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2008 DIGILAW 714 (KER)

Sundaram Finance Ltd. v. The Tahsildar, Kollam

2008-11-18

PIUS C.KURIAKOSE

body2008
Judgment :- M/s.Sundaram Finance Ltd., a public limited company engaged in the business of financing by hire purchase and otherwise is the petitioner in this original petition under Article 226. The respondents were originally (1) the revenue recovery Tahsildar, Kollam (2) the Kerala State Industrial Development Corporation (3) the Sun Refineries (P) Ltd., Kollam represented by its Director one D.Ravindran and (4) the State of Kerala. Later one R. Kumaresan, R.Ganesh Sundar and D.Raveendran, Directors of Sun Refineries (P) Ltd. were impleaded as additional respondents 5 to 7. The case of the petitioner is that in the course of its business the third respondent approached them for finance and as a consequence, hire purchase agreements were entered into in respect of the machineries detailed in the hire purchase agreement. The third respondent agreed to abide by all the terms of the hire purchase agreement and under these agreements an amount of nearly more than Rs.37 lakhs is due to the petitioner company from the third respondent by way of instalment. According to the petitioner, besides the hire purchase agreement an additional letter of guarantee, guaranteeing payment of the amounts due under the hire purchase agreements was also executed in favour of the third respondent. It is stated that the directors of the third respondent company created a mortgage by deposit of title deeds relating to the properties belonging to the Directors themselves personally and these properties are situated in Sy. Nos. 7316, 7317 and 7318 of Thrikkadavoor Village within the limits of Thrikkadavoor Panchayat in Kollam District. The petitioner came to know that the third respondent had already borrowed money from the 2nd respondent KSIDC in respect of the machineries which are subject to the hire purchase agreement in their favour. While matters stood so, the first respondent revenue recovery Tahsildar came forward with a plea that large amounts are due to it by way of salestax arrears from the third respondent to the 4th respondent State of Kerala. The grievance of the petitioner is that the first respondent in spite of the mortgage of the immovable properties by deposit of title deeds in petitioner's favour claimed priority under section 26B of the Amended Kerala General Sales Tax Act, 1963. The grievance of the petitioner is that the first respondent in spite of the mortgage of the immovable properties by deposit of title deeds in petitioner's favour claimed priority under section 26B of the Amended Kerala General Sales Tax Act, 1963. Petitioner points out that the mortgage in their favour was executed as early as 25-8-1994 and a substantial portion of the sales tax arrears allegedly due to the Government arose much later than 25-8-1994 when the mortgage in favour of the petitioner was executed. The petitioner relies on section 2C of the Act (Amended Kerala General Salestax Act, 1963) and contends that the liability of the Directors of the Company are subject to the provisions of the Companies Act in respect of liability to tax. The third respondent's liability, it is pointed out, is not unlimited, but it is limited only to the assets of the company. It is contended that the property belonging to the Directors personally cannot be proceeded against for the alleged arrears of salestax because there is no provision in the Memorandum of Articles of Association of the third respondent company indicating unlimited liability. The Articles of Association of the Company is produced by the petitioner along with I.A. No.10408 of 2006. The Articles of Association does not say that the liability of the Directors is unlimited. Petitioner relies on Section 322 of the Companies Act and contends that section 26C of the Amended Kerala General Salestax Act will not be attracted and that the first respondent is not entitled to place reliance on the same. The petitioner also submits that based on the mortgage the petitioner company filed O.S.107 of 1997 on the files of the Sub Court, Kollam and obtained a decree against the third respondent for recovery of a sum of Rs.26,84,254.81 with interest at 23% per annum. It is submitted that to the above judgment and decree the Directors of the third respondent company were also parties and suffered the decree. Copies of this judgment and decree are produced by the petitioner along with IA. No.11832 of 2005. According to the petitioner, they are entitled to realise the decree debt in O.S.107 of 1997 by sale of the properties described in schedule-B to the decree and hence they filed the original petition seeking the following relief: 1. Copies of this judgment and decree are produced by the petitioner along with IA. No.11832 of 2005. According to the petitioner, they are entitled to realise the decree debt in O.S.107 of 1997 by sale of the properties described in schedule-B to the decree and