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Bank Of Maharashtra v. Konkan Chemicals Pvt. Ltd.
Structured Summary of the Opinion
Factual and Procedural Background
The Bank of Maharashtra (plaintiff) filed Suit No. 782 of 1992 against Konkan Chemicals Pvt. Ltd. (1st defendant) and others for a declared indebtedness of Rs. 71,64,549.63 with interest and other consequential reliefs. A Court Receiver was appointed by order dated 18 March 1992 with respect to mortgaged property and hypothecated goods, with powers under Order 40, Rule 1 of the Code of Civil Procedure, excluding the power of sale. A decree on admission as against the 1st defendant was passed on 18 June 1992, and the suit remained pending against other defendants.
The applicants in the instant Chamber Summons are the State of Maharashtra. They seek, inter alia, (i) priority over all other creditors of Konkan Chemicals in respect of arrears of sales tax dues; (ii) permission to lodge a claim with the Court Receiver for arrears of sales tax and directions that the Receiver decide the claim and the priority of the applicants over the plaintiff's claim; and (iii) directions that the Receiver give notice to the applicants prior to any auction sale of the 1st defendant's property and distribute sale proceeds after determining priorities.
The applicants' affidavit states that Konkan Chemicals was assessed to sales tax under the Bombay Sales Tax Act and the Central Sales Tax Act for multiple periods and that the total arrears assessed for the relevant periods amounted to Rs. 69,58,171/-. Demand notices, notices under section 39 of the Bombay Sales Tax Act and under section 178 of the Maharashtra Land Revenue Code were issued; an attachment order was issued in respect of office premises but the factory at Badlapur could not be attached because a Court Receiver had been appointed. The applicants learnt that the Receiver had fixed an auction sale of the factory premises for 16 September 1998 and allege they were not furnished copies of Receiver's orders when requested because they were not parties to the Bank's suit.
Legal Issues Presented
- Whether the State of Maharashtra (the applicants) has a statutory first charge on the property of Konkan Chemicals Pvt. Ltd. for arrears of sales tax such that it has priority over the Bank's mortgage claim and other creditors.
- Whether, in the circumstances, the applicants should be permitted to lodge a claim with the Court Receiver and whether the Receiver should be directed to decide the claim and determine priority between the applicants and the plaintiff-bank.
- Whether the Receiver should be directed to give notice to the applicants before selling the 1st defendant's property and thereafter distribute sale proceeds after determining priorities.
Arguments of the Parties
Applicants' (State of Maharashtra) Arguments — as advanced by Mr. Sawant, Advocate General
- The State relied on an Ordinance issued on 6 February 1999 (published 16 February 1999) which inserts section 38-C into the Bombay Sales Tax Act providing that any amount of tax, penalty, interest or other sum payable under the Act shall be the first charge on the property of the dealer (subject to any central Act first charge).
- Section 9 of the Ordinance (inserting section 38-C) creates a statutory first charge on the entire property of the dealer, giving the State priority over other charges including mortgages; the statutory charge operates on the entire property and on the mortgagee's interest.
- The State relied principally on the Supreme Court decision in State Bank of Bikaner and Jaipur v. National Iron & Steel Rolling Corporation (1995) 2 SCC 19, and the Court's treatment of a similar statutory provision (section 11-AAAA of the Rajasthan Sales Tax Act), to submit that the present facts are squarely covered and justify permitting the applicants to lodge their claim with the Receiver and obtain priority.
- The applicants sought directions for the Receiver to give notice to them prior to sale and to distribute sale proceeds after determining priority between the State and the plaintiff-bank.
Plaintiff-Bank's Arguments — as advanced by Mr. Shroff
- The Bank argued the Chamber Summons was misconceived and should be dismissed (specific points in the affidavit in reply were limited to general denials).
- Mr. Shroff contended procedurally that the application ought to have been made by Notice of Motion rather than by Chamber Summons; he also argued that the notification (the Ordinance) must be prospective and not retrospective in effect.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| State Bank of Bikaner and Jaipur v. National Iron & Steel Rolling Corporation, (1995) 2 SCC 19 | Held that a statutory provision (section 11-AAAA of the Rajasthan Sales Tax Act) creating a first charge for sales tax dues gives priority to the statutory charge over all other charges on the property including mortgages; the charge operates on the entire property, including the mortgagee's interest. | The Court treated this decision as dispositive and directly analogous; it found the present controversy fully covered by its ratio and relied on it to conclude in favour of the applicants (i.e., that the State's statutory charge has priority over the Bank's claim). |
| Dattatraya Shanker Mote v. Anand Chintaman Datar, (1974) 2 SCC 799 | Discussed the distinction between a "mortgage" and a "charge" and the broader scope of "charge" as a term which can include a mortgage; used by subsequent courts to interpret statutory first-charge provisions. | The Supreme Court's analysis in this case was referred to within the State Bank of Bikaner judgment; the present Court noted that the State Bank decision relied on the Dattatraya Shanker Mote distinction to conclude that a statutory first charge prevails over a mortgage. |
Court's Reasoning and Analysis
The Court analyzed the matter by comparing the statutory provision newly inserted by the Maharashtra Ordinance (section 38-C inserted into the Bombay Sales Tax Act via section 9 of the Ordinance) with the statutory provision considered by the Supreme Court in State Bank of Bikaner and Jaipur (section 11-AAAA of the Rajasthan Sales Tax Act). The Advocate General contended that the Ordinance provision creates a first charge on the dealer's property for taxes, penalty and interest and that this charge is prior to mortgages and other charges.
