REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 7128 OF 2008

(Arising out of SLP (C) No.13004 of 2007

Union of India & Ors. … Appellants

Versus

SICOM Ltd. & Anr. … Respondents

WITH

CIVIL APPEAL NO. 7132 OF 2008

(Arising out of SLP (C) No.21137 of 2007)

JUDGMENT

S.B. Sinha, J.

1. Leave granted.

2. Whether realization of the duty under the Central Excise Act will

have priority over the secured debts in terms of the State Financial

Corporation Act, 1951 (1951 Act) is the core question involved herein.
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3. Respondent No.2 borrowed a sum of Rs.51,00,000/- from the first

respondent by an Indenture of Mortgage executed on 22.12.1986.

Indisputably, the mortgage created under the said document is governed by

the provisions of the 1951 Act. It also owed a sum of Rs.19,00,000/- by

way of Central Excise duty for the period April 1983 to May 1988.

Assessment of central excise duty for the said sum was confirmed.

Indisputably the provisions of Sections 27, 29, 30, 31, 32A to 32F, 41

and 41A of the 1951 Act have been extended in favour of the respondent by

the Government of India in exercise of its power conferred upon it under

sub-section (1) of Section 46 of the said Act by issuing an appropriate

notification.

Respondent No.2 having committed defaults in repayment of the

principal amount of loan as also the interest accrued thereon, the first

respondent invoked Section 29 of the 1951 Act by issuing notice to take

possession of the said securities. Actual physical possession of the

mortgaged assets was taken over. Respondent No.2, however, continued to

commit defaults as a result whereof the first respondent recalled the entire

amount of loan wherefor a notice dated 19th March, 1996 was served.

Respondent No.2 owed a sum of Rs.48,08,242/- to the appellant. It

expressed its intention to attach and seize its properties. First Respondent,
 3

however, by its letter dated 11.11.1996 informed them that they had the first

charge of the said properties which are mortgaged in their favour. Despite

the same, the appellant expressed intention to proceed to recover the amount

from the said properties. First Respondent, by its letters dated 21.7.2000

and 22.8.2000 followed by a lawyer’s notice, called upon the appellants to

desist from taking any action against their securities and to remove their

seal, if any, from the properties of the borrower. As the appellant did not

respond thereto, a writ petition was filed. The principal question which, as

noticed hereinbefore, arose for consideration before the High Court was as

to whether dues of the first respondent-corporation will have priority over

the Central Excise dues.

The High Court, upon consideration of a large number of decisions

opined that despite the fact that the dues of the appellant were recoverable

as land revenue in terms of Rule 213(2) of the Central Excise Rules read

with Section 32(g) and Section 151 of the Maharashtra Land Revenue Code,

1966, the same by itself would not mean that a first charge of the appellant-

corporation would give way thereto. It was held :

“30. Turning to provisions of Section 169 of the

Code, sub-section (1) provides that the arrears of
land revenue due on account of land shall be
paramount charge on the land and every part
thereof and shall have precedence over any other
debt demand or claim whatsoever, whether in
 4

respect of mortgage, judgment-decree, execution

or attachment, or otherwise however, against any
land or the holder thereof, sub-section (2) provides
that claim of the State Government to any monies
other than arrears of land, revenue but recoverable
as a revenue demand under Chapter II shall have
priority over all unsecured claims against any land
or holder thereof.
31. It is thus clear that the arrears of land
revenue dues on account of land shall be
paramount charge on the land or every part
thereof. Those will have precedence over any
other dues, debts, demands, or claim. But other
claims of the State Government which are
recoverable as arrears of land revenue get priority
over all unsecured claims against any land of
holder. In the case of secured loan of the
Government and other creditors, priority will
depend upon precedence of such loan, it is thus
clear that security of the Corporation being prior
in point of time, it being in the nature of mortgage
of priority, the dues claimed by Corporation will
have priority over the dues of Customs.”

Ms. Sunita Rao, learned counsel appearing on behalf of the appellant,

would submit that the crown debt and, in particular, arrears of tax will have

a priority over all other debts and in that view of the matter, the impugned

judgment is wholly unsustainable. Strong reliance has been placed in this

behalf upon a decision of this Court in Macson Marbles Pvt. Ltd. v. Union

of India [2003 (158) ELT 424 (SC)].