hence they filed the original petition seeking the following relief: 1. Issue a writ of prohibition seeking to restrain respondents 1 and 2 from proceeding with the properties situated in Sy. Nos. 7316, 7317 & 7318 (ReSy. No. 443/14 & 15) situated in Thrikkadavur Panchayat and Village, for the alleged amounts due from the 3rd respondent to the 2nd respondent; 2. for a declaration that the sale of the properties shall not proceeded with and for a further declaration that until the rights of the petitioner are established and satisfied respondents 1 and 2 shall not proceed with the sale of the properties mentioned above; and 3. for the issue of any other appropriate writ, direction or order as may be deemed fit and necessary in the circumstances of the case to meet the ends of justice. 2. The contentions raised on behalf of respondents 1 and 4 are that the mortgage decree obtained by the petitioner will not absolve or override the crown priority available under section 26B an 26C of the K.G.S.T. Act. On behalf of R1 and R4 the first respondent has filed a counter affidavit on 20-11-2000. It is contended therein that the third respondent is a registered dealer doing business in refined oil is in the practice of purchasing refined oil from outside the State in bulk and effecting sales of small quantities after packing. The third respondent is an assessee on the rolls of Assistant Commissioner (Assessment), Special Circle, Kollam. He filed returns claiming exemption as a medium small scale industrial units. As there was no manufacturing activity involved in the business his claim for exemption was rejected. Accordingly final assessment for the year 1994-95 and provisional assessments for the years 1995-96 and 1996-97 were completed. As the third respondent failed to pay the tax it was advised for revenue recovery and it is based on the revenue recovery requisition that notices were issued under sections 7 and 34 to the third respondent. Accordingly final assessment for the year 1994-95 and provisional assessments for the years 1995-96 and 1996-97 were completed. As the third respondent failed to pay the tax it was advised for revenue recovery and it is based on the revenue recovery requisition that notices were issued under sections 7 and 34 to the third respondent. It is also contended that since the transaction between the petitioner and third respondent is one of hire purchase there is no debtor and creditor relationship between them. It is pointed out that a total amount of Rs.4.22 crores is due from the third respondent by way of salestax arrears. Under section 44 of the Kerala Revenue Act, the Government revenue has got first charge over the property of the defaulter. The counter affidavit refers to Supreme Court judgment and contends that the action of the respondents in attaching the property for sale for realisation of the salestax arrears is valid. 3. To that counter affidavit, the petitioner filed a reply affidavit reiterating their contentions. It is pointed out that the third respondent Sun Refineries appear to have started functioning only from 10-7-1994 and it is therefore un-understandable as to how there could be an assessment for the year 1994-96. Ext.P4 copy of the invitation card relating to the inauguration of the factory of the third respondent is produced. Ext.P3 produced along with the original petition is referred to and it is submitted that Ext.P3 will reveal a declaration of the owners of the property of their intention to create an equitable mortgage by deposit of title deeds. Petitioner is a mortgagee and a secured creditor in 1994 itself and has a precedence and priority over the claims of respondents 1 and 4. 4. The second respondent KSIDC has filed a counter affidavit. It is contended therein that the second respondent had granted term loan of Rs.90 lakhs to the third respondent company on the security of mortgage of immovable properties of land and buildings and hypothecation of all movable assets. As security for the said loan an agreement of hypothecation was executed by the third respondent company on 24-8-1993 charging and hypothecating all the movable assets of the company including all movable plant and machineries etc. The hypothecation and charge created by the third respondent company on the said immovable and movable assets have been duly registered with the Registrar of Companies on 26-8-1993. The hypothecation and charge created by the third respondent company on the said immovable and movable assets have been duly registered with the Registrar of Companies on 26-8-1993. The petitioner has no manner of right or claim in respect of the immovable properties mortgaged to the 2nd respondent and the movable assets hypothecated and charged to the 2nd respondent. The claim of the petitioner that hire purchase agreements are executed and certain items of machineries are said to be covered by the hire purchase agreement executed long after purchase of the machineries and equipments. It is pointed out that the petitioner has filed