The Court examined the Supreme Court's reasoning in State Bank of Bikaner and Jaipur, which itself relied upon principles in the Transfer of Property Act and the Dattatraya Shanker Mote discussion of the distinction between a "mortgage" and a "charge." The Supreme Court in State Bank held that the statutory first charge operates on the entire property (not merely the equity of redemption) and therefore has precedence over an existing mortgage.
Applying that precedent and the relevant reasoning, the Court concluded that the controversy in the present case was fully covered by the cited Supreme Court authority and therefore favoured the applicants. The Court rejected the Bank's procedural objection that the matter should have been by Notice of Motion rather than Chamber Summons, relying on Rule 121, Chapter IX of the Original Side Rules which permits disposal by Chamber Summons. The Court also rejected the Bank's submission that the Ordinance must be prospective and not retrospective, finding that this submission did not withstand the precedent cited.
The Court further observed that the affidavit in reply by the Bank contained only general denials and no specific substantive points disputing the applicants' claim; on the law and facts as presented, the State's position — based on the statutory first charge and the controlling Supreme Court authority — governed the outcome.
Holding and Implications
Holding: The Chamber Summons was made absolute in terms of prayer clauses (b) and (c) and the Chamber Summons was accordingly disposed of. There was no order as to costs.
Direct consequences for the parties (as recorded in the opinion): the applicants' Chamber Summons succeeded in the respects sought under the specified prayer clauses, and the Court found the controversy against the plaintiff-bank and in favour of the applicants. The Receiver is to act in accordance with the law as the Chamber Summons was allowed (the applicants were permitted to pursue the reliefs set out in the successful prayer clauses).
The opinion treats the cited Supreme Court decision as fully dispositive; it does not record the creation of any new legal precedent beyond application of existing law. No further broader legal implications beyond the direct effect on these parties are discussed in the opinion.
This summary is limited strictly to information contained in the provided opinion and does not add, infer, or assume facts or reasoning beyond that text.
1. This Chamber Summons is taken out by the applicants, namely, the State of Maharashtra, praying inter alia that the applicants be given priority over all other creditors of Konkan Chemicals Pvt. Ltd., a private limited Company which is arraigned as defendant No. 1 in the suit filed by the Bank of Maharashtra against defendant No. 1 and other defendants, and necessary direction in this regard be given to the Court Receiver, High Court. In the alternative, it is prayed that this Court be pleased to permit the applicants to lodge a claim with the Receiver in respect of the arrears of sales tax dues and the Receiver be directed by the Court to decide and consider the claim and the priority of the applicants over the claims of the plaintiff. It is also prayed that the Court Receiver appointed by this Court on 18th March, 1992 and 18th June, 1992 be directed to sell the property in his possession belonging to the 1st defendant viz., Konkan Chemicals Pvt. Ltd. with notice of the said auction sale to the applicants herein.
2. This suit is filed by the plaintiff Bank against the defendants for declaration that the defendants are jointly and severally liable to pay to the plaintiff, a sum of Rs. 71,64,549.63 as per particulars of claim Exhibit-I annexed to the Plaint with interest thereon at the rate of 25% per annum with quarterly rests from the date of the filing of the suit till payment or realisation. Other consequential prayers are also sought. It appears from the proceedings that Court Receiver came to be appointed by Mr. Dhanuka, J. by his order dated 18th March, 1992 with respect to the mortgaged property described in Exhibit-D to the plaint and of the hypothecated goods mentioned in Exhibit-B to the plaint with all powers under Order 40, Rule 1 of the Code of Civil Procedure, excluding the power of sale. Thereafter, it appears that decree on admission as against the 1st defendant, in terms of the Minutes by and between the plaintiff and the 1st defendant came to be passed on 18th June, 1992 (Coram: Mr. Jhunjhunwala, J.) suit was kept pending as against other defendants.
