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Judgment
S.L. Jain, J.
Being aggrieved by the order dated 15-9-99 passed by VIIth Additional District Judge, Bhopal in Transfer Execution Case No. 8/ 98, rejecting the application filed by the appellant under Order 21 Rule 58 of the CPC (henceforth the ''Code''), the appellant has filed this appeal under sub-rule (4) of Rule 58 of Order 21 of the Code.
The facts as unfolded in nutshell are that the judgment debtor, respondent No. 1, Premier Brass & Metal Works, Ltd., Bhopal had availed various facilities from the appellant/objector/bank right from the year 1956. The loans and the cash credit facilities were renewed/increased from time to time. The respondent No. 1/judgment debtor, through its directors by way of securities for repayments of such loan and cash credit facility made available to them, had equitably mortgaged their lease hold plot No. 8, Industrial Estate, Govindpura, Bhopal together with the building constructed thereon in favour of the appellant. The respondent had also created other securities such as hypothecation of tangible movable properties and machineries as well as finished and raw materials stored or available in stocks or in the trade thereof from time to time.
Having failed to operate various banking accounts and also having failed to repay the total balance outstanding amount to the appellant, a suit for recovery of its dues amounting to Rs.14,03,38,797.30 was filed by the appellant in the Court of District Judge, Bhopal on 6-5-94, which was registered as C.S. No. 56-A/94. It appears that this case was subsequently transferred to Debt Recovery Tribunal and which has been decreed.
During the pendency of the above suit, the respondent No. 5, Hidustan Copper Limited filed a suit before the High Court at Delhi to which the appellant was not a party and was not having knowledge of the same. This suit was decreed. The decree was transferred to District Judge, Bhopal for its execution. The same was transferred to VIIth Additional District Judge, Bhopal, where the transfer execution case was registered as Case No. 8/92. In the execution proceedings the property of respondent No. 1, Premier Brass & Metal Works, Ltd., Bhopal was attached. When the auction was being conducted the appellants came to know about the same. They filed a petition under Order 21 Rule 58 of the code before the executing court.
The grounds on which the petitioner/bank objected to the attachment and sale is that it is a secured creditor having obtained pledge or mortgage of all the movables and immovables attached in the recovery proceedings belonged to the bank and other creditor has no right to proceed against the machineries and other movable and immovable properties mortgaged with it without satisfying its claim and debt.
During the pendency of the execution proceedings respondent No. 6, State of M.P. through sales tax department, also filed a petition alleging dues of sales tax department.
The executing Court, on the basis of Section 53 of M.P. Vanijyakar Adhiniyam, 1994 (henceforth the ''Adhiniyam'') vide the impugned order came to the conclusion that the amount of tax and penalty if any payable by the dealer/respondent No. 1 under the Act is a first charge on the property of the dealer and stayed the execution proceedings and gave liberty to the State Government/respondent No. 6, to recover the amount of tax from the suit-property and thereafter further proceedings shall take place regarding the auction of the attached property.
It is this order of the Court-below which is the cause of grievance of the appellant.
In this appeal, Jiwan Singh Chhatwal, who purchased the property in the sale held by the sales tax department in the recovery proceedings raised objection as intervener. The Union of India also raised an objection that a sum of Rs. 41,47,546/- adjudicated by them towards the central excise dues and Rs. 20,00,000/- towards penalty against the respondent No. 1 are recoverable from respondent No. 1 as land revenue and this amount is the first charge on the suit-property and it was prayed that an amount of Rs. 38,40,000/- be paid to the Union of India out of the proceeds of the auction made by the State Government.
I have heard Shri V.S. Shroti, senior counsel, with Shri A. Shroti, appearing for appellant and Shri Sudesh Verma, Govt. Advocate, appearing for the State/respondent No. 6, and perused the record of the case. At the time of final arguments, none appeared on behalf of intervener, Jiwan Singh Chhatwal and also for Union of India.
Learned counsel for appellant vehemently submitted that the words used in Section 53 of the Adhiniyam are in Section 33-C of General Sales Tax Act (henceforth the ''Act'') which was in force before coming into force of the Adhiniyam "the first charge on the property of the dealer" will not affect any pledge or mortgage created before the tax which is sought to be recovered become due. In any case, it will not affect any pledge or mortgage created before 15th March, 1976 when Section 33-C of the Act came into force.
Per contra, learned counsel for respondent No. 6 submitted that revenue authorities are empowered to have resort to the provisions of the Land Revenue Code in respect of the amount due as tax and the appellant / bank is not entitled or justified to raise any objection and is entitled to only excess and surplus sale proceeds after satisfying the tax dues.
