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industrial Finance Corporation of India Vs. the State of Punjab and ors. - Court Judgment

LegalCrystal Citation
SubjectSales Tax
CourtPunjab and Haryana High Court
Decided On
Case Number Letters Patent Appeal No. 541 of 1970
Judge
Reported in[1973]30STC581(P& H)
Appellantindustrial Finance Corporation of India
RespondentThe State of Punjab and ors.
Appellant Advocate Anand H.L. and; T.S. Munjral, Advs.
Respondent Advocate K.S. Thapar, Adv. for; Adv.-General and; R.N. Narula
DispositionAppeal allowed
Cases ReferredBank of Bihar v. State of Bihar and Ors.
Excerpt:
.....order. - 17. in the present case, it was rightly urged on behalf of the corporation that, at best, the department could proceed only against the equity of redemption in the mortgaged property, which alone vested in the company......proceed only against the equity of redemption in the mortgaged property, which alone vested in the company. mortgagee rights did not belong to the company and had been transferred to and vested in the corporation. there is no provision either in the punjab general sales tax act or in the punjab land revenue act which gives priority to the arrears of sales tax or the land revenue over the secured creditors of the defaulter. as already indicated, the law on the point only provides speedy procedure for the recovery of the arrears from the property of the defaulter and, in case of a mortgage, the property as such does not vest in the defaulter but some rights in the property stand transferred to the mortgagee.18. the supreme court decision in builders supply corporation v. the union of india.....
Judgment:

Harbans Singh, C.J.

1. The facts giving rise to this appeal under clause 10 of the Letters Patent, which are not in dispute, may briefly be stated as under :-

2. The Industrial Finance Corporation of India (hereinafter referred to as the corporation) sanctioned a loan of Rs. 25 lacs for Suraj Textile Mills Limited (hereinafter referred to as the company). Out of this amount, Rs. 6 lacs were advanced immediately and the remaining 19 lacs were to be given subsequently on various dates as agreed between the parties. In consideration of the above, on 27th April, 1962, a mortgage-deed (copy annexure A at page 47 of the paper-book) was executed by the company in favour of the corporation. This mortgage was an English mortgage as contemplated under Clause (e) of Section 58 of the Transfer of Property Act. The entire movable and immovable property of the company was conveyed and transferred to the corporation with the proviso that on the company complying with the terms of the mortgage and repaying the loan, as mentioned therein, the corporation would reconvey the property back to the company (see in this respect clause 2 at page 54). Between 21st November, 1966, and 20th December, 1968, the company committed various defaults with regard to the payment. As per terms of the mortgage, on 19th April, 1969, the corporation called up the entire amount by a notice (copy annexure B at page 93) directing the company to pay the entire amount within 15 days, failing which the corporation would be entitled to enforce the terms of the mortgage and the provisions of the Industrial Finance Corporation Act, 1948. At that time a total sum of Rs. 21,64,932.32 was due to the corporation. On 29th April, 1969, the company acknowledged the receipt of this notice and pleaded that due to financial difficulty it was not possible for the company to repay the debt at that time and sought accommodation for time.

3. On 2nd September, 1969, the Excise and Taxation Officer, Ferozepur, within whose jurisdiction the company's textile mill is situated, gave an intimation to the corporation that arrears of sales tax for the period 1963-64 to 1966-67, aggregating over Rs. 3i lacs were payable by the company and that exercising the powers under Section 11B of the Punjab General Sales Tax Act, a warrant of distraint of movable property under Section 70 and of attachment of immovable property under Section 72 of the Punjab Land Revenue Act having been issued, the possession of movable and immovable properties was taken over by the Excise and Taxation Department and premises were sealed (copy of this letter is annexure D at page 98). On 19th September, 1969, the corporation, vide letter copy annexure E addressed to the Excise and Taxation Officer, protested against the order of distraint and attachment. As the department was in no mood to recognise the prior rights of the corporation, the writ out of which the present appeal has arisen, was filed on 20th September, 1969, praying for quashing the aforesaid distraint and attachment in respect of the properties under mortgage and seeking a direction for restraining the State Government and the department concerned from disposing of the properties by sale or otherwise. This writ petition was dismissed by the learned Judge on 14th July, 1970, and the corporation has filed this appeal.

4. Only two points were urged before this court, though some other points were also taken before the learned single Judge.