OP. No. 5822 of 1997 against the second respondent. In that O.P. the second respondent has filed a detailed counter affidavit and seeks leave to refer to the said counter affidavit. The alleged hire purchase agreements are all subsequent to the purchase of the machineries as per invoices in the name of the 3rd respondent company and hypothecation and charge executed and created by the third respondent company in favour of the 2nd respondent. Even the registration of charge under section 125 of the Companies Act is long after and subsequent to registration of charge made by the 2nd respondent regarding the movable and immovable properties of the third respondent company. It is then pointed out that the third respondent company has been ordered to be wound up by the Company Court in C.P. No. 29 of 1998 and thereafter the Official Liquidator has taken possession of the immovable and movable properties and assets of the company from the second respondent on 1-9-2003. Thus whatever immovable and movable properties taken over by the 2nd respondent under section 29 of the State Financial Corporations Act have been taken over by the Official Liquidator pursuant to orders of the Company Court. The company court directed the second respondent to meet the security expenses and advertisement expenses for sale of the properties mortgaged and hypothecated to the 2nd respondent . If at all the petitioner has any claim it has to be made to the Official Liquidator since he is the custodian of the immovable and movable properties of the third respondent company. 5. On 1st August 2006 an additional counter affidavit is filed on behalf of R1 and R4. If at all the petitioner has any claim it has to be made to the Official Liquidator since he is the custodian of the immovable and movable properties of the third respondent company. 5. On 1st August 2006 an additional counter affidavit is filed on behalf of R1 and R4. It is stated that this additional counter affidavit is being filed after ascertaining the registration and assessment history of the 3rd respondent from the office of salestax assessing authority for traversing various allegations in the writ petition as well as in the reply affidavit. Exts. R1(a) and R1(b) are true copies of security bonds/additional security executed by D.Raveendran, R.Kumaresan and Soman Pillai, Directors of the third respondent company and it is submitted that it was against these security bonds that salestax registration was given to the third respondent company. The executants of R1(a) and R1(b) are wholly liable to discharge the entire tax liability of the assessee company. At the time of registration enquiry they have agreed before the officer to ensure payment of the tax dues by the assessee and in default by themselves and the assessing officer had recorded their such statements on 23-7-1993. Exts.R1(c) and R1 (d) are true copies of the statements of D.Raveendran, Ganesh Sundaram and R.Kumaresan. R1(e), R1(f) and R1(g) respectively are the assessment orders passed by the assessing authority against the third respondent company for the assessment years 1994-95, 1995-96 and 1996-97 respectively dated 11-10-96, 31-1-2000 and 29-3-2001. These assessment orders have become final and under section 23(3) of the KGST Act the third respondent company owes the Government a sum of Rs.2,53,76,586/- by way of tax dues and interest. Recovery proceedings initiated against third respondent company and properties of Raveendran, Ganesh Sundaram and Kumaresan is perfectly legal and in order. The statutory liability of the company and its directors is now clear from the terms of section 26B and 26C of the KGST Act. The liability of the guarantors is absolute and de hors the provisions of the Companies Act. The plea that there is a prior mortgage and a decree in favour of the petitioner will not in any way legally obliterate the preferential right of the State to recover its salestax dues. Legal position is settled by a catena of judicial pronouncements. 6. To the above additional counter affidavit the petitioner has filed an additional reply affidavit. The plea that there is a prior mortgage and a decree in favour of the petitioner will not in any way legally obliterate the preferential right of the State to recover its salestax dues. Legal position is settled by a catena of judicial pronouncements. 6. To the above additional counter affidavit the petitioner has filed an additional reply affidavit. It is contended the security bonds produced by the first respondent do not touch the points at issue involved in the O.P. These security bonds are personal bonds and there is nothing to enable the first respondent to proceed with the realization of the alleged arrears from the third respondent by proceeding against the personal properties of the directors. It is reiterated that these bonds do not relate to any mortgage or hypothecation of immovable property. They are all at best personal liabilities which the directors of the 3rd respondent might have been compelled to undertake to meet salestax demands but do not touch the points at issue involved in the original petition. These bonds do not stipulate an undertaking by which the immovable properties of the directors of the company are made liable. These bonds and the so called depositions do not relate to any immovable properties and the mortgage effected by the directors of the company is not affected and the undertakings before the salestax department and other incidental matters do not at all, go to show that the personal properties of the directors of the 3rd respondent are also liable for any alleged demands made by the salestax department. 