The sum and substance of the contention of Shri V.S. Shroti, senior counsel is that the appellant is the pledgee/mortgagee of the machineries and other movables and immovables of respondent No. 1 and the possession of such movables and immovables after the pledge or mortgage is for or on behalf of the bank. Therefore, on proceedings by any creditor against the respondent No. 1 can be made in respect of the pledge or mortgage of the properties and consequently, the order impugned is illegal and erroneous; and is liable to be set aside.
It is undisputed that the appellant/bank advanced loan on pledges and mortgages of movable and immovable properties and machineries of the respondent No. 1. It instead of taking physical possession of the pledged movables of respondent No. 1, permitted the later to be in possession of the machineries and other movables for and on behalf of the bank. The movable and immovable properties were mortgaged or pledged in the year 1966. Even if the amount of tax is due and payable to the State Government, the debt due and payable to appellant/bank had come into existence much prior to the incident of liability of the sales tax dues.
The appellant/bank holds the legal possession and custody of the machineries and other movables of respondent No. 1 which were under pledge and they must be held to be in the possession of the bank itself. The physical possession of the movables and the machineries of the respondent No. 1 may be with the respondent No. 1 but in fact, in the eyes of law the respondent No. 1 shall be deemed to be in possession of the same for and on behalf of the bank, the pledgee and the mortgagee. Immovable properties mortgaged with the bank are also subject to the mortgage. The order of the Court-below is based on the assumption that the sales tax dues are the first charge on the property of the dealer. Section 53 of the Adhiniyam reads as follows :
Tax to be first charge : Notwithstanding anything to the contrary, contained in any law for the time being in force and subject to the provisions of Section 530 of the Companies Act, 1956 (No. 1 of 1956), any amount of tax and/or penalty or interest, if any, payable by a dealer or other person under this Act shall be first charge on the property of the dealer or such person.
Learned counsel for the appellant submitted that Section 33-C of the Act came into force with effect from 15th March, 1976. It will not affect any pledge or mortgage created before 15th March, 1976.
Mortgage of immovable property and hypothecation or pledge of immovable property creates an interest in the property. The interest created by mortgage is itself immovable property. Similarly, the property under a pledge or hypothecation shall be held to be of the person to whom it is hypothecated or pledged. As has been held in M.K. Rangnathan v. Govt. of Madras. AIR 1955 SC 607 quoting Lord Wren bury in Food Controller v. Cork, 1923 AC 647 the mortgagee is in a position to say that the mortgaged property is to the extent of the mortgage is my property. While discussing a similar situation a Division Bench of this Court, in State Bank of Indore Vs. The Additional Tehsildar-Cum-Sales Tax Officer and Others, , observed thus :
There can be no doubt that a mortgage of immovable property creates an interest in the property mortgaged in favour of the mortgagee which interest is itself immovable prorperty. The mortgagee is in a position to say that "the mortgaged property is to the extent of the mortgage my property" see M.K. Rangnathan v. Government of Madras, (AIR 1955 SC 607). Lord Wrenbury in Food Controller v. Cork (1923 AC 647). Similarly, a pawnee has a "special property or special interest in the thing pledged" and this right to property vests in the pawnee in so far it is necessary to secure the debt by enabling the Pawnee to compel payment of the debt or to sell the goods when the right to do so arises. This special property is to be distinguished from the mere right of detention which the holder of a lien possesses [see Bank of Bihar v. State of Bihar, AIR 1971 SC 12]. Section 33-C, as earlier stated, came into force on 15th March, 1976. It says that any amount of tax and/or penalty payable by a dealer "shall be first charge on the property of the dealer". Now if the dealer sold his property before 15th March, 1976, it is obvious that the property sold would not be affected by section 33-C for the reason that after sale it ceased to be the property of the dealer. Similarly, if the dealer made a mortgage or pledge of his property before 15th March, 1976, the interest so transferred in favour of the mortgagee or Pawnee, which is itself property, would not be affected by section 3-C as it ceased to be the property of the dealer before the charge u/s 33-C started operating. Even if the tax due is for any period prior to 15th March, 1976, it becomes first charge on the property of the dealer as available on that date. It is to be noted that the charge created by section 33-C is not like the one created by section 137 of the Madhya Pradesh Land Revenue Code, 1959, which enacts that the land revenue assessed on any land shall be first charge on the land. Had the provision been that the tax payable on sale of goods sold, the legal position would be different. The question as to whom the land and the goods belong is irrelevant in such cases. Section 33-C from 15th March, 1976, created first charge in respect of any amount of tax payable by a dealer on the property of the dealer; it is therefore, relevant to enquire as to what was the property of the dealer on 15th March 1976. The interest created before that date in favour of a mortgagee or Rawnee had ceased to be the property of the dealer and, therefore, that interest could not be affected by section 33-C. In this view of the matter the petitioner''s interest arising in the property of the respondents in both the petitions from the mortgages and pledges created before 14th March 1976 would not be affected by section 33-C.
