2024 (9) TMI 1771 - HC - VAT / Sales Tax

Recovery of dues - priority of dues of secured creditor in view of Section 26-E of SARFAESI Act - possession of the property was taken over by the petitioner bank under the provision of SARFAESI Act 2002 - attachment from the property was not removed - HELD THAT - Section 26E of the SARFAESI Act 2002 as referred above has an overriding effect on any other provision of any other law for the time being in force. The aforesaid section provides that the benefit of compliance of the provisions of Chapter IVA and declares that after the registration of security interest the debts due to any secured creditor shall be paid in priority over; (a) all other debts (b) revenues (c) cesses and; (d) other rates payable to the (i) Central Government; (ii) State Government or (iii) any local authority. The section has carved out an exception to the common law principle that a sovereign debt has priority over all other private debts. Hon ble Division Bench in case of Mahadev Cotton Industries vs. Department of Central Sales Tax 2023 (1) TMI 1396 - GUJARAT HIGH COURT held that The petitioner has no concern with the dues of the State Authorities which is of the erstwhile owner. The petitioner has paid full and final sale consideration to respondent No. 5 Bank and if the State Authorities have dispute qua their dues they can avail appropriate legal remedy before appropriate forum against the appropriate person/s. Any of the respondent has no right to disturb the right title and interest of the petitioner qua the property in question. Under these circumstances the petitioner cannot be left in lurch. The petitioner therefore is required to be protected. Moreover now it is well settled legal position that the mortgagor bank has priority to recover the dues against any charges of the State Government or Central Government irrespective of the fact otherwise. The Hon ble Supreme Court in the case of Dena Bank v. Bhikhabhai Prabhudas Parekh Company 2000 (4) TMI 36 - SUPREME COURT has observed that The State shall have a preferential right to recover its dues over the rights of the appellant bank and the property of the partner shall also be liable to be proceeded against. No useful purpose would therefore be served by allowing the appeal which will only further complicate the controversy. In light of the position of law and considering Section 26E of the SARFAESI Act 2002 as also considering the undisputed facts in the opinion of this Court the charge of the petitioner Bank shall precede over the charge of the State with respect to the subject property. Further the petitioner herein has also issued sale certificate in favour of the auction purchaser under Rule 9(6) of the Security Interest (Enforcement) Rules 2002 on 25.05.2023. Conclusion - The petitioner bank has first charge over the properties mortgaged by the respondent Nos. 3 to 6 under Section 26E of the Act and has overriding effect over the charge of the respondent No. 2 under Section 48 of the VAT Act. This is a fit case to exercise extraordinary jurisdiction under Article 226 of the Constitution of India - The impugned attachment order and charge recorded in the revenue record vide Entry No. 1749 by the respondent No. 2 herein is quashed and set-aside - Petition allowed.

Summary

The core legal questions considered by the Court in this judgment are:

1. Whether the secured creditor bank's charge over the mortgaged property, created and enforced under the SARFAESI Act, 2002, has priority over the charge created by the State Sales Tax Department under Section 48 of the Gujarat Value Added Tax (VAT) Act, 2003.

2. Whether the impugned attachment order and charge recorded by the State Sales Tax Department in the revenue records can be quashed or set aside on the ground of the bank's priority under Section 26E of the SARFAESI Act.

3. The effect and scope of Section 26E of the SARFAESI Act, 2002, especially its overriding effect over other laws, including State tax laws.

4. The applicability of judicial precedents regarding priority of secured creditors vis-`a-vis Government dues, including taxes and statutory charges.

5. The legal consequences of the timing of charges and their registration in the revenue records, particularly the effect of a subsequent statutory charge created by the State after the bank's mortgage and possession under SARFAESI Act.

Issue-wise Detailed Analysis

Issue 1: Priority of the secured creditor's charge under SARFAESI Act over State's charge under VAT Act

Relevant legal framework and precedents: The Court extensively examined Section 26E of the SARFAESI Act, 2002, which states that "notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority." This provision contains a non-obstante clause indicating its overriding effect.

Additionally, Section 31B of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDB Act), inserted by an amendment in 2016, similarly provides priority to secured creditors over Government dues. Section 35 of the SARFAESI Act further clarifies that its provisions override inconsistent laws.

