State Bank of Bikaner & Jaipur v. National Iron & Steel Corp.

By way of this judgment it will be clear that a piece of property was mortgaged with SBI and the property also had tax liability imposed on it as per the State legislation. While deciding whose claim was prior, it was held that tax liability was prior to mortgage liability to the bank.
CITATION1995 SCC (2) 19
COURTHigh Court of Rajasthan
JUDGES/CORAMChief Justice K.G. Agrawal
DATE OF JUDGEMENT02.09.1993

Introduction

The present case relates to the conflict caused by Section 11AAAA of the Rajasthan Sales Tax Act which gave a prior charge to the Sales Tax authorities even if a charge was created before the operation of the Section.

Facts

The facts of the case are as follows: The petitioner-appellant, namely, the State Bank of Bikaner and Jaipur had given cash credit facilities to National Iron and Steel Rolling Corporation. As a security for repayment of the amounts advanced the Corporation created a mortgage of their factory premises situated at Industrial Area, Bharatpur by a Deed of Mortgage dated 18.10.1977. They had also, by a Letter of Promise dated 10.06.1981, pledged the plant and machinery installed in the said premises to the bank as a security for the aforesaid expenses. There was also an agreement for the pledge of movables dated 07.01.1980 executed by the Corporation in favour of the appellant-bank.

The appellant-bank filed Civil Suit No. 5/86 in the court of the Additional District Judge II, Bharatpur against the respondents for the recovery of total sum of Rs 3,79,672/- due and payable under the cash credit facility and for future interest @ 16.25% p.a. with quarterly rests. In this particular suit the appellant-bank also asked for the realisation of the mortgage security under Order 34, Rule 4 given Code of Civil Procedure.

While the suit was pending, the Commercial Taxes Officer, Bharatpur got himself impleaded in the suit on 18.05.1990 on the ground that he had a prior claim for the recovery of a sum of Rs 1, 19,122/- as sales tax dues from the Corporation and was entitled to realize it by sale of the mortgaged property.

Issues

The main issues in the case were:

  1. Whether or not, the State Bank of Bikaner & Jaipur has a prior charge on National Iron and Steel Corporation’s mortgaged property.
  2. Whether or not Section 11AAAA of the Rajasthan Sales Tax Act was contrary to Article 255 of the Constitution of India and thus was liable to be ignored.

Summary of court decision and judgment

The property which was the subject-matter of the mortgage had been sold by auction under the orders of the court for a sum of Rs 4,02,000/- to one Smt Kamlesh Goel. Under the orders of the court the sale proceeds had been deposited in court. It was contended by the Commercial Taxes Officer, Bharatpur that the sales tax dues of the Corporation were liable to be paid first out of the sale proceeds. The claim of the appellant-bank could be satisfied only out of the balance amount. The Trial Court by its judgment and order dated 18.05.1990 accepted this claim of the Commercial Taxes Officer. The revision petition of the appellant-bank was dismissed by the High Court by the impugned judgment and order. Hence, an appeal was made by special leave and the Court held the claim of Commercial Taxes Officer as prior under Section 11AAAA.

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Analysis

The claim of the Commercial Taxes Officer, Bharatpur rested on the provisions of Section 11-AAAA of the Rajasthan Sales Tax Act, 1954. The said provision provides that “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 particular person”. The appellant, however, contended that since the mortgage in their favour was prior in point of time, their claim would have precedence over the claim of the sales tax authorities.

It is, therefore, necessary to consider the effect of Section 11-AAAA 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 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 under Section 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 v. Anand Chintaman Datar[1]. The Court has observed 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 has held that the phrase “transferee of property” refers to the transferee of entire interest in the property and it does not cover the transfer of only an interest in the property by way of a mortgage.

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In the present case we have to consider whether the statutory first charge have priority over an earlier mortgage. It was urged by 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, would 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 a 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 under Section 11-AAAA 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 him.

Regarding the next issue of 11AAAA of the Rajasthan Sales Tax Act being contrary to Article 255 of the Constitution of India, the answer has to be in negative. Although the Section was brought in 1989, it would be applicable to all claims of bank or any other persons and in that event, taxes would be recoverable as a priority. The law has given priority to the sales tax recoverable under the Act. It is not necessary for the Sales Tax Department to file a suit for recovery of the same. The taxes are recoverable under the Act as arrears of land revenue and, as such, neither a suit was required to be filed nor that would a claim of the taxes have to give way to the claim of the State Bank of Bikaner and Jaipur. It is true that the State Bank of Bikaner and Jaipur was a nationalised bank, but that should not debar the application of the provisions of Section 11AAAA to the present case.

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The Rajasthan High Court gave its final decision in line with the above analysis and hence, the judgement was appropriate and logically correct.

Conclusion

In the present case, the impugned 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 created by Section 11-AAAA of the Rajasthan Sales Tax Act can operate only over the equity of redemption, could not be accepted. 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 case 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.


[1](1974) 2 SCC 799.