The facts before the Hon’ble Supreme Court were that the bank gave credit facilities to dealers against mortgage of moveable and immovable properties. When the bank sought to recover money by sale of properties through the Debts Recovery Tribunal (DRT) the Sales Tax Department intervened saying that by virtue of specific provisions in the State Sales Tax Acts (like Section 26B in the Kerala Act and Sec.38C in the BST Act, 1959) sales tax recovery has priority and first charge. The banks were insisting that since the properties are mortgaged to them and since recovery is under Central legislations viz., the DRT Act, 1993 they have priority. The respective High Courts of Kerala and Bombay held in favour of State Sales Tax Authorities. Hence matters were taken to the Supreme Court by respective banks. The Supreme Court confirmed the orders of the High Courts. Various constitutional challenges were raised. The Supreme Court, after dealing with same, rejected the said challenges.
Short gist of observations on constitutional issues is as under :
The Supreme Court held that Article 254 of the Constitution gets attracted only when both Central and State legislations have been enacted on any of the matters enumerated in List III in the Seventh Schedule to the Constitution and there is conflict between the two legislations. The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 have been enacted by the Parliament under Entry 45 in List I in the Seventh Schedule, whereas the Bombay Sales Tax Act, 1959 and the Kerala General Sales Tax Act, 1963 have been enacted by the concerned State Legislatures under Entry 54 in List II in the Seventh Schedule. The two sets of legislations have been enacted with reference to entries in different Lists in the Seventh Schedule. Therefore, the Supreme Court held that Article 254 cannot be invoked for striking down the State legislations on the ground that they are in conflict with the Central legislations. The Supreme Court held that there is no ostensible overlapping between the two sets of legislations.
The Supreme Court observed that there is no provision in either of 1993 or 2002 enactments by which a first charge has been created in favour of banks, financial institutions or secured creditors qua the property of the borrower. Under Section 13(1) of the 2002 Act, limited primacy has been given to the right of a secured creditor to enforce his security interest vis-à-vis Section 69 or Section 69A of the Transfer of Property Act. In terms of that sub-Section, a secured creditor can enforce security interest without intervention of the Court or Tribunal and if the borrower has created any mortgage of the secured asset, the mortgagee or any person acting on his behalf cannot sell the mortgaged property or appoint a receiver of the income of the mortgaged property or any part thereof in a manner which may defeat the right of the secured creditor to enforce security interest. The Supreme Court held that this primacy has not been extended to other provisions like Section 38C of the Bombay Act and Section 26B of the Kerala Act by which a first charge has been created in favour of the State over the property of the dealer or any person liable to pay the dues of sales tax, etc. Sub-Section (7) of Section 13 of the 2002 Act which envisages application of the money received by the secured creditor by adopting any of the measures specified under sub-Section(4) merely regulates distribution of money received by the secured creditor. It does not create a first charge in favour of the secured creditor, observed the Supreme Court.
The Supreme Court also observed that the non obstante clauses contained in Section 34(1) of the 1993 Act and Section 35 of the 2002 Act give overriding effect to the provisions of those Acts only if there is anything inconsistent contained in any other law or instrument having effect by virtue of any other law. In other words, if there is no provision in the other enactments which are inconsistent with the 1993 Act or the 2002 Act, the provisions contained in those Acts cannot override other legislations. Section 38C of the Bombay Act and Section 26B of the Kerala Act also contain non obstante clauses and give statutory recognition to the priority of the State’s charge over other debts. These Sections and similar provisions contained in other State legislations not only create a first charge on the property of the dealer or any other person liable to pay sales tax, etc., but also give them overriding effect over other laws, held the Supreme Court.
The Supreme Court analysed the background of the above legislations and observed that while enacting the 1993 Act and the 2002 Act, the Parliament was aware of the law laid down by the Supreme Court, wherein priority of the State dues was recognised. If the Parliament intended to create a first charge in favour of banks, financial institutions or other secured creditors on the property of the borrower, then it would have incorporated a provision like Section 529A of the Companies Act, 1956 or Section 11(2) of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 and ensured that dues of banks, financial institutions and other secured creditors should have priority over the State’s statutory first charge in the matter of recovery of the dues of sales tax, etc. In the absence of any specific provision to that effect, it is not possible to read any conflict or inconsistency or overlapping between the provisions of the 1993 Act and 2002 Act on the one hand and Section 38C of the Bombay Act and Section 26B of the Kerala Act on the other. And the non obstante clauses contained in Section 34(1) of the 1993 Act and Section 35 of the 2002 Act cannot be invoked for declaring that the first charge created under the State legislation will not operate qua or affect the proceedings initiated by banks, financial institutions and other secured creditors for recovery of their dues or enforcement of security interest, as the case may be.
The Supreme Court also held that the State legislations creating first charge in favour of the State operate in respect of charges that are in force on the date of introduction of the provisions creating the charge.
Observing as above, in elaborate judgment, the Supreme Court confirmed the orders of the High Courts and held that the provisions creating first charge for recovery of sales tax dues will prevail upon the charge in favour of banks under the DRT Act, 1993 and Securitisation Act, 2002.
Certificate of Entitlement – Stretching back effective date in assessment proceedings! appeals against assessment orders
Whirlpool India Ltd. S.A.1212 of 2003 dt.18.3.2009 (Larger Bench of M.S.T. Tribunal)
The issue before the Larger Bench was from reference judgment passed by the 2nd Bench in S.A.1212 of 2003 dt.31.3.2008. The appellant has filed this S.A. against assessment order for 1997-98. He was granted Certificate of Entitlement (COE) under PSI 1993, effective from 16.9.98. The date of commencement of commercial production was 1.3.98 and the appellant was praying to stretch back the effective date of COE in the assessment proceedings from 16.9.98 to 1.3.98. The Referring Bench noted judgments in case of Prav Electro (S. A. 575 of 96, dated11.1.2002) and Hikal Ltd., wherein it is held that the effective date can be stretched back in second appeal against assessment order also. The Referring Bench held a different view that the effective date cannot be stretched back in appeal against assessment order. Therefore, the matter was referred to the Larger Bench.
