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State Bank Of Indore v. Regional Provident Fund Commissioner, Indore And Others
Factual and Procedural Background
By a mortgage deed dated 5 December 1959 the respondent No. 5, Bhandari Iron and Steel Company Private Limited (the Company), mortgaged its immovable property to the petitioner, the State Bank of Indore (the Bank). The Company failed to pay employer's contributions under the Employees' Provident Funds Act, 1952 (the Act) in respect of specified periods in 1957–58. Proceedings for recovery of those employer's contributions as arrears of land revenue were initiated under Section 3 of the Act read with Section 155 of the Madhya Pradesh Land Revenue Code, 1959 (the Code). The Naib-Tahsildar attached a Chawl of the Company that had been mortgaged to the Bank. The Bank objected to sale of the Chawl on the ground that it was mortgaged to the Bank and that the demand for employer's contribution had no priority over the Bank's mortgage claim. The Naib-Tahsildar rejected the objection, taking the view that, by Sections 137 and 152 of the Code, the property could be sold free of encumbrances.
The Bank appealed to the Sub-Divisional Officer, who rejected the appeal and held that (i) the arrear of employer's contribution was recoverable as an arrear of land revenue under Section 8 of the Act and Section 155 of the Code and (ii) property attached could therefore be sold free of encumbrances; the Sub-Divisional Officer also observed that the demand for contributions accrued before the mortgage, so the Bank could not claim priority by effecting a later mortgage. The Bank's application for a stay from the Commissioner, Indore, was refused. The Bank then filed a writ petition under Article 226 seeking quashing of the Naib-Tahsildar's and Sub-Divisional Officer's orders and a direction prohibiting sale of the attached property free from the Bank's mortgage.
Legal Issues Presented
- Whether an arrear of employer's contribution recoverable "in the same manner as an arrear of land revenue" under Section 8 of the Employees' Provident Funds Act, 1952, and Section 155 of the Madhya Pradesh Land Revenue Code, 1959, creates any statutory charge on the employer's property or gives the demand priority over existing secured debts (specifically a mortgage in favour of a bank).
- Whether Sections 137 and 152 of the Land Revenue Code (which make land revenue a first charge and provide that land sold for arrears of land revenue is acquired free of encumbrances) apply so as to permit sale of the attached property free of the Bank's mortgage when recovery is sought under Section 8 of the Act and Section 155 of the Code.
Arguments of the Parties
Petitioner-Bank's Arguments (Shri Chitaley)
- Section 8 of the Act does not create a charge on the employer's property nor give a statutory priority for employer's contributions over other debts; it merely prescribes the manner of recovery ("in the same manner as an arrear of land revenue") and does not convert the amount into an arrear of land revenue.
- Section 155(c) of the Code makes Chapter XI applicable "insofar as they are applicable," but that does not mean all provisions of Chapter XI (including Sections 137 and 152) necessarily apply to such recovery; Section 137 makes land revenue a first charge on land and profits, and Section 152 makes a purchaser acquire land free of encumbrances only when land is sold for arrears of land revenue due in respect of that land.
- Accordingly, Sections 137 and 152 have no applicability where the amount recovered under Section 8 of the Act is not itself an arrear of land revenue assessed on the land.
- Relied on authorities: Munshi Maulabux v. Sardarmal (ILR (1952) Nag 211 : AIR 1952 Nag 341 (FB)) and Ragbo Prosad v. Mewa Lal (ILR 34 All 223 (PC)), and a statement in Halsbury's Laws of England (para 1311, p. 661) in support of the contention that no statutory priority exists.
Respondents / Government Advocate's Arguments (Shri Khaskalam)
- Because employer's contributions are recoverable "in the same manner as an arrear of land revenue" under Section 8 of the Act and Section 155 of the Code, the sale of the Company's attached property would be governed by Section 152 of the Code (i.e., allowing sale free of encumbrances).
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Munshi Maulabux v. Sardarmal, ILR (1952) Nag 211 : AIR 1952 Nag 341 (Full Bench) | Relied upon by the petitioner to support the submission that provisions like Section 152 (or its analogue) apply only where land revenue itself is being recovered and do not convert other sums into land revenue. | The Court treated the Full Bench decision as concluding the matter: it held that the provision applies only where land revenue due is itself being recovered and does not apply if land revenue is not being recovered. |
| Ragbo Prosad v. Mewa Lal, ILR 34 All 223 (Privy Council) | Relied upon by the petitioner (citation used in argument). | The opinion records reliance on the case by petitioner; the Court's analysis rests primarily on statutory interpretation and the Full Bench decision cited above. |
| Halsbury's Laws of England, Vol. 6, 3rd Ed., para 1311, p. 661 (textual authority) | Statement that, subject to statutory provisions, the Crown has no priority over other unsecured creditors; used for analogy about lack of statutory priority absent explicit provision. | The Court cited this principle to emphasize that in the absence of a statutory charge or priority the employer's contribution cannot have priority over secured creditors. |
Court's Reasoning and Analysis
The Court accepted the petitioner's interpretation and analyzed the relevant statutory provisions step by step:
- Interpretation of Section 8 of the Act: The Court held that Section 8 provides that an amount due from an employer "may ... be recovered ... in the same manner as an arrear of land revenue." It does not say the amount is to be recovered as an arrear of land revenue, nor does it convert the amount into an arrear of land revenue. The provision prescribes a mode or manner of recovery only; it does not itself create a charge on the employer's property or give statutory priority in payment.
