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Madhya Pradesh High Court · body

2010 DIGILAW 140 (MP)

KOTAK MAHINDRA BANK LTD. v. STATE OF M. P.

2010-02-02

K.S.CHAUHAN, R.S.GARG

body2010
Judgment R.S.Garg,J. ( 1. ) The Judgment of the Court was delivered by This order shall dispose of Writ Petition No.394/2004, Writ Petition No.30/2005, Writ Petition No.2377/2006, Writ Petition No. 14453/2006, Writ Petition No. 17965/2006, Writ Petition No.3770/2007 and Writ Petition No.4315/2007 as different petitioners are challenging constitutional validity of Section 53 of Madhya Pradesh Vanijyik Kar Adhiniyam,1994 on the grounds which we shall refer hereinafter. ( 2. ) Each of the petitioner is a registered nationalized bank and has extended some loans to some of the companies/private entrepreneurs. They are aggrieved of Section 53 of Madhya Pradesh Vanijyik Kar Adhiniyam,1994 (hereinafter referred to as the"1994 Adhiniyam")on the ground that the State Government has no legislative competence to enact an Act or a provision of law which puts secured creditors and unsecured creditors at different level though each of the creditor had extended loan to the tax defaulters. It is submitted that from the very language of Section 53 of 1994 Adhiniyam,it would clearly appear that subject to the provisions of Section 530 of the Companies Act,1956(No.l of 1956) (hereinafter referred to as the "Companies Act"), secured creditors only are protected while unsecured creditors, private"creditors, banks or such other authorities are not entitled to have better claim in comparison to the tax which under Section 53 of the 1994 Adhiniyam would be the first charge. ( 3. ) Shri Rahul Jain, learned Deputy Advocate General for the State submits that 1994 Adhiniyam has replaced Madhya Pradesh General Sales Tax Act,1958 (2 of 1959) (hereinafter referred to as the "1958 Act") which had a pari materia provision contained in Section 33-C of 1958 Act and has been held to be a valid piece of legislation, therefore, the petitioners are not entitled to maintain these petitions. It is also submitted that distinction pointed out by learned counsel for the petitioners in the language of Section 33-C of 1958 Act and Section 53 of 1994 Adhiniyam would show that the secured creditors who were otherwise not entitled to claim any charge over the tax recovery now have been saved to some extent under Section 53 of the 1994 Adhiniyam. ( 4. ( 4. ) It is also submitted that provisions contained in Section 53 of 1994 Adhiniyam are to be read in juxtaposition with Section 530 of the Companies Act and assuming the words "subject to the provisions of Section 530 of the Companies Act, 1956 (No. 1 of 1956)" are deleted from Section 53 of the 1994 Adhiniyam then language of Section 53 would be pari materia to Section 33-C of 1958 Act and as the said Section 33-C of 1958 Act has been held to be a valid piece of legislation, the petitions deserve to be dismissed. ( 5. ) For proper appreciation of the controversy between the parties, it is necessary to refer to Section 33-C of 1958 Act:- "33-C. Tax to be first charge. -Notwithstanding anything to the contrary contained in any law for the time being in force, any amount of tax and or penalty, if any, payable by a dealer or other person under this Act shall be a first charge on the property of the dealer or such person." ( 6. ) Section 53 of the 1994 Adhiniyam reads as under:- "53. 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." ( 7. ) A comparison of Section33-C of 1958 Act and Section 53 of 1994 Adhiniyam would make it clear that Section 33-C of 1958 Act left no reservation in favour of the secured or unsecured creditors. Section 33-C of 1958 Act has been held to be intra-vires in the matter of State of MP and another Vs. State Bank of Indore and others, (2002) 10 SCC441. In the said matter the Division Bench of the High Court of Madhya Pradesh held that Section 33-C of 1958 Act was ultra-vires the constitution but however the Supreme Court observed that Section 33-C created a statutory first charge which prevails over any charge that was in existence. State Bank of Indore and others, (2002) 10 SCC441. In the said matter the Division Bench of the High Court of Madhya Pradesh held that Section 33-C of 1958 Act was ultra-vires the constitution but however the Supreme Court observed that Section 33-C created a statutory first charge which prevails over any charge that was in existence. The Supreme Court was of the opinion that the charge created under Section 33-C in favour of the State in respect of the sales tax dues was valid because there was no question of restrospectivity. The Supreme Court observed that Section 33-C was a valid piece of legislation. ( 8. ) Considering the said position,Shri Rajesh Maindiretta,learned counsel for the petitioners submitted that a perusal of Section 53 of 1994 Adhiniyam makes it clear that the reservation in favour of the secured creditors would be ultra vires the constitution because Section 53 does not protect the unsecured creditors. ( 9. ) For proper appreciation of this argument, Section 530 of the Companies Act, 1956 is required to be appreciated. It would also be beneficial to refer to Section 529-A of the 1956 Act, which reads as under: "529-A. Overriding preferential payments.