Union of India &
Ors. Vs. Sicom Ltd. & ANR. [2008] INSC 2105 (5 December 2008)
Judgment
IN THE SUPREME COURT
OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO. 7128 OF 2008 (Arising
out of SLP (C) No.13004 of 2007 Union of India & Ors. ... Appellants Versus
SICOM Ltd. & Anr. ... Respondents WITH
CIVIL APPEAL NO. 7132
OF 2008 (Arising out of SLP (C) No.21137 of 2007)
S.B. Sinha, J.
1.
Leave
granted.
2.
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 (1951
Act) is the core question involved herein.
3.
Respondent
No.2 borrowed a sum of Rs.51,00,000/- from the first respondent by an Indenture
of Mortgage executed on 22.12.1986.
Indisputably, the
mortgage created under the said document is governed by the provisions of the
1951 Act. It also owed a sum of Rs.19,00,000/- by way of Central Excise duty
for the period April 1983 to May 1988.
Assessment of central
excise duty for the said sum was confirmed.
Indisputably the
provisions of Sections 27, 29, 30, 31, 32A to 32F, 41 and 41A of the 1951 Act
have been extended in favour of the respondent by the Government of India in
exercise of its power conferred upon it under sub-section (1) of Section 46 of
the said Act by issuing an appropriate notification.
Respondent No.2
having committed defaults in repayment of the principal amount of loan as also
the interest accrued thereon, the first respondent invoked Section 29 of the
1951 Act by issuing notice to take possession of the said securities. Actual
physical possession of the mortgaged assets was taken over. Respondent No.2,
however, continued to commit defaults as a result whereof the first respondent
recalled the entire amount of loan wherefor a notice dated 19th March, 1996 was
served.
Respondent No.2 owed
a sum of Rs.48,08,242/- to the appellant. It expressed its intention to attach
and seize its properties. First Respondent, 3 however, by its letter dated
11.11.1996 informed them that they had the first charge of the said properties
which are mortgaged in their favour. Despite the same, the appellant expressed
intention to proceed to recover the amount from the said properties. First
Respondent, by its letters dated 21.7.2000 and 22.8.2000 followed by a lawyer's
notice, called upon the appellants to desist from taking any action against
their securities and to remove their seal, if any, from the properties of the
borrower. As the appellant did not respond thereto, a writ petition was filed.
The principal question which, as noticed hereinbefore, arose for consideration
before the High Court was as to whether dues of the first
respondent-corporation will have priority over the Central Excise dues.
The High Court, upon
consideration of a large number of decisions opined that despite the fact that
the dues of the appellant were recoverable as land revenue in terms of Rule
213(2) of the Central Excise Rules read with Section 32(g) and Section 151 of
the Maharashtra Land Revenue Code, 1966, the same by itself would not mean that
a first charge of the appellant- corporation would give way thereto. It was
held :
"30. Turning to
provisions of Section 169 of the Code, sub-section (1) provides that the
arrears of land revenue due on account of land shall be paramount charge on the
land and every part thereof and shall have precedence over any other debt
demand or claim whatsoever, whether in 4 respect of mortgage, judgment-decree,
execution or attachment, or otherwise however, against any land or the holder
thereof, sub-section (2) provides that claim of the State Government to any
monies other than arrears of land, revenue but recoverable as a revenue demand
under Chapter II shall have priority over all unsecured claims against any land
or holder thereof.
31. It is thus clear
that the arrears of land revenue dues on account of land shall be paramount
charge on the land or every part thereof. Those will have precedence over any
other dues, debts, demands, or claim. But other claims of the State Government
which are recoverable as arrears of land revenue get priority over all
unsecured claims against any land of holder. In the case of secured loan of the
Government and other creditors, priority will depend upon precedence of such
loan, it is thus clear that security of the Corporation being prior in point of
time, it being in the nature of mortgage of priority, the dues claimed by
Corporation will have priority over the dues of Customs."
Ms. Sunita Rao,
learned counsel appearing on behalf of the appellant, would submit that the
crown debt and, in particular, arrears of tax will have a priority over all
other debts and in that view of the matter, the impugned judgment is wholly
unsustainable. Strong reliance has been placed in this behalf upon a decision
of this Court in Macson Marbles Pvt. Ltd. v. Union of India [2003 (158) ELT 424
(SC)].
