The Point of Taxation Rules, 2011

Notification 18/2011 dated 1st March 2011 brought stringent provisions of service tax to get early revenue to the government by introducing “Pont of Taxation Rules, 2011”. The purpose of rule is to set out as to when service tax to be paid by the service provider and determination of effective rate of service tax.

From 1st April 2011 the rule is came into effect but through notification no.25/2011 it is effectively applicable from 1st July 2011.

What is the “Point of Taxation”?

“Point of Taxation” means the point in time when a service shall be deemed to have been provided so that tax to be paid to government. This is for the purpose of Collection of Service Tax.

The following are the Point of Taxation:-

Situation	Point of Taxation
If Service Provided	Date of Invoice (If Invoice not raised within 14 days of provision of Service then date of completion of service) or Date of amount received whichever is earlier
Before provision of service Invoice raised and payment received	Date of Invoice or Date of payment received whichever is earlier
If advance received towards provision of service	Date of Advance received

In case of Service provided BEFORE the “Change in effective Rate”:

S.No	Before Change	After Change	Point of Taxation
1	Invoice Raised	Payment Received	Date of Issuing of Invoice
2	Payment Received	Invoice Raised	Date of Payment
3	Invoice Raised & Payment Received	-	Date of receipt of payment or date of issue of Invoice whichever is earlier
4	-	Invoice Raised & Payment Received	Date of receipt of payment or date of issue of Invoice whichever is earlier

In case of Service provided AFTER the “Change in effective of Rate”:

S.No	Before Change	After Change	Point of Taxation
1	Invoice Raised	Payment Received	Date of Payment
2	Payment Received	Invoice Raised	Date of issuance of Invoice
3	Invoice Raised & Payment Received	-	Date of receipt of payment or date of issue of Invoice whichever is earlier
4	-	Invoice Raised & Payment Received	Date of receipt of payment or date of issue of Invoice whichever is earlier

5. Payment of Tax in cases of new Services other than Services Covered under Rule 6:-

Situation	Taxability
Invoice Raised and Payment receivedBEFORE such service become Taxable	No tax shall be payable
Payment received BEFORE such service become taxable but Invoice raised after such service become taxable but WITHIN14 days period referred in Rule 4A of the Service Tax Rules, 1994	No tax shall be payable
Payment received BEFORE such service become taxable but Invoice raised after such service become taxable but NOTwithin 14 days period referred in Rule 4A of the Service Tax Rules, 1994	Taxable

Determination of Point of Taxation in case of “Continuous Supply of Service”:-

“Continuous Supply of Service” means any service provided or to be provided for a continuous period exceeding three months under a contract.

Situation	Point of Taxation
If Invoice Raised within 14 days of completion of Service	The time when the invoice for the service provided or to be provided is issued.
If Invoice NOT Raised within 14 days of completion of Service	Date of Completion of Service
If, before the time specified above the service provider receives a payment.	Date of receipt of Payment
f advance received (in all cases)	Date of receipt of each such advance

Date of Completion: Where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the service receiver to make any payment to service provider, the date of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of service.

Determination of Point of Taxation in case of Specified Services or Persons:-

S.No	Specified Persons	Point of Taxation
1	The services covered by sub-rule (1) of rule 3 of Export of Services Rules, 2005	Date on which Payment Received	Where payment is not received within the period specified by the Reserve Bank of India, the point of taxation shall be determined, as if this rule does not exist
2	The persons required to pay tax as recipients under the rules made in this regard in respect of services notified under sub-section (2) of section 68 of the Finance Act, 1994 [Notified by Central Govt.]		Where the payment is not made within a period of six months of the date of invoice, the point of taxation shall be determined as if this rule does not exist.
3	Individuals or proprietary firms or partnership firms providing taxable services Architect Interior Decorator Consulting Engineer Chartered Accountant Cost Accountant Company Secretary Scientific & Technical Consultancy Legal Consultancy

The point of taxation in respect of associated enterprises:- Where the person providing the service is located outside India, the point of taxation shall be the date of credit in the books of account of the person receiving the service or date of making the payment whichever is earlier. Associated enterprises means as set out under Section 92A of the Income-tax Act, 1961.

Determination of Point of Taxation in case of copyrights etc:-

In respect of royalties and payments pertaining to copyrights, trademarks, designs or patents, the point of taxation is as follows.

Situation When	Point of Taxation
The whole amount of consideration  for provision of service is ascertainable at the time when service was performed	Date of issuance of Invoice or date of receipt of payment whichever is earlier
The whole amount of consideration for provision of service is NOT ascertainable at the time when service was performed. But Subsequently ascertained in part or otherwise.	Each time- Date of invoice or date of receipt of payment whichever is earlier

This point of taxation rules are not applicable for Provision of service completed or invoices issued prior to 1st July 2011. In Case of Services for which provision is completed on or before 30th day of June, 2011 or where the invoices are issued up to the 30th day of June, 2011, the point of taxation shall, at the option of the taxpayer, be the date on which the payment is received or made as the case may be.

Amendments in CENVAT Credit Rules, 2004:

1. CENVAT Credit rules has been amended to allow service receiver take credit of service tax payable or paid based on invoice received.

1. In case of an input service where the service tax is paid on reverse charge by the recipient of the service, the CENVAT credit in respect of such input service shall be allowed on or after the day on which payment is made of the value of input service and the service tax paid or payable as indicated in invoice.

1. In case the payment of the value of input service and the service tax paid or payable as indicated in the invoice, bill or, as the case may be, challan referred to in rule 9, is not made within three months of the date of the invoice, bill or, as the case may be, challan, the manufacturer or the service provider who has taken credit on such input service, shall pay an amount equal to the CENVAT credit availed on such input service and in case the said payment is made, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier.

1. If any payment or part thereof, made towards an input service is refunded or a credit note is received by the manufacturer or the service provider who has taken credit on such input service, he shall pay an amount equal to the CENVAT credit availed in respect of the amount so refunded or credited.

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Latest SC Decision – A fit case for review

In Ganduri Koteshwaramma and Anr. Vs. Chakiri Yanadi & Anr. (in Civil  Appeal No. 8538 of 2011) decided by the Supreme Court on 12.10.2011,  it is not clear as to when was the Suit for partition instituted.  This information is very much necessary, especially in the context of partition of a Hindu coparcenary property.  

There are two possibilities – (1) the suit for partition might have been instituted prior to coming into force of the Hindu Succession (Andhra Pradesh) Amendment Act, 1986; or (2) instituted after the coming into force of the said Act.

Position if the partition suit had been instituted prior to 5.9.1985

If such a suit had been instituted prior to the coming into force of The Hindu Succession (Andhra Pradesh) Amendment Act, 1986 (Act 13 of 1986) which granted equal coparcenery rights to daughters with effect from 5.9.1985, then the daughters were not co-parcenars by the relevant date and as such were not entitled for coparcenary share.  At best, they could have only been entitled for inheritance right in the share of the property that fell to their father.

Partition in the instant case was instituted only in the year 1991

I contacted the Advocate of one of the parties to the case and ascertained that the Suit for partition had been instituted in the year 1991.