- Section 11 of the Act (priority on insolvency/winding up): The Court observed that Section 11 expressly provides priority only where an employer is adjudicated insolvent or a company is being wound up; amounts in Section 11 are deemed debts under the Insolvency Act and Companies Act and take priority in distribution. The omission of any general provision creating a charge or priority for contributions outside those circumstances indicates no general priority exists.
- Analogy to Crown priority: The Court quoted Halsbury to underline the general rule that, absent statutory provision, public claims do not have priority over other unsecured creditors; by analogy, absence of statutory charge or priority for employer contributions means they cannot rank ahead of secured creditors.
- Scope of Section 155(c) of the Code: That section allows, where a sum is declared recoverable in the same manner as an arrear of land revenue, as far as may be, the application of Chapter XI of the Code. The Court read this as a limited incorporation "so far as may be" and not an automatic application of every provision of Chapter XI to every such recovery.
- Non-applicability of Section 137 of the Code: Section 137 makes land revenue assessed on land the first charge on that land and rents and profits. The Court held the employer's contribution due under Section 8 of the Act is not land revenue assessed on any land; therefore Section 137 does not apply.
- Non-applicability of Section 152 of the Code: Section 152 gives effect to Section 137 by providing that when land is sold for arrears of land revenue due in respect thereof the purchaser acquires it free of encumbrances. The Court stressed the qualifying words "the land sold for arrears of land revenue" and "due in respect thereof" — showing Section 152 applies only where land revenue due on that land is being recovered. Because the attached Chawl was not being sold for arrears of land revenue assessed on it, Section 152 does not apply.
- Reliance on Full Bench authority: The Court referred to the Full Bench decision in ILR (1952) Nag 211 : AIR 1952 Nag 341 as dispositive, stating that the words qualifying the phrase "arrears of land revenue" limit the operation of the provision to cases where land revenue itself is being recovered.
- Consequences for the specific attachment: Given the above statutory interpretation, the Naib-Tahsildar and the Sub-Divisional Officer erred in holding that the Chawl mortgaged to the Bank could be sold free of the mortgage for recovery of employer's contributions under Section 8 of the Act. The sale, if pursued under Chapter XI procedures, must be subject to the Bank's entire mortgage burden.
Holding and Implications
Holding: The Court allowed the petition. The core ruling is emphasized as follows:
The orders of the Naib-Tahsildar and the Sub-Divisional Officer that the attached Chawl would be sold free of the mortgage encumbrance in favour of the Bank are quashed.
Direct consequences and remedial directions:
- The respondents Nos. 1 to 4 are restrained from selling the attached property free of the mortgage encumbrance in favour of the petitioner-Bank.
- The attached Chawl may, if the respondents proceed under Chapter XI of the Code, be sold only subject to the entire mortgage burden held by the Bank on the Company's properties.
- If the property is sold subject to that burden, the proceeds can be applied in the manner laid down in Section 151 of the Code; but any purchaser would acquire the property subject to the mortgage and could not redeem it without paying the entire mortgage amount due to the Bank from the Company.
- The petitioner shall have the costs of the application; counsel's fee fixed at Rs. 150; the outstanding amount of the security deposit to be refunded to the petitioner.
Broader implications: The opinion confines itself to statutory interpretation of the Act and the Code in the facts before it. It does not purport to create any wider statutory priority beyond what is expressed in the Act (notably Section 11 for insolvency/winding up). The decision applies existing precedent and statutory construction; it does not announce a new general statutory charge over employer property beyond the specific holding that recovery under Section 8 does not convert amounts into land revenue or create priority over pre-existing mortgages.