Precedents relied upon include:

• Mahadev Cotton Industries vs. Department of Central Sales Tax: Held that secured creditors have first charge and priority over State dues under Section 26E.
• Bank of Baroda vs. State of Gujarat: Affirmed secured creditor's priority over State charges.
• Indian Overseas Bank vs. Deputy Commissioner of State Tax and State of Gujarat vs. Pra Realities LLP: Reiterated that mere entry of charge by State in revenue records does not override secured creditor's rights.
• Supreme Court decisions such as Dena Bank v. Bhikhabhai Prabhudas Parekh & Co., Punjab National Bank v. Union of India, Central Bank of India v. Siriguppa Sugars & Chemicals Ltd., and Kotak Mahindra Bank Ltd. v. Girnar Corrugators Pvt. Ltd., which emphasize that secured creditors' rights prevail over Crown or State dues where there is a prior perfected security interest.

Court's interpretation and reasoning: The Court held that the secured creditor bank's charge, created by mortgage and possession under SARFAESI Act, is prior and has overriding effect over the State's charge under Section 48 of the VAT Act. The Court emphasized that the non-obstante clause in Section 26E is deliberate and clear, granting priority to secured creditors over all other debts including Government dues.

The Court noted that the State's charge was recorded later in time (February 2023) compared to the bank's mortgage (December 2013 and April 2016) and possession under SARFAESI Act (June 2018). Thus, the bank's charge is prior in time and law.

The Court also observed that the State's charge recorded in the revenue records without any attachment order does not create an encumbrance that can override the bank's rights. The State's rights to recover dues remain intact but cannot interfere with the bank's priority over the mortgaged property.

Key evidence and findings: The mortgage deed dated 16.04.2016 and possession taken on 14.06.2018 under SARFAESI Act were produced. The sale certificate issued on 25.05.2023 in favor of auction purchasers was also on record. The State's charge was recorded on 14.02.2023 and entered in revenue records on 01.06.2023.

Application of law to facts: Since the bank's charge was registered and possession taken prior to the State's charge, and Section 26E provides overriding priority, the bank's charge must prevail. The State's subsequent charge cannot impede the bank's right to execute conveyance and realize its security interest.

Treatment of competing arguments: The State argued that its statutory charge under Section 48 of the VAT Act creates a first charge on the property for tax dues. However, the Court distinguished this by noting that Section 48 applies only after the tax liability is crystallized and assessed, which occurred after the bank's charge and possession. The Court rejected the argument that the State's charge could override the bank's prior security interest.

Conclusion: The bank's charge under SARFAESI Act has priority over the State's charge under VAT Act. The impugned attachment and charge recorded by the State are quashed and set aside.

Issue 2: Validity of impugned attachment order and charge recorded by State Sales Tax Department

Relevant legal framework and precedents: The Court referred to the statutory provisions under the VAT Act, including Section 48 (charge on property for tax dues) and Section 47 (voidance of transfer after tax becomes due), as well as the SARFAESI Act's overriding provisions.

Precedents such as Mahadev Cotton Industries and Bank of Baroda cases were cited to support the quashing of State's attachment when it conflicts with secured creditor's rights.

Court's interpretation and reasoning: The Court held that the attachment order and charge recorded by the State Sales Tax Department in the revenue records, vide Entry No. 1749, were issued after the bank's mortgage and possession and thus cannot override the bank's rights. The Court emphasized that mere entry of charge in revenue records does not amount to an effective encumbrance preventing the bank from executing conveyance to auction purchasers.

Key evidence and findings: The impugned attachment order dated 22.01.2018 and communication dated 19.04.2018 by the State were challenged and found to be subsequent and subordinate to the bank's charge.

Application of law to facts: Since the bank had already acquired possession and sold the property under SARFAESI Act, the State's attachment and charge were ineffective to block the bank's rights.

Treatment of competing arguments: The State contended that the tax dues are recoverable and the charge is statutory and prior. The Court rejected this, clarifying that the charge under Section 48 of VAT Act arises only after assessment and crystallization of dues, which occurred after the bank's charge and possession.

Conclusion: The impugned attachment and charge by the State are quashed and set aside.

Issue 3: Effect and scope of Section 26E of the SARFAESI Act

Relevant legal framework and precedents: Section 26E provides that debts due to secured creditors shall have priority over all other debts and Government dues, notwithstanding any other law. Section 35 of the SARFAESI Act confirms its overriding effect. The Court also referred to the Statement of Objects and Reasons of the SARFAESI Act and the RDB Act, highlighting the legislative intent to facilitate speedy recovery by secured creditors.

Precedents include Supreme Court decisions in Dena Bank, Punjab National Bank, and Kotak Mahindra Bank Ltd., which emphasize the primacy of secured creditors under SARFAESI Act.