The case relates to Andhra Pradesh, and the daughters taking birth in the family had been granted equal coparcenary rights as that of the sons, by Hindu Succession (Andhra Pradesh) Amendment Act, 1986, effective from 5.9.1985.  Since the suit for partition was instituted only in the year 1991, after coming into force of the AP Amendment Act, 1986, the decision of the Supreme Court, granting equal share to the daughters in the coparcenary property along with the sons in the family IS ABSOLUTELY CORRECT.

BUT THE REASONING GIVEN BY THE SUPREME COURT FOR ARRIVING AT THE SAID DECISION APPEARS TO BE WRONG FOR THE  REASONS:

According to classical Hindu Law, some of the circumstances in which partition can take place   are: (i) partition effected by father; (ii) partition by Agreement; (iii) severance by unilateral declaration by one of the coparcenar; (iv) partition by conduct by one of the coparcener; (vi) partition by institution of suit etc.

Classical law to prevail

According to Section 4 (a) of the HSA 1956, “any text, rule or interpretation of Hindu law or any custom or usage as part of that law in force immediately before the commencement of the HSA 1956 shall cease to have effect with respect to any matter for which provision is made in this Act” (emphasis supplied).

Prior to the HSA (Amendment) Act, 2005 w.e.f. 9.9.2005, there was no provision in the Hindu Succession Act, 1956 which provided for devolution of interest in coparcenary property – other than when ‘a male Hindu dies’.  (See Section 6).

Thus, in the absence of any provision in the HSA, 1956, the Classical Hindu Law will prevail.

Effect of filing of suit for partition:

The institution of a suit for partition by an adult coparcener is an unequivocal intimation of his intention to separate and there is consequently a severance of his joint status from the date when the suit is instituted. [Kawal Narain v. Prabhu Lal (1915) 44 IA 159; Rachhpali v. Chandresar AIR 1924 Oudh 252.]

The moment the partition is effected in any of the above methods, the dejure (in law) partition takes place.

The partition strictly speaking is complete the moment the community of interest is severed or severance in status takes place.  The actual physical division of the property by metes and bounds may, or may not follow and the members may continue to hold the property in joint possession as tenants-in-common, without the incidents of fluctuation of interest and application of the doctrine of survivorship.

The defector partition – i.e. actual physical division of the property by metes and bounds may take place later on.

A suit demanding a partition, will effect a severance of the status from the date of its institution in a court of law, irrespective of whether he gets a decree from the court or not. [Ramalinga v. Narayana AIR 1922 PC 201.]

The following catena of decisions by the Supreme Court support the above view.

Case title	Date of Decision	SC Coram	Decision
Kalyani (Dead) by Lrs. Vs. Respondent: Narayanan and Ors. [1980]2SCR1130	27.02.1980	A. N. Sen, D. A. Desai and V. D. Tulzapurkar, JJ.	10.  … Partition is a word of technical import in Hindu law. Partition in one sense is a severance of joint status and coparcener of a coparcenary is entitled to claim it as a matter of his individual volition. In this narrow sense all that is necessary to constitute partition is a definite and unequivocal indication of his intention by a member of a joint family to separate himself from the family and enjoy his share in severally. Such an unequivocal intention to separate brings about a disruption of joint family status, at any rate, in respect of separating member or members and thereby puts an end to the coparcenary with right of survivorship and such separated member holds from the time of disruption of joint family as tenant-in-common. Such partition has an impact on devolution of shares of such members. It goes to his heirs displacing survivorship. Such partition irrespective of whether it is accompanied or followed by division of properties by metes and bounds covers both a division of right and division of property (see Approviar v. Rama Subha Aiyar (1886) 11 M. I. A. 75 quoted with approval in Smt. Krishnabai Bhritar Ganpatrao Deshmukh v. Appasaheb Tuljaramarao Nimbalkar and Ors. [1980] 1 SCR 161 . A disruption of joint family status by a definite and unequivocal indication to separate implies separation in interest and in right, although not immediately followed by a de facto actual division of the subject-matter. This may at any time, be claimed by virtue of the separate right (see Girja Bai v. Sadashiv 41 I A 151. A physical and actual division of property by metes and bounds follows from disruption of status and would be termed partition in a broader sense.
Gurupad Khandappa Magdum vs. Hirabai Khandappa Magdum and Ors. AIR 1978 SC 1239	27.04.1978	Y. V. Chandrachud, C.J., V. D. Tulzapurkar and P. N. Shingal, JJ.	“11. … Whether a partition had actually taken place between the plaintiff’s husband and his sons is beside the point for the purposes of Explanation 1. That Explanation compels the assumption of a fiction that in fact “a partition of the property had taken place”, the point of time of the partition being the one immediately before the death of the person in whose property the heirs claim a share. 12. The fiction created by Explanation 1 has to be given its due and full effect as the fiction created by Section 18A(9)(b) of the Indian Income-tax Act, 1922, was given by this Court in Commissioner of Income-tax, Delhi v. S. Teja Singh MANU/SC/0062/1958 . It was held in that case that the fiction that the failure to send an estimate of tax on income Under Section 18A(3) is to be deemed to be a failure to send a return, necessarily involves the fiction that a notice had been issued to the assessee Under Section 22 and that he had failed to comply with it. In an important aspect, the case before us is stronger in the matter of working out the fiction because in Teja Singh’s case, a missing step had to be supplied which was not provided for by Section 18A(9)(b), namely, the issuance of a notice Under Section 22 and the failure to comply with that notice. Section 18A(9)(b) stopped at creating the fiction that when a person fails to send an estimate of tax on his income Under Section 18A(3) he shall be deemed to have failed to furnish a return of his income. The section did not provide further that in the circumstances therein stated, a notice Under Section 22 shall be deemed to have been issued and the notice shall be deemed not to have been complied with. These latter assumptions in regard to the issuance of the notice Under Section 22 and its non-compliance had to be made for the purpose of giving due and full effect to the fiction created by Section 18A(9)(b). In our case it is not necessary, for the purposes of working out the fiction, to assume and supply a missing link which is really what was meant by Lord Asquith in his famous passage in East End Dwellings Co. Ltd. v. Finsbury Borough Council. [1952] A.C. 109/132. He said if you are bidden to treat an imaginary state of affairs as real, you must also imagine as real the consequences and incidents which, if the putative state of affairs had in fact existed, must inevitably have flowed from or accompanied it; and if the statute says that you must imagine a certain state of affairs, it cannot be interpreted to mean that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs. 13. In order to ascertain the share of heirs in the property of a deceased coparcener it is necessary in the very nature of things, and as the very first step, to ascertain the share of the deceased in the coparcenary property. For, by doing that alone can one determine the extent of the claimant’s share. Explanation 1 to Section 6 resorts to the simple expedient, undoubtedly fictional, that the interest of a Hindu Mita-kshara coparcener “shall be deemed to be” the share in the property that would have been allotted to him if a partition of that property had taken place immediately before his death. What is therefore required to be assumed is that a partition had in fact taken place between the deceased and his coparceners immediately before his death. That assumption, once made, is irrevocable. In other words, the assumption Raving been made once for the purpose of ascertaining the share of the deceased in the coparcenary property, one cannot go back on that assumption and ascertain the share of the heirs without reference to it. The assumption which the statute requires to be made that a partition had in fact taken place must permeate the entire process of ascertainment of the ultimate share of the heirs, through all its stages. To make the assumption at the initial stage for the limited purpose of ascertaining the share of the deceased and then to ignore it for calculating the quantum of the share of the heirs is truly to permit one’s imagination to boggle. All the consequences which flow from a real partition have to be logically worked out, which means that the share of the heirs must be ascertained on the basis that they had separated from one another and had received a share in the partition which had taken place during the life time of the deceased. The allotment of this share is not a processual step devised merely for the purpose of working out some other conclusion. It has to be treated and accepted as a concrete reality, something that cannot be recalled just as a share allotted to a coparcener in an actual partition cannot generally be recalled. The inevitable corollary of this position is that the heir will get his or her share in the interest which the deceased had in the coparcenary property at the time of his death, in addition to the share which he or she received or must be deemed to have received in the notional partition.
Anar Devi & Ors. V. Parmeshwari Devi & Ors. AIR 2006 SC 3332	18.9.2009	B.N.Agrawal and P.P.Naolekar JJ.	Follows the above decision.
Munni Lal Mahto and Ors. Vs. Chandeshwar Mahto and Anr. AIR 2007 Pat. 66	24.07.2006	Navaniti Prasad Singh, J of Patna High Court	Relied upon the decisions of Supreme Court in: Kalyani v. Narayan and Ors. AIR 1980 Supreme Court 1173;  wherein it has been inter-alia held that “holds that once there is a partition then there is a disruption in the joint family status and the rights are crystalised although not immediately followed by a de facto actual division of the subject matter of dispute. This decision clearly shows that the effectuate partition, it is not necessary that all joint family properties must be divided by metes and bounds and till that is not done, the joint family would continue. This judgment clearly lays down otherwise. The fact is that the momement the preliminary decree was passed, the joint family status stood disrupted and the parties became tenants in common.” M.L. Subbaraya Setty and Ors. v. ML Nagappa Setty and Ors. AIR 2002 Supreme Court 2066 holding that “severence of joint family status takes place no sooner preliminary decree is filed even though properties are not physically partitioned. Members of the joint family becomes tenants in common of the family property from the said day.”

