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Judgment
S.S. Subramani, J.—Sixth defendant in O.S. 9703 of 1981 on the file of II Additional City Civil Court, Madras is the appellant. Parties
herein will be referred to according to their rank in the suit.
First respondent herein/plaintiff filed the above suit for recovery of Rs. 71,047.34/- with future interest at 16-1/2% per annum from the date of
suit till the date of payment, allowing plaintiff to recover the same from defendants 1 to 6 jointly and severally and to direct the defendants to pay
the cost of the suit and for such other reliefs.
Plaintiff is a nationalised bank. First defendant is a firm in which defendants 2 to 4 are partners. The firm had availed Bill purchasing facility from
bank subject to ''the maximum limit of Rs. 5,00,000/-. First defendant also executed a power of Attorney in favour of plaintiff on 7.7.1979 to
collect the proceeds of the bill from the drawees separately. This act amounts to equitable assignment. If any amount is payable by drawees, the
same could be collected by plaintiff directly from them and in default of such payment, plaintiff is entitled to take proceedings without the junction
of first defendant. 6th defendant is one of the drawees and on the basis of power of attorney, Plaintiff is entitled to collect the amount from 6th
defendant.
But it seems that 7th defendant issued a notice u/s 26of Tamil Nadu General Sales Tax Act to pay the amount to it as if there are sales tax
arrears from first defendant. The demand notice issued by 7th defendant was for Rs. 71,044.34, higher than the amount due to plaintiff. It is said
that since plaintiff has become agent coupled with interest, it has got unqualified power to recover the dues from the amount payable in respect of
each of the local bills purchased by plaintiff. In spite of the fact that 6th defendant was brought to the notice of power of attorney, it paid a sum of
Rs. 21,000/- out of which total outstanding liability of Rs.58,916.04 to 7th defendant. This according to plaintiff is not valid payment and 6th
defendant is therefore liable to pay plaintiff the entire amount outstanding under the bills, i.e. Rs. 58,916.04 + interest. 5th defendant also executed
a deed of guarantee on 31.10.1979 agreeing to repay the outstanding in respect of loan facilities including the facility granted to first defendant
under bills purchase limit.
An advocate notice was issued to defendant on 28.6.1980 for which a reply was sent by defendants 1 to 5 that due to financial troubles, they
could not pay the amount and they are making arrangements to pay the amount without any further delay. Since the matter was not settled in spite
of the notice, the suit was instituted.
Defendants 2 and 3 have filed written statement admitting the transaction and they further contended that in view of the power of attorney, there
is equitable assignment and therefore they cannot be made personally liable for the amount due to plaintiff.
Defendants 4 and 5 also adopted the contentions of third defendant.
Sixth defendant contended that first defendant during the material time supplied to 6th defendant goods to it and in the course of business
amounts have become due to first defendant. In regard to power of attorney it is said that it cannot have any precedence against the debt and when
Ex.B6 notice was issued to 7th defendant, it is bound to pay the same and to that extent it is entitled to get due credit for the payment made by it.
It is also said that u/s 26 of the Tamil Nadu General Sales Tax Act, money advanced by plaintiff to first defendant is to be adjusted against the
moneys due and payable by first defendant to the plaintiff as per the books of account of plaintiff in respect of bills purchased is against the
provisions of Section 26 of the Tamil Nadu General Sales Tax Act. It is said that 6th defendant paid amount to the 7th defendant. It gives valid
discharge as against it and that for the amount that is paid plaintiff has no cause of action against 7th defendant. It is prayed for dismissal of the suit.
7th defendant, who is Commercial Tax Officer contended that the suit itself is not maintainable as against it, since no notice u/s 80 of CPC was
issued to it and State Government was also not made a party to the suit. It is also said that amount was due from first defendant towards sales tax
arrears for the year 1978-79 and 1979-80 and notice was issued to 6th defendant asking it to pay the amount towards sales tax arrears. It is said
that 6th defendant is liable to pay an amount of Rs. 62,098/- towards sales tax as per Ex.B6 notice. It prayed for dismissal of the suit as against it.
Along with the suit, three other suits were also jointly tried and trial Court passed decree directing 6th defendant to pay a sum of Rs. 57,04434
to plaintiff. It further directed defendants 1 to 5 to pay a sum of Rs. 57.044.34. It also found that defendants 1 to 5 are bound to pay a sum of Rs.
21,000/- to plaintiff and in case they do not pay the amount, 6th defendant is liable to pay the sum and in case if such payment 6th defendant is
entitled to recover the same from defendants 1 to 5. Cost was also allowed as against defendants 1 to 5 and against 7th defendant, the suit was
dismissed. 7th defendant was also allowed to recover the cost from defendants 1 to 5.