Another Division Bench of this Court in Bank of India Vs. Binod Steel Ltd. and Another, has held that hypothecation of goods is only an en-tended lien of pledge, the creditor permitting a debtor to retain possession on behalf of or intrust for himself. A subsequent creditor cannot attach and sell the goods for recovery of his debt without satisfying the pledgee.
On the basis of the above authorities I am of the view that the appellant is in a position of a secured creditor and the State Government has no authority to attach and sell the movable and immovable property mortgaged or pledged with the appellant without satisfying the appellant''s debt.
Learned Government Advocate referred to the decision of Supreme Court in Builders Supply Corporation v. Union of India and submitted that the recovery of the amount of tax due to sales tax department will take precedence over the debts due to other private creditors but in the judgment cited by the counsel for the State, the debt was an unsecured debt. In the present case, the debt is secured debt of the appellant, therefore, the judgment cited the counsel for the State has no application to the present case. The charge on the property of the respondent No. 1 will operate only on its property as it existed on 15th March, 1976, the day on which Section 33-C of the Act came into force. Any interest in the property which the respondent No. 1 transferred or created earlier in favour of the appellant-bank would not be affected by Section 33-C of the Act
Learned Government Advocate also submitted that even prior to coming into force of Section 33-C of the Act Sections 137 and 155 of M.P. Land Revenue Code were in force. Under these sections the amount of sales tax is recoverable as land revenue and the land revenue is the first charge.
Per Contra, learned senior counsel appearing on behalf of the appellant-bank, relying on Collector of Aurangabad and Another Vs. Central Bank of India and Another, ; submitted that the priority specified in Section 137 of M.P. Land Revenue Code applied only in respect of land revenue and not in respect of other taxes. Merely because other taxes are recoverable as land revenue, the same will not become land revenue.
Under Section 155 of M.P. Land Revenue Code the arrears of sales tax do not become the arrears of land revenue. They have been declared merely recoverable as arrears of land revenue. Dues recoverable as arrears of land revenue under the enactment other than the land revenue code would be recoverable u/s 155 of the Code but to such recovery proceedings the provisions of section 137 of the Code are not applicable. The sale is subject to prior changes. There will be distinction between any other areas to be recovered as arrears of land revenue and actually the arrears of such land revenue which is assessed on a land under the provisions of the code namely Sections 58, 59-A, 59-B and 60 under Chapter 6. Therefore, the contention of learned government advocate cannot be countenanced.
No primacy can be given to the dues on account of the sales tax over secured debt in favour of the bank and the finding of the trial Court that the sales tax due is the first charge on the property of respondent No. 1 is not defensible.
Learned counsel for the State lastly submitted that the State is entitled to claim priority towards payment of sales tax according to the common law doctrine of Priority of Crown Debts. Common law doctrine was evolved in English Law which is described by Hallsburry as follows :
The royal prerogative may be defined as being that pre-eminence which the Soverign enjoys over and above all other persons by virtue of the common law, but out of its ordinary course, in right of her regal dignity, and comprehends all the special dignities, liberties, privileges, powers and royalties allowed by the common law to the Crown of England.
In Dena Bank Vs. Bhikhabhai Prabhudas Parekh and Co. and Others, , it has been held that the preferential right of the crown regarding recovery of debts of other creditors is confined to ordinary and unsecured creditors. It does not apply over a mortgagee or pledgee of goods or a secured creditor. In Dena Bank (supra) the Apex Court observed in paragraph 10 of the judgment thus :
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 it debts over a mortgagee or pledges 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 vs. Grover [ (1832) 131 ER 563] it has been held that the Crown has no precedence over a pledgee of goods. In The Bank of Bihar Vs. The State of Bihar and Others, the principle has been recognized by this court holding that the rights of the pawnee who has parted with money in favour 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 (TTL, 7th Edn.,p. 386) - "It seems a government debt in India is not entitled to precedence over a prior secured debt.
The above being the position of law, I am of the view that the common law doctrine of the priority of Crown debts would not extend to provide in preference to Crown debts over secured private debts.
For the reasons stated above, the objection of the Union of India is also not acceptable because on the date on which the amount of Central Excise became due, the property in dispute were mortgaged with the appellant.
For all the reasons stated above I have no hesitation to hold that the impugned order is illegal and erroneous and is liable to be set aside.
In the result, the appeal is allowed. The order impugned dated 15.2.1999 is set aside and it is declared that Section 33-C of the Act does not affect the rights created in the appellant''s favour by mortgage or pledge of the property of respondent No. 1 before 15th March, 1976 and these rights cannot be sold for the recovery of the sales tax dues of the respondent No. 1 or for the amount due to the decree holder.