Mr. Shekhar Naphade,
Learned senior counsel appearing on behalf of the respondent, on the other
hand, submitted that principle that a crown debt 5 prevails over other debts
is confined only to the unsecured ones as secured debts will always prevail
over a crown debt. Our attention in this behalf has been drawn to the non
obstante clause contained in Section 56 of the 1951 Act. It was furthermore
contended that for the self-same reason Section 529A in the Companies Act was
inserted in terms by way of special provisions creating charge over the
property and some of the State Governments also amended their Sales Tax Laws
incorporating such a provision. The Central Government also with that view,
amended the Employees Provident Fund and (Miscellaneous) Provisions Act, 1952
and Employees State Insurance Act, 1948.
The learned counsel
appears to be right.
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 6 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. It is trite that when a Parliament or State
Legislature makes an enactment, the same would prevail over the common law.
Thus, the common law
principle which was existing on the date of coming into force of the
Constitution of India must yield to a statutory provision.
To achieve the same
purpose, the Parliament as also the State Legislatures inserted provisions in
various statutes, some of which have been referred to hereinbefore providing
that the statutory dues shall be the first charge over the properties of the
tax-payer. This aspect of the matter has been considered by this Court in a
series of judgments.
In M/s. Builders
Supply Corporation v. The Union of India & Ors.
[AIR 1965 SC 1061],
this Court construing Section 46(2) of the Income Tax Act, 1922 which enabled
the Income Tax Officer to forward to the Collector a certificate specifying the
amount of arrears due from an assessee and requiring the Collector, on receipt
of such certificate, to proceed to recover 7 from the assessee in question the
amount specified as if it were an arrear of land revenue, held :
"Section 46(2)
does not deal with the doctrine of the priority of Crown debts at all; it
merely provides for the recovery of the arrears of tax due from an assessee as
it were an arrear of land revenue. This provision cannot be said to convert
arrears of tax into arrears of land revenue either;
all that it purports
to do is to indicate that after receiving the certificate from the Income-tax
Officer, the Collector has to proceed to recover the arrears in question as if
the said arrears were arrears of land revenue. We have already seen that other
alternative remedies for the recovery of arrears of land revenue are prescribed
by sub- section (3) and (5) of section 46. In making a provision for recovery
of arrears of tax, it cannot be said that section 46 deals with or provides for
the principal of priority of tax dues at all; and so, it is impossible to
accede to the argument that section 46 in terms displaces the application of
the said doctrine in the present proceedings."
{See also
Superintendent and Remembrancer of Legal Affairs, West Bengal v. Corporation of
Calcutta [AIR 1967 SC 997]} Yet again in Bank of Bihar v. State of Bihar &
Ors. [AIR 1971 SC 1210], it was laid down :
"4. Now it is
common ground that the plaintiff (which is the appellant before us) held the
sugar which was seized from its custody as security for 8 payment of the debts
or advances made to Defendant 2 in its cash credit account. There were arrears
of certain cess due from Defendant 2. As stated before, the Cane Commissioner
took proceedings under the Public Demands Recovery Act and attached the price
of the sugar which had been deposited by the appropriate authorities in the
Government Treasury instead of being paid to the plaintiff. The Cane
Commissioner indisputably did not have any right of priority over the other
creditors of Defendant 2 and, in particular, the secured creditors. Section 172
of the Contract Act defines a pledge to mean the bailment of goods as security
for payment of debt or performance of a promise."
{See also Revathinnal
Balagopala Varma v. His Highness Sri Padmanabhadasa Varma (since deceased)
& Ors. [1991 (2) SCALE 1142]}.
These aspects of the
matter, however, have been considered at some length by a Three Judge Bench of
this Court in Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. & Ors.
