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A.F.R.

Court No. - 3

Case :- WRIT TAX No. - 690 of 2015

Petitioner :- M/S Gem Aromatics Private Limited

Respondent :- State Of U.P. And 6 Others

Counsel for Petitioner :- Madan Lal Srivastava

Counsel for Respondent :- C.S.C,Akhilesh

Tripathi,C.B.Tripathi,S.K. Kakkar

Hon'ble Naheed Ara Moonis,J.

Hon'ble Saumitra Dayal Singh,J.

1.Heard Sri Navin Sinha, learned Senior Counsel assisted by

Sri Madan Lal Srivastava, Sri Apoorv Hajela, learned Standing

Counsel for the revenue and Sri Sumit Kumar Kakkar, learned

counsel for the respondent- Bank.

2.Present writ petition has been filed, effectively to restrain

the respondent-State authorities from adopting coercive

measures against the property purchased by the petitioner

company, under a registered sale-deed dated 16.07.2014.

Thereby, Plot Nos.126/1, 10 and 126M situate at Village-

Gathauna, Pargana Ujhani, District - Badaun (hereinafter

referred to as 'the property-in-dispute') were purchased by the

petitioner, from another company - M/s Kanha Vanaspati Ltd.-

respondent no.7 (hereinafter referred to as 'assessee-in-default').

Relief has also been sought against the citation dated

26.05.2015, seeking those recoveries from the petitioner.

3.Undisputedly, the ‘assessee-in-default’ was assessed to

tax for the A.Ys. 1992-93 (U.P. and Central), 1993-94 (Central),

2006-07 (Central) and 2006-07 (Entry Tax), under the provisions

of U.P. Trade Tax Act, 1948, Central Sales Tax Act, 1956 and The

U.P. Entry Tax Act. It was further faced with other demands of tax

etc. raised against it for the A.Ys. 1994-95 to 2000-01. Those

arrears of tax were stated to be Rs.17,64,83,574/-, in the

impugned recovery citation dated 26.05.2015.

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4.Though the revenue authorities deny, yet, upon exchange

of affidavits, it appears, the ‘assessee-in-default’ owed dues to

the State Bank of India, against loan facility availed by it.

According to the petitioner, amongst others, the ‘property-in-

dispute’ had been mortgaged by the ‘assessee-in-default’, to the

State Bank of India. Thus, a first charge existed over the same

which was duly registered with the Registrar of Companies,

Kanpur. In this regard, a Certificate dated 06.08.2014, issued by

the Registrar of Companies (Annexure 7 to the writ petition)

certifying satisfaction of charge no. 80067412 dated 08.11.2005

for Rs. 32,89,00,000 in full has been placed on record. It is

undisputed. The petitioner has brought on record copy of letter

dated 15.07.2014 issued by the State Bank of India,

acknowledging lifting its charge on the ‘property-in-dispute’, upon

satisfaction of its dues under the One Time Settlement (OTS in

short). Also, the State Bank of India has filed a copy of its letter

dated 10.05.2015 written to the petitioner acknowledging the

prior existence of its charge in favour of that bank and of that

charge agreed to be lifted from over the ‘property-in-dispute’,

upon payment of Rs. 2.61 crores.

5.In such facts, the petitioner claims, pursuant to the OTS

entered between the ‘assessee-in-default’ and the State Bank of

India, Rs. 2.61 crores were paid by it directly to that bank,

towards the entire consideration for the ‘property-in-dispute’.

Upon that deposit made, the charge (over it) was lifted on

15.07.2014. Only thereafter, the ‘property-in-dispute’ could be

and it was sold by means of the registered sale-deed dated

16.07.2014, a copy of which is also on record. Later, the

petitioner learnt about the attachment of the ‘property-in-dispute’,

first made in the year 2015. By means of a Supplementary

Affidavit filed to the writ petition, a copy of the Khatauni has been

attached which document is admitted to the State. It recites, the

fact of the attachment order made on 18.06.2015 - over the

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‘property-in-dispute’ i.e., after the sale-deed came to be

registered.

6.Relying on Section 34 of U.P Trade Tax Act, 1948

(hereinafter referred to as the 'Act, 1948'), it has been first

submitted by Sri Sinha, the first charge over the ‘property-in-

dispute’ was created in the year 2005, in favour of the State

Bank of India. Undisputedly, it is a ‘banking company’ as defined

under the Banking Regulation Act, 1949 (hereinafter referred to

as the Banking Act). Therefore, by virtue of Section 34(2) of the

Act, nothing contained in Section 34(1) of the Act, would apply to

the transaction in question. Consequently, the sale-deed dated

16.07.2014 was wholly valid and the petitioner cannot be

deprived of its property on account of outstanding tax dues, of

the ‘assessee-in-default’. Alternatively, it has been submitted,

even if Section 34(1) of the Act was applicable, no fraud was

committed by the petitioner. In that regard, it is submitted, the

respondent bank was a secured creditor of the ‘assessee-in-

default’ and undisputedly, full, and fair consideration had been

paid; no rights had been reserved in favour of the transferor and

the parties to the sale deed were unrelated. Even then, if at all,

the only remedy available to the revenue authority was to

institute a proper suit proceeding as in any case such a

transaction would remain voidable and it is not void ab initio. No

suit proceeding having been instituted within limitation, the

revenue authorities cannot resist the absolute right and title of

the petitioner over the ‘property-in-dispute’.

7.Reliance has been placed on two decisions of the Privy

Council in Musahar Sahu and another vs Hakim Lal and another

reported in AIR 1915 PC 115 and Ma Pwa May and another vs

S.R.M.M.A. Chettyar Firm reported in AIR 1929 PC 279. That

principle of law was applied and followed by the Supreme Court

in Chogmal Bhandari vs Deputy Commissioner Tax Officer

reported in (1976) 3 SSC 749 and in Union of India vs

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Rajeshwari and Co. and others reported in (1986) 3 SCC 426.