The Larger Bench, on hearing both the parties, observed that stretching back in appeal against assessment order is not permissible. The Hon’ble Larger Bench gave its verdict on different points raised by the appellant as under:
- In the assessment proceedings, the Assessing Officer has authority to change the effect of COE and grant benefits of exemption by doing so.
The Assessing Officer in assessment proceedings u/ s.33 has no authority to change the effect of COE. The benefits of exemption u/ s.41 are dependent upon Entitlement Certificate (EC) & COE. The benefits could only be claimed by the appellant in respect of goods manufactured and sold during the eligibility period mentioned in E.C. and COE.
- The 1993 PSI, provides unconditionally for grant of COE from the date of commencement of commercial production.
On close reading of the provisions contained in 1993 PSI, such a proposition cannot be advanced. The said Scheme does not provide for the same.
- Other COE, being a certificate under 1993 PSI, is administrative in nature. The Assessing Officer has authority to change its effect in assessment proceedings. As such by the Tribunal too.
No doubt COE is a part of 1993 PSI. However, for regulatory aspect, it has been accommodated in Notification entry E-3, 136 u/s.41 of the Act. The authority to grant exemption to a specified class of sales is delegated by law to the Government u/ s.41 of the Act. Thus the COE and its regulatory aspect for grant of exemption to a specified class of sale in the Act is well absorbed in Notification entry E-3/136 u/s.41 of the Act. By law the Assessing Officer has to strictly follow Notification entry E-3/136 while consid-ering exemption to a specified class of sales. He has no authority to change the effect of COE in assessment proceedings and hence the Tribunal.
The Bombay High Court in Great Eastern case lays the law that ‘the sales tax liability accrues when event of sale takes place. It cannot be extinguished by subsequent certification with retrospective effect.’
Thus the proposition, canvassed by the appellant, does not get any support of law.
- The benefits of exemption could be claimed unconditionally by the appellant on possessing of COE without looking into the eligibility period mentioned in COE.
The sales tax benefits become available to Eligible Unit (EU) on the basis of EC and COE and not on the basis of COE alone. They are available in respect of goods manufactured and sold during the eligibility period mentioned in EC and COE. All the Package Schemes viz.,1979, 1983, 1988 and 1993 of the Government adopt the benefits during the eligibility period given in EC and COE, the 1993 PSI does not adopt a different period or a different terminology.
- A liberal interpretation be made of Notification entry E-3/136, u/s.41 of the Act for allowing the benefits of exemption to the appellant in assessment.
The ratio of the Supreme Court judgment in Wood Papers case, warrants strict construction of Notification entry E-3/136 u/s.41 of the Act. A plain reading of the Notification and plain construction of the Entry do not advance the case of the appellant. There is no contingency for full play to be given to the appellant for exemption and more particularly in assessment when the Assessing Officer has no authority.
- The judgment of the Tribunal in the case of Prav Electro Spark Ltd. does advance the case of the appellant,
The Tribunal’s judgment in the above matter does not advance the correct proposition of law declared by the Apex Court in Jeypore case for the explained reason.
- The effect of COE could be changed in the assessment proceedings by the Assessing Officer and benefits of exemption could be made available to the appellant.
The ratio of the Bombay High Court’s judgment in the case of Great Eastern Spinning & Weaving Mills demolishes this proposition, so also the Wood Papers judgment of the Apex Court. Such a proposition of the appellant also goes against the Notification E-3/136 u/s.d lof the Act.
- Substantial justice be done to the appellant since he was pursuing alternate remedy for change of effect of COE by representing to the Commissioner and the Government.
The appellant did not agitate on the effect given to EC & COE at any point of time u/ s.55 of this – Act. The alternative remedy claimed by the appellant being administrative in nature, it has no sanctity of law and it is not a matter concerning the lawful remedy. In the present case we are in appeal against assessment (and no appeal is before us against COE). The powers which we possess u/ s.55 of this Act pertain to a limited aspect of what the Assessing Officer can do in assessment, we can do it in appeal, or what the Assessing Officer was supposed to do in assessment but not done, can be done by the Appellate Authority. This is the authority explained by the Bombay High Court in the case of M/ s.Amar Dye Chem, we are in possession . of. There exists no case for substantial justice when a matter pertains to strict construction and strict compliance of exemption conditions, as held by the Supreme Court, and when exemption is dependent on EC and COE and not COE alone.
- The Tribunal has an authority to change the effect of EC & COE to date of commencement of commercial production certified by IA in assessment proceedings.
The appeal proceedings before the Tribunal are against the assessment. The Tribunal could deal with the grounds of appeal in the manner and authority the Assessing Officer remains in possession of. The ratio of the Apex Court judgment in Wood Papers (cited supra) warrants a strict interpretation of exemption notification. It does not allow the Tribunal to act otherwise. Any attempt of granting exemption by amending COE and EC in assessment shall amount to violation of the position of law declared by the Apex Court. It would be in breach of Notification so also result in subsuming the Notification to the appellant’s proposition. It is not a proposition of law.
Thus the Hon’ble Larger Bench held that the issue of stretching back the date of COE cannot be entertained in the appeal proceedings against the assessment order.