-(1) Notwithstanding anything contained in any other provision of this Act or any other law for the time being in force, in the winding up of a company- (a) workmens dues; and (b)debts due to secured creditors to the extent such debts rank under clause (c) of the proviso to sub-section (1) of Section 529 pari passu with such dues. shall be paid in priority to all other debts. (2) The debts payable under clause (a) and clause (b)of subsection (1) shall be paid in full, unless the assets are insufficient to meet them, in which case they shall abate in equal proportions." ( 10. ) From a perusal of Section 529-A of 1956 Act which refers to overriding preferential payments in case of winding up of a company, it would appear that notwithstanding anything contained in any other provision of Companies Act or any other law for the time being in force, in the winding up of a company, workmens due and debts due to secured creditors subject to certain conditions shall be paid in priority to all other debts. After making such payment, if any property is yet left, then Section 530 of the Companies Act, 1956 shall come into operation, which reads as under:- "530. After making such payment, if any property is yet left, then Section 530 of the Companies Act, 1956 shall come into operation, which reads as under:- "530. Preferential payments.-(1) In a winding up, [subject to the provisions of Section 529A, there shall be paid] in priority to all other debts- (a) all revenues, taxes, cesses and rates due from the company to the Central or a State Government or to a local authority at the relevant date as defined in clause (c) of sub-section (8), and having become due and payable within the twelve months next before that date; (b)all wages or salary (including wages payable for time or piece work and salary earned wholly or in part by way of commission) of any employee, in respect of services rendered to the company and due for a period not exceeding four months within the twelve months next before the relevant date [****]subject to the limit specified in sub-section (2); (c) all accrued holiday remuneration becoming payable to any employee, or in the case of his death to any other person in his right, on the termination of his employment before, or by the effect of, the winding up order of resolution; (d) unless the company is being wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company, all amounts due, in respect of contributions payable during the twelve months next before the relevant date, by the company as the employer of any persons, under the Employees State Insurance Act,1948, or any other law for the time being in force; (e)unless the company is being wound up voluntarily merely for the purposes of reconstruction or of amalgamation with another company, or unless the company has, at the commencement of the winding up, under such a contract with insurers as is mentioned in Section 14 of the Workmens Compensation Act, 1923, rights capable of being transferred to and vested in the workman, all amounts due in respect of any compensation or liability for compensation under the said Act in respect of the death of disablement of any employees of the company; (f)all sums due to any employee from a provident fund, a pension fund, a gratuity fund or any other fund for the welfare of the employees, maintained by the company; and (g)the expenses of any investigation held in pursuance of Section 235 or 237, in so far as they are payable by the company." ( 11. ) A bare reading and understanding of Section 530 of the Companies Act would clearly provide that subject to Section 529-A there shall be paid in priority to all other debts, all revenues, taxes, cesses and rates due from the company to the Central or a State Government or to a local authority etc. Section 530 of the Companies Act would come into operation only after anything is left after satisfying the workmens dues and debts due to the secured creditors. When Section 33-C of 1958 Act was in force as a valid piece of legislation even the secured creditors under Section 529-A or other creditors under Section 530 were not entitled to