[(2000) 5 SCC 694]. Dealing extensively with the doctrine of priority to Crown
Debts, it was held:
"7. What is the
common law doctrine of priority or precedence of Crown debts? Halsbury, dealing
with general rights of the Crown in relation to property, states that where the
Crown's right and that of a subject meet at one and the same time, that of the
Crown is in general preferred, the rule being "detur digniori" (Laws
of England, 4th Edn., Vol. 8, para 1076, at p. 666). Herbert Broom states:
9 "Quando jus
domini regis et subditi concurrunt jus regis praeferri debet.--Where the title
of the king and the title of a subject concur, the king's title must be
preferred. In this case detur digniori is the rule. ... where the titles of the
king and of a subject concur, the king takes the whole. ... where the king's
title and that of a subject concur, or are in conflict, the king's title is to
be preferred."
(Legal Maxims, 10th
Edn., pp. 35-36) This common law doctrine of priority of State's debts has been
recognised by the High Courts of India as applicable in British India before
1950 and hence the doctrine has been treated as "law in force" within
the meaning of Article 372(1) of Constitution."
It was, furthermore,
observed :
"10. However,
the Crown's preferential right to 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 for recovery of its debts over a mortgagee or
pledgee of goods or a secured creditor. It is only in cases where the Crown's
right and that of the subject meet at one and the same time that the Crown is
in general preferred. Where the right of the subject is complete and perfect
before that of the King commences, the rule does not apply, for there is no
point of time at which the two rights are at conflict, nor can there be a
question which of the two ought to prevail in a case where one, that of the
subject, has prevailed already. In Giles v.
Grover it has been
held that the Crown has no precedence over a pledgee of goods. In Bank of Bihar
v. State of Bihar the principle has been recognised by this Court holding that
the rights of the pawnee who has parted with money in favour 10 of the pawnor
on the security of the goods cannot be extinguished even by lawful seizure of
goods by making money available to other creditors of the pawnor without the
claim of the pawnee being first fully satisfied. Rashbehary Ghose states in Law
of Mortgage (TLL, 7th Edn., p. 386) -- "It seems a government debt in India
is not entitled to precedence over a prior secured debt."
The principles
enunciated therein have been reiterated by the Andhra Pradesh High Court in
Sitani Taxtiles & Fabrics (P) Ltd. v. Asstt.
Commissioner of
Customs & Central Excise, Hyderabad-I [1999 (106) ELT 296 (AP)] where the
applicability of the provisions of the 1951 Act vis-`-vis the Central Excise
dues were in question holding:
"22. From the
above it follows: That in the case of a pledge, pawnee has special property and
lien which is not of an ordinary nature on the goods and so long as his claim
is not satisfied no other creditor of the pawnor has any right to take away
goods or its price. The right of a pawnee could not be extinguished by the
subsequent attachment/seizure of the goods under any other law. It gives the
Pawnee a primary right to sell the goods in satisfaction of the liability of
the pawner.
An unsecured creditor
could not have any higher rights than the pawner and was entitled only to the
surplus money after satisfaction of the secured creditor's dues."
11 The principles
laid down in Dena Bank were reiterated recently in Bank of India v. Siriguppa
Sugars & Cheimicals Ltd. [(2007) 8 SCC 353] wherein it was held:
"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, under Section 529 and 529-A of the Companies Act, 1956, stand only
as unsecured creditor and their rights cannot prevail over the rights of the
pawnee of the goods. Thus, the rights of the appellant bank over the pawned
sugar had precedence over the claims of the Cane Commissioner and that of the
workmen."
This Court also in
State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling
Corporation & Ors. [(1995) 2 SCC 19], stated the law thus:
"6. The claim of
the Commercial Taxes Officer, Bharatpur rests on the provisions of Section 11-
AAAA of the Rajasthan Sales Tax Act, 1954.
Section 11-AAAA has
been introduced in the Rajasthan Sales Tax Act, 1954 by way of an amendment in
1989. Section 11-AAAA is as follows:
12 "11-AAAA.
Liability under this Act to be the first charge.-- Notwithstanding anything to
the contrary contained in any law for the time being in force, any amount of
tax, penalty, interest and any other sum, 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."
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 Taxes 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."
If a company had a
subsisting interest despite a lawful seizure, there cannot be any doubt
whatsoever that a charge /mortgage over immoveable property will have the same
consequence.
