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Case Number

D.B Civil Writ Petition No. 403 of 1995

Attorney(S)

Vineet Kothari, for Petitioner
B.C Mehta, for Respondents 1 and 2

Judges

Mr. Prem Krishan Palli
Mr. Jasraj Chopra

Acts

S. 29(1) and s. 46(B) of the State Financial Corporations Act, 1951 (in short the Act of 1951),
provisions of Section 11AAAA of Rajasthan Sales Tax Act, the provisions of S. 46(B)
provisions of Section 11AAAA of the Rajasthan Sales Tax Act.4. Section 11AAAA
provisions of Section 11AAAA of the Rajasthan Sales Tax Act, 1954.
provisions of S. 11AAAA of the Rajasthan Sales Tax Act.6.
provisions of S. 11AAAA of the Rajasthan Sales Tax Act
Central Act and the Rajasthan Sale Tax Act
Sections 29/30 of the S.F.C Act, 1951.(viii)
provisions of the Rajasthan Sales Tax Act
S. 11AAAA of the Rajasthan Sales Tax Act
Rajasthan Sales Tax Act
Kothari.3. Section 46(B)

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Smart Summary

Judgment Summary: P. K. Palli, J.

Factual and Procedural Background

The petitioner instituted a writ petition seeking multiple reliefs challenging actions of the Sales Tax Department and asserting rights of the Rajasthan State Industrial Development and Investment Corporation Ltd. (RIICO). The petitioner sought, inter alia:

Quashing of impugned orders/letters of respondent No.2 (Annexures 9 and 10 dated 22-12-1994).
A declaration that respondents Nos.1 and 2 are not entitled to attach, auction, sell or otherwise take possession of the industrial undertaking of respondent No.3 in a manner violating the Corporation's rights.
A declaration that Section 11AAAA of the Rajasthan Sales Tax Act does not override statutory powers of the petitioner under Sections 29/30 of the State Financial Corporations Act, 1951 (SFC Act, 1951).
Injunctions restraining auction, setting aside any sale, direction to deposit realizations with the petitioner, permission to take over assets under Sections 29/30 of the SFC Act, and striking down Section 11AAAA as ultra vires.
Claim for exemplary costs and compensation.

The matter was argued before P.K. Palli, J. The petition was dismissed in limine at the admission stage.

Legal Issues Presented

Whether Sections 29(4) and 46(B) of the State Financial Corporations Act, 1951 create or operate as a statutory first charge in favour of the Financial Corporation (RIICO) on the borrower's property vis-à-vis other claims.
Whether Section 11AAAA of the Rajasthan Sales Tax Act creates a statutory first charge on the property of a dealer such that it overrides any rights claimed by the Financial Corporation under the SFC Act.
Whether a statutory or bipartite agreement executed under the SFC Act can have overriding effect over a statutory provision like Section 11AAAA of the Rajasthan Sales Tax Act.
Whether Article 254 of the Constitution (parliamentary law prevailing over state law in case of repugnancy) supports the petitioner's contention that the SFC Act provisions prevail over Section 11AAAA of the Rajasthan Sales Tax Act.

Arguments of the Parties

Petitioner's Arguments (as presented in the opinion)

Counsel for the petitioner (Mr. Vineet Kothari) contended that under Article 4.1 of the Loan Agreement and Sections 29(1) and 46(B) of the SFC Act, a loan advanced by RIICO to the respondent-company creates a first charge on the borrower's assets.
He argued that the SFC Act (a Central Act) and the agreement entered under it (particularly by virtue of Section 46(B) which contains a non-obstante provision) should have overriding effect over provisions of the Rajasthan Sales Tax Act (a State Act), specifically Section 11AAAA inserted by the 1990 Act.
He relied on Article 254 of the Constitution to submit that Central legislation would have precedence over State legislation in case of repugnancy, and therefore Section 11AAAA should not operate to give the Sales Tax Department a priority over RIICO.