Still later, this principle was applied by the Supreme Court in

Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co. and others

reported in (2000) 5 SCC 694. As to the remedy, if at all being

suit proceedings, reliance has been placed on Chogmal

Bhandari (Supra).

8.In short, it has been submitted, in absence of any contrary

statutory provision creating preferential right in favour of the

Crown/State, the secured creditor stands in preference over the

Crown/State dues. A valid charge was created over the ‘property-

in-dispute’, in favour of the State Bank of India, a ‘banking

company’ within the meaning of that term under Section 34(2) of

the Act, 1948. It came to be lifted to allow the execution of the

sale-deed in favour of the petitioner, after satisfaction of that

charge. Nothing contained in Section 34(1) of the Act, 1948 may

apply to override that sale- deed. Alternatively, it has been

submitted, no fraud was committed. Therefore, resort may not be

had to the provisions of Section 34(1) of the Act. In any case, the

remedy if any, would be to institute a suit proceeding and seek a

declaration, before resorting to coercive measures against the

petitioner.

9.Responding to the above, the learned Standing Counsel

has vehemently urged, the first relief sought in the writ petition is

wholly inadequate, since the attachment order dated 18.06.2015

has neither been placed on record nor it has been specifically

challenged. At the same time, the learned Standing Counsel

does not dispute the existence of the attachment order dated

18.06.2015. It is also not the case of the revenue that there was

any other attachment order made, prior to the first charge

created over the ‘property-in-dispute’, in favour of the State Bank

of India.

10.Relying on the contents of the counter affidavit, it has been

next submitted - various demands of tax and other dues (under

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the taxation enactments), were in existence against the

‘assessee-in-default’, since long, from A.Y. 1992-93 onward.

These dues were in the knowledge of the petitioner. Though the

petitioner asserts, it first acquired that knowledge in the year

2015, at the same time, it is the own case of the petitioner that its

registration application filed under the Act had been rejected, in

the year 2015 itself i.e., prior to be attachment order. That

rejection order was passed, for reason of pre-existing tax dues

against the ‘assessee-in-default’.

11.Last, reliance has been placed on the recital contained in

the sale-deed dated 16.07.2014; the letter issued by the Bank

dated 15.7.2014 (annexed to the writ petition) and letter dated

01.10.2015. Relying on the same, the learned Standing Counsel

has vehemently urged - on 15.07.2014 itself the State Bank of

India lifted its charge over the ‘property-in-dispute’. Thus, no

charge existed on 16.07.2014 when the sale-deed was executed

by the ‘assessee-in-default’. There is a complete absence of any

recital in that sale-deed of any existing charge in favour of the

State Bank of India. Also, with equal vehemence, it has been

stressed, the sale-deed dated 16.7.2014 was neither executed in

favour of nor, it has been executed by the State Bank of India.

Instead, it has been executed by the ‘assessee-in-default’, itself.

Hence, the sale-deed dated 16.07.2014 is not protected under

Section 34(2) of the Act.

12.Next, relying on a decision of a co-ordinate Bench of this

Court in the case of Reflex Industries and another vs. State of

U.P. and others reported in 2004 (4) ACC 3471, it has been

submitted, in similar circumstances, such a transaction was

found to fraudulent and therefore void ab initio. Therefore, there

is no requirement of law to compel the revenue authorities to first

institute a suit proceeding and to then seek recovery from the

‘property-in-dispute’, only upon a decree in that suit.

13.Relying on Rule 285 of U.P Z. A & L.R Rules, 1952, it has

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been submitted, there exists a preferential right in favour of the

revenue authorities, over the ‘property-in-dispute’. Last, a plea of

alternative remedy has been raised. It has been submitted, if at

all, objections should have been raised by the petitioner before

the Collector/Commissioner under the provisions of U.P.Z.A &

L.R, Rules, 1952, before approaching this Court.

14.Having heard the learned counsel for the parties and

perused the record, we observe, it is too late in the day to accept

the plea of alternative remedy. The writ petition had been filed in

the year 2015. The revenue and the State Bank of India are

represented. They have filed pleadings. The matter is ripe for

final hearing. An interim order is also operating in favour of the

petitioner. Further, the issue raised is purely legal and it does not

arise on disputed facts. Therefore, the objection raised and

pressed at this stage by the learned Standing Counsel, on that

count, is rejected.

15.Again, no reliance may be placed on Rule 285N of U.P.Z.A.

& L.R., Rules, 1952. It would apply only if the sale of the

‘property-in-dispute’ had been confirmed under that enactment.

Here, admittedly, the ‘property-in-dispute’ was first attached by

the respondent authorities, almost a year after its purchase by

the petitioner. Also, no auction ever took place. Clearly, Rule 285

N of the U.P. Z.A. & L.R., Rules is inapplicable to the present

facts.

16.As to the main issue of applicability of Section 34 of the

Act, 1948, it would be fruitful to our discussion to extract that

provision, in entirety. It reads as below.

“34(1) Transfer to defraud revenue void.-(1) Where, during the

pendency of any proceedings under this Act, any person liable to

pay any tax or other dues creates a charge on, or transfers any

[movable or immovable] property belonging to him in favour of any

other person with the intention of defrauding any such tax or other

dues, such charge or transfer shall be void as against any claim in

respect of any tax or other dues payable by such person as a result

of the completion of the said proceedings:

Provided that nothing in this section shall impair the rights of a

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transferee in good faith and for consideration.