The Supreme Court in the instant case of Ganduri Koteshwaramma has mainly dealt with the following two aspects to arrive its conclusion in the matter:

(1)  Meaning of the term “partition”  

(2)  Preliminary decree can be altered

The meaning of the term ‘Partition’:

In the instant case, the Supreme Court also heavily relied upon the Explanation under Section  6(5) in regard to the meaning of the term “Partition”.  According to the said provision, “partition” means any partition made by execution of a deed of partition duly registered under the Registration Act, 1908 (16 of 1908) or partition effected by a decree of a court.

It is worth noting that this explanation has been introduced only in the HSA (Amendment) 2005 Act.  Therefore, the same could not be made applicable to the position obtaining prior to the coming into force of the Amendment Act.

This is for the reason, that the Amendment Act, 2005 itself very specifically says that the said amendment is effective “on and from the commencement of the Hindu Succession (Amendment) Act, 2005.”

Thus, the SC could not have invoked the explanation under Section 6(5) of the Amended HSA, 1956 to give meaning to the word “partition”.

Even otherwise, the explanation under Section 6(3) of the amended Act is in pari materialwith the explanation 1 under un-amended Section 6 of the HSA, 1956.

The Supreme Court (three judge bench) has already ruled that once a fiction of ‘partition’ has been created it has to be given its logical end.  See Gurupad Khandappa Magdum vs. Hirabai Khandappa Magdum and Ors. AIR 1978 SC 1239.

Such partition irrespective of whether it is accompanied or followed by division of properties by metes and bounds covers both a division of right and division of property (see Approviar v. Rama Subha Aiyar (1886) 11 M. I. A. 75 quoted with approval in Smt. Krishnabai Bhritar Ganpatrao Deshmukh v. Appasaheb Tuljaramarao Nimbalkar and Ors. [1980] 1 SCR 161 .

A disruption of joint family status by a definite and unequivocal indication to separate implies separation in interest and in right, although not immediately followed by a de facto actual division of the subject-matter. This may at any time, be claimed by virtue of the separate right (see Girja Bai v. Sadashiv 41 IA 151.

A physical and actual division of property by metes and bounds follows from disruption of status and would be termed partition in a broader sense.

In view of the above categorical decisions by the SC decisions, the latest decision does not appear to be correct.  Further, in case of conflict, the decision of the higher bench (3 judge bench) would prevail than the decision of the division bench.

Modification of preliminary decree

The decision in Phoolchand and Anr. Vs. Gopal Lal (AIR 1967 SC 1470) quoted by the SC to support the view that  “If in the interregnum i.e. after passing of the preliminary decree and before the final decree is passed, the events and supervening circumstances occur necessitating change in shares, there is no impediment for the court to amend the preliminary decree or pass another preliminary decree re-determining the rights and interests of the parties having regard to the changed situation” is totally misplaced and misapplied.  The changed circumstances does not talk about changed circumstances in law; but the changed circumstances in facts of the case.

NO NEED for invoking the provisions of Hindu Succession (Amendment) Act, 2005

Since the Suit for partition was instituted in the year 1991, even according to the Hindu Succession (Andhra Pradesh) Amendment Act, 1986, the daughters have become equal co-parcenars in the coparcenary property.

Therefore, there was no need for the Supreme Court to have invoked the provisions of the 2005 Amendment Act at all.

A FIT CASE FOR ‘REVIEW’

The latest decision by the SC, which according to my understanding is not well founded on legal reasoning, is bound to upset the well settled legal positions and would cause immense confusion and doubts as regards the rights and entitlements in regard to the partition of the Coparcenary property is concerned.  Since the instant decision appears to have overlooked a plethora of earlier decisions and has not addressed several legal issues in a cogent and logical manner, and the reasoning for the decision is ill-founded, it is a fit case for seeking Review.  Review is also a must in order to protect the interests of scores of persons whose suit for partition might be pending adjudication throughout the country.

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Statutory first charge of Government and position of the Bankers

Taxing statutes provide to the effect that 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 the Act, shall be the first charge on the property of the dealer, or, as the case may be, person.

The reading of the section suggests that liability under the Sales Tax Act shall be first charge. It overrides anything contained in any contract, which is contrary to the particular section. It provides that any amount of tax, penalty, interest or any other sum payable by a dealer or any other person under this Act shall be first charge on the property of the dealer or that person but subject to any provision regarding first charge in any Central Act for the time being in force.

In other words, if in any Central Act provides for first charge, the charge created under the Sales Tax Act is overridden. Conversely, if the Central Act does not provide for first charge in respect of the liability under the said Act, the first charge created under section of Sales Tax Act shall hold the field. Section 13 of the Securitization Act does not indicate, “Statutorily incorporated first charge”. Having read section 13 carefully, undersigned is unable to agree with the claim of the Bank in light of the legislative lacking.

Section 13 is not a provision regarding first charge. It provides the machinery for realization of the security without intervention of the court or Tribunal by a secured creditor. It overrides the provisions contained in Sections 69 and 69A of the Transfer of Property Act which empowers the mortgagee to sell or concur in selling the mortgaged property or any part thereof in default of payment of the mortgage money without intervention of court in the circumstances referred to in section 69 and for payment of Court Receiver as provided in section 69A.