The opinion does not set out detailed affirmative arguments of the respondents in the record excerpt provided; the court's reasoning addresses the petitioner's contentions.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
State Bank of Bikaner and Jaipur v. National Iron and Steel Rolling Corpn. (Supreme Court decision cited in the opinion)	The decision holds that Section 11AAAA of the Rajasthan Sales Tax Act creates a first charge on the property of the dealer, giving priority to the statutory charge over all other charges on the property (including a mortgagee). A statutory first charge operates on the entire property and has precedence over an existing mortgage.	The court relied on this Supreme Court decision to conclude that Section 11AAAA has overriding effect as regards payment of dues to the Sales Tax Department and that the Sales Tax Department is authorised to attach and auction the property of respondent No.3. On that basis the court held that Annexures 5, 9 and 10 do not deserve to be quashed.
Dattatreya Shanker Mote's case (referred to in the Supreme Court reasoning)	Establishes that a "charge" is a wider term than a mortgage and that when a first charge is created by operation of law over any property, that charge will have precedence over an existing mortgage.	The court recited this principle (as relied upon in the Supreme Court decision) to support the conclusion that a statutory first charge under Section 11AAAA overrides prior mortgage or other charges.

Court's Reasoning and Analysis

The court proceeded by textual and legal analysis of the relevant statutory provisions and the relationship between them:

Interpretation of Section 29(4) SFC Act: The court observed that Section 29(4) provides a rule for application of sale proceeds when the Financial Corporation takes over and sells the mortgaged property — namely, proceeds are to be applied first to costs, charges and expenses properly incurred in taking over and selling the property, and secondly to discharge the debt due to the Financial Corporation, with any residue payable to the person entitled. The court emphasized that this provision prescribes a procedure for applying sale proceeds and does not itself create a statutory first charge in favour of the Corporation.
Scope of Section 46(B) SFC Act: Section 46(B) contains a non-obstante clause stating that the provisions of the SFC Act and rules shall have effect notwithstanding anything inconsistent contained in any other law. The court held that Section 46(B) operates only where there is inconsistency between provisions; because Section 29(4) does not create a first charge, there is no inconsistency with Section 11AAAA of the Rajasthan Sales Tax Act for Section 46(B) to displace.
Nature of the loan agreement: The court distinguished a statutory agreement executed under the SFC Act from an express statutory provision. While the agreement may be binding between parties and may be justiciable, its contents cannot take the place of or have the efficacy of a statutory provision. Hence the bipartite agreement cannot override Section 11AAAA.
Interpretation of Section 11AAAA Rajasthan Sales Tax Act: Section 11AAAA expressly begins with a non-obstante clause, declaring that any amount payable under the Sales Tax Act shall be the first charge on the property of the dealer. The court described this as creating a statutory first charge which operates against all other dues and debts of the borrower.
Constitutional argument under Article 254: The court noted the petitioner's submission based on Article 254 (parliamentary law prevailing over state law) but found it inapplicable because no conflict of the specific kind (parallel or identical provisions with non-obstante clauses in central and state Acts) exists here. The court observed that the absence of a first charge under Section 29(4) means there is no true repugnancy to be resolved under Article 254.
Reliance on Supreme Court authority: The court cited a recent Supreme Court decision (State Bank of Bikaner and Jaipur v. National Iron and Steel Rolling Corpn.) which held that Section 11AAAA creates a first charge over the entire property (including a mortgagee's interest) and that a statutory first charge has precedence over existing mortgages. The court adopted this reasoning to hold that Section 11AAAA has overriding effect with respect to realization of tax dues.
Resulting consequence: Applying the above analysis, the court concluded that the Sales Tax Department had authority to attach and auction the property of respondent No.3 for realization of its dues, and that the actions evidenced by the impugned documents (including Annexures 5, 9 and 10) did not merit quashing.

Holding and Implications

Holding: The writ petition was dismissed in limine at the admission stage.

Implications and direct effects:

The court held that Section 11AAAA of the Rajasthan Sales Tax Act creates a statutory first charge on the property of the dealer, which takes precedence over other charges including those claimed by the Financial Corporation under the SFC Act.
The contention that Sections 29(4) read with 46(B) of the SFC Act, or a bipartite agreement executed under that Act, operate to give RIICO a first charge that overrides Section 11AAAA was rejected.
The Sales Tax Department was held to be authorised to attach and auction the property of respondent No.3 for recovery of tax dues; the impugned annexures (including Annexures 5, 9 and 10) were not quashed.
Any proceeds of sale held by RIICO must, in the absence of a contract to the contrary, be applied in the order prescribed by Section 29(4) — first to costs and expenses, then to discharge the Corporation's debt — but Section 11AAAA gives the Sales Tax Department priority as a statutory first charge for its dues.