(2) Nothing in sub-section (1) shall apply to a charge or transfer in

favour of a banking company as defined in the Banking Regulation

Act, 1949, or any other financial institution specified by the State

Government by notification in this behalf.

17.Undisputedly, the State Bank of India is a ‘banking

company’ defined under the Banking Act. Therefore, it became

open to it to raise a plea based on Section 34(2) of the Act. A

plain reading of that provision brings out the existence of a non

obstante clause created by the legislature. Thus, nothing

contained in Section 34(1) of the Act, 1948 shall apply to (i) a

charge created in favour of the State Bank of India or (ii) transfer

made ‘in favour’ of the State Bank of India.

18.Undisputedly, on 15.07.2014, State Bank of India wrote to

the ‘assessee-in-default’, as below:

“SAMB/CL-II/693

DT: 15/07/2014

M/S Kanha Vanaspati Ltd.

126, Ayodhya Nagar,

Ujhani, Distt. Budaun (U.P.)

Dear Sirs,

STRESSED ASSETS MANAGEMENT BRANCH

M/S KANHA VANASPATI LTD.

We advise that the Bank has released the property of M/s. Kanha

Vanaspati Ltd. situated at Khasra No.8, 9, 10 & 126, Gram Gathona,

Ujhani, District Budaun (U.P.), which was mortgaged to the Bank, on

receipt of payment as per terms of approved OTS entered between

the Bank and the above company. Henceforth the Bank will not have

any charge over the said land.”

19.Again, on 01.10.2015, the State Bank of India wrote to the

petitioner, as under.

“SAMB-ND/CL-II/2015-16/885 Date: October 01, 2015

The Authorised Signatory

Gem Aromatic Pvt. Ltd.

A/410, Kailash Complex, Park Site

Vikhroli-Powai Link road, Vikroli(W)

Dear Sir,

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M/s KANHA VANASPATI LIMITED

With reference to your letter dated September 14, 2015, we reply in

seriatim as follows:

The immovable property i.e. land at Khasra No.8, 9, 10 & 126, Gram

Gathona, Ujhani, Distt. Budaun (U.P.) charged to our Bank, was sold

to you by M/s Kanha Vanaspati Limited for a consideration of Rs.

2.61 crores.

In this connection, we have not confirmed at any point of time that

there was any charge encumbrance or attachment or coercive

proceedings on the said property as alleged in your letter except our

charge which is evident form our letter no.SAMB/CL-II/594 dated

27.06.2014 addressed to yourselves. It had been specifically

confirmed to you that the charge over the land at Khasra no.8, 9, 10

& 126, Gram Gathona, Ujhani, Distt. Budaun(U.P.) will be released

and the original title deeds and possession of the property will be

handed over to you on receipt of Rs.2.61 crores (Rs. Two crores

sixty-one lacs only) as per under noted schedule of payment.

1. Rs.11.00 lacs vide cheque no.723031 dated 27.06.2014 as up

front payment.

2. Rs. 250.00 lacs through RTGS by 15.07.2014(+/- 5 days).

We would also like to bring to your notice that the MOU dated

27.06.2014 entered between M/s Gem Aromatics Pvt. Ltd. Mumbai

(Buyer) and M/s Kanha Vanaspati Ltd. (seller) states that the seller

has agreed to sell the said plot/ property for a total consideration of

Rs.2.61 crores and the buyer agrees to buy the same and further

states that the buyer will be idemnified for any statutory or other

liabilities including any defective title found if any at a later date by

the seller. It is encumberance upon M/s Kanha Vanaspati Ltd.(seller)

to discharge such statutory or other liabilites on the said property

and to disclose details any encumbrances or statutory liabilities etc.

We reiterate once again that nowhere at any point of time, have we

ever represented that there is no charge, liability, encumbrance, and

proceedings over the property except our charge. Therefore, the

allegations made by you are baseless and we are not responsible for

any kind of loss referred by you.”

20.Reading the above letters along with the Certificate issued

by the Registrar of Companies, Kanpur, dated 06.08.2014, it is

clear, a charge was created (on 08.11.2005), in favour of the

State Bank of India, over the ‘property-in-dispute’ i.e., the land

bearing Khasra Nos. 8, 9, 10 & 126, Gram Gathona, Ujhani,

Distt. Budaun(U.P.). That was done almost nine years before the

impugned sale-deed was executed on 16.07.2014, in favour of

the petitioner. There is no evidence that the petitioner was in the

picture at that stage. Also, the existence of that charge (in the

first place), is undisputed by the revenue authorities. Clearly, that

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charge on the ‘property-in-dispute’ was created ‘in favour’ of the

State Bank of India.

21.Further, the impugned sale-deed dated 16.07.2014 was

executed in pursuance of the One Time Settlement (OTS in

short), reached between the ‘assessee-in-default’ and the State

Bank of India. Towards that settlement reached, the amount of

Rs. 2.61 crore was paid by the petitioner to the State Bank of

India, prior to execution of that sale-deed, under the apparently

consequential Memorandum of Understanding (MOU in short)

dated 27.06.2014 executed between the petitioner and the

‘assessee-in-default’/respondent no. 7. Thus, Rs. 11,00,000/- (on

26.06.2014) and Rs. 2,50,00,000/- (on or before 15.07.2014),

were paid by the petitioner to the State Bank of India, under that

MOU. These facts emerge from the recital made in the letters

dated 15.07.2014 and 01.10.2015 written by the State Bank of

India. They are wholly corroborated by the recital made in the

impugned sale-deed dated 16.07.2014, and upon being duly

evidenced by the representatives of the State Bank of India and

the banker of the present petitioner. Both bankers signed that

deed as marginal witnesses. There is nothing on record to doubt

the due issuance or execution of such documents, in the manner

narrated above. Clearly, the ‘property-in-dispute’ was under the

charge created in favour of the State Bank of India, till before the

execution of the sale-deed dated 16.07.2014.