5. The learned counsel for the corporation urged that in the first place in view of the mortgage being in English form under Clause (e) of Section 58 of the Transfer of Property Act, all the rights and interest of the company vested in the corporation and there was nothing left with the company against which the department could have proceeded for the recovery of its dues. Reliance for this was placed on the wording of Clause (e) of Section 58 of the Transfer of Property Act, which is as under :

Where the mortgagor binds himself to repay the mortgage money on a certain date, and transfers the mortgaged property absolutely to the mortgagee, but subject to a proviso that he will re-transfer it to the mortgagor upon payment of the mortgage money as agreed, the transaction is called an English mortgage.

6. Clause 2 of the mortgage-deed, annexure A, at page 54 was also relied upon. The relevant part of this clause is as follows:

For the consideration aforesaid the company doth hereby grant, convey, assign and assure unto the corporation all that piece or parcel of land or ground together with building...and all the estate, right, title, interest, claim and demand of the company into or upon all the land and buildings or any part therefor to hold the same unto the corporation for every and to have and to hold the plant unto the corporation absolutely but as to all the said premises subject to the proviso for redemption hereinafter contained.

7. This proviso is contained in clause 3, according to which, if the company pays to the corporation all the said principal and interest secured by the debt, 'then in such case the corporation shall at any time thereafter upon the request and at the cost of the, company reconvey the land and buildings and the plant hereinbefore expressed to be hereby conveyed (hereinafter collectively called 'the mortgaged premises') unto the company or as it shall direct.'

8. A reading of clauses 2 and 3 of the mortgage-deed together, on the face of it, shows that the deed purports to convey the entire mortgaged property for ever and absolutely to the corporation. Later, after the company has repaid the entire loan and the interest, etc., the company has a right to ask the corporation to reconvey the aforesaid property to the company.

9. The learned counsel, however, conceded that he cannot press this argument very much to the extreme and urge that the company was left with no interest whatever. This is so in view of the pronouncement of their Lordships of the Privy Council in Ram Kinkar Banerjee and Ors. v. Satya Charan Shrimani and Ors. A.I.R. 1939 P. C. 14.

10. Clause (a) of Section 58 of the Transfer of Property Act defines 'mortgage' and then the Clauses (b) onwards describe different types of mortgages. Relevant part of Clause (a) is as follows:

A mortgage is the transfer of an interest in specific immovable property for the purpose of securing the payment of money advanced or to be advanced by way of loan...

11. Their Lordships of the Privy Council held that the substantial rights are dealt with in Clause (a) of Section 58 and in Section 60, which deals with the question of right of the mortgagor to get redemption. In head-note (d), their Lordships of the Privy Council observed as follows :

Whatever form is used nothing more than an interest is transferred and that interest is subject to the right of redemption. Hence in India a mortgagor when he assigns his interest under a lease to a mortgagee does not under any of the forms specified in Section 58 of the Act transfer an absolute interest to the mortgagee...

12. In view of the above, he really pressed his alternate claim that in the year 1962 by virtue of the mortgage-deed, the mortgagee rights in the entire property, which was the subject-matter of the mortgage, came to vest in the corporation and what was left with the company was only the equity of redemption. There cannot be any dispute so far as this is concerned.

13. On behalf of the department reliance is mainly placed on Section 11B of the Punjab General Sales Tax Act, 1948, read with Sections 67, 70 and 72 of the Punjab Land Revenue Act, 1887. Section 11B of the Punjab General Sales Tax Act is as follows :

The amount of any tax and penalty imposed under this Act, which remains unpaid after the due date, shall be recoverable as arrears of land revenue.

14. Thus, this section only provides procedure for the recovery of the arrears of sales tax and the procedure prescribed is the same as has to be followed for the recovery of the arrears of land revenue. Relevant part of Section 67 of the Punjab Land Revenue Act is as under:

Subject to the other provisions of this Act, an arrear of land revenue may be recovered by any one or more of the following processes, namely:

* * * (c) by distress and sale of his movable property and uncut or ungathered crops ;

* * *(h) by proceeding against other immovable property of the defaulter.

15. Section 70 deals with sale of distrained movable property and Section 72(1) authorises the Collector to cause the estate or holding in respect of which the arrear is due to be attached and taken under his own management, etc.