Dixit, C.J:— The circumstances in which this application, under Article 226 of the Constitution has been filed are that by a mortgage deed executed on 5th December, 1959 the respondent No. 5, namely, Bhandari Iron and Steel Company Private Limited of Indore (hereinafter referred to as the Company), mortgaged its entire immoveable property with the petitioner, the State Bank of Indore (hereinafter referred to as the Bank). The said Company failed and neglected to pay the employer's contribution due from it under the Employees' Provident Funds Act, 1952 (hereinafter referred to as the Act) in respect of the periods from September, 1957, to July, 1958, and from August to September, 1958, and consequently proceedings for the recovery of the employer's contribution from the Company as an arrear of land revenue were started under Sec. 3 of the Act read with Sec. 155 of the Madhya Pradesh Land Revenue Code, 1959, (hereinafter referred to as the Code). In those proceedings, the Naib-Tahsildar of Indore attached a Chawl belonging to the Company which, along with other property belonging to the Company, had been mortgaged with the Bank. The Bank objected to the proposed sale of the Chawl on the ground that the property sought to be sold stood mortgaged to it on the date of the attachment and that the demand of the employer's contribution under the Act had no priority over its claim under the mortgage against the Company. The Naib-Tahsildar rejected this objection taking the view that by virtue of Secs. 137 and 152 of the Code the property attached could be sold free of all encumbrances.
2. The petitioner Bank then preferred an appeal be fore the Sub-Divisional Officer, Indore, which was rejected. While rejecting the appeal the Sub-Divisional Officer expressed the view that ss the arrear of employer's contribution under the Act was recoverable as an arrear of land revenue under Sec. 8 of the Act, Sec. 155 of the Code and all other provisions of the Code contained in Chapter XI of the Code were applicable; and that, therefore the property attached could be sold free of all encumbrances. He also added that since the demand in respect of the employer's contribution under the Act accrued before the mortgage was executed by the respondent-Company in favour of the Bank, the Bank could not claim priority “over Government dues simply by effecting a mortgage on a later date.” The petitioner-Bank then preferred a second appeal before the Commissioner, Indore, and applied for stay of the sale of the property attached for the recovery of the employer's contribution due from the Company. The Commissioner rejected the petitioner's prayer for stay. Thereupon, the Bank filed this petition for quashing by a writ of certiorari the orders of the Naib-Tahsildar, Indore, and the Sub-Divisional Officer, Indore, rejecting its objections and for the issue of a direction prohibiting the respondents Nos. 1 to 4 from selling the property attached free from the mortgage, encumbrance in favour of the Bank. It was argued by Shri Chitaley, learned counsel appearing for the petitioner, that there was no provision in the Employees' Provident Funds Act, 1952, giving to the demand in respect of the employer's contribution priority of payment over other debts owed by the employer to a private person or the Government; and that Sac. 8 of the Act merely laid down that any arrear of employer's contribution would be recoverable by the appropriate Government in the same manner as an arrear of land revenue, and did not create any charge on the employer's property for the payment of the contribution. Learned counsel proceeded to say that under section 155(c) of the Code the provisions contained in Chapter XI of the code in so far as they were applicable would apply to the recovery of the amount of employer's contribution as an arrear of land revenue, but from this it did not follow that all the provisions contained in that Chapter become applicable in the proceeding; that Sec. 137 of the Code made only the land revenue assessed on any land the first charge on the land and on the rents and profits thereof; that under Sec. 152 of the Code it is only when land is sold for arrears of land revenue due in respect thereof that the purchaser acquires it free of all encumbrances; and that Secs. 137 and 152 of the Code have no applicability whatsoever to recovery of any amount which is not an arrear of land revenue but which is only recoverable in the same manner as an arrear of land revenue.
3. It was further submitted that the property attached by the Naib-Tahsildar could no doubt be sold subject to the burden of the entire mortgage held by the petitioner; but that in the absence of any statutory provision creating a first charge on the employer's property for the payment of contribution due from him under the Act, no priority could be given to the demand on account of the employer's contribution over the secured debt of the Bank. In support of his argument learned counsel relied on Munshi Maulabux v. Sardarmal, ILR (1952) Nag 211 : (AIR 1952 Nag 341 (FB)), and Ragbo Prosad v. Mewa Lal, ILR 34 All 223 (PC), and referred us to the statement in paragraph 1311 at page 661 of Halsbury's Laws of England, Volume 6, 3rd Edition.
4. As against this, Shri Khaskalam, learned Government Advocate, contended that as the amount of the employer's contribution was recoverable in the same manner as an arrear of land revenue under Sec. 8 of the Act and Sec. 155 of the Code, the sale of the Company's property attached by the Naib-Tahsildar would be governed by Sec. 152 of the Code.