Mr. Shekhar Naphade, Learned senior counsel appearing on behalf of

the respondent, on the other hand, submitted that principle that a crown debt
 5

prevails over other debts is confined only to the unsecured ones as secured

debts will always prevail over a crown debt. Our attention in this behalf has

been drawn to the non obstante clause contained in Section 56 of the 1951

Act. It was furthermore contended that for the self-same reason Section

529A in the Companies Act was inserted in terms by way of special

provisions creating charge over the property and some of the State

Governments also amended their Sales Tax Laws incorporating such a

provision. The Central Government also with that view, amended the

Employees Provident Fund and (Miscellaneous) Provisions Act, 1952 and

Employees State Insurance Act, 1948.

The learned counsel appears to be right.

Generally, the rights of the crown to recover the debt would prevail

over the right of a subject. Crown debt means the debts due to the State or

the king; debts which a prerogative entitles the Crown to claim priority for

before all other creditors. [See Advanced Law Lexicon by P. Ramanatha

Aiyear (3rd Edn.) p. 1147]. Such creditors, however, must be held to mean

unsecured creditors. Principle of Crown debt as such pertains to the

common law principle. A common law which is a law within the meaning

of Article 13 of the Constitution is saved in terms of Article 372 thereof.

Those principles of common law, thus, which were existing at the time of
 6

coming into force of the Constitution of India are saved by reason of the

aforementioned provision. A debt which is secured or which by reason of

the provisions of a statute becomes the first charge over the property having

regard to the plain meaning of Article 372 of the Constitution of India must

be held to prevail over the Crown debt which is an unsecured one. It is trite

that when a Parliament or State Legislature makes an enactment, the same

would prevail over the common law.

Thus, the common law principle which was existing on the date of

coming into force of the Constitution of India must yield to a statutory

provision.

To achieve the same purpose, the Parliament as also the State

Legislatures inserted provisions in various statutes, some of which have

been referred to hereinbefore providing that the statutory dues shall be the

first charge over the properties of the tax-payer. This aspect of the matter

has been considered by this Court in a series of judgments.

In M/s. Builders Supply Corporation v. The Union of India & Ors.

[AIR 1965 SC 1061], this Court construing Section 46(2) of the Income Tax

Act, 1922 which enabled the Income Tax Officer to forward to the Collector

a certificate specifying the amount of arrears due from an assessee and

requiring the Collector, on receipt of such certificate, to proceed to recover

 7

from the assessee in question the amount specified as if it were an arrear of

land revenue, held :

“Section 46(2) does not deal with the doctrine of

the priority of Crown debts at all; it merely
provides for the recovery of the arrears of tax due
from an assessee as it were an arrear of land
revenue. This provision cannot be said to convert
arrears of tax into arrears of land revenue either;
all that it purports to do is to indicate that after
receiving the certificate from the Income-tax
Officer, the Collector has to proceed to recover the
arrears in question as if the said arrears were
arrears of land revenue. We have already seen that
other alternative remedies for the recovery of
arrears of land revenue are prescribed by sub-
section (3) and (5) of section 46. In making a
provision for recovery of arrears of tax, it cannot
be said that section 46 deals with or provides for
the principal of priority of tax dues at all; and so, it
is impossible to accede to the argument that
section 46 in terms displaces the application of the
said doctrine in the present proceedings.”

{See also Superintendent and Remembrancer of Legal Affairs, West

Bengal v. Corporation of Calcutta [AIR 1967 SC 997]}

Yet again in Bank of Bihar v. State of Bihar & Ors. [AIR 1971 SC

1210], it was laid down :

“4. Now it is common ground that the plaintiff

(which is the appellant before us) held the sugar
which was seized from its custody as security for
 8

payment of the debts or advances made to

Defendant 2 in its cash credit account. There were
arrears of certain cess due from Defendant 2. As
stated before, the Cane Commissioner took
proceedings under the Public Demands Recovery
Act and attached the price of the sugar which had
been deposited by the appropriate authorities in
the Government Treasury instead of being
paid to the plaintiff. The Cane Commissioner
indisputably did not have any right of priority over
the other creditors of Defendant 2 and, in
particular, the secured creditors. Section 172 of the
Contract Act defines a pledge to mean the
bailment of goods as security for payment of debt
or performance of a promise.”

{See also Revathinnal Balagopala Varma v.

His Highness Sri Padmanabhadasa Varma (since
deceased) & Ors. [1991 (2) SCALE 1142]}.