7. Respondents 5 to 7 have filed additional counter affidavit which deals with Exts.R1(a) to R1(d) produced from the side of the Government. It is contended that in none of the above documents the additional respondents have given any undertaking as the Government contends. It is submitted that no statement than what is produced as Exts.R1 (a) to R1(d) have been given before any authority. In the circumstances the contention of the Government that Kumaresan and Soman Pillai have given separate undertakings on 1-4-1995 before the Salestax Officer agreeing for prior charge on their properties in the event of there being tax arrears for the company can only be false. In the circumstances the contention of the Government that Kumaresan and Soman Pillai have given separate undertakings on 1-4-1995 before the Salestax Officer agreeing for prior charge on their properties in the event of there being tax arrears for the company can only be false. It is also contended that these additional respondents have resigned from the company on 2-8-1996 consequent to which they filed Form No.32 before the Registrar or Companies on 3-8-1996 and had informed the Salestax Officer about their resignation on 5-8-1996. The first assessment for the year 1994-95 was conducted only on 19-9-1996 subsequent to the resignation of these respondents. Section 26B and 26C were amended with effect from 1-4-1999 and as the amendment is only prospective and since the respondents had resigned prior to the amendment and even prior to the issuance of assessment orders the amendment will not bind these respondents and the contention raised on this basis is legally unsustainable. 8. In the light of the above additional counter affidavit from respondents 5 to 7 respondents 1 and 4 have filed another additional counter affidavit. The filing of a further additional counter affidavit is explained by pointing out that since the assessing authority, the Salestax Officer, First Circle, Kollam was not made a party in the original petition the details of the undertaking which was given by Sri.Kumaresan and Soman Pillai before the Addl. Salestax Officer, Kollam could not be placed on record. Ext.R1(h) and R1(i) dated 1-4-1995 are produced as the separate undertakings given by Sri.Kumaresan and Soman Pillai before the Salestax Officer agreeing prior charge on their property in the event of company making default in payment of taxes. It is pointed out that these undertakings are incorporated in the assessment records in page Nos. 315 and 317. It is argued on the basis of R1(h) and (i) that the guarantors have expressed their willingness in unequivocal terms, to part with their property in the event of default by the company of the salestax dues. 9. Extensive submissions were addressed before me by Sri.V.R.Venkitakrishnan, senior counsel for the petitioners, Sri.V.V.Ashokan, then Special Govt. Pleader, Taxes and after him by Sri.K.P.Pradeep Spl. Govt. Pleader (Taxes). Sri.M.Pathrose Mathai, senior counsel addressed me on behalf of the KSIDC and Sri.V.G.Arun, learned counsel for additional respondents 5 and 7 also addressed me. 9. Extensive submissions were addressed before me by Sri.V.R.Venkitakrishnan, senior counsel for the petitioners, Sri.V.V.Ashokan, then Special Govt. Pleader, Taxes and after him by Sri.K.P.Pradeep Spl. Govt. Pleader (Taxes). Sri.M.Pathrose Mathai, senior counsel addressed me on behalf of the KSIDC and Sri.V.G.Arun, learned counsel for additional respondents 5 and 7 also addressed me. The submissions were on the basis of the pleadings raised by the parties and Sri.V.R.Venkitakrishnan relied on the judgment of the Supreme Court in Dena Bank v. Bhikhabai Prabhudas Parekh & Co., (2000)5 SCC 694 and the judgment of the Division Bench of this Court in Sherry Jacob v. Canara Bank, 2004(3) KLT 1089. Sri.V.V.Ashokan, then Spl. Govt. Pleader, Taxes in his submissions would refer to the judgment of the Division Bench of this Court in South Indian Bank Ltd. v. State of Kerala, 2006(1) KLT 65 and the judgment in State of Kerala v. Rajmohan Cashew (P) Ltd. 2005(2) KLT 131. Sri.K.P.Pradeep, Spl. Govt. Pelader, Taxes in his submissions referred to the judgment of the Division Bench of this Court in South Indian Bank Ltd. v. State of Kerala, 2006(1) KLT 65, the judgment of the Division Bench of this Court in Hamsa v. Asst. Commissioner, 2008(3) KLT 180, the judgment of the Supreme Court in Dena Bank v. Bhikhabai Prabhudas Parekh & Co.