16. One thing is clear that both under Clause (c) and Clause (h) of Section 67 of the Punjab Land Revenue Act, the authorities concerned can proceed against the movable or immovable property of the defaulter. Obviously, they cannot proceed against the property which does not belong to the defaulter but belongs to a third party.

17. In the present case, it was rightly urged on behalf of the corporation that, at best, the department could proceed only against the equity of redemption in the mortgaged property, which alone vested in the company. Mortgagee rights did not belong to the company and had been transferred to and vested in the corporation. There is no provision either in the Punjab General Sales Tax Act or in the Punjab Land Revenue Act which gives priority to the arrears of sales tax or the land revenue over the secured creditors of the defaulter. As already indicated, the law on the point only provides speedy procedure for the recovery of the arrears from the property of the defaulter and, in case of a mortgage, the property as such does not vest in the defaulter but some rights in the property stand transferred to the mortgagee.

18. The Supreme Court decision in Builders Supply Corporation v. The Union of India and Ors. [1965] 56 I.T.R. 91 (S.C.) on which reliance has been placed by the department, is not a case of a competition between the dues which could be recovered as arrears of land revenue-in that case the income-tax dues -and the secured debts of the defaulter. In that case, one of the creditors of the assessee had obtained a money decree. This point is made clear in paragraph 21 of the judgment at page 1068 as follows:

At this stage, we ought to make it clear that in the present appeal we are dealing with a very narrow point, and that relates to respondent No. 1's claim that arrears of tax due to it have precedence or priority over money debts due to a private creditor from the same debtor.

19. It was held in that case that the Union of India was entitled to claim priority in the matter of arrears of tax due from respondent No. 2 (the assessee) over the decretal debt due to the appellant from the same debtor.

20. The question of a secured creditor came up for consideration by the Supreme Court in Bank of Bihar v. State of Bihar and Ors. [1971] 41 Comp. Cas. 591 (S.C.). There the company had pledged its stock of sugar with the appellant-banker. The stock was kept in a godown, the key of which was kept by the bank. For the recovery of arrears of sugar-cess, which could be recovered as arrears of land revenue, some quantity of sugar so pledged was seized and sold, and the sale proceeds thereof had been appropriated by the Cane Commissioner towards the sugar-cess. In a suit filed by the appellant-bank against the State, the company and its directors, the trial court passed a decree for Rs. 93,910.00 being the amount due to the appellant-bank on the goods pledged. The High Court set aside that decree and on appeal to the Supreme Court, the appeal was accepted and the decree of the trial court was restored. Grover, J., while delivering the judgment of the court, at page 593 observed as under :

The Cane Commissioner indisputably did not have any right of priority over the other creditors of defendant No. 2, and, in particular, the secured creditors.

21. After quoting from Halsbury's Laws of England, as to what is 'pawn' and what are the rights of a pawnee, the following statement from the same book was particularly noted :

On the bankruptcy of the pawnor the pawnee is a secured creditor in the bankruptcy with respect to things pledged before the date of the receiving order and without notice of a prior available act of bankruptcy.

22. At page 595 of the report, his Lordship went on to observe as follows:

After the goods had been seized by the Government it was bound to pay the amount due to the plaintiff and the balance could have been made available to satisfy the claim of other creditors of the pawnor. But by a mere act of lawful seizure the Government could not deprive the plaintiff of the amount which was secured by the pledge of the goods to it. As the act of the Government resulted in deprivation of the amount to which the plaintiff was entitled it was bound to reimburse the plaintiff for such amount which the plaintiff in ordinary course would have realized by the sale of the goods pledged with it on the pawnor making a default in payment of debt.

23. The present case is much stronger than that of goods which were pledged with the bank. Here the legal title in the goods to the extent of the mortgage amount had passed to the corporation. The corporation was the legal owner of the mortgagee rights and no attachment of the property could be made by the department in derogation of the rights of the corporation. Indeed, as already stated, the department can recover its dues only out of the equity of redemption which belongs to the company.

24. In view of the above, we accept this appeal, set aside the order of the learned single Judge and hold that the department has no priority over the mortgage debt of the corporation. We, however, express no opinion as to whether the amount due to the department will have priority over other unsecured debts as that point does not arise in this case. As the department wrongly took the position, that it had priority over the claim of the appellant, the costs of this appeal and that of the writ petition incurred by the appellant would be borne by respondents Nos. 1 and 2.


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