It is against the said judgment and decree, 6th defendant preferred this appeal.
In the various grounds taken in the memorandum of appeal it is contended that State debt is having priority and when a prohibitory order is
issued by State Government asking it to pay the amount, any payment made thereafter will amount to full discharge and 6th defendant is not to be
made liable to pay the amount over again to plaintiff. It is also argued that u/s 26 of Tamil Nadu General Sales Tax Act, statutory protection is
given to the person who receives garnishes order if payment is made to department and in case the order is not honoured garnishee is to be made
personally liable for the amount. It is also contended that when the statutory charge is created consequent upon default of the registered dealer to
pay the sales tax due, registered dealer is thereafter precluded from in any way dealing with his assets whatsoever. It is also argued that when there
is arrears of sales tax and when there is statutory demand for the same, all properties belonging to the registered dealer automatically get charged
for the amount. It prayed for dismissal of the suit as against it.
Before going into the rival contentions. I will first consider what is the finding of the lower Court.
Lower Court found that u/s 202 of the Indian Contract Act, Bank is the agent of first defendant and the agency is with interest. It further came
to the conclusion that when a power of attorney has been executed by the executant, it amounts to equitable assignment and automatically plaintiff
becomes the owner of the amount which the 6th defendant owes to first defendant. In that view of the matter, 6th defendant should not have paid
any amount to Sales Tax Department pursuant to Ex.B6 notice and State Government also not entitled to any priority as against Bank. Trial Court
further held that 6th defendant should have paid the entire amount to plaintiff towards bill purchased and even before demand is made, the amount
has become the asset of the Bank.
The above decree of the Trial Court is challenged by 6th defendant in this appeal.
The question that requires consideration is whether the reasoning of lower court in making 6th defendant liable for the amount is correct or not?
I heard the learned counsel on both sides in detail.
Section 24 of the Tamil Nadu General Sales Tax Act provides for payment or recovery of sales tax. Section 26 deals with mode of recovery.
Relevant portion of Section 26 reads thus,
(1) The assessing authority may, at any time or from time to time, by notice in writing (a copy of which shall be forwarded to the dealer at his last
address known to the assessing authority) require-
(i) any person from whom money is due or may become due to the dealer or to any person who has become liable to pay any amount due under
this Act; or
(ii) any person who holds or may subsequently hold money for or an account of the dealer or other person who has become liable to pay any
amount due under this Act,
to pay the assessing authority either forthwith upon the money becoming due or being held at or within the time specified in the notice (not being
before the money becomes due or is held) so much of the money as is sufficient to pay the amount due by the dealer or other person in respect of
the arrears that have become payable under this Act or the whole of the money when it is equal to or is less than the arrears aforesaid.
... ... ...
Sec.26(3) - Any person making any payment in compliance with a notice under this section shall be deemed to have made the payment under the
authority or the dealer and the receipt of the assessing authority shall constitute a good and sufficient discharge of the liability of such person to the
extent of the amount referred to in the receipt.
Sec.26(4) - Any person making any payment to the dealer after receipt of the notice referred to in this section shall be personally liable to the
assessing authority to the extent of the payment made or to the extent of the liability of the dealer for the amount due under this Act, whichever is
less.
... ... ...
Sec.26(6) - Any amount which a person is required to pay 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 purpose of this Section, the amount due to a dealer or money held for or an 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.
It is in pursuance of this provision, Ex.B6 demand notice was issued to 6th defendant.
According to 7th defendant, a sum of Rs. 62,098/- is due from first defendant towards sales tax arrears for the year 1978-79 and 1979-80. It
is to recover this amount Ex.B6 notice was issued. 6th defendant is in possession of the amount belonging to first defendant on the basis of
transactions between them. On the basis of power of attorney executed by first defendant in favour of plaintiff, plaintiff is entitled to recover the
amount from 6th defendant directly. The question that requires consideration is what is the effect of power of attorney when a demand is made by
State towards Sales Tax arrears and the question is how to consider the priority as between them. Lower Court held that by virtue of power of
attorney, the amount in the hands of 6th defendant automatically vests with plaintiff and consequently 6th defendant is not entitled to pay the
amount to the State or State is not entitled to recover any amount from 6th defendant.
Learned Counsel for Bank relied on the decisions reported in Seth Loon Karan Sethiya Vs. Ivan E. John and Others, and Bharat Nidhi Ltd.
Vs. Takhatmal (Decd. by his Legal Representatives) and Another, In the first case, the question that came for consideration was whether power of
attorney in question is a power coupled with interest, if it is so, whether the same is revocable? The further question that arose was whether the
Bank can be held to be an assignee of the interest in the decree; if so whether that assignment is a legal assignment or an equitable assignment?