{See also KSIIDC Ltd.
v. Secretary, Ministry of Commerce [2005 (187) ELT 12 (Kar)]}.
In ICICI Bank Ltd.
(Since substituted by Standard Chartered Bank) V. SIDCO Leathers Ltd. &
Ors. [(2006) 10 SCC 452], this Court held as under:
13 "48. Section
9 of the Companies Act only states that provisions thereof would override the
memorandum or articles of association of the company or any other agreement
executed or resolution passed by the company. There does not exist any
provision in the Companies Act which provides that the provisions of Section 48
of the Transfer of Property Act would not be applicable in relation to the
affairs of a company. Unless, expressly or by necessary implication, such a
provision contrary to or inconsistent therewith carrying a different intent can
be found in the Companies Act, Section 48 of the Transfer of Property Act,
cannot be held to be inapplicable.
49. Section 48 of the
Transfer of Property Act reads as under:
"48. Priority of
rights created by transfer.-- Where a person purports to create by transfer at
different times rights in or over the same immovable property, and such rights
cannot all exist or be exercised to their full extent together, each later
created right shall, in the absence of a special contract or reservation
binding the earlier transferees, be subject to the rights previously
created."
50. The said
provision, as noticed hereinbefore, deals with a specific situation. The
exceptions to the provisions of Section 48 are as under:
(i) where parties
execute a registered deed at any point in time which is subsequent to a prior
but an unregistered deed. This is also subject to the doctrine of notice i.e.
that parties to the registered deed executed after the unregistered deed did
not have notice of the same;
14 (ii) where there
are exceptions carved out by a statute--for example, Section 98 of the Bengal
Tenancy Act;
(iii) a mortgage
executed on the directions of the court to preserve a property;
(iv) where a
"salvage lien" is created i.e. where lien is created for moneys
advanced for the purposes of saving the property from destruction or
forfeiture. The salvage lien is confined in English law to maritime lien."
Strong reliance,
however, has been placed by Ms. Sunita Rao on Union of India v. Somasundram
Mills (P) Ltd. & Anr. [(1985) 2 SCC 40] wherein this Court while construing
the provisions of sub-section (2) and (3) of Section 73 of the Code of Civil
Procedure, held as under :
"It is a general
principle of law that debts due to the State are entitled to priority over all
other debts. If a decree holder brings a judgment- debtor's property to sale
and the sale proceeds are lying in deposit in court, the State may, even
without prior attachment exercise its right to priority by making an application
to the executing court for payment out. If however, the State does not choose
to apply to the court for payment of its dues from the amount lying in deposit
in the court but allows the amount to be taken away by some other attaching
decree holder, the State cannot thereafter make an application for payment of
its dues from the sale proceeds since there is no amount left with the court to
be paid to the State.
However, if the State
had already effected an attachment of the property which was sold even before
its sale, the State would be entitled to 15 recover the sale proceeds from
whoever has received the amount from the court filing a suit.
Section 73(3) read
with 73(2) CPC contemplate such a relief being granted in a suit."
This Court in that
case was dealing with conflict of interest between a secured creditor and an
unsecured creditor and not with a question we have to deal with.
Reliance has also
been placed by Ms. Rao on Macson Marbles Pvt. Ltd. (supra) wherein the dues
under Central Excise Act was held to be recoverable from an auction purchaser,
stating :
"7. 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.
8. 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 16 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.
Section 11 of the
Central Excise Act, 1944 reads as under :
"Section
11.--Recovery of sums due to Government--In respect of duty and any other sums
of any kind payable to the Central Government under any of the provisions of
this Act or of the rules made thereunder, including the amount required to be
paid to the credit of the Central Government under section 11D the officer
empowered by the Central Board of Excise and Customs constituted under the
Central Boards of Revenue Act, 1963 (54 of 1963) to levy such duty or require
the payment of such sums may deduct the amount so payable from any money owing
to the person from whom such sums may be recoverable or due which may be in his
hands or under his disposal or control, or may recover the amount by attachment
and sale of excisable goods belonging to such person; and if the amount payable
is not so recovered, he may prepare a certificate signed by him specifying the
amount due from the person liable to pay the same and sent it to the Collector
of the district in which such person resides or conducts his business and the
said Collector, on receipt of such certificate, shall proceed to recover from
the said person the 17 amount specified therein, as if it were an arrear of
land revenue.
