2025 (5) TMI 313 - HC - VAT / Sales Tax

Recovery of dues - priority of claim over the dues - secured creditor (Petitioner-Bank) having registered its security interest under the SARFAESI Act with CERSAI prior to the attachment order by the Sales Tax/M-VAT Department has priority over the State s claim and charge on the secured asset or not - HELD THAT - The core issue involved in the present matter is no more res integra in the light of the view taken by this Court in the Full Bench Judgment of Jalgaon Janta Sahakari Bank Ltd 2022 (9) TMI 163 - BOMBAY HIGH COURT . Once the security interest of the creditor is registered under the provisions of the SARFAESI Act with CERSAI Act the priority as provided under Section 26-E comes into play. In the present matter admittedly the security interest is registered with CERSAI on 09/07/2011 and much thereafter on 02/02/2015 the order of attachment of secured asset has been passed by the Tax Officer. Respondent No. 1 has only produced attachment order and one 7/12 extract of the secured asset with its reply. Nothing else is produced. Not even Mutation Entries under which the encumbrance is recorded. No material in support of any steps for proclamation is produced. It is noted here that nothing is brought to notice that the attachment order was registered with CERSAI by the Respondent Tax Authorities as required under section 26B(4) of the SARFAESI Act. The authorities were bound by the said requirement after 24/01/2020 when chapter IVA was brought on the statute book including section 26B to 26E thereof. It is material to note that the sale has taken place as e-auction sale under notice dated 06/12/2022 and there was sufficient time in the interregnum for the Respondent Authorities to register its attachment order. Undisputedly it is also not shown of steps taken by the Respondent State to undertake the proclamation of