of violation of the provisions of the Constitution of India. For all the reasons stated above, we reject the plea on behalf of the appellant-

bank of the alleged inconsistency with the provisions of the Transfer of Property Act, as unsustainable and devoid of merit.

We also make it clear that merely because we have assumed for the purpose of dealing with the contentions of the learned senior counsel for

the appellant-bank, that the claim of the bank is that of a secured creditor, it does not constitute any acceptance of such claim by us. The fact as to

whether a particular claim satisfies the legal requirements necessary to treat the same as a ""secured creditor"" would depend upon the relevant

documents as also the nature of the debt, and also the claim concerned and this has got also to be really proved in accordance with law. Neither

was there any necessity for us to go into such question, nor were any materials furnished before us for enabling us to adjudicate the same in

accordance with law. In the absence of any such finding by us, it cannot amount to any declaration by us merely because an assertion of the

appellant-bank has been considered, as though it is a secured creditor also, while dealing with the various legal issues. That is a matter which, if

need be, it is for the appellant to get adjudicated otherwise and so far as we are concerned in the light of the decision of the apex court and the

conclusions of ours, adjudication of such questions have been totally rendered unnecessary for consideration, as directed even by the learned single

judge before the civil court.

We are also of the view that the challenge by the appellant-bank to section 26(6) of the Tamil Nadu General Sales Tax Act is inappropriate.

Section 24 is the relevant provision for the case on hand. Section 26 of the Tamil Nadu General Sales Tax Act is akin and similar to what is

otherwise known as ""garnishee proceedings"" for dealing with persons from whom money is due or may become due to the defaulter-dealer and

section 26(6) only is meant to create a charge on the properties of such garnishee, who has been required to pay to the assessing authority the

amount due u/s 26(1) and which remains unpaid notwithstanding such demand@ The case before us, at any rate, in these proceedings is not that

any notice has been issued to the appellant u/s 26(1) of the Tamil Nadu General Sales Tax Act. In any event, the reasons assigned for sustaining

the constitutional validity of section 24(2) will equally apply in respect of the challenge made to section 26(6) and there is no merit in the

contentions to the contrary.

For all the reasons stated supra, we see no merit whatsoever in the writ appeal and the same fails and shall stand dismissed. No costs.