22.In face of the aforesaid charge (over the ‘property-in-

dispute’), created ‘in favour’ of the State Bank of India on

08.11.2005, it survives for consideration whether despite that

charge being satisfied on 15.07.2014, it insulated the transfer of

the ‘property-in-dispute’ made in favour of the petitioner, on

16.07.2014, from the recoveries being sought by the revenue

authorities. Section 34(2) of the Act insulates a 'charge' or

'transfer' made ‘in favour of’ a ‘banking company’, as defined

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under the Banking Act. Hence, spoken in the literal sense, that

transfer may not appear to be directly protected under sub-

section (2) of section 34.

23.Interestingly, the meaning of the word “charged’ (used in

Articles 291 and 112(2) of the Constitution of India), came up for

consideration in the context of the challenge raised to the

Presidential Orders de-recognising the erstwhile Rulers of the

former Indian States, in Madhav Rao Jivaji Rao Scindia v. Union

of India, reported in (1971) 1 SCC 85. While dealing with that

question, the majority view of the nine-Judge Constitution bench

of the Supreme Court, took note of the meaning attached to the

word ‘charged’, under the general law relating to transfer of

property. It was thus observed:

“122. In support of his contention that by using the expression

“charged” in Articles 291 and 112(2) it is only intended to enact that

the expenditure is not subject to the vote of the Parliament and that

no priority in payment in respect of expenditure is declared, and in

any event the expression “charged” creates no obligation

enforceable at the instance of the person for whose benefit it is

charged, the Attorney-General invited our attention to different

provisions of the Constitution in each of which there is both a charge

on the Consolidated Fund of an item of expenditure and an express

direction for payment of the prescribed sum, and contended that

Article 291 which merely recognizes the obligations of the Union

Government to abide by the pre-existing covenants, creates no

obligation for payment of the Privy Purse to the Rulers. He urged

that the word “charge” in the Constitution in dealing with State

financial procedure has the meaning it has in accountancy practiced

it merely specifies the source from which payment is to be made and

does not create a right in the Ruler or any enforceable obligation

against the Union. Under the general law relating to transfer of

property, a charge does not give rise to a right in rem : the right is

however more than a mere personal obligation, for it is a jus ad rem

a right to payment out of property specified : Govind Chandra

Pal v. Dwarka Nath Pal [ILR 35 Cal 837, 843] ; Raja Sri Shiva

Prasad v. Beni Madhab [ILR 1 Pat 387] . A charge gives a right to

payment out of a specific fund or property, and a right to prior

payment; but it does not create a right in rem in the fund or the

property. A charge therefore gives rise to a right to receive payment,

out of a specified fund or property in preference over others. In the

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absence of a clear indication to the contrary, it would be difficult to

hold that the expression “charged” used in the contest of financial

matters of the State, has a different meaning. Our Constitution-

makers borrowed the concept of a Consolidated Fund from the

British system. That has also been adopted in the Constitutions of

Canada, Australia, South Africa and other Commonwealth Countries.

Certain Acts in the United Kingdom and elsewhere prescribe a

sequence of priorities in payment of different heads of expenditure

charged on the Consolidated Fund; Section I Consolidated Funds

Act, 1816; Section 1 The House of Commons (Speaker) Act, 1832;

Sections 103, 104 and 105 of the British North America Act, 1867;

Sections 117, 119 Constitution of the Union of South Africa, 1909;

Sections 81 and 82 of the Australian Constitution 1900”.

(emphasis supplied)

24.Pertinent to our discussion, the ‘charge’ created in favour

of the State Bank of India clearly gave rise to a right to the State

Bank of India to receive payment, out of the specified property

i.e., the ‘property-in-dispute’, in preference over others. Section

34(1) seeks to create a part exception to that well established

rule under the ‘general law’, in certain circumstances, in favour of

the Crown/state dues. At the same time, Section 34(2) of the Act,

overrides Section 34(1) of the Act and thus completely negates

the exception and makes that pre-existing preferential right

absolute. That effect arises in law, by virtue of the ‘charge’

created in favour of a ‘banking company’ as defined under the

Banking Act.

25.Thus, it cannot be disputed - had the ‘charge’ created over

the ‘property-in-dispute’, continued to exist till date, the

respondent revenue authorities would continue to stand

restrained from proceeding against the ‘property-in-dispute’, for

recovery of their dues. Also, that direct consequence of section

34(2) of the Act would have been caused, if the State Bank of

India had obtained the sale-deed of the ‘property-in-dispute’, in

its favour, either pursuant to that charge or otherwise, to recover

its dues. It is so because, Section 34(2) of the Act completely

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negates Section 34(1) of the Act by use of the words - “Nothing

in sub-section (1) shall apply”. That overriding effect may be

avoided, only if the revenue were to contend, either that the

charge was never created, or it was not created in favour of a

‘banking company’ as defined under The Banking Act. Clearly,

that is not the case here.