Section 13 of the Securitization Act is a procedural provision for expeditious realization of security interest by a secured creditor in substitution of normal process of recovery of debts through the court or the Tribunal. It does not create the charge by itself much less first charge; rather it provides for process for enforcement of charge that has been created under the contract in favour of the secured creditor. Undersigned could not find other provisions either with reference to the Securitization Act or any other Central Act, which provides for first charge in favour of the Bank.

As a matter of fact, basis of the charge is the mortgage that has been created in favour of the Bank by the company for availing the credit facilities and that is under the contract and not under any statutory provision much less any Central Act. Sales Tax Act and Securitization Act have been enacted by the competent legislatures for different purposes and operate in different fields. The Sales Tax Act is enacted by the State Legislature under Entry 54 of List II in the Seventh Schedule for levy of tax on the sale or purchase of certain goods in the State.

On the other hand, the Securitization Act has been enacted by the Parliament under Entry 54 of List I for regulating the securitization and reconstruction of financial assets and for enforcement of security interest. There is neither any conflict in these two Acts nor Section of the Sales Tax Act can be said to be inconsistent with section 35 of the Securitization Act. The area of operation is entirely different and there is no overlapping anywhere. Section 35 of the Securitization Act may have had some bearing, if there was some provision in the Securitization Act for first charge in favour of the banks and financial institutions. However, neither section 13 nor any other provision under the Securitization Act makes a provision for first charge.

There being no provision in the Securitization Act providing for first charge in favour of the banks, section 35 of the Securitization Act cannot be held to override Section of the Sales Tax Act, 1959 that specifically provides that the liability under the said Act shall be the first charge. The overriding provision contained in section is only subject to the provision of the first charge in the Central Act holding the field. The case of the Bank is not covered by the expression, “subject to any provision regarding first charge in any Central Act for the time being in force” and that being the position, section is not overridden by section 35 of the Securitization Act.

The contention of the Bank that may be probably based on the overriding effect of provisions of Section 35 of the Securitization and Reconstruction Act will have no substance in my view. Normally the use of a phrase by the Legislature in an enactment stating that its provisions will have the effect “notwithstanding anything inconsistent therewith contained in any other law for the time being in force” is another way of saying that the enactment in which the non-obstante clause occurs usually would prevail over the other law.

Non-obstante clauses are not always to be regarded as repealing clauses nor as clauses, which expressly or completely supersede any other provisions of the law, but merely as clauses, which remove all obstructions, which might arise out of the operation of the enactment, which contains a non-obstante clause. The conflict in such cases is resolved on consideration of purpose and policy underlying the enactments and the language used in them.

Both operate in two different fields and there is no conflict in them. Undoubtedly, intention of Parliament in enacting the Securitization and Reconstruction Act was to ensure that the banks and financial institutions could quickly and effectively recover the amount due by taking possession of the secured assets of the defaulters instead of having resort to the cumbersome method of recovery through civil courts or tribunals. The said Act is enacted to have yet speedier legal method to recover the public dues of the banks and financial institutions.

The provisions of Section 13 of the said Act give right to the banks and financial institutions to take possession of the secured assets and realize their dues by resorting to any of the four methods provided under Sub-section (4) of section 13. The intention of the Legislature was not to give any precedence to the dues of the banks and financial institutions over the statutory dues under such provisions as made in the said Act. The Act does not have any substantive provision giving precedence to the dues of the banks and financial institutions.

The three Judge Bench of the Supreme Court in the case of State Bank of Bikaner & Jaipur dealt with the question of first charge over property of the dealer under the Rajasthan Sales Tax Act vis a vis the provision of the Transfer of Property Act. Section under the Rajasthan Sales Tax Act like section 38 C of the Bombay Sales Tax Act provides for the liability under the said Act to be first charge. That Section reads to the effect that “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.”

The language of Section is bit different from Section 38 C of the Bombay Sales Tax Act. However, the creation of first charge in favour of the Bank being not under any Central Act, the decision of the Supreme Court in the case of State Bank of Bikaner and Jaipur becomes relevant.

In the present case we have to consider whether the statutory first charge which is created under Sales Tax Act over the property of the dealer or a person liable to pay sales tax and or other dues under the Sales Tax Act, is created in respect of the entire interest in the property or only the mortgagor’s interest in the property when the dealer has created a mortgage on the property. In other words, will the statutory first charge have priority over an earlier mortgage?

Bank may argue that at the time when the statutory first charge came into existence, there was already a mortgage in respect of the same property. Therefore, the only property, which was possessed by the dealer and or person liable to pay tax or other dues under Sales Tax Act, was equity of redemption in respect of that property. The first charge would operate, therefore, only on the equity of redemption.

The argument though ingenious, will have to be rejected. Where a mortgage is created in respect of any property, undoubtedly, an interest in the property is carved out in favour of the mortgagee. The mortgagor is entitled to redeem his property on payment of the mortgage dues. This does not, however, mean that the property ceases to be the property of the mortgagor. The title to the property remains with the mortgagor. Therefore, when a statutory first charge is created on the property of the dealer, the property subjected to the first charge is the entire property of the dealer. The interest of the mortgagee is not excluded from the first charge. The first charge, therefore, which is created under Section of the Sales Tax Act, will operate on the property as a whole and not only on the equity of redemption.

The Supreme Court with reference to first charge over the property of the dealer under Section of the Sales Tax Act vis a vis earlier mortgage of the same property held that the statutory first charge has precedence over an existing mortgage. Sales Tax Act provides for first charge in respect of the sales tax liability over the property of the dealer or the concerned person and that statutory first charge (in the absence of any other statutory first charge created in favour of the Bank) has precedence over the bank’s charge based on contractual mortgage.

In the case of Bharat Co-operative Bank, it was held that Section 38 C of the Bombay Sales Tax Act read with Section 169 of the Maharashtra Land Revenue Code leaves no manner of doubt that recovery of sales tax dues has priority over the secured creditors. The said judgment is not elaborate as it was given at the motion hearing stage while considering whether writ petition deserved to be admitted or not. However, Court considered Section 38 C of the Bombay Sales Tax Act and Section 169 of the Maharashtra Land Revenue Code in the light of the submission made by the counsel for the bank that the bank being the secured creditor and the property having been mortgaged with the bank, such property could not be put to sale under Section 38 C of the Bombay Sales Tax Act.

After referring Section 38 C and 169, we held thus:

“We are afraid; Section 169 of the Maharashtra Land Revenue Code, 1966 does not support the submission of the learned Counsel for the petitioner at all as contended. By virtue of Section 38 C of the Bombay Sales Tax Act, the recovery of sales tax dues has first charge. The said recovery is made as arrears of land revenue and a conjoint reading of Section 38 C of the Bombay Sales Tax Act and Section 169 of the Maharashtra Land Revenue Code, 1944 leaves no manner of doubt that the recovery of sales tax dues has priority over the secured creditors.”

Article 245 of the Constitution is the fountain source of legislative power. It provides to the effect that subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the legislature of a State may make laws for the whole or any part of the State. The legislative field between Parliament and the legislature of any State is divided by Article 246 of the Constitution.

Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule, called the “Union List”. Subject to the said power of Parliament, the legislature of any State has power to make laws with respect to any of the matters enumerated in List III, called the “Concurrent List”. Subject to the abovesaid two, the legislature of any State has exclusive power to make laws with respect to any of the matters enumerated in List II, called the “State List”.

Under Article 248, the exclusive power of Parliament to make laws extends to any matter not enumerated in the Concurrent List or State List. The power of making any law imposing a tax not mentioned in the Concurrent List or State List vests in Parliament. This is what is called the residuary power vesting in Parliament. The principles have been succinctly summarized and restated by a Bench of three learned Judges on a review of the available decision in Hoechst Pharmaceuticals Ltd. v. State of Bihar.

They are:

(1) The various entries in the three lists are not “powers” of legislation but “fields” of legislation. The Constitution effects a complete separation of the taxing power of the Union and of the States under Article 246. There is no overlapping anywhere in the taxing power and the Constitution gives independent sources of taxation to the Union and the States.

(2) In spite of the fields of legislation having been demarcated, the question of repugnancy between law made by Parliament and a law made by the State Legislature may arise only in cases when both the legislations occupy the same field with respect to one of the matters enumerated in the Concurrent List and a direct conflict is seen. If there is a repugnancy due to overlapping found between List II on the one hand and List I and List III on the other, the State law will be ultra vires and shall have to give way to the Union law.

(3) Taxation is considered a distinct matter for purposes of legislative competence. There is a distinction made between general subjects of legislation and taxation. The general subjects of legislation are dealt with in one group of entries and power of taxation in a separate group. The power to tax cannot be deduced from a general legislative entry as an ancillary power.

(4) The entries in the lists being merely topics or fields of legislation, they must receive a liberal construction inspired by a broad and generous spirit and not in a narrow pedantic sense. The words and expressions employed in drafting the entries must be given the widest-possible interpretation. This is because, to quote V. Ramaswami, J., the allocation of the subjects to the lists is not by way of scientific or logical definition but by way of a mere simplex enumeration of broad categories. A power to legislate as to the principal matter specifically mentioned in the entry shall also include within its expanse the legislations touching incidental and ancillary matters.

(5) Where the legislative competence of the legislature of any State is questioned on the ground that it encroaches upon the legislative competence of Parliament to enact a law, the question one has to ask is whether the legislation relates to any of the entries in List I or III. If it does, no further question need be asked and Parliament’s legislative competence must be upheld.

Where there are three lists containing a large number of entries, there is bound to be some overlapping among them. In such a situation, the doctrine of pith and substance has to be applied to determine as to which entry does a given piece of legislation relate. Once it is so determined, any incidental trenching on the field reserved to the other legislature is of no consequence.

The court has to look at the substance of the matter. The doctrine of pith and substance is sometimes expressed in terms of ascertaining the true character of legislation. The name given by the legislature to the legislation is immaterial. Regard must be had to the enactment as a whole, to its main objects and to the scope and effect of its provisions. Incidental and superficial encroachments are to be disregarded.

(6) The doctrine of occupied field applies only when there is a clash between the Union and the State Lists within an area common to both. There the doctrine of pith and substance is to be applied and if the impugned legislation substantially falls within the power expressly conferred upon the legislature, which enacted it, an incidental encroaching in the field assigned to another legislature is to be ignored.

While reading the three lists, List I has priority over Lists III and II and List III has priority over List II. However, still, the predominance of the Union List would not prevent the State Legislature from dealing with any matter within List II though it may incidentally affect any item in List 1.

Section 35 of the Securitization Act has no effect whatsoever in the operation of Section under the Sales Tax Act. Section 35 of the Securitization Act does not override Section of the Sales Tax Act and, therefore, based on Section 35 of the Securitization Act, the Bank does not get precedence or for that matter priority over the statutory first charge under the Sales Tax Act. Rather the statutory first charge under the Sales Tax Act has precedence over the Bank’s charge based on contract.

Taxing statutes provide to the effect that 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 the Act, shall be the first charge on the property of the dealer, or, as the case may be, person.

The reading of the section suggests that liability under the Sales Tax Act shall be first charge. It overrides anything contained in any contract, which is contrary to the particular section. It provides that any amount of tax, penalty, interest or any other sum payable by a dealer or any other person under this Act shall be first charge on the property of the dealer or that person but subject to any provision regarding first charge in any Central Act for the time being in force.

In other words, if in any Central Act provides for first charge, the charge created under the Sales Tax Act is overridden. Conversely, if the Central Act does not provide for first charge in respect of the liability under the said Act, the first charge created under section of Sales Tax Act shall hold the field. Section 13 of the Securitization Act does not indicate, “Statutorily incorporated first charge”. Having read section 13 carefully, undersigned is unable to agree with the claim of the Bank in light of the legislative lacking.

Section 13 is not a provision regarding first charge. It provides the machinery for realization of the security without intervention of the court or Tribunal by a secured creditor. It overrides the provisions contained in Sections 69 and 69A of the Transfer of Property Act which empowers the mortgagee to sell or concur in selling the mortgaged property or any part thereof in default of payment of the mortgage money without intervention of court in the circumstances referred to in section 69 and for payment of Court Receiver as provided in section 69A.

Section 13 of the Securitization Act is a procedural provision for expeditious realization of security interest by a secured creditor in substitution of normal process of recovery of debts through the court or the Tribunal. It does not create the charge by itself much less first charge; rather it provides for process for enforcement of charge that has been created under the contract in favour of the secured creditor. Undersigned could not find other provisions either with reference to the Securitization Act or any other Central Act, which provides for first charge in favour of the Bank.

As a matter of fact, basis of the charge is the mortgage that has been created in favour of the Bank by the company for availing the credit facilities and that is under the contract and not under any statutory provision much less any Central Act. Sales Tax Act and Securitization Act have been enacted by the competent legislatures for different purposes and operate in different fields. The Sales Tax Act is enacted by the State Legislature under Entry 54 of List II in the Seventh Schedule for levy of tax on the sale or purchase of certain goods in the State.

On the other hand, the Securitization Act has been enacted by the Parliament under Entry 54 of List I for regulating the securitization and reconstruction of financial assets and for enforcement of security interest. There is neither any conflict in these two Acts nor Section of the Sales Tax Act can be said to be inconsistent with section 35 of the Securitization Act. The area of operation is entirely different and there is no overlapping anywhere. Section 35 of the Securitization Act may have had some bearing, if there was some provision in the Securitization Act for first charge in favour of the banks and financial institutions. However, neither section 13 nor any other provision under the Securitization Act makes a provision for first charge.

There being no provision in the Securitization Act providing for first charge in favour of the banks, section 35 of the Securitization Act cannot be held to override Section of the Sales Tax Act, 1959 that specifically provides that the liability under the said Act shall be the first charge. The overriding provision contained in section is only subject to the provision of the first charge in the Central Act holding the field. The case of the Bank is not covered by the expression, “subject to any provision regarding first charge in any Central Act for the time being in force” and that being the position, section is not overridden by section 35 of the Securitization Act.