Their Lordships held that a power of attorney is a power coupled with interest and hence the same is not revocable. Their Lordships further
said that the transaction entered into under that document amounts to an equitable assignment of the decree in favour of the Bank to the extent
necessary to discharge appellant''s debts to the Bank. It is further held that where the agency is created for valuable consideration and authority is
given to effectuate a security or to secure interest of the agent, the authority cannot be revoked. Their Lordships further considered the question
whether on the terms of Power of attorney a conclusion could be arrived as to whether the assets have been transferred or assigned? Their
Lordships said that as per the terms of the document, appellant continues to be the owner of the amount due under the decree and the bank was
merely authorised to act as its agent and therefore it is not possible to hold in law that bank was assignee of decree. The interest of appellant under
the decree cannot be said to have been transferred to the Bank either in writing or by operation of law.
In the second decision, i.e., in Bharat Nidhi Ltd.''s case, a similar question came for consideration. There also a bank obtained power of
attorney from its debtor and third party effected an attachment over the same. The question was whether the attachment could be valid? Their
Lordships said that in view of Section 202 of Contract Act and Section 130 of Transfer of Property Act, it amounts to equitable assignment on
actionable claim.
Reliance was also placed by lower Court on the decision reported in Somasundaram Mills (P.) Ltd., Coimbatore Vs. Union of India (UOI)
and Others, . A Division Bench of this Court held that the State has got priority and it is Common Law right. Even in such cases, State will have to
apply to the Court, which is in custody of the debtor''s property and State will have to move separately the executing Court and claim priority.
All these decisions considered only the effect of Section 202of Indian Contract Act and Section 130 of Transfer of Property Act. It only said
that when an agency is created with interest, the same is not liable to be revoked at the will of the principal and when power of attorney is executed
for consideration, it amounts to equitable assignment. At the same time, their Lordships said that the ownership of property continues to be with
debtor and the agent is authorised to collect it without the intervention of debtor. The above decisions also make it clear that the bank is given a
power to realise the fund and that right is made over to bank with further authority to set out the amount really due to it and power of attorney
amounts to engagements to pay out of particular fund the debt due to bank and to that extend it amounts to equitable assignment. In none of the
cases Court considered the scope of priority to sovereign debt.
As per Section 26 of the Tamil Nadu General Sales Tax Act, if any person is liable to pay any amount as per demand and remains unpaid, a
statutory charge is created on the properties of the said person. Section 24 further says that if after demand is made and amount is not paid within
21 days thereafter, there shall be charge on the properties of person liable to pay tax with interest. A combined reading of those two provisions of
Sales Tax Act says that statutory charge is created.
In Dattatreya Shanker Mote and Others Vs. Anand Chintaman Datar and Others, their Lordships considered the distinction between a
mortgage and charge. In paragraph 7 of the Judgment, after extracting Section 100 of Transfer of Property Act, their Lordships held thus,
It is apparent from the provisions of the above section that a charge does not amount to a mortgage through all the provisions which apply to a
simple mortgage contained in the proceeding provisions shall, so far as may be, apply to such charge, while a charge can be created either by act
of parties or operation of law, a mortgage can only be created by act of parties. A charge is thus a wider term as it includes also a mortgage, in that
every mortgage is a charge, but every charge is not a mortgage. The Legislature while defining a charge in Section 100 indicated specifically that it
docs not amount to a mortgage. It may be incongruous and in terms even appear to be an antithesis to say on the one hand that a charge does not
amount to a mortgage and yet apply the provisions applicable to a simple mortgage to it as if it has been equated to a simple mortgage both in
respect of the nature and efficacy of the security. This misconception had given rise to certain decisions where it was held that a charge created by
a decree was enforceable against a transferee for consideration without notice, because of the fact that a charge has been erroneously assumed to
have created an interest in property reducing the full ownership to a limited ownership. The declaration that ""all the provisions hereinbefore
contained which apply to a simple mortgage shall, so far as may be, apply to such charge"" does not have the effect of changing the nature of a
charge to one of interest in property.
(Emphasis supplied)
The above legal position was again considered by Honourable Supreme Court in the decision reported in State Bank of Bikaner and Jaipur
Vs. National Iron and Steel Rolling Corporation and Others, which is a case coming under Rajasthan Sales Tax Act, 1954. In that case, State
created mortgage over the property and the mortgage property was sought to be sold. A claim was put forward by the State Government for
recovery of amount due to it under Sales Tax arrears. It was contended that it has got priority over the mortgage debt. While considering the same,
their Lordships followed the decision in Dattatkeya Shanker Note''s case (cited supra) and in paras 8 to 11 held thus,
In the present case we have to consider whether the statutory first charge which is created u/s 11- AAAA of the Rajasthan Sales Tax Act 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. Tarkunda, 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 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 of 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 u/s 11-AAAA of the Rajasthan Sales Tax Act will operate on the properly as a whole and not only on the equity of redemption as
urged by Mr. Tarkunde.