These aspects of the matter, however, have been considered at some

length by a Three Judge Bench of this Court in Dena Bank v. Bhikhabhai

Prabhudas Parekh & Co. & Ors. [(2000) 5 SCC 694]. Dealing extensively

with the doctrine of priority to Crown Debts, it was held:

“7. What is the common law doctrine of priority or

precedence of Crown debts? Halsbury, dealing
with general rights of the Crown in relation to
property, states that where the Crown’s right and
that of a subject meet at one and the same time,
that of the Crown is in general preferred, the rule
being “detur digniori” (Laws of England, 4th
Edn., Vol. 8, para 1076, at p. 666). Herbert
Broom states:
 9

“Quando jus domini regis et subditi concurrunt

jus regis praeferri debet.—Where the title of the
king and the title of a subject concur, the king’s
title must be preferred. In this case detur digniori
is the rule. ... where the titles of the king and of a
subject concur, the king takes the whole. ... where
the king’s title and that of a subject concur, or are
in conflict, the king’s title is to be preferred.”
(Legal Maxims, 10th Edn., pp. 35-36)
This common law doctrine of priority of State’s
debts has been recognised by the High Courts of
India as applicable in British India before 1950
and hence the doctrine has been treated as “law in
force” within the meaning of Article 372(1) of
Constitution.”

It was, furthermore, observed :

“10. However, the Crown’s preferential right to

recovery of debts over 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 it has been held that the Crown has no
precedence over a pledgee of goods. In Bank of
Bihar v. State of Bihar the principle has been
recognised by this Court holding that the rights of
the pawnee who has parted with money in favour
 10

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 (TLL, 7th Edn., p. 386) — “It
seems a government debt in India is not entitled to
precedence over a prior secured debt.”

The principles enunciated therein have been reiterated by the Andhra

Pradesh High Court in Sitani Taxtiles & Fabrics (P) Ltd. v. Asstt.

Commissioner of Customs & Central Excise, Hyderabad-I [1999 (106) ELT

296 (AP)] where the applicability of the provisions of the 1951 Act vis-à-vis

the Central Excise dues were in question holding:

“22. From the above it follows: That in the case

of a pledge, pawnee has special property and lien
which is not of an 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
goods or its price. The right of a pawnee could
not be extinguished by the subsequent
attachment/seizure of the goods under any other
law. It gives the Pawnee a primary right to sell the
goods in satisfaction of the liability of the pawner.
An unsecured creditor could not have any higher
rights than the pawner and was entitled only to the
surplus money after satisfaction of the secured
creditor’s dues.”
 11

The principles laid down in Dena Bank were reiterated recently in

Bank of India v. Siriguppa Sugars & Cheimicals Ltd. [(2007) 8 SCC 353]

wherein it was held:

“There is no dispute that the sugar was pledged

with the appellant Bank for securing a loan of the
first respondent and the loan had not been repaid.
The goods were forcibly taken possession of at the
instance of the revenue recovery authority from
the custody of the pawnee, the appellant bank. In
view of the fact that the goods were validly
pawned to the appellant bank, the rights of the
appellant bank as pawnee cannot be affected by
the orders of the Cane Commissioner or the
demands made by him or the demands made on
behalf of the workmen. Both the Cane
Commissioner and the workmen in the absence of
a liquidation, under Section 529 and 529-A of the
Companies Act, 1956, stand only as unsecured
creditor and their rights cannot prevail over the
rights of the pawnee of the goods. Thus, the rights
of the appellant bank over the pawned sugar had
precedence over the claims of the Cane
Commissioner and that of the workmen.”

This Court also in State Bank of Bikaner & Jaipur v. National Iron &

Steel Rolling Corporation & Ors. [(1995) 2 SCC 19], stated the law thus:

“6. The claim of the Commercial Taxes Officer,

Bharatpur rests on the provisions of Section 11-
AAAA of the Rajasthan Sales Tax Act, 1954.
Section 11-AAAA has been introduced in the
Rajasthan Sales Tax Act, 1954 by way of an
amendment in 1989. Section 11-AAAA is as
follows:
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“11-AAAA. Liability under this Act to be

the first charge.— 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.”
Under this section the amount of sales tax or any
other sum due and payable by a dealer or any other
person under the Rajasthan Sales Tax Act, 1954, is
a first charge on the property of the dealer or of
such person. It is on account of the provisions of
this section that the Commercial Taxes Officer
claimed priority for the recovery of the sales tax
dues from the sale proceeds of the mortgaged
property. The appellant, however, contended that
since the mortgage in their favour is prior in point
of time, their claim will have precedence over the
claim of the sales tax authorities.”

If a company had a subsisting interest despite a lawful seizure, there

cannot be any doubt whatsoever that a charge /mortgage over immoveable

property will have the same consequence.

{See also KSIIDC Ltd. v. Secretary, Ministry of Commerce [2005

(187) ELT 12 (Kar)]}.