The contention of the Bank that may be probably based on the overriding effect of provisions of Section 35 of the Securitization and Reconstruction Act will have no substance in my view. Normally the use of a phrase by the Legislature in an enactment stating that its provisions will have the effect “notwithstanding anything inconsistent therewith contained in any other law for the time being in force” is another way of saying that the enactment in which the non-obstante clause occurs usually would prevail over the other law.

Non-obstante clauses are not always to be regarded as repealing clauses nor as clauses, which expressly or completely supersede any other provisions of the law, but merely as clauses, which remove all obstructions, which might arise out of the operation of the enactment, which contains a non-obstante clause. The conflict in such cases is resolved on consideration of purpose and policy underlying the enactments and the language used in them.

Both operate in two different fields and there is no conflict in them. Undoubtedly, intention of Parliament in enacting the Securitization and Reconstruction Act was to ensure that the banks and financial institutions could quickly and effectively recover the amount due by taking possession of the secured assets of the defaulters instead of having resort to the cumbersome method of recovery through civil courts or tribunals. The said Act is enacted to have yet speedier legal method to recover the public dues of the banks and financial institutions.

The provisions of Section 13 of the said Act give right to the banks and financial institutions to take possession of the secured assets and realize their dues by resorting to any of the four methods provided under Sub-section (4) of section 13. The intention of the Legislature was not to give any precedence to the dues of the banks and financial institutions over the statutory dues under such provisions as made in the said Act. The Act does not have any substantive provision giving precedence to the dues of the banks and financial institutions.

The three Judge Bench of the Supreme Court in the case of State Bank of Bikaner & Jaipur dealt with the question of first charge over property of the dealer under the Rajasthan Sales Tax Act vis a vis the provision of the Transfer of Property Act. Section under the Rajasthan Sales Tax Act like section 38 C of the Bombay Sales Tax Act provides for the liability under the said Act to be first charge. That Section reads to the effect that “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.”

The language of Section is bit different from Section 38 C of the Bombay Sales Tax Act. However, the creation of first charge in favour of the Bank being not under any Central Act, the decision of the Supreme Court in the case of State Bank of Bikaner and Jaipur becomes relevant.

In the present case we have to consider whether the statutory first charge which is created under Sales Tax Act over the property of the dealer or a person liable to pay sales tax and or other dues under the Sales Tax Act, is created in respect of the entire interest in the property or only the mortgagor’s interest in the property when the dealer has created a mortgage on the property. In other words, will the statutory first charge have priority over an earlier mortgage?

Bank may argue that at the time when the statutory first charge came into existence, there was already a mortgage in respect of the same property. Therefore, the only property, which was possessed by the dealer and or person liable to pay tax or other dues under Sales Tax Act, was equity of redemption in respect of that property. The first charge would operate, therefore, only on the equity of redemption.

The argument though ingenious, will have to be rejected. Where a mortgage is created in respect of any property, undoubtedly, an interest in the property is carved out in favour of the mortgagee. The mortgagor is entitled to redeem his property on payment of the mortgage dues. This does not, however, mean that the property ceases to be the property of the mortgagor. The title to the property remains with the mortgagor. Therefore, when a statutory first charge is created on the property of the dealer, the property subjected to the first charge is the entire property of the dealer. The interest of the mortgagee is not excluded from the first charge. The first charge, therefore, which is created under Section of the Sales Tax Act, will operate on the property as a whole and not only on the equity of redemption.

The Supreme Court with reference to first charge over the property of the dealer under Section of the Sales Tax Act vis a vis earlier mortgage of the same property held that the statutory first charge has precedence over an existing mortgage. Sales Tax Act provides for first charge in respect of the sales tax liability over the property of the dealer or the concerned person and that statutory first charge (in the absence of any other statutory first charge created in favour of the Bank) has precedence over the bank’s charge based on contractual mortgage.

In the case of Bharat Co-operative Bank, it was held that Section 38 C of the Bombay Sales Tax Act read with Section 169 of the Maharashtra Land Revenue Code leaves no manner of doubt that recovery of sales tax dues has priority over the secured creditors. The said judgment is not elaborate as it was given at the motion hearing stage while considering whether writ petition deserved to be admitted or not. However, Court considered Section 38 C of the Bombay Sales Tax Act and Section 169 of the Maharashtra Land Revenue Code in the light of the submission made by the counsel for the bank that the bank being the secured creditor and the property having been mortgaged with the bank, such property could not be put to sale under Section 38 C of the Bombay Sales Tax Act.

After referring Section 38 C and 169, we held thus:

“We are afraid; Section 169 of the Maharashtra Land Revenue Code, 1966 does not support the submission of the learned Counsel for the petitioner at all as contended. By virtue of Section 38 C of the Bombay Sales Tax Act, the recovery of sales tax dues has first charge. The said recovery is made as arrears of land revenue and a conjoint reading of Section 38 C of the Bombay Sales Tax Act and Section 169 of the Maharashtra Land Revenue Code, 1944 leaves no manner of doubt that the recovery of sales tax dues has priority over the secured creditors.”

Article 245 of the Constitution is the fountain source of legislative power. It provides to the effect that subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the legislature of a State may make laws for the whole or any part of the State. The legislative field between Parliament and the legislature of any State is divided by Article 246 of the Constitution.

Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule, called the “Union List”. Subject to the said power of Parliament, the legislature of any State has power to make laws with respect to any of the matters enumerated in List III, called the “Concurrent List”. Subject to the abovesaid two, the legislature of any State has exclusive power to make laws with respect to any of the matters enumerated in List II, called the “State List”.

Under Article 248, the exclusive power of Parliament to make laws extends to any matter not enumerated in the Concurrent List or State List. The power of making any law imposing a tax not mentioned in the Concurrent List or State List vests in Parliament. This is what is called the residuary power vesting in Parliament. The principles have been succinctly summarized and restated by a Bench of three learned Judges on a review of the available decision in Hoechst Pharmaceuticals Ltd. v. State of Bihar.

They are:

(1) The various entries in the three lists are not “powers” of legislation but “fields” of legislation. The Constitution effects a complete separation of the taxing power of the Union and of the States under Article 246. There is no overlapping anywhere in the taxing power and the Constitution gives independent sources of taxation to the Union and the States.

(2) In spite of the fields of legislation having been demarcated, the question of repugnancy between law made by Parliament and a law made by the State Legislature may arise only in cases when both the legislations occupy the same field with respect to one of the matters enumerated in the Concurrent List and a direct conflict is seen. If there is a repugnancy due to overlapping found between List II on the one hand and List I and List III on the other, the State law will be ultra vires and shall have to give way to the Union law.

(3) Taxation is considered a distinct matter for purposes of legislative competence. There is a distinction made between general subjects of legislation and taxation. The general subjects of legislation are dealt with in one group of entries and power of taxation in a separate group. The power to tax cannot be deduced from a general legislative entry as an ancillary power.

(4) The entries in the lists being merely topics or fields of legislation, they must receive a liberal construction inspired by a broad and generous spirit and not in a narrow pedantic sense. The words and expressions employed in drafting the entries must be given the widest-possible interpretation. This is because, to quote V. Ramaswami, J., the allocation of the subjects to the lists is not by way of scientific or logical definition but by way of a mere simplex enumeration of broad categories. A power to legislate as to the principal matter specifically mentioned in the entry shall also include within its expanse the legislations touching incidental and ancillary matters.