We find support for this conclusion in the observation made in Fisher and Lightwood''s Law of Mortgage 10th Edn. 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. Haymarket Publishing Ltd. the English Court of Appeals was
required to consider whether a statutory charged 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 create by Section 11-AAAA 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 Dattarraya Shankar Mote case a charge is a wider term than a mortgage. It could 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"".
(Emphasis supplied)
Similar is the case in Rm. Arunachalam Vs. Commissioner of Income Tax, which arose under income tax Act. There also their Lordships
followed the decision in Dattatraya Shankar Mote Case and State Bank of Bikaner & Jaipur case (cited supra). In para 26 of the Judgment, their
Lordships held thus:
This would show that a charge differs from a mortgage in the sense that in a mortgage there is transfer of interest in the property mortgaged
while in a charge no interest is created in the properly charged so as to reduce the full ownership to a limited ownership. The creation of a change
u/s 74(1) of the Estate Duty Act cannot, therefore, he construed as creation of an interest in property that is the subject-matter of the charge. The
creation of the charge u/s 74(1) only means that in the matter of recovery of estate duly from the property which is the subject matter of the change
the amount recoverable by way of estate duty would have priority over other liabilities of the accountable person. In that sense the claim in respect
of estate duty would have precedence over the claim of the mortgagee because a mortgage is also a charge, (see: State Bank of Bikaner & Jaipur
v. National Iron & Steel Rolling Corpn.). The High Court has, therefore, rightly held that as a result of the charge created u/s 74(1) of the Estate
Duty Act, it could not be said that title of the assessee to the immovable properties received by him from Smt. Umayal Achi was incomplete and
imperfect in any way. In the context of the facts of this case, the High Court has found that the assessee had admittedly become the full owner of
the assets even before the payment of estate duty and on payment of the same he had not acquired a now right, tangible or intangible, in the assets.
It cannot, therefore, be said that the amount proportionate to estate duty paid by the assessee on the properties that were transferred should be
treated as ""cost of acquisition of the assets"" under Sections 48 and 49 read with Section 55(2) of the Act. Since the title of the assessee to the
immovable properties acquired was not incomplete and imperfect in any way, it cannot also be said that as a result of the payment of the estate
duty by the assessees there was an improvement in the title of the assessee and the said payment could be regarded as ""cost of improvement"" u/s
48 read with Section 55(1)(b) of the Act.
(Emphasis supplied)
A similar case arose under Kerala General Sales Tax Act and the same is reported in Delhi Auto and General Finance Private Limited Vs. Tax
Recovery Officer, Income Tax and Others, Section 23of the Kerala General Sales Tax Act, is similar to Section 24 of the Tamil Nadu General
Sales Tax Act and interpreting the same, their Lordships said thus:
.... It is idle to contend that the appellant has a priority for payment of the amount due to him over the sales tax amount due to the State from the
borrower under the Kerala Sales Tax Act.
A Division Bench of this Court has also considered a similar question and the same is reported in Volume 113 Sales Tax Cases 145 (Central
Bank of India v. State of Tamil Nadu). In that case, even the validity of Tamil Nadu General Sales Tax Act was in question and their Lordships
held that he said contention cannot be accepted.
From the above decisions it is clear that the decisions of lower Court that Sales Tax authorities are not having priority and the payment made
by appellant cannot be recognised by plaintiff is not the correct position of law. The power of attorney only made that the debt owing to the lender
could be paid out of specific fund of borrower and nothing more. Borrower continues to be the owner of the fund and therefore a charge is created
in respect of those amounts for which a power of attorney has been executed.
According to the decisions cited above, lower Court has not properly understood the scope of decision reported in Bharat Nidhi Ltd. Vs.
Takhatmal (Decd. by his Legal Representatives) and Another, and AIR 1974 Mad 190 (cited supra). As I said earlier in both the cases, priority of
debt was not the matter in issue nor the relevant provisions of Sales Tax Act, income tax Act or Estate Duty Act came for consideration.
In the result, the decree and judgment of lower Court is set aside as against appellant. It is declared that 7th defendant has got priority over the
amounts due to it and any amount paid by appellant to 7th defendant pursuant to Ex.B5 notice will amount to discharge and appellant cannot be
further made liable for paying that amount to bank, plaintiff in the case. The appeal is allowed as indicated above, however, without any order as to
cost.