26.Undoubtedly, a non obstante clause appearing in sub-Sec-

tion (2) of Section 34 of the Act, is a legislative device employed

to give an overriding effect to that provision of law, over section

34(1) of the Act. In Union of India v. G.M. Kokil, 1984 Supp SCC

196, the Supreme Court while dealing with a similar clause

appearing under the Factories Act, reasoned and held as under:

“11. Section 70, so far as is relevant, says “the provisions of the

Factories Act shall, notwithstanding anything contained in that Act,

apply to all persons employed in and in connection with a factory”. It

is well-known that a non obstante clause is a legislative device which

is usually employed to give overriding effect to certain provisions

over some contrary provisions that may be found either in the same

enactment or some other enactment, that is to say, to avoid the

operation and effect of all contrary provisions. Thus the non obstante

clause in Section 70, namely, “notwithstanding anything contained in

that Act” must mean notwithstanding anything to the contrary

contained in that Act and as such it must refer to the exempting

provisions which would be contrary to the general applicability of the

Act. In other words, as all the relevant provisions of the Act are made

applicable to a factory notwithstanding anything to the contrary

contained in it, it must have the effect of excluding the operation of

the exemption provisions. Just as because of the non obstante

clause the Act is applicable even to employees in the factory who

might not be ‘workers’ under Section 2(1), the same non obstante

clause will keep away the applicability of exemption provisions qua

all those working in the factory. The Labour Court, in our view, was,

therefore, right in taking the view that because of the non obstante

clause Section 64 read with Rule 100 itself would not apply to the

respondents and they would be entitled to claim overtime wages

under Section 59 of that Act read with Section 70 of the Bombay

Shops and Establishments Act, 1948”.

(emphasis supplied)

27.Therefore, to accept the objection raised by Shri. Hajela -

that the protective gaze of section 34(2) of the Act did not extend

to the sale-deed dated 16.07.2014 executed by the ‘assessee-in-

default’ (in favour of the petitioner), may lead to unintended,

anomalous, inconvenient, and even absurd results, in law. If

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accepted, a secured creditor may hold safe a secured asset till

eternity, both against the debtor and the world at large, and no

other creditor may attach it, till all dues of that secured creditor

were satisfied. However, that secured creditor may never be

enabled to negotiate a sale of such secured asset, to recover its

dues, without first obtaining a prior transfer, in its favour.

28.Thus, in absence of any statutory intervention made, if the

submission raised by the learned Standing Counsel is accepted,

it would introduce an unreasonable restriction on the free play of

section 34(2) of the Act. It would, without any legislative intent or

purpose shown to exist, dictate a material alteration of the rights

of the parties and force a change in the mode and way, a

‘banking company’ under the Banking Act may conduct itself viz

a viz its secured assets. Though the debt of the State Bank of

India may remain a secured debt against its charge existing on

the ‘property-in-dispute’ and it may remain entitled to recover its

dues upon sale of the ‘property-in-dispute’, to the exclusion of

the Crown/state dues, however, that sale may be obtained only

in its own name.

29.There is absolutely no warrant to allow for such an

anomalous, uncertain, and therefore undesirable and even

absurd result to arise. Plainly, there is nothing in the language of

the Act, to allow for such a restrictive condition to be read into

the words ‘in favour of’ prefixed to the words ‘banking company’

appearing in section 34(2) of the Act. That narrow meaning (as

discussed above) would lead to results that are wholly absurd

and may defeat the very object of enactment of Section 34(2) of

the Act.

30.The Act created indefeasible right in the State Bank of

India, by virtue of its status as a ‘banking company’ as defined

under the Banking Act, occasioned by its charge over the

‘property-in-dispute’. That indefeasible right cannot be lost or

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diluted, merely because in the process of recovering its dues,

that bank chose to negotiate or allow a third-party sale of the

‘property-in-dispute’, in favour of the petitioner, instead of first

obtaining title in it. Therefore, we hold, the words ‘in favour’

appearing in section 34(2) of the Act must be read to refer,

indicate, and include all transfers made to the sole benefit of the

‘banking company’ (as defined under the Banking Act), towards

discharge of its/their outstanding dues, against charge existing

over the “property-in-dispute”.

31.The charge over the ‘property-in-dispute’ being in

existence, in favour of the ‘banking company’ as defined under

the Banking Act, the words ‘in favour’ need not be read literally -

to mandate only such transfer as may have been made to that

‘banking company’ itself. The words “transfer in favour of

banking company” appearing in Section 34(2) of the Act are wide

enough to include within their plain ambit, a transaction of this

nature whereby instead of first obtaining of transfer of the

‘property-in-dispute’, in its own name, the State Bank of India

allowed that charged property to be sold to the petitioner, for the

same purpose, for its benefit namely, to recover its dues from the

‘assessee-in-default’. It is inconsequential that the pre-existing

charge over the ‘property-in-dispute’ was satisfied on 15.07.2014

or that the State Bank of India did not first obtain title in it.

32. We are supported in our approach by the decision of the

Supreme Court in Tirath Singh v. Bachittar Singh, AIR 1955 SC

830. In that case a question arose if the words “all persons”

appearing in section 99(1)(ii) of the Representation of Peoples

Act, 1951, would include a person against whom charge of

corrupt practice may have been proved, for the purpose of issue

of a fresh notice preceding the order of the Election Tribunal as

to corrupt practice committed at an election. Read literally, such

notice was contented to be mandatory. However, that

interpretation was rejected, and the requirement to issue a fresh

15

notice was restricted to refer to any person other than one

against whom proceeding had already been conducted. It was

reasoned and held:

“6. The object of giving notice to a person under the proviso is

obviously to give him an opportunity to be heard before a finding is

given under Section 99(1)(a)(i) that he has committed a corrupt or

illegal practice. This clearly appears from clause (b) of the proviso,

which enacts that the person to whom notice is to be given should

have an opportunity of cross-examining witnesses who had been

examined before and given evidence against him, of calling his own

evidence and of being heard. This is in accordance with the rule of

natural justice which requires that no one should be condemned

without being given an opportunity to be heard. The reason of the

rule, therefore, requires that notice should be given to persons who

had had no previous opportunity in respect of the matters mentioned

in sub-clause (b) to the proviso. Such, for example, would be

witnesses and possibly agents of the parties, as observed

in Nyalchand Virachand v. Election Tribunal [8 Election Law Reports

417, 421] though it is not necessary to decide that point, but it

cannot refer to parties to the petition who have had every opportunity

of taking part in the trial and presenting their case. Where an

election petition is founded on a charge of corrupt practice on the

part of the candidate, that becomes the subject-matter of enquiry in

the petition itself. If at the trial the Tribunal came to the conclusion

that the charge had been proved, then it has to hold under Section

100(2)(b) that the election is void, and pass an order to that effect

under Section 98(d). Section 99(1) enacts that the finding of corrupt

practice under Section 99(1)(a)(i) or naming a person under Section

99(1)(a)(ii) should be at the time of making an order under Section

98. If the contention of the appellant is to be accepted, then the

result will be that even though there was a full trial of the charges set

out in the petition, if the Tribunal is disposed to hold them proved it

has first to give notice of the finding which it proposes to give, to the

parties, and hold a fresh trial of the very matters that had been

already tried. That is an extraordinary result, for which it is difficult to

discover any reason or justification. It was argued by the learned

Attorney-General that the giving to a party to a proceeding a second

opportunity to be heard was not unknown to law, and he cited the

instance of an accused in a warrant case being given a further

opportunity to recall and cross-examine prosecution witnesses after

charge is framed, and of a civil servant being given an opportunity

under Article 311 to show cause against the action proposed to be

taken against him. In a warrant case, the accused is not bound to

cross-examine the prosecution witnesses before charge is framed,

16

and in the case of civil servants, the decision that they are entitled to

a second opportunity was based on the peculiar language of

Sections 240(2) and (3) of the Government of India Act, 1935, and

Article 311 of the Constitution. They are exceptional cases, and do

not furnish any safe or useful guidance in the interpretation of

Section 99”.

(emphasis supplied)

33.Again, in D. Saibaba v. Bar Council of India, (2003) 6 SCC

186 a question arose, if the words “sixty days from the date of

that order” appearing in Section 48-AA of the Advocates Act,

1961 require computation of that time, from the date on which

such order was passed or from the date when that order was

served on the person aggrieved. Departing from the obvious

grammatical meaning of the words, the Supreme Court reasoned

and held:

“16. Placing such a construction, as we propose to, on the provision

of Section 48-AA is permitted by well-settled principles of

interpretation. Justice G.P. Singh states in Principles of Statutory

Interpretation (8th Edn., 2001):

“It may look somewhat paradoxical that plain meaning rule is not

plain and requires some explanation. The rule, that plain words

require no construction, starts with the premise that the words are

plain, which is itself a conclusion reached after construing the words.

It is not possible to decide whether certain words are plain or

ambiguous unless they are studied in their context and construed.”

(p. 45)

The rule of literal interpretation is also not to be read literally. Such

flexibility to the rule has to be attributed as is attributable to the

English language itself.

17. The learned author states again:

“In selecting out of different interpretations ‘the court will adopt that

which is just, reasonable and sensible rather than that which is none

of those things’, as it may be presumed ‘that the legislature should

have used the word in that interpretation which least offends our

sense of justice’.” (p. 113, ibid)

“The courts strongly lean against a construction which reduces the

statute to a futility. A statute or any enacting provision therein must

17

be so construed as to make it effective and operative ‘on the

principle expressed in the maxim: ut res magis valeat quam pereat’.”

(p. 36, ibid)

“If the language used is capable of bearing more than one

construction, in selecting the true meaning regard must be had to the

consequences resulting from adopting the alternative constructions.

A construction that results in hardship, serious inconvenience,

injustice, absurdity or anomaly or which leads to inconsistency or

uncertainty and friction in the system which the statute purports to

regulate has to be rejected and preference should be given to that

construction which avoids such results.” (pp. 112-13, ibid)

18. Reading word for word and assigning a literal meaning to

Section 48-AA would lead to absurdity, futility and to such

consequences as Parliament could have never intended. The

provision has an ambiguity and is capable of being read in more

ways than one. We must, therefore, assign the provision a meaning

— and so read it — as would give life to an otherwise lifeless letter

and enable the power of review conferred thereby being

meaningfully availed and effectively exercised”.

34.As discussed above, in the facts of the present case, there

is absolutely no doubt that the transfer of the ‘property-in-dispute’

took place for the sole benefit of a ‘banking company’ as defined

under the Banking Act. Therefore, that transaction was covered

within the meaning of the words - “in favour of the banking

company”. In such undisputed facts, the non-obstante clause

pre-fixed to sub-Section (2) of Section 34 of the Act, wholly

insulates the sale-deed dated 16.07.2014. In fact, it takes that

sale-deed out of the reach and gaze of sub-Section (1) of

Section 34 of the Act.

35.That piercing gaze of sub-section (1) of Section 34 of the

Act would ever remain confined to tear apart the protective shield

of an otherwise valid sale-deed, if it seeks to protect a

transaction conducted to defraud the revenue, involving a

creditor, other than a ‘banking company’ as defined under the

Banking Act.

36. Resultantly, by virtue of Section 34(1) of the Act, a partial

18

exception arises to the general principle in law, that exists to the

benefit of all secured creditors viz a viz Crown/revenue dues.