(5) Where the legislative competence of the legislature of any State is questioned on the ground that it encroaches upon the legislative competence of Parliament to enact a law, the question one has to ask is whether the legislation relates to any of the entries in List I or III. If it does, no further question need be asked and Parliament’s legislative competence must be upheld.

Where there are three lists containing a large number of entries, there is bound to be some overlapping among them. In such a situation, the doctrine of pith and substance has to be applied to determine as to which entry does a given piece of legislation relate. Once it is so determined, any incidental trenching on the field reserved to the other legislature is of no consequence.

The court has to look at the substance of the matter. The doctrine of pith and substance is sometimes expressed in terms of ascertaining the true character of legislation. The name given by the legislature to the legislation is immaterial. Regard must be had to the enactment as a whole, to its main objects and to the scope and effect of its provisions. Incidental and superficial encroachments are to be disregarded.

(6) The doctrine of occupied field applies only when there is a clash between the Union and the State Lists within an area common to both. There the doctrine of pith and substance is to be applied and if the impugned legislation substantially falls within the power expressly conferred upon the legislature, which enacted it, an incidental encroaching in the field assigned to another legislature is to be ignored.

While reading the three lists, List I has priority over Lists III and II and List III has priority over List II. However, still, the predominance of the Union List would not prevent the State Legislature from dealing with any matter within List II though it may incidentally affect any item in List 1.

Section 35 of the Securitization Act has no effect whatsoever in the operation of Section under the Sales Tax Act. Section 35 of the Securitization Act does not override Section of the Sales Tax Act and, therefore, based on Section 35 of the Securitization Act, the Bank does not get precedence or for that matter priority over the statutory first charge under the Sales Tax Act. Rather the statutory first charge under the Sales Tax Act has precedence over the Bank’s charge based on contract.

Taxing statutes provide to the effect that 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 the Act, shall be the first charge on the property of the dealer, or, as the case may be, person.

The reading of the section suggests that liability under the Sales Tax Act shall be first charge. It overrides anything contained in any contract, which is contrary to the particular section. It provides that any amount of tax, penalty, interest or any other sum payable by a dealer or any other person under this Act shall be first charge on the property of the dealer or that person but subject to any provision regarding first charge in any Central Act for the time being in force.

In other words, if in any Central Act provides for first charge, the charge created under the Sales Tax Act is overridden. Conversely, if the Central Act does not provide for first charge in respect of the liability under the said Act, the first charge created under section of Sales Tax Act shall hold the field. Section 13 of the Securitization Act does not indicate, “Statutorily incorporated first charge”. Having read section 13 carefully, undersigned is unable to agree with the claim of the Bank in light of the legislative lacking.

Section 13 is not a provision regarding first charge. It provides the machinery for realization of the security without intervention of the court or Tribunal by a secured creditor. It overrides the provisions contained in Sections 69 and 69A of the Transfer of Property Act which empowers the mortgagee to sell or concur in selling the mortgaged property or any part thereof in default of payment of the mortgage money without intervention of court in the circumstances referred to in section 69 and for payment of Court Receiver as provided in section 69A.

Section 13 of the Securitization Act is a procedural provision for expeditious realization of security interest by a secured creditor in substitution of normal process of recovery of debts through the court or the Tribunal. It does not create the charge by itself much less first charge; rather it provides for process for enforcement of charge that has been created under the contract in favour of the secured creditor. Undersigned could not find other provisions either with reference to the Securitization Act or any other Central Act, which provides for first charge in favour of the Bank.

As a matter of fact, basis of the charge is the mortgage that has been created in favour of the Bank by the company for availing the credit facilities and that is under the contract and not under any statutory provision much less any Central Act. Sales Tax Act and Securitization Act have been enacted by the competent legislatures for different purposes and operate in different fields. The Sales Tax Act is enacted by the State Legislature under Entry 54 of List II in the Seventh Schedule for levy of tax on the sale or purchase of certain goods in the State.

On the other hand, the Securitization Act has been enacted by the Parliament under Entry 54 of List I for regulating the securitization and reconstruction of financial assets and for enforcement of security interest. There is neither any conflict in these two Acts nor Section of the Sales Tax Act can be said to be inconsistent with section 35 of the Securitization Act. The area of operation is entirely different and there is no overlapping anywhere. Section 35 of the Securitization Act may have had some bearing, if there was some provision in the Securitization Act for first charge in favour of the banks and financial institutions. However, neither section 13 nor any other provision under the Securitization Act makes a provision for first charge.

There being no provision in the Securitization Act providing for first charge in favour of the banks, section 35 of the Securitization Act cannot be held to override Section of the Sales Tax Act, 1959 that specifically provides that the liability under the said Act shall be the first charge. The overriding provision contained in section is only subject to the provision of the first charge in the Central Act holding the field. The case of the Bank is not covered by the expression, “subject to any provision regarding first charge in any Central Act for the time being in force” and that being the position, section is not overridden by section 35 of the Securitization Act.

The contention of the Bank that may be probably based on the overriding effect of provisions of Section 35 of the Securitization and Reconstruction Act will have no substance in my view. Normally the use of a phrase by the Legislature in an enactment stating that its provisions will have the effect “notwithstanding anything inconsistent therewith contained in any other law for the time being in force” is another way of saying that the enactment in which the non-obstante clause occurs usually would prevail over the other law.

Non-obstante clauses are not always to be regarded as repealing clauses nor as clauses, which expressly or completely supersede any other provisions of the law, but merely as clauses, which remove all obstructions, which might arise out of the operation of the enactment, which contains a non-obstante clause. The conflict in such cases is resolved on consideration of purpose and policy underlying the enactments and the language used in them.

Both operate in two different fields and there is no conflict in them. Undoubtedly, intention of Parliament in enacting the Securitization and Reconstruction Act was to ensure that the banks and financial institutions could quickly and effectively recover the amount due by taking possession of the secured assets of the defaulters instead of having resort to the cumbersome method of recovery through civil courts or tribunals. The said Act is enacted to have yet speedier legal method to recover the public dues of the banks and financial institutions.

The provisions of Section 13 of the said Act give right to the banks and financial institutions to take possession of the secured assets and realize their dues by resorting to any of the four methods provided under Sub-section (4) of section 13. The intention of the Legislature was not to give any precedence to the dues of the banks and financial institutions over the statutory dues under such provisions as made in the said Act. The Act does not have any substantive provision giving precedence to the dues of the banks and financial institutions.

The three Judge Bench of the Supreme Court in the case of State Bank of Bikaner & Jaipur dealt with the question of first charge over property of the dealer under the Rajasthan Sales Tax Act vis a vis the provision of the Transfer of Property Act. Section under the Rajasthan Sales Tax Act like section 38 C of the Bombay Sales Tax Act provides for the liability under the said Act to be first charge. That Section reads to the effect that “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.”

The language of Section is bit different from Section 38 C of the Bombay Sales Tax Act. However, the creation of first charge in favour of the Bank being not under any Central Act, the decision of the Supreme Court in the case of State Bank of Bikaner and Jaipur becomes relevant.