5. In our judgment, the contentions advanced on, behalf of the petitioner must be given effect to. Section 8 of the Act provides, inter alia, that any amount due from the employer in relation to an establishment to which a Scheme under the Act applies, may, if the amount is in arrear, be recovered by the appropriate Government in the same manner as an arrear of land revenue. It does not say that the amount may be recovered as an arrear of, land revenue. It merely provides the manner of the recovery of the amount mentioned in Sec. 8. The manner, prescribed for the recovery of the, amount as an arrear of land revenue does not convert the amount into an arrear of land revenue; nor does it create any charge on any property of the employer for the payment of the amount or give a priority in the manner of payment of the amount. There is no provision in the Act in regard to the creation of any such charge or priority for the payment of the employer's contribution.
6. It, is significant that Sec. 11 of the Act, which deals, with priority of payment of contributions over other debts, is restricted only to those cases where any employer is adjudicated insolvent or, being a Company, has been ordered to be wound up. In those cases the amounts mentioned in Sec. 11 have been deemed to be included among, the debts under the Insolvency Act and the Companies Act and are required to be paid in priority to all other debts in the distribution of the property of the insolvent or the assets of the company. The omission of a provision in the Act creating a charge on the employer's, property or giving a priority in cases not falling under Sec. 11 in the matter of the payment of the amount only shows that a demand for the payment of the employer's contribution can have no priority over other secured or unsecured debts.
7. It has been stated in paragraph 1311 at page 661 of Halsbury's Laws of England, Volume 6, 3rd Edition, that
“subject to the statutory provisions with regard to assessed taxes, the Crown has no priority over other unsecured creditors in respect of debts due to the Crown.” A fortiori, in the absence of a statutory provision creating a charge or giving a priority in the matter of the payment of the employer's contribution, the amount can have no priority over the debts of secured creditors due from the employer.
8. Section 155(c) of the Code only rays down that if under any enactment any sum is declared to be recoverable in the same manner as an arrear of land revenue, then it may be recovered, as far as may be, under the provision of Chapter XI of the Code in the same manner as an arrear of land revenue. Section 137 of the Code is not attracted in the present case as that only makes the land revenue assessed on any land the first charge on that land and on the rents and profits thereof. The amount due from an employer under Sec. 8 of the Act is clearly not any land revenue on any land and, therefore, Sec. 137 has no applicability whatsoever. Section 152 of the Code only gives effect to the provisions, contained in Sec. 137 of the Code when it says that the purchaser of the land sold for arrears of land revenue due in respect thereof shall acquire it free of all encumbrances imposed on it. The words “the land sold for arrears of land revenue” and the qualifying words “due in respect thereof” unmistakably show that it is only when land is sold for arrears of land revenue assessed on that land that the purchaser of the land acquires it free of all encumbrances imposed on it.
9. This provision has also no applicability here for the simple reason that the property that is intended to be sold is not any land and the arrears of the employer's contribution is not any amount of arrears of land revenue. Both the Naib Tahsildar and the Sub-Divisional Officer, therefore, erred in holding that the Chawl mortgaged with the petitioner-Bank by the Company could be sold free of the mortgage encumbrance for the recovery of the amount due from the Company under Sec. 8 of the Act. The matter is really concluded by the Full Bench decision in ILR (1952) Nag 211 : (AIR 1952 Nag 341 (FB)) (supra) where it has been held with reference to Section 138 of the C.P Land Revenue Act, 1917—analogous to Sec. 152 of the Code—that the words “due in respect thereof” in Sec. 138 qualify the words “arrears of land revenue” in the section; that section applies only to those cases in which land revenue due is itself recovered; and that it does not come into play if the land revenue is not being recovered.
10. The attached Chawl can only be sold subject to the entire mortgage burden. As there is no statutory provision creating a charge for the payment of the employer's contribution or giving any priority in the matter of the payment of that amount, it makes no difference whether the mortgage in favour of the Bank was created before or after the liability of the Company for the payment of the employer's contribution accrued. If the opponents desire to sell the attached Chawl for the recovery of the employer's contribution from the Company by following the procedure laid down in Chapter XI of the Code, they can no doubt do so, but the property can be sold only subject to the burden of the entire mortgage held by the petitioner on all the properties of the Company including the one attached by the Naib-Tahsildar. If they succeed in selling the property with this burden, they can also apply the proceeds of the sale in the manner laid down in Sec. 151 of the Code, but the person who purchases the property will get it only subject to the mortgage burden and will not be able to redeem it without paying the entire mortgage amount due to the petitioner from the Company. For these reasons, this petition is allowed. The decision of the Naib-Tahsildar and the Sub-Divisional Officer that the Chawl will be sold free of the mortgage encumbrance in favour of the Bank is quashed; and the respondents Nos. 1 to 4 are restrained from selling the attached property free of the mortgage encumbrance in favour of the Bank. The petitioner shall have costs of this application. Counsel's fee is fixed at Rs. 150/-. The out standing amount of the security deposit shall be refunded to the petitioner.
JH/MVJ/R.G.D
11. Order accordingly.
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