(2000)5 SCC 694, the judgment of the Supreme Court in State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling Corporation and others, (1995) 2 SCC 19, the judgment of the Division Bench of this Court in Jaya v. State of Kerala, 2005(2) KLT 543, the judgment of this Court in Sherry Jacob v. Canara Bank, 2004(3) KLT 1089 and the judgment of this Court in SBT v. Recovery Officer, 2007(2) KHC 626. Sri.V.G.Arun in his submissions referred to the dissimilarities in the signatures of the Directors in the bonds Ext.R1 (b) and R1(d) and in the undertakings Ex.R1(h) and R1(i). 10. I have anxiously considered the submissions addressed at the Bar in the light of the ratio emerging from the various decisions cited before me. I am of the view that the petitioner cannot be granted any relief in view of law as settled by the Supreme Court though the common law doctrine of priority of crown debts would not extend to providing preference in crown debts over secured private debts. I am of the view that the petitioner cannot be granted any relief in view of law as settled by the Supreme Court though the common law doctrine of priority of crown debts would not extend to providing preference in crown debts over secured private debts. The Supreme Court in State Bank of Bikaner & Jaipur v. National Iron and Steel Rolling Corporation, (1995) 2 SCC 19 analysed the scope of statutory charge over the earlier mortgage and after referring to the judgment of the Court in Dattatreya Shanker Mote v.Anand Chintaman Datar, (1974) 2 SCC 799 reiterated that the 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. It was held by the court in the context of the application of the second part of section 100 of the Transfer of Property Act dealing with charges unenforceable against a bona fide transferee of the property for value without notice, 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 mortgage etc. Their Lordships went on to hold that the first charge 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 on the property alone if the property is already under a mortgage in favour of some other creditor. In fact, a Division Bench of this Court in Sherry Jacob v.Canara Bank, 2004(3) KLT 1089 following the decisions of the Supreme Court in State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling Corporation & others, (1995) 2 SCC 19 and State of Mamdhya Pradesh & another v. State Bank of Indore & others, (2002) 10 KTR 366 (SC) would refer to section 26B of the Kerala General Salestax Act and observe that the said provision is in pari materia with section 11 AAAA of the Rajasthan Salestax Act and Section 33C of the Madhya Pradesh General Salestax Act and held that the statutory first charge created under section 26B of the KGST Act will prevail over any charge or right created in favour of the mortgagee/secured creditor. It has been ruled unambiguously that the statutory first charge shall get precedence over an existing mortgage right and that the precedence or priority is not confined to right of redemption alone. 11. The learned senior counsel Mr.Venkitakrishnan's argument based on the mortgage decree obtained by the petitioner also will have to be turned down in view of the decision of this Court in South Indian Bank Ltd. v. State of Kerala, 2006(1) KLT 65. That was a case where the mortgage in favour of the bank was of the year 1984 and the civil court decree was passed in favour of the bank in 1995. The revenue recovery proceedings and the attachment therein were years after the mortgage and this court held in the following terms. "Decree passed by the civil court is the formal expression of an adjudication, which exclusively determines the rights of parties, but unless and until the decree is executed the Bank would not procure the property and the State's overriding rights would have precedence over that of the Bank. When a first charge created by the operation of law over any property that charge will have precedence over an existing mortgage and the decree obtained by the bank against the mortgagor will not affect the State since State was not a party to the suit. Decree has only conclusively determined the right between the mortgagor and mortgagee, which would not affect the statutory rights of the State. The expression "rights of parties" used in S.2(2) means rights of parties to the suit. State which has got a statutory first charge under S.26B of the K.G.S.T. Act would prevail over the rights created in favour of the Bank by an unexecuted decree. The decree obtained by the Bank will not have any precedence over the first charge created in favour of the State under S. 26B of the K.G.S.T.Act" In fact this court also held in the above case that the right of the State to have priority in the matter of recovery of sales tax from the defaulters over the equitable mortgages created by them in favour of Banks and financial institutions is no more res integra and that the Supreme Court has already recognised the