3. In the affidavit in support of the present Chamber Summons, the applicants have stated that defendant No. 1 Company was registered under the Bombay Sales Tax Act and the Central Sales Tax Act and was assessed to Sales Tax for the period from 1-5-1986 to 30-4-1987, 1-4-1989 to 31-3-1990, 1-4-1990 to 31-3-1991 and 1-4-1991 to 31-3-1992 and the assessment Order pertaining to the said period was accordingly passed by the Sales Tax Officer, Assistant Commissioner of Sales Tax Assessment. Exhibit-3 annexed to the affidavit in support of the Chamber Summons is the total outstanding dues in the case of defendant No. 1, in view of the assessment orders passed for the relevant period under the Bombay Sales Tax Act and Central Sales Tax Act. It is submitted that the total arrears of Sales Tax dues from defendant No. 1 for assessment for the above stated period is Rs. 69,58,171/-. It is further submitted that the demand notices were issued demanding the arrears of the Sales Tax dues for each of the assessment period and the said demand notices were duly served on defendant No. 1. Thereafter, the applicants tried to take action under section 39 of the Bombay Sales Tax Act and notice was issued under section 39 of the said Act to defendant No. 1 for recovery of the arrears of Sales Tax dues. Thereafter, notice under section 178 of the Maharashtra Land Revenue Code was also issued against defendant No. 1 for recovery of arrears of Sales Tax dues. Thereafter, order of attachment was also issued in respect of the office premises situated at G-1.Court Chambers, New Marine Lines, Mumbai-400020 and the said notice was served by the Inspector, who visited the office of defendant No. 1 at those premises. In view of the appointment of Court Receiver, the factory of defendant No. 1 at Badlapur could not be attached. The Sales Tax Department learnt that the plaintiff Bank viz., Bank of Maharashtra had filed suit against defendant No. 1 being Suit No. 782 of 1992 and had obtained orders dated 18th March, 1992 and 18th June, 1992, whereby Court Receiver was appointed receiver of the factory premises at Badlapur defendant No. 1. The applicants made an application to the Court Receiver for furnishing copies of the orders and other relevant documents. However, they were not furnished by the Court Receiver stating that, that could not be done since the applicants were not parties to the suit. Thereafter, the applicants made similar application to the Prothonotary and Senior Master for taking inspection of the proceedings of the suit and thereafter the applicants came to know that the Court Receiver had fixed auction sale of the said factory premises on 16th September, 1998. The prayer of the applicants is that the Receiver be directed by this Court to sell the property of defendant No. 1, which is in his possession, after giving notice to the applicants and to distribute the sale proceeds realised from the sale after deciding and determining the priorities of claims of the applicants and the plaintiff. The applicants have prayed that they be permitted to lodge their claim of Sales Tax dues with the Receiver and the Receiver be directed to decide the same as per the provisions of law and if the Receiver has already sold the property, then he may be directed to pay to the plaintiff as secured creditor and to pay the remaining balance of the sale proceeds lying with the Receiver to the applicants towards the arrears of Sales Tax dues payable by defendant No. 1 Company.
4. Mr. Sawant, learned Advocate General appearing on behalf of the applicants submitted that the Government of Maharashtra has issued Ordinance of 6th February, 1999, which was published in the Maharashtra Government Gazette dated 16th February, 1999, for the purpose of amending certain Tax Laws in operation in the State of Maharashtra. He drew attention of the Court to section 9, which can be reproduced as below:
“9. Insertion of section 38-C in Bom. LI of 1959.— After section 38-B of the Bombay Sales Tax Act, the following section shall be inserted, namely:—
“38C. Notwithstanding anything contained in any contract to the contrary but subject to any provision regarding first charge in any Central Act for the time being in force, any amount of tax, penalty, interest or any other sum, payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer, or, as the case may be, person.”
5. Relying upon the above mentioned section 9 of the Maharashtra Ordinance No. II of 1999, the learned Advocate General argued that State has the first charge over the property of defendant No. 1. He submitted that section 9 creates a first charge on the property of defendant No. 1 which clearly gives priority to the statutory charge over all other charges on the property including a mortgage. He submitted that the charges operate on the entire property of defendant No. 1 including the interest of the mortgage therein. The learned Advocate General heavily relied upon State Bank of Bikaner and Jaipur v. National Iron & Steel Rolling Corporation, reported in (1995) 2 SCC 19 to substantiate his arguments.
