Commissioner of Service Tax 1 vs State Bank of India

S. Ravi Kumar, Chairperson

This Appeal is against Order dated 19.01.2017 of DRT, Bangalore, in OA 766/2013.

Brief facts leading to this Appeal are as follows:-

Respondents 1 to 16, which are Banks/Financial Institution, as consortium of Banks, filed above referred OA for recovery of a sum of Rs.6203,35,03,879.42p, due from Respondents 17 to 20 herein ( who are Defendants 1 to 4 in OA) as on 31.05.2013, with future interest;

In the said OA, Appellant herein filed IA 2318/2014 contending that it has first charge over the mortgaged/hypothecated properties as per Section 88 of Finance Act, 1994. Said Application was allowed, pursuant to which, Appellant is impleaded as Defendant No.6 in the OA and filed its Written Statement, contending that an amount of Rs.58.17 Crores is due from Respondent No.17 herein, as Service Tax that was collected from customers, and as per Section 88 of Finance Act, 1994, Appellant has the first charge over properties;

Defendants 1 to 4 filed Written Statement disputing the claim;

Tribunal below, on the basis of pleadings, framed 14 points for consideration, and out of 14 points, point No.14, is in respect of contention of Appellant herein. Tribunal below held that as per Section 31B of Recovery of Debts and Bankruptcy Act, 1993 (in short, RDB Act), the contention of Appellant herein is not correct and held the point against Appellant herein. Aggrieved by that finding, present Appeal is preferred.

Advocate for Appellant and Advocate for Banks representing R1, R3, R6 to R16, filed Written Arguments and Advocate for R21 adopted the Written Arguments filed by R1 and the contents of Written Arguments are reiterated at the time of oral submissions.

Advocate for Appellant submitted that Appellant is having first charge as per Section 88 of Finance Act, 1994, as per which, Appellant has attached the Kingfisher House, Mumbai, 6 Aircrafts, 2 Helicopters and frozen the Bank accounts of M/s. Kingfisher Airlines Ltd., as per Order dated 18.12.2014. He submitted, when Appellant is having first charge, mere priority given under Section 31B of RDB Act, 1993, cannot override the right of Appellant given under Finance Act, 1994. He submitted, Tribunal below has not correctly considered the legal provisions. He further submitted that Tribunal below proceeded on misreading and mi-interpretation of Section 31B of RDB Act, 1993, in comparison with Section 88 of Finance Act, 1994, therefore, impugned Order is untenable. He submitted, as Appellant has statutory first charge, the findings of Tribunal below are to be set aside and Appeal has to be allowed.

On the other hand, Advocate for Banks submitted that as against the attachment Order of Appellant, Banks preferred Writ Petition before Hon’ble High Court of Karnataka, and in that Writ Petition, in view of undertaking given by Banks, Hon’ble High Court, permitted Banks to take steps to sell secured properties, in accordance with law, and retain and utilize sale proceeds subject to undertaking. He submitted, DRT correctly appreciated law and arrived at a just conclusion by relying on Section 31B of RDB Act, 1993, which came into force from 12.08.2016. He submitted, a bare reading of Section 31B of RDB Act, 1993, makes it clear that, the rights of Secured Creditors over the secured asset will have precedence over all Government dues including taxes. He submitted, even Section 88 of Finance Act, 1994, would indicate that the Government will have first charge on the property of Assessee, but subject to an exception in respect of rights/action created/taken under RDB Act, 1993, therefore, Secured Creditor enforcing its right under RDB Act, 1993, has priority over the claim of Appellant. He submitted that Tribunal below rightly negatived the contentions of Appellant, and there are no grounds to interfere with the Order of Tribunal below.

I have perused the material papers including impugned Order dated 19.01.2017.

It may be relevant to examine the provisions relied on by Advocate for Appellant and Advocate for Respondents. They are as follows:-

Section 88 of Finance Act, 1994:- Liability under Act to be first charge. — Notwithstanding anything to the contrary contained in any Central Act or State Act, any amount of tax, penalty, interest, or any other sum payable by an assessee or any other person under this Chapter, shall, save as otherwise provided in section 529A of the Companies Act, 1956 (1 of 1956) and the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of 1993) and the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002 (54 of 32 2002), be the first charge on the property of the assessee or the person as the case may be.

Section 31B of RBD Act, 1993: [31B. Priority to secured creditors.-- Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority.

Explanation.-- For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code.]

As already referred to above, main contention of Appellant is that it has got first charge over the assets of Borrowers as per Section 88 of Finance Act, 1994. While dealing with this contention, Tribunal below examined the provisions of Section 88 of Finance Act, 1994, and provisions of Section 31B of RDB Act, 1993. It is not in dispute that Section 31B of RDB Act, 1993, makes it very clear that rights of Secured Creditors over the secured assets will have precedence over all Government dues including taxes. This provision has come into force in 2016, and the provision under which Appellant relies on, is of the year, 1994, therefore, Section 31B of RDB Act, 1993, would override the provision relied on by Appellant. In other words, Section 31B of RDB Act, 1993, clarifies that the rights of Secured Creditors will have precedence over all Government dues including taxes, and it prevails over Section 88 of Finance Act, 1994.

As rightly pointed out by Advocate for Banks, even the liability under Section 88 of Finance Act, 1994 is subject to the provisions of Section 529A of Companies Act, 1956, provisions of RDB Act, 1993 and provisions of SARFAESI Act, 2002. So, the contention of Advocate for Banks that Section 88 of Finance Act, 1994, creates an exception in respect of action taken under RBD Act, 1993, has to be accepted.

On a scrutiny of provisions referred to above, I am of the considered view that the Tribunal below has rightly applied Section 31B of RDB Act, 1993 and recorded a finding, and there are absolutely no grounds to interfere with said finding.

In view of my foregoing observations and discussions, it is held that the Appeal is devoid of merits and liable to be dismissed.

In the result, the Appeal in R.A:196/2018 is dismissed. Parties shall bear their own costs. All pending IAs, if any, stand closed.