any preferential payments. Section 529-A of the Companies Act provides that in the matter of winding up of a company a particular mode is to be adopted. However,Section 530 of the Companies Act provides that the remainder is to be distributed in a particular manner. The words "and subject to the provisions of Section 530 of the Companies Act,1956" are to be understood in their true perspective to mean that the property shall be distributed in accordance with Section 530 of the Companies Act. If Section 33-C of 1958 Act is held to be a valid piece of legislation, then mode of the distribution as provided under Section 530 of the Companies Act cannot be held to be ultra vires the constitution because Section 530 of the Companies Act provides for distribution of assets of a company and by force of incorporation, the said provisions contained in Section 530 of the Companies Act will have to be read in addendum to Section 53 of 1994 Act. For the reasons aforesaid, we are unable to hold that Section 53 of 1994 Adhiniyam is ultra vires the Constitution. ( 12. ) It was then contended that Section 51 of 1994 Adhiniyam is also ultra vires the constitution because the authority is given to the State Government or Recovery Officers to hold that during the pendency of any proceeding under 1994 Act, they can declare any transfer or charge to be a fraudulent transfer and thereby cause serious prejudice to any creditor who has extended loan facility or has purchased property or has taken the property under mortgage, gift, exchange etc. ( 13. ) Section 51 of the 1994 Act reads as under:- "51. Transfer to defraud revenue void. ( 13. ) Section 51 of the 1994 Act reads as under:- "51. Transfer to defraud revenue void. -Where during the pendency of any proceeding under this Act or under the Act repealed by this Act or under the Madhya Pradesh Land Revenue Code,1959(No.20 of 1959) any dealer creates a charge on or parts with the possession by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever of any of his assets in favour of any other person with the intention to defraud revenue, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the dealer as a result of the completion of such proceeding under this Act or in pursuance of such proceeding under the Madhya Pradesh Land Revenue Code, 1959 (No.20 of 1959). Provided that such charge or transfer shall not be void if made by the transferor and the transferee for valuable consideration under this Act or the Act repealed by this Act or the Madhya Pradesh Land Revenue Code, 1959 (No.20 of 1959)." ( 14. ) If language of the Act is properly read and appreciated, it would mean that where during the pendency of any proceeding under the Act or under the Repealed Act, 1958 Act or under the Madhya Pradesh Land Revenue Code 1959. any dealer creates a charge on or parts with the possession,of his property with the intention to defraud revenue such charge or transfer shall be void as against any claim in respect of any tax etc. When some property is transferred/alienated or charge is created over it then unless otherwise proved a transfer would be held valid and binding on the parties. If the State Government is of the opinion that such alienation or creation of charge was to defraud revenue or was with an intention to defraud revenue then the competent officers of the State Government/Revenue Recovery Officers will have to make an enquiry into the subject after issuing notice to the transferor, transferee and/or the person who created the charge and the persons in whose favour the charge is created and after giving appropriate opportunities to all the parties it has come to the conclusion that transfer was with or without an intention to defraud the revenue. ( 15. ( 15. ) It would be trite to say that a simple word or a simple finding without any supporting evidence or foundational fact that creation of charge/allegation was with an intention to defraud revenue would not be sufficient. When somebody alleges fraud, it has to plead the requirement and they will have to prove that how the fraud was committed and how the said fraud was against the interest of the revenue and was with an intention to defraud the revenue. In our opinion, Section 51 of 1994 Adhiniyam infact provides protection to the creditors in whose favour the property has been alienated by any mode i. e mortgage, gift, exchange etc. or in whose favour charge over the property has been created. ( 16. ) Taking into consideration the totality of circumstances, we are unable to hold that Sections 53 and 51 of the Adhiniyam are ultra vires the constitution. All the petitions deserve to and are accordingly dismissed. There shall be no order as to cost. Petition dismissed.