This principle was clearly laid down in Musahar Sahu (supra) as

under:

“As a matter of law their Lordships take it to be clear that in a case in

which no consideration of the law of bankruptcy or insolvency

applies there is nothing to prevent a debtor paying one creditor in full

and leaving others unpaid although the result may be that the rest of

his assets will be insufficient to provide for the payment of the rest of

his debts. The law is, in their Lordships' opinion, rightly stated by

Palles C.B. in Inre Moroney(1), where he says: “The right of the

creditors, taken as a whole, is that all the property of the debtor

should be applied in payment of demands of them or some of them,

without any portion of it being parted with without consideration or

reserved or retained by the debtor to their prejudice. Now, it follows

from this, that security given by a debtor to one creditor upon a

portion of or upon all his property, 'although the effect of it or even

the interest of the debtor in making it, may be 'to defeat an expected

execution of another creditor, is not a fraud within the 'Statute,

because notwithstanding such an act, the entire property remains

'available for the creditors or some or one of them, and as the

Statute gives no 'right to rateable distribution, the right of the

creditors by such act is not 'invaded or affected.'

The transfer which defeats or delays creditors is not an instrument

which prefers one creditor to another, but an instrument which

removes, property from the creditors to the benefit of the debtor. The

debtor must not retain a benefit for himself. He may pay one creditor

and leave another unpaid [ Middleton v. Pollock (2 Ch. Div., 108)].

(1) So soon as it is found that the transfer here impeached was

made for adequate consideration in satisfaction of genuine debts,

and without reservation of any benefit to the debtor it follows that no

ground for impeaching it lies in the fact that the plaintiff, who also

was a creditor, was a loser by payment being made to this preferred

creditor-there being in the case no question of bankruptcy.”

37. That principle was followed in Ma Pwa May (Supra). It was

specifically applied by the Supreme Court in Union of India vs

Rajeswari and Co. (supra) in the context of Section 53 of

Transfer of Property Act. Therein the Supreme Court observed

as below:

“9. It seems clear that it is open to a debtor to prefer one or more

creditors over the others in the payment of his debts, and so long as

he retains no benefit in the property the mere circumstance that

some creditors stand paid while others remain unpaid does not

attract the provisions of section 53 of the Transfer of Property Act. It

is not disputed that the debts satisfied by payment of the sale

proceeds are genuine. A faint attempt was made to show that some

of the debts discharged were owed to persons who were also

Directors of the Company. There is no findings by the High Court in

support of that contention. It was also urged that the consideration

which passed for the sale of the assets was inadequate and that the

19

assets had been undervalued. Here again there is no finding to

support the submission. The questions raised are questions of fact,

and this Court will not permit such questions to be raised unless

there is material evidence which has been ignored by the High Court

or the finding reached by the Court is perverse.

10. A point was sought to be made by learned counsel for the

appellant that the transfer of the assets was effected in favour of

Rajeswari & Co. which was not one of the creditors. It has been

found by the High Court that the sale was effected for the purpose of

discharging the debts payable by the Company. Once it is also found

that the consideration was not inadequate it is immaterial, as the

High Court has observed, that the transfer was effected in favour of

a person who was not a creditor. It has been clearly found that the

sale proceeds were employed for paying off the creditors of the

Company.”

38.Besides the above, in The Bank of Bihar vs The State of

Bihar and others reported in (1972) 3 SCC 196, in the context of

right of a pawnee viz a viz the sovereign's right over the pawned

goods, it was held:

“6. In our judgment the High Court is in error in considering that the

rights of the Pawnee who had parted with money in favour of the

pawnor on the security of the goods can be defeated by the goods

being lawfully seized by the Government and the money being made

available to other creditors of the pawnor without the claim of the

Pawnee being fully satisfied. The Pawnee has special property and a

lien which is not of ordinary nature on the goods and so long as his

claim is not satisfied no other creditor of the pawnor has any right to

take away the goods or its price. 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 pawner. 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

sale of the goods pledged with it on the pawnor making a default in

payment of debt.

7. The approach of the trial court was unexceptionable. The plaintiff's

right as a Pawnee could not be extinguished by the seizure of the

goods in its possession inasmuch as the pledge of the goods was

not meant to replace the liability under the cash credit agreement. It

was intended to give the plaintiff a primary right to sell the goods in

satisfaction of the liability of the pawnor. The Cane Commissioner

who was an unsecured creditor could not have any higher rights

than the pawnor and was entitled only to the surplus money after

satisfaction of the plaintiff's dues.

39.That principle was again applied in Dena Bank (supra). It

was held as below:

“10. However, the Crown's preferential right to recovery of debts over

20

other creditors is confined to ordinary or unsecured creditors. The

Common Law of England or the principles of equity and good

conscience (as applicable to India) do not accord the Crown a

preferential right for recovery of its debts over a mortgagee or

pledgee of goods or a secured creditor. It is only in cases where the

Crown's right and that of the subject meet at one and the same time

that the Crown is in general preferred. Where the right of the subject

is complete and perfect before that of the King commences, the rule

does not apply, for there is no point of time at which the two rights

are at conflict, nor can there be a question which of the two ought to

prevail in a case where one, that of the subject, has prevailed

already. In Giles v. Grover 1832 131 ER 563 it has been held that the

Crown has no precedence over a pledgee of goods. In Bank of Bihar

v. State of Bihar & Ors. AIR 1971 SC 1210, the principle has been

recognised by this Court holding that the rights of the pawnee who

has parted with money in favour of the pawnor on the security of the

goods cannot be extinguished even by lawful seizure of goods by

making money available to other creditors of the pawnor without the

claim of the pawnee being first fully satisfied. Rashbehary Ghose

states in Law of Mortgage (T.L.L., Seventh Edition, p.386) It seems a

Government debt in India is not entitled to precedence over a prior

secured debt.”

40.The above noted principle has been consistently applied by

the Supreme Court in M/s Rana Girders Ltd. Vs Union of India

reported in (2013) 10 SCC 746 wherein it was observed:

“18. In so far dues of the Government in the form of tax or excise etc.

are concerned, the Court was of the opinion that rights of the Crown

to recover the dues would prevail over the right of the subject. Crown

debt means the debts due to the State or the King. Such creditors,

however, must be held to mean unsecured creditors. The principle of

Crown debt pertains to the common law principle. When Parliament

or State Legislature makes an enactment, the same would prevail

over the common law and thus the common law principles which

existed on the date of coming into force of the Constitution of India,

must yield to a statutory provision. A debt, which is secured or which

by reason of the provisions of a statute becomes the first charge

over the property must be held to prevail over the Crown debt which

is an unsecured one. On this reasoning, the debt payable to secured

creditor like the Financial Corporation was prioritised vis-a- vis the

Central Excise Dues.”

41.Again, in Principal Commissioner Of Income Tax Vs

Monnet Ispat And Energy Ltd. reported in 2018 (18) SCC 786 the

same principle was applied in the context of dues of Income Tax.

The only exception drawn in certain other decisions is where the

Crown/state dues had been specifically given a preferential right,

by statutory intervention.

42.As discussed above, Section 34 (1) of the Act makes a part

exception to the above noted principle, in cases involving a

21

charge created in favour of a creditor who is not a ‘banking

company’ under the Banking Act. In those cases, alone, the

revenue may be permitted to overlook any charge created or

transfer made in favour of such a creditor, if that was done to

defraud the revenue. Even then, Section 34(1) does not seek to

completely override the otherwise pre-existing preferential right

in favour of a secured creditor. It only draws an exception to that

principle, in specified circumstance - of fraud being committed.

43. To complete our discussion, in any case, if Section 34(1) of

the Act was to be invoked there would have to exist a prima facie

case of fraud made out against the petitioner. In that case the

remedy may not lie with the revenue authorities themselves, by

way of first and only choice. A regular suit proceeding may

always be instituted to seek a declaration in that regard, as was

opined by Supreme Court in Chogmal Bhandari (supra). Though

that law was laid down in the context of Section 54 of the

Transfer of Property Act, at the same time, those provisions

being similar (in material parts) to Section 34 of the Act, that ratio

is wholly applicable. In that decision, it was held as below:

“10. In the special and peculiar facts of the present case which have

been catalogued above, in our opinion, this is not a fit case In which

the sales tax authorities can be allowed to hold that the deed of trust

executed by the settlors was hit by section 53 of the Transfer of

Property Act. It may be noted that under section 53 of the Transfer of

Property Act if a transfer is made with intent to defeat or delay the

creditors it is not void but only voidable. If the transfer is voidable,

then the ' sales tax authorities cannot ignore or disregard it but have

to get it set aside through a properly constituted suit after impleading

necessary parties and praying for the desired relief. In Chutterput

Singh & ors. v. Maharaj Bahadoor and others, (2) the Privy Council

observed as follows:

"No issue was stated in this suit whether the transfers were or were

not liable to be set aside at the instance of Dhunput under section 53

of the Transfer for Property Act, and no decree has been made for

setting them aside. Such an (1) [1974] 2 S.C.R. 655. (2) L.R. 32 I.A.

1.

7-L522SCI/76 issue could be raised and such a decree could be

made only in a suit properly constituted either as to parties or other

wise."

To the same effect is the later decision of the Privy Council in Safer

Hasan and others v. Farid-Ud-Din and others,(l) where Lord

Thankerton made the following observations:

22

"Further, under section 53 the wakfnama would only be voidable at

the option of the "person so defrauded or delayed"... Until so voided

the deed remains valid."

44.At the same time, in a case of fraud established on

admitted/undisputed facts, the principle - fraud vitiates everything

may be invoked to claim such a sale-deed to be void ab initio

and the plea of nullity may be set-up, outside the suit remedies

as well. However, such is not the case here.

45.The decision of the co-ordinate Bench of this Court in the

Reflex Industries and another (supra) is wholly distinguishable. It

was not a case arising under section 34 of the Act. It was also

not a case of involving liquidation of debts of a secured creditor

or a ‘banking company’ under the Banking Act. Rather, it was a

case of sale made to defraud the revenue as stood established

on undisputed facts. The Court lifted the corporate veil and found

the sale-deed set up by the petitioner (in that case), to be void

ab initio. Neither such facts exist in this case, nor that ratio may

arise, in the context of section 34 of the Act.

46.As to the objection with respect to the relief, we find, the

petitioner has sought a writ of Mandamus, to restrain the

respondents from making any recovery from the personal assets

of the petitioner. The exact wording of the prayer clause apart, in

effect that prayer is duly supported by pleadings and material on

record. In absence of any doubt as to the rights of the parties

that stand established on the strength of undisputed facts noted

above, it would be hyper technical to deny relief to the petitioner.

The substance and the essence of the prayer made is clear. It

arises on a clear cause of action admittedly existing, in the

shape of the attachment order enforced by the State

respondents. Also, all material facts giving rise to the cause of

action and for our decision are undisputed.

47.In such undisputed facts and in the position of law

discussed above, the writ Court cannot be seen to be diffident or

23

stingy in granting the consequential relief. A writ Court ensures

obedience to the rule of law. In that process, relief may flow to

the petitioner as a natural outcome of the exercise. Once, the

facts are clear and the crease or doubt in law stands cleared,

relief must flow unhindered, upon application of that law to the

clear facts of the case. It may not be obstructed on mere

technicalities – such as the objection to the exact wording of the

prayer clause.

48.Consequently, the respondents are restrained from

proceeding against the personal assets of the petitioner or the

‘property-in-dispute’, so however, they may remain at liberty to

recover their dues from respondent no. 7 and its properties, in

accordance with law.

49.The writ petition is allowed. No order as to costs.

Order Date :- 7.10.2021

A.Kr.