In the present case we have to consider whether the statutory first charge which is created under Sales Tax Act over the property of the dealer or a person liable to pay sales tax and or other dues under the Sales Tax Act, is created in respect of the entire interest in the property or only the mortgagor’s interest in the property when the dealer has created a mortgage on the property. In other words, will the statutory first charge have priority over an earlier mortgage?

Bank may argue that at the time when the statutory first charge came into existence, there was already a mortgage in respect of the same property. Therefore, the only property, which was possessed by the dealer and or person liable to pay tax or other dues under Sales Tax Act, was equity of redemption in respect of that property. The first charge would operate, therefore, only on the equity of redemption.

The argument though ingenious, will have to be rejected. Where a mortgage is created in respect of any property, undoubtedly, an interest in the property is carved out in favour of the mortgagee. The mortgagor is entitled to redeem his property on payment of the mortgage dues. This does not, however, mean that the property ceases to be the property of the mortgagor. The title to the property remains with the mortgagor. Therefore, when a statutory first charge is created on the property of the dealer, the property subjected to the first charge is the entire property of the dealer. The interest of the mortgagee is not excluded from the first charge. The first charge, therefore, which is created under Section of the Sales Tax Act, will operate on the property as a whole and not only on the equity of redemption.

The Supreme Court with reference to first charge over the property of the dealer under Section of the Sales Tax Act vis a vis earlier mortgage of the same property held that the statutory first charge has precedence over an existing mortgage. Sales Tax Act provides for first charge in respect of the sales tax liability over the property of the dealer or the concerned person and that statutory first charge (in the absence of any other statutory first charge created in favour of the Bank) has precedence over the bank’s charge based on contractual mortgage.

In the case of Bharat Co-operative Bank, it was held that Section 38 C of the Bombay Sales Tax Act read with Section 169 of the Maharashtra Land Revenue Code leaves no manner of doubt that recovery of sales tax dues has priority over the secured creditors. The said judgment is not elaborate as it was given at the motion hearing stage while considering whether writ petition deserved to be admitted or not. However, Court considered Section 38 C of the Bombay Sales Tax Act and Section 169 of the Maharashtra Land Revenue Code in the light of the submission made by the counsel for the bank that the bank being the secured creditor and the property having been mortgaged with the bank, such property could not be put to sale under Section 38 C of the Bombay Sales Tax Act.

After referring Section 38 C and 169, we held thus:

“We are afraid; Section 169 of the Maharashtra Land Revenue Code, 1966 does not support the submission of the learned Counsel for the petitioner at all as contended. By virtue of Section 38 C of the Bombay Sales Tax Act, the recovery of sales tax dues has first charge. The said recovery is made as arrears of land revenue and a conjoint reading of Section 38 C of the Bombay Sales Tax Act and Section 169 of the Maharashtra Land Revenue Code, 1944 leaves no manner of doubt that the recovery of sales tax dues has priority over the secured creditors.”

Article 245 of the Constitution is the fountain source of legislative power. It provides to the effect that subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India, and the legislature of a State may make laws for the whole or any part of the State. The legislative field between Parliament and the legislature of any State is divided by Article 246 of the Constitution.

Parliament has exclusive power to make laws with respect to any of the matters enumerated in List I in the Seventh Schedule, called the “Union List”. Subject to the said power of Parliament, the legislature of any State has power to make laws with respect to any of the matters enumerated in List III, called the “Concurrent List”. Subject to the abovesaid two, the legislature of any State has exclusive power to make laws with respect to any of the matters enumerated in List II, called the “State List”.

Under Article 248, the exclusive power of Parliament to make laws extends to any matter not enumerated in the Concurrent List or State List. The power of making any law imposing a tax not mentioned in the Concurrent List or State List vests in Parliament. This is what is called the residuary power vesting in Parliament. The principles have been succinctly summarized and restated by a Bench of three learned Judges on a review of the available decision in Hoechst Pharmaceuticals Ltd. v. State of Bihar.

They are:

(1) The various entries in the three lists are not “powers” of legislation but “fields” of legislation. The Constitution effects a complete separation of the taxing power of the Union and of the States under Article 246. There is no overlapping anywhere in the taxing power and the Constitution gives independent sources of taxation to the Union and the States.

(2) In spite of the fields of legislation having been demarcated, the question of repugnancy between law made by Parliament and a law made by the State Legislature may arise only in cases when both the legislations occupy the same field with respect to one of the matters enumerated in the Concurrent List and a direct conflict is seen. If there is a repugnancy due to overlapping found between List II on the one hand and List I and List III on the other, the State law will be ultra vires and shall have to give way to the Union law.

(3) Taxation is considered a distinct matter for purposes of legislative competence. There is a distinction made between general subjects of legislation and taxation. The general subjects of legislation are dealt with in one group of entries and power of taxation in a separate group. The power to tax cannot be deduced from a general legislative entry as an ancillary power.

(4) The entries in the lists being merely topics or fields of legislation, they must receive a liberal construction inspired by a broad and generous spirit and not in a narrow pedantic sense. The words and expressions employed in drafting the entries must be given the widest-possible interpretation. This is because, to quote V. Ramaswami, J., the allocation of the subjects to the lists is not by way of scientific or logical definition but by way of a mere simplex enumeration of broad categories. A power to legislate as to the principal matter specifically mentioned in the entry shall also include within its expanse the legislations touching incidental and ancillary matters.

(5) Where the legislative competence of the legislature of any State is questioned on the ground that it encroaches upon the legislative competence of Parliament to enact a law, the question one has to ask is whether the legislation relates to any of the entries in List I or III. If it does, no further question need be asked and Parliament’s legislative competence must be upheld.

Where there are three lists containing a large number of entries, there is bound to be some overlapping among them. In such a situation, the doctrine of pith and substance has to be applied to determine as to which entry does a given piece of legislation relate. Once it is so determined, any incidental trenching on the field reserved to the other legislature is of no consequence.

The court has to look at the substance of the matter. The doctrine of pith and substance is sometimes expressed in terms of ascertaining the true character of legislation. The name given by the legislature to the legislation is immaterial. Regard must be had to the enactment as a whole, to its main objects and to the scope and effect of its provisions. Incidental and superficial encroachments are to be disregarded.

(6) The doctrine of occupied field applies only when there is a clash between the Union and the State Lists within an area common to both. There the doctrine of pith and substance is to be applied and if the impugned legislation substantially falls within the power expressly conferred upon the legislature, which enacted it, an incidental encroaching in the field assigned to another legislature is to be ignored.

While reading the three lists, List I has priority over Lists III and II and List III has priority over List II. However, still, the predominance of the Union List would not prevent the State Legislature from dealing with any matter within List II though it may incidentally affect any item in List 1.

Section 35 of the Securitization Act has no effect whatsoever in the operation of Section under the Sales Tax Act. Section 35 of the Securitization Act does not override Section of the Sales Tax Act and, therefore, based on Section 35 of the Securitization Act, the Bank does not get precedence or for that matter priority over the statutory first charge under the Sales Tax Act. Rather the statutory first charge under the Sales Tax Act has precedence over the Bank’s charge based on contract.

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