Court's interpretation and reasoning: The Court interpreted Section 26E as a special provision that overrides the general principle of sovereign priority of Government dues. The Court noted that the legislature intended to create a special regime for secured creditors to recover dues efficiently without interference from other claims, including State tax charges.

Key evidence and findings: The notification bringing Section 26E into force from 1st September 2016 was noted. The Court observed that the State's charge arose after this date, reinforcing the applicability of Section 26E.

Application of law to facts: The bank's charge being registered and possession taken under SARFAESI Act post-2016 amendment, Section 26E applies fully, granting priority over State dues.

Treatment of competing arguments: The State argued for the applicability of Section 48 of VAT Act and its statutory charge. The Court held that Section 26E's non-obstante clause expressly overrides such State provisions.

Conclusion: Section 26E of the SARFAESI Act has overriding effect and grants secured creditors priority over State tax charges.

Issue 4: Effect of timing and registration of charges in revenue records

Relevant legal framework and precedents: The Court considered the principle that priority depends on the order of creation and registration of charges. The mortgage and possession under SARFAESI Act occurred prior to the State's charge entry in revenue records.

Precedents such as Mahadev Cotton Industries and Bank of Baroda cases emphasize that subsequent charges cannot override prior registered security interests.

Court's interpretation and reasoning: The Court held that since the bank's charge and possession predated the State's charge, the bank's rights prevail. The Court also explained that mere entry of charge by the State in revenue records, without attachment or crystallized dues at the time of bank's possession, cannot affect the bank's priority.

Key evidence and findings: The bank's mortgage deed dated 2013 and 2016, possession in 2018, and sale certificate in 2023, contrasted with the State's charge entry in 2023.

Application of law to facts: The bank's prior charge and possession under SARFAESI Act confer priority over the later State charge.

Treatment of competing arguments: The State contended that its charge is statutory and recorded in revenue records. The Court clarified that timing and crystallization of dues are crucial, and the bank's earlier charge is superior.

Conclusion: The bank's charge and possession precede and override the State's subsequent charge recorded in revenue records.

Significant Holdings

"Section 26E of the SARFAESI Act, 2002, as referred above, has an overriding effect on any other provision of any other law for the time being in force. The aforesaid section provides that the benefit of compliance of the provisions of Chapter IVA and declares that after the registration of security interest, the debts due to any secured creditor shall be paid in priority over; (a) all other debts (b) revenues (c) cesses, and; (d) other rates, payable to the (i) Central Government; (ii) State Government, or (iii) any local authority."

"The debts due to financial institution / Bank - a secured creditor shall be paid in priority over other debts/taxes payable to the State Government. The petitioner has no concern with the dues of the State Authorities which is of the erstwhile owner. The petitioner has paid full and final sale consideration to respondent No. 5 - Bank and if the State Authorities have dispute qua their dues, they can avail appropriate legal remedy before appropriate forum against the appropriate person/s."

"The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law." (Section 35, SARFAESI Act)

"The common law doctrine about priority of crown debts which was recognised by Indian High Courts prior to 1950 constitutes law in force within the meaning of Article 372 (1) and continues to be in force. The basic justification for the claim for priority of State debts is the rule of necessity and the wisdom of conceding to the State the right to claim priority in respect of its tax dues. 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." (Supreme Court in Dena Bank v. Bhikhabhai Prabhudas Parekh & Co.)

"If the submission on behalf of respondent No. 1 for the dues under MSMED Act would prevail over the SARFAESI Act, then in that case, not only the object and purpose of special enactment / SARFAESI Act would be frustrated, even the later enactment by way of insertion of Section 26E of the SARFAESI Act would be frustrated." (Supreme Court in Kotak Mahindra Bank Ltd. v. Girnar Corrugators Pvt. Ltd.)

"Mere Entry in the revenue records creating charge over the property would not amount to any encumbrance on the immovable property, which has been sold in the public auction, moreso when there is no attachment order of the property-in-question." (Division Bench in State of Gujarat & Anr v. Pra Realities LLP & Anr)

Final determinations:

• The secured creditor bank's charge and rights under the SARFAESI Act, including possession and sale of the mortgaged property, have priority over the State's charge under Section 48 of the VAT Act.
• The impugned attachment order and charge recorded by the State Sales Tax Department in the revenue records are quashed and set aside.
• The bank is entitled to execute registered conveyance in favor of the auction purchasers without interference from the State's charge.
• The State remains free to recover its dues by appropriate proceedings but cannot override the secured creditor's priority under SARFAESI Act.