The opinion does not purport to lay down a novel precedent beyond its application of the Supreme Court authority cited; the decision is a dismissal of the petition on the legal bases summarized above.

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Rajasthan State Industrial Development And Investment Corporation Ltd. (Riico) v. State Of Rajasthan And Others

The Judgment of the Court was delivered by

P.K Palli, J.:— By this writ petition, the petitioner has sought the following reliefs:—

(i) Quash the impugned orders/letters of the respondent No. 2, Annexure 9 and Annexure 10, dt. 22-12-1994.

(ii) Hold that the respondents Nos. 1 and 2 are not entitled to attach/auction, sell or otherwise take over the possession of the industrial undertaking of the respondent No. 3, in violation of rights of the petitioner Corporation.

(iii) Hold that the S. 11AAAA of the RST Act does not override statutory powers of the petitioner-Corporation, under Ss. 29/30 of the Act.

(iv) Restrain the respondents Nos. 1 and 2 from auctioning the property, in question.

(v) Set aside the sale or transfer, if any made by the respondent No. 2.

(vi) Direct the respondents Nos. 1 and 2 to deposit realization, if any, made by them by auction of property of the respondents No. 3 with the petitioner-Corporation.

(vii) Permit the petitioner-Corporation to take over the assets of the respondent No. 3 under Sections 29/30 of the S.F.C Act, 1951.

(viii) Strike down the provisions of Section 11AAAA of the Act as ultra vires and further realize their loan by sale, auction or otherwise transfer of property, in question.

(ix) A ward exemplary cost and compensation.

2. It was contended by Mr. Vineet Kothari, learned counsel appearing for the petitioner that keeping in view Art. 4.1 of the Loan Agreement No. 1 (Annexure 1) read with S. 29(1) and s. 46(B) of the State Financial Corporations Act, 1951 (in short the Act of 1951), a loan advanced by the Rajasthan State Industrial Development and Investment Corporation Ltd. (in short ‘RIICO’) to the respondent-Company will have a first charge on his assets and, therefore, the contention of the Sales Tax Department that respondent-Department will have a first charge on the assets of the respondent-Company, cannot be sustained, because the provisions of the Act of 1951 will have an overriding effect over the provisions of the Rajasthan Sales Tax Act because the former happens to be the Central Act and the Rajasthan Sale Tax Act happens to be the State Act. In this respect it was contended by him that the agreement being statutory and as it has been provided under S. 46(B) of the Act of 1951 that the provisions of this Act and of any rules or orders made thereunder shall have an effect notwithstanding anything inconsistent therewith contained in any other law, this agreement should have an overriding effect over the provisions of Section 11AAAA of the Rajasthan Sales Tax Act, 1954. In this respect he has drawn our attention to sub-sec. (4) of S. 29 which reads as follows:

“Section 29(4) — Where any action has been taken against an industrial concern under the provisions of sub-sec. (1), all costs, charges and expenses which in the opinion of the Financial Corporation have been properly incurred by it as incidental thereto shall be recoverable from the industrial concern and the money which is received by it shall, in the absence of any contract to the contrary, be held by it in trust to be applied firstly, in payment of such costs, charges and expenses and secondly in discharge of the debt due to the Financial Corporation, and the residue of the money so received shall be paid to the person entitled thereto”. This provision only provides that if the assets of an industry concern are taken over by RIICO under S. 29(1) of the Act of 1951, then all costs, charges and expenses which in the opinion of the Financial Corporation have been properly incurred will be recovered from the industry concerned from the money which is received by it by selling of the mortgaged property and in absence of any contract to the contrary the sale proceeds of the property of the industry will be held by the Corporation in trust to be applied firstly, in payment of such costs, charges and expenses and secondly in discharge of the debt due to the Financial Corporation. This does not create a first charge by the Corporation on the property of borrower. It only says that the property mortgaged with the Corporation can be taken over by it and it can be sold by it for discharge of his debt and in doing so, the proceeds of the sale will first be utilized in payment of the costs, charges etc. incurred in taking over the property of the industry and in selling it and thereafter the remaining property will be applied to the debt which has been taken by the debtor. This only provides the procedure for application of funds held in trust. It does not create any first charge as alleged by Mr. Kothari.

