September 07 2010
The question which arose for determination before a Supreme Court Bench comprising Justice BN Agrawal, Justice GS Singhvi and Justice Aftab Alam was whether Section 38-C of the Bombay Sales Tax Act 1959 and Section 26-B of the Kerala General Sales Tax Act 1963, which create a first charge on the property of a dealer or other person liable to pay sales tax, were inconsistent with the provisions of (i) the Recovery of Debts Due to Banks and Financial Institutions Act 1993 for the recovery of debt, and (ii) the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 for the enforcement of a security interest.(1) A further aspect for consideration before the court was whether, by virtue of non obstante (notwithstanding) clauses contained in Section 34(1) of the Recovery Act and Section 35 of the Securitisation Act, the two pieces of national legislation had primacy over the state legislation.
Before the Supreme Court the appellant banks contended that the two national pieces of legislation had been enacted by Parliament under Article 246(1) (read with Schedule VII List 1 Entry 45) of the Constitution and were given overriding effect in regard to other laws. In view of this, the provisions contained in the two national laws would take priority over state legislation enacted under Article 246(2) (read with Schedule VII List II Entry 54), and under which first charge had been created in favour of the state in respect of sales tax dues. Emphasising the non obstante clauses contained in Section 34(1) of the Recovery Act and Section 35 of the Securitisation Act, the appellants argued that even though the language of Section 38-C of the Bombay enactment and Section 26-B of the Kerala enactment suggested that state legislation had been given overriding effect in regard to other laws, the courts were duty bound to give full effect to the primacy of central legislation over state legislation.
The respondent states of Maharashtra and Kerala contended that despite the national pieces of legislation containing non obstante clauses, Section 38-C of the Bombay enactment and Section 26-B of the Kerala enactment, as well as similar provisions contained in other state legislation by which first charge was expressly created on the property of a dealer or any other person liable to pay sales tax, could not be treated to be inconsistent with the central legislation. They argued that there was no provision in either national enactment creating a first charge in favour of banks, and consequently the provisions contained in state legislation creating a first charge in respect of the dues of sales tax could not be treated to be inconsistent with central legislation. Kerala further contended that the levy and collection of tax was a sovereign function as well as a necessity for the state, and as such the state had plenary power to legislate on that subject to the exclusion of any specific provision in national acts creating first charge in favour of the banks.
The court observed that if no provisions in any other enactments were inconsistent with the national acts, the provisions contained in those acts would not override the other legislation. The court also observed that the non obstante clauses contained in the national acts merely gave overriding effect to the provisions of those acts if there was anything inconsistent contained in any other law. The court held that Section 38-C of the Bombay enactment and Section 26-B of the Kerala enactment contained non obstante clauses and accorded express statutory recognition to the priority of the state's charge over other debts. In other words, those sections and similar provisions contained in other state legislation not only created first charge on the property of the dealer or any other person liable to pay sales tax, but also gave overriding effect over other laws.
The court observed that if Parliament had intended to create first charge in favour of the borrower in priority over the first charge created under state legislation, it would have expressly incorporated provisions similar to those contained in other legislations such as:
In addition, Parliament would have ensured that notwithstanding a series of judicial pronouncements, the dues of banks, financial institutions and other secured creditors would have priority over the state's statutory first charge in the matter of recovery of sales tax due. The court held that in the absence of any specific provision to that effect in the national pieces of legislation, it was not possible to read any conflict between the two national pieces of legislation on the one hand, and Section 38-C of the Bombay enactment and Section 26-B of the Kerala enactment on the other. It was held that the non obstante clauses in the national acts could not be invoked to declare that the first charge created under the state legislation would not operate or affect the proceedings initiated by banks and other financial institutions for recovery of their dues or the enforcement of their security interests, as the case may be.
The court's judgment held that the two national legislative enactments create no first charge in favour of the banks, financial institutions and other secured creditors, and that the provisions contained in Section 38-C of the Bombay act and Section 26-B of the Kerala act are not inconsistent with the provisions of the national acts so as to invoke the non obstante clauses contained in Section 34(1) of the Recovery Act or Section 35 of the Securitisation Act.
Accordingly, cases of recovery of monies by banks and financial institutions cannot, in the absence of relevant statutory provision under the national acts, be given priority over instances of state legislation that expressly create a first charge in favour of the state government in respect of the sales tax due.
For further information on this topic please contact Manu Nair or Saanjh Purohit at Amarchand & Mangaldas & Suresh A Shroff & Co by telephone (+91 11 2692 0500) or by fax (+ 91 11 2692 4900) or by email (firstname.lastname@example.org or email@example.com).
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