statutory first charge in respect of salestax arrears. In fact the above decision is referred to by a Division Bench of this Court in State of Kerala v. Rajmohan Cashew (P) Ltd. 2005(2) KLT 131 also. It is to be noted in this context that the constitutionality of section 26A of the KGST Act, 1963 was upheld by this court by judgment in Jaya v. State of Kerala, 2005(2) KLT 543 wherein it has been held inter alia that section 26A does not restrict or purport to impose any restriction on any freedom of trade by the citizen of the country, but only to safeguard public interest. This court in State Bank of Travancore v. the Revenue Recovery Officer and others, 2007(2) KHC 626 would consider whether the RDB Act can have any overriding effect over the Kerala General Sales Tax Act. This court held that the purpose of the RDB Act which is applicable to the banking institutions is only for speedy recovery of the amounts due to them and not for creation of any statutory charge for banks or financial institutions. In the absence of any conferment of statutory charge neither the banks nor financial institutions can have any priority over the statutory first charge which is applicable to the Government under the KGST Act. 12. One of the arguments addressed by the learned senior counsel which was shared by Mr.V.G.Arun, counsel for the additional respondents was that section 26B which was introduced by the Finance Act 1999 cannot have any retrospective operation and therefore the amounts due to the petitioner company under the decree passed by a competent civil court should be allowed to be recovered. It is difficult to accept the above argument since I find that the Supreme Court in State of Madhya Pradesh v. State Bank of Indore, 126 STC 1 dealing with section 33C of the Madhya Pradesh General Sales Tax Act, 1958, a provision which is almost identical to section 26B of the Kerala General Sales Tax Act would held as follows: "In respect of the 2nd respondent's sales tax dues, the State claimed a first charge under Section 33-C upon the machinery in priority to the charge held by the Bank. The trial court and the High Court did not accept the State's submission in this behalf. The trial court and the High Court did not accept the State's submission in this behalf. In the view of the High Court, the bank's charge on the machinery was created on 5th September, 1974, that is, prior to the enforcement of Section 33-C, and the subsequent loans taken on January 23, 1979 and January 25, 1979 did not alter the position in favour of the State. In its view, "the charge created once remained valid and operative till repayment of the loan as borrowed." The High Court also took the view that the appeal before it was flawed because it challenged the judgment of the trial court and not its decree. Section 33-C creates a statutory first charge that prevails over any charge that may be in existence. Therefore, the charge thereby created in favour of the State in respect of the sales tax dues of the 2nd respondent prevailed over the charge created in favour of the bank in respect of the loan taken by the 2nd respondent. There is no question of retrospectivity here, as, on the date when it was introduced, Section 33-C operated in respect of all charges that were then in force and gave sales tax dues precedence over them. This position in law is discussed in detail in the judgment of this Court in Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. (2000) 5 SCC 694." It is then held by the Supreme Court that as on the date when the statutory provision was introduced the provision operates in respect of all charges that were then in force and gave salestax dues precedence. This judgment in my opinion is applicable to the facts of this case and in view of the applicability of Section 26B of the KGST Act no priority can be claimed by the petitioner over the properties proceeded by the Government for recovering the salestax dues even if there is prior mortgage and an unexecuted decree. 13. The argument of Mr.V.G. Arun and the learned senior counsel Mr.V.R.Venkitakrishnan on the basis of section 322 of the Companies Act also has to fail. This is a case where the Directors in their personal capacity have guaranteed assured due payment of the tax dues payable by the company. The explanation offered by the State for not producing the undertakings submitted by the Directors earlier is convincing. 14. This is a case where the Directors in their personal capacity have guaranteed assured due payment of the tax dues payable by the company. The explanation offered by the State for not producing the undertakings submitted by the Directors earlier is convincing. 14. The argument of Mr.V.G.Arun highlighting the dissimilarity in the signatures on Exts.R1(h) and R1(i) and the circumstance of those documents not being filed in the 1st instance does not impress me. R1(h) and R1(i) do fasten personal liability upon the directors. The result of the above discussion is that the O.P. fails and will stand dismissed.