6. In the above mentioned Supreme Court case, the appellant, namely, State Bank of Bikaner and Jaipur had given cash credit facilities to respondent No. 1, National Iron and Steel Rolling Corporation. Respondent Nos. 2 to 5 were the partners of respondent No. 1. As a security for repayment of the amounts advanced to respondent No. 1 by the appellant-bank, respondent No. 1 created a mortgage of their factory premises situated at Industrial Area, Bharatpur by a Deed of Mortgage dated 18-10-1977. They had also, by a Letter of Promise dated 10-6-1981, pledged the plant and machinery installed in the said premises to the bank as a security for the said advances. There was also an agreement for the pledge of movables dated 7-1-1980 executed by the first respondent in favour of the appellant-bank. While the suit filed by the appellant-bank against the respondents was pending, the Commercial Taxes Officer, Bharatpur got himself impleaded in the suit on the ground that he had a prior claim for the recovery of a sum of Rs. 1,19,122/- as sales tax dues from respondent No. 1 and was entitled to realise it by sale of the mortgaged property. The said property which was the subject matter of the mortgage had been sold by auction under the orders of the Court for a sum of Rs. 4,02,000/- to one Smt. Kamlesh Goel. Under the orders of the Court, the sale proceeds were deposited in the Court. The claim of the Commercial Taxes Officer was accepted by the trial Court. The revision petition of the appellant-bank was dismissed by the High Court. The Bank, therefore, approached to the Supreme Court by way of Special Leave Petition.
7. The claim of the Commercial Taxes Officer, Bharatpur in the above mentioned case rested on the provisions of section 11-AAAA of the Rajasthan Sales Tax Act, 1954. The said section can be reproduced below for the sake of convenience:
“11-AAAA. Liability under this Act to be the first charge.— Notwithstanding anything to the contrary contained in any law for the time being in force, any amount of tax, penalty, interest and any other sum, if any, payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer, or such person.”
8. Under this section the amount of sales tax or any other sum due and payable by a dealer or any other person under the Rajasthan Sales Tax Act, 1954, is a first charge on the property of the dealer or of such person. It is on account of the provisions of this section that the Commercial Taxes Officer claimed priority for the recovery of the sales tax dues from the sale proceeds of the mortgaged property. The appellant, however, contended that since the mortgage in their favour was prior in point of time, their claim will have precedence over the claim of the sales tax authorities.
9. The Supreme Court, after considering the relevant provisions of the Transfer of Property Act, relating to mortgage and after taking into consideration the distinction between the “mortgage” and the ‘charge’, which was earlier discussed by the Supreme Court in the case of Dattatraya Shanker Mote v. Anand Chintaman Datar; (1974) 2 SCC 799, came to the conclusion that section 11-AAAA created 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 Supreme Court specifically rejected the contention of the appellant-bank that the statutory first charge created by the said section 11-AAAA of the Rajasthan Sales Tax Act, could operate only over the equity of redemption and held that the charge operates on the entire property of the dealer including the interest of the mortgagee therein.
10. Mr. Sawant, learned Advocate General, submitted that the facts of the present case are squarely covered by the ratio of the above mentioned Supreme Court Judgment. He pointed out that the provisions of section 9 of the Ordinance No. II of 1999 are identical with the provisions of section 11-AAAA of the Rajasthan Sales Tax Act, 1954. He also specifically drew attention of the Court to paras 10 and 11 of the said Judgment of the Supreme Court wherein reference is made to Dattatreya Mote's case. In the said case it was held by the Supreme Court that ‘change’ is a wider term than ‘mortgage’ and that it would cover within its ambit a mortgage also and, therefore, when a first charge is created by operation of law over any property, the charge will have precedence over an existing mortgage. He thus, submitted that in the present case at hand when there are sales tax arrears payable to the applicants from defendant No. 1 Company, those sales tax dues have the first charge and, therefore, the applicants be permitted to put up their claim before the Court Receiver, who can decide and consider the applicant's case and priority of the applicants over the claim of the plaintiff in accordance with law. He also tenders for my perusal, various judgments passed by this Court on similar lines, who have also relied upon the ratio of the Supreme Court case of State Bank of Bikaner and Jaipur.
11. After perusing the proceedings, the Supreme Court Judgment relied upon by the learned Advocate General and after hearing his arguments, I find that the controversy is fully covered against the plaintiff Bank and in favour of the applicants. Mr. Shroff appearing for the plaintiff Bank tried to argue in vain that the application is misconceived and has to be dismissed by the Court. In fact, in the affidavit in reply to the Chamber Summons, there is no specific point as to why the Chamber Summons taken out by the applicants is being opposed by the plaintiffs. The averments are by way of general denial only. Across the bar, Mr. Shroff tried to submit that this application should have been by way of Notice of Motion and not by way of Chamber Summons. This argument of Mr. Shroff has to be rejected in view of Rule 121, Chapter IX of the Original Side Rules of the High Court which deals with matters which can be disposed of by the Judge, by way of Chamber Summons. Mr. Shroff also tried to argue in vain that the notification has to be prospective in nature and not retrospective in effect. This argument also does not hold any water and I am rejecting the same. In fact, the Supreme Court Judgment (State Bank of Bikaner and Jaipur, supra) is the complete answer as to why the application of the applicants has to be allowed. Hence the following order:
12. Chamber Summons is made absolute in terms of prayer clauses (b) and (c).
13. Chamber Summons is accordingly disposed of. No order as to costs.
Order accordingly.
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