Provided that where
the person (hereinafter referred to as predecessor) from whom the duty or any
other sums of any kind, as specified in this section, is recoverable or due,
transfers or otherwise disposes of his business or trade in whole or in part,
or effects any change in the ownership thereof, in consequence of which he is
succeeded in such business or trade by any other person, all excisable goods,
materials, preparations, plants, machineries, vessels, utensils, implements and
articles in the custody or possession of the person so succeeding may also be
attached and sold by such officer empowered by the Central Board of Excise and
Customs, after obtaining written approval from the Commissioner of Central
Excise, for the purposes of recovering such duty or other sums recoverable or
due from such predecessor at the time of such transfer or otherwise disposal or
change."
A bare perusal of the
aforementioned provision clearly goes to show that the right to recover must
start with the sale of excisable goods. It is only when the dues of the Central
Excise Department are not satisfied by sale of such excisable goods,
proceedings may be initiated to recover the dues as land revenue.
We may notice that a
Division Bench of Orissa High Court in Suburban Ply & Panels Pvt. Ltd. v.
Assistant Commissioner of Central Excise & Customs, BBSR [2002 (144) ELT
257 (Ori)], despite noticing 18 Dena Bank (supra) as also other decisions,
relying on Section 11 of the Central Excise Act and Rule 230(2) of the Central
Excise Rules held as under :
"The rule is
prima facie wide in its operation.
There is no challenge
to the validity of the rule in this proceeding. Going by Sub-Rule (2) of Rule
230, it appears to us that a change in ownership of the undertaking would not
in any manner effect the obligation of the person liable to pay excise duty and
authority concerned has the right to proceed against the successor in business
or transferee even though the duty is assessed subsequently but the liability
had arisen before such transfer. In other words, the right is given to the
department to proceed against the Undertaking or its products or machinery even
though it may be in the hands of the transferee. On a plain reading of the
rule, it appears to us that if the defaulter had sold the Undertaking, the
transferee would be liable for the excise duty that remained outstanding as on
the date of transfer in its favour."
The High Court, with
utmost respect, proceeded on a wrong premise that only in terms of sub-section
(4) of Section 29, proceeds of the sale will be held in trust by the Financial
Corporation and appropriated towards the discharge of the debt due to it after
first applying the proceeds in payment of cost charges and expenses incurred
and the balance to be paid to the person entitled and having regard to the
doctrine of Crown debt, the auction purchaser must satisfy it.
19 The Orissa High
Court failed to notice the binding precedent of this Court in Dena Bank in its
proper perspective. We are concerned here with the respective rights of a
secured creditor and unsecured creditor over a property. If the finding of the
Orissa High Court is correct, there was no necessity for the State Legislatures
or the Parliament to amend laws incorporating provisions to create first charge
over the properties of the debtor. The High Court failed to notice Article 372
of the Constitution as also the well settled principles of law that a statutory
provision shall prevail over the Crown debt.
Furthermore, the
right of a State Financial Corporation is a statutory one. The Act contains a
non- obstante clause in Section 46B of the Act which reads as under :
"Section
46B--Effect of Act on other laws--The provision of this Act and of any rule or
orders made thereunder shall have effect notwithstanding anything inconsistent
therewith contained in any other law for the time being in force or in the
memorandum or articles of association of an industrial concern or in any other
instrument having effect by virtue of any law other than this Act, but save as
aforesaid, the provisions of this Act shall be in addition to, and not in
derogation of, any other law for the time being applicable to an industrial
concern."
20 The non-obstante
clause shall not only prevail over the contract but also other laws. [See
Periyar & Pareekanni Rubber Ltd. v. State of Kerala (2008 (4) SCALE 125)]
For the reasons aforementioned, there is no merit in the appeals. The appeals
are dismissed accordingly with costs. Counsel's fee quantified to Rs.50,000/-
.....................................J.
[S.B. Sinha]
.....................................J.[Cyriac
Joseph]
New
Delhi;
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