3. Section 46(B) only provides that the provisions of this Act and of any rules or orders made thereunder shall have effect notwithstanding anything inconsistent therewith contained in any other law. When S. 29(4) does not start with any non obstinate clause and does not make debt due to the Corporation from any borrower as a first charge on its assets and hence in absence of any inconsistency with provisions of Section 11AAAA of Rajasthan Sales Tax Act, the provisions of S. 46(B) will not come into play and they cannot override the effect of the provisions of Section 11AAAA of the Rajasthan Sales Tax Act.

4. Section 11AAAA reads as follows:

“Section 11AAAA—-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.” This section starts with non obstinate clause and makes the debts due to the Sales Tax Department from the borrower as a first charge as against all other dues and debts due from the borrower.

5. The agreement which is entered into between the Corporation and the borrower may be statutory agreement because it is executed under the provisions of the Act of 1951 but that only makes it justifiable by a court of law. Such an agreement cannot be categorized as an order or rule or provision of the Act, and, therefore, if anything which has been contained in the agreement, it will only bind the parties but it cannot take the place of or have efficacy as a statutory provision of law. Thus contents of the bipartite agreement cannot have any overriding effect over the provisions of S. 11AAAA of the Rajasthan Sales Tax Act.

6. It was argued by Mr. Vineet Kothari, learned counsel for the petitioner that as per Art. 254 of the Constitution, the Central Legislation will have precedence over the State Legislation. As the provisions of the Act of 1951, i.e S. 29(4) read with S. 46(B) do not create any first charge of the dues of the Corporation (RIICO) as against dues of the Sales Tax Department and, hence, this argument of the learned counsel for the petitioner has no force. It is true that S. 11AAAA of the Act No. 3 of 1990 has not received the assent of the President. That hardly matters because that has to be taken into consideration only when there are parallel or identical provisions in the Central and the State Act and both of them start with non obstinate clause and are inconsistent with each other. That conflict of provisions of two Acts is not present in this case and, therefore, that argument of the learned counsel has to be rejected for the reasons aforesaid.

7. A somewhat similar controversy came up for consideration before Hon'ble the Supreme Court a recent decision rendered in the case of State Bank of Bikaner and Jaipur v. National Iron and Steel Rolling Corpn. (1), wherein their Lordships of the Supreme Court have observed as under:

“Para 10. 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 in-clouding a mortgagee. The submission, therefore, that the statutory first charge created by S. 11AAAA 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.

Para 11. 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 Dattatreya Shanker Mote's case (supra), a charge is a wider term a than a mortgage. It would 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.” Thus, this provision in the Rajasthan Sales Tax Act has an overriding effect over all other provisions of all other Acts as regards the payment of debt due to Financial Corporation and in these circumstances this contention of Mr. Vineet Kothari that in view of the provisions of S. 29(4) read with S. 46(B) of the Act of 1951, the provisions of S. 11AAAA of the Rajasthan Sales Tax Act, 1954 will have no effect cannot be sustained and S. 11AAAA inserted by the Act of 1990 cannot be quashed as ultra vires provisions of the Act of 1951. Even if the property which was mortgaged with the Corporation has been attached by them and has been sold by them, they will have to keep the proceeds of the sale of that property in trust and the dues of the Sales Tax Department, i.e tax, penalty, interest and any other sum will have to be recovered from the sale proceeds of the property as a first charge. Accordingly, if the Rajasthan Sales Tax Department has attached and is auctioning the property of the industry, i.e the respondent No. 3 for realization of its dues, it has authority to do so. That action of the Sales Tax Department being in accordance with the provisions of S. 11AAAA of the Rajasthan Sales Tax Act and accordingly, Annexures 5, 9 and 10 do not deserve to be quashed.

8. This writ petition, therefore, has no force and it is hereby dismissed in limine at the admission stage.

Rajasthan State Indu... v. State Of Rajasthan A...