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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