In ICICI Bank Ltd. (Since substituted by Standard Chartered Bank)

V. SIDCO Leathers Ltd. & Ors. [(2006) 10 SCC 452], this Court held as

under:
 13

“48. Section 9 of the Companies Act only states

that provisions thereof would override the
memorandum or articles of association of the
company or any other agreement executed or
resolution passed by the company. There does not
exist any provision in the Companies Act which
provides that the provisions of Section 48 of the
Transfer of Property Act would not be applicable
in relation to the affairs of a company. Unless,
expressly or by necessary implication, such a
provision contrary to or inconsistent therewith
carrying a different intent can be found in the
Companies Act, Section 48 of the Transfer of
Property Act, cannot be held to be inapplicable.

49. Section 48 of the Transfer of Property Act

reads as under:
“48. Priority of rights created by transfer.—
Where a person purports to create by
transfer at different times rights in or over
the same immovable property, and such
rights cannot all exist or be exercised to
their full extent together, each later created
right shall, in the absence of a special
contract or reservation binding the earlier
transferees, be subject to the rights
previously created.”

50. The said provision, as noticed hereinbefore,

deals with a specific situation. The exceptions to
the provisions of Section 48 are as under:
(i) where parties execute a registered deed at
any point in time which is subsequent to a
prior but an unregistered deed. This is also
subject to the doctrine of notice i.e. that
parties to the registered deed executed after
the unregistered deed did not have notice of
the same;
 14

(ii) where there are exceptions carved out by

a statute—for example, Section 98 of the
Bengal Tenancy Act;
(iii) a mortgage executed on the directions
of the court to preserve a property;
(iv) where a “salvage lien” is created i.e.
where lien is created for moneys advanced
for the purposes of saving the property from
destruction or forfeiture. The salvage lien is
confined in English law to maritime lien.”

Strong reliance, however, has been placed by Ms. Sunita Rao on

Union of India v. Somasundram Mills (P) Ltd. & Anr. [(1985) 2 SCC 40]

wherein this Court while construing the provisions of sub-section (2) and

(3) of Section 73 of the Code of Civil Procedure, held as under :

“It is a general principle of law that debts due to

the State are entitled to priority over all other
debts. If a decree holder brings a judgment-
debtor’s property to sale and the sale proceeds are
lying in deposit in court, the State may, even
without prior attachment exercise its right to
priority by making an application to the executing
court for payment out. If however, the State does
not choose to apply to the court for payment of its
dues from the amount lying in deposit in the court
but allows the amount to be taken away by some
other attaching decree holder, the State cannot
thereafter make an application for payment of its
dues from the sale proceeds since there is no
amount left with the court to be paid to the State.
However, if the State had already effected an
attachment of the property which was sold even
before its sale, the State would be entitled to
 15

recover the sale proceeds from whoever has

received the amount from the court filing a suit.
Section 73(3) read with 73(2) CPC contemplate
such a relief being granted in a suit.”

This Court in that case was dealing with conflict of interest between a

secured creditor and an unsecured creditor and not with a question we have

to deal with.

Reliance has also been placed by Ms. Rao on Macson Marbles Pvt.

Ltd. (supra) wherein the dues under Central Excise Act was held to be

recoverable from an auction purchaser, stating :

“7. We are not impressed with the argument

that the State Act is a special enactment and the
same would prevail over the Central Excise Act.
Each of them is a special enactment and unless in
the operation of the same any conflict arises this
aspect need not be examined. In this case, no such
conflict arises between the corporation and the
Excise Department. Hence it is unnecessary to
examine this aspect of the matter.
8. The Department having initiated the
proceedings under Section 11A of this Act
adjudicated liability of respondent No.4 and held
that respondent No.4 is also liable to pay penalty
in a sum of Rs.3 lakhs while the Excise dues liable
would be in the order of a lakh or so. It is difficult
to conceive that the appellant had any opportunity
to participate in the adjudication proceedings and
contend against the levy of the penalty. Therefore,
in the facts and circumstances of this case, we
think it appropriate to direct that the said amount,
if already paid, shall be refunded within a period
 16

of three months. In other respects, the order made

by the High Court shall remain undisputed. The
appeal is disposed of accordingly.”

The decision, therefore, was rendered in the facts of that case. The

issue with which we are directly concerned did not arise for consideration

therein. The Court also did not notice the binding precedent of Dena Bank

as also other decisions referred to hereinbefore.

Section 11 of the Central Excise Act, 1944 reads as under :

“Section 11.—Recovery of sums due to

Government—In respect of duty and any other
sums of any kind payable to the Central
Government under any of the provisions of this
Act or of the rules made thereunder, including the
amount required to be paid to the credit of the
Central Government under section 11D the officer
empowered by the Central Board of Excise and
Customs constituted under the Central Boards of
Revenue Act, 1963 (54 of 1963) to levy such duty
or require the payment of such sums may deduct
the amount so payable from any money owing to
the person from whom such sums may be
recoverable or due which may be in his hands or
under his disposal or control, or may recover the
amount by attachment and sale of excisable goods
belonging to such person; and if the amount
payable is not so recovered, he may prepare a
certificate signed by him specifying the amount
due from the person liable to pay the same and
sent it to the Collector of the district in which such
person resides or conducts his business and the
said Collector, on receipt of such certificate, shall
proceed to recover from the said person the
 17

amount specified therein, as if it were an arrear of

land revenue.
Provided that where the person (hereinafter
referred to as predecessor) from whom the duty or
any other sums of any kind, as specified in this
section, is recoverable or due, transfers or
otherwise disposes of his business or trade in
whole or in part, or effects any change in the
ownership thereof, in consequence of which he is
succeeded in such business or trade by any other
person, all excisable goods, materials,
preparations, plants, machineries, vessels, utensils,
implements and articles in the custody or
possession of the person so succeeding may also
be attached and sold by such officer empowered
by the Central Board of Excise and Customs, after
obtaining written approval from the Commissioner
of Central Excise, for the purposes of recovering
such duty or other sums recoverable or due from
such predecessor at the time of such transfer or
otherwise disposal or change.”

A bare perusal of the aforementioned provision clearly goes to show

that the right to recover must start with the sale of excisable goods. It is

only when the dues of the Central Excise Department are not satisfied by

sale of such excisable goods, proceedings may be initiated to recover the

dues as land revenue.

We may notice that a Division Bench of Orissa High Court in

Suburban Ply & Panels Pvt. Ltd. v. Assistant Commissioner of Central

Excise & Customs, BBSR [2002 (144) ELT 257 (Ori)], despite noticing
 18

Dena Bank (supra) as also other decisions, relying on Section 11 of the

Central Excise Act and Rule 230(2) of the Central Excise Rules held as

under :

“The rule is prima facie wide in its operation.

There is no challenge to the validity of the rule in
this proceeding. Going by Sub-Rule (2) of Rule
230, it appears to us that a change in ownership of
the undertaking would not in any manner effect
the obligation of the person liable to pay excise
duty and authority concerned has the right to
proceed against the successor in business or
transferee even though the duty is assessed
subsequently but the liability had arisen before
such transfer. In other words, the right is given to
the department to proceed against the Undertaking
or its products or machinery even though it may be
in the hands of the transferee. On a plain reading
of the rule, it appears to us that if the defaulter had
sold the Undertaking, the transferee would be
liable for the excise duty that remained
outstanding as on the date of transfer in its
favour.”

The High Court, with utmost respect, proceeded on a wrong premise

that only in terms of sub-section (4) of Section 29, proceeds of the sale will

be held in trust by the Financial Corporation and appropriated towards the

discharge of the debt due to it after first applying the proceeds in payment of

cost charges and expenses incurred and the balance to be paid to the person

entitled and having regard to the doctrine of Crown debt, the auction

purchaser must satisfy it.

 19

The Orissa High Court failed to notice the binding precedent of this

Court in Dena Bank in its proper perspective. We are concerned here with

the respective rights of a secured creditor and unsecured creditor over a

property. If the finding of the Orissa High Court is correct, there was no

necessity for the State Legislatures or the Parliament to amend laws

incorporating provisions to create first charge over the properties of the

debtor. The High Court failed to notice Article 372 of the Constitution as

also the well settled principles of law that a statutory provision shall prevail

over the Crown debt.

Furthermore, the right of a State Financial Corporation is a statutory

one. The Act contains a non- obstante clause in Section 46B of the Act

which reads as under :

“Section 46B—Effect of Act on other laws—The

provision of this Act and of any rule or orders
made thereunder shall have effect notwithstanding
anything inconsistent therewith contained in any
other law for the time being in force or in the
memorandum or articles of association of an
industrial concern or in any other instrument
having effect by virtue of any law other than this
Act, but save as aforesaid, the provisions of this
Act shall be in addition to, and not in derogation
of, any other law for the time being applicable to
an industrial concern.”
 20

The non-obstante clause shall not only prevail over the contract but

also other laws. [See Periyar & Pareekanni Rubber Ltd. v. State of Kerala

(2008 (4) SCALE 125)]

For the reasons aforementioned, there is no merit in the appeals. The

appeals are dismissed accordingly with costs. Counsel’s fee quantified to

Rs.50,000/-

……………………………….J.
[S.B. Sinha]

..…………………………..…J.
[Cyriac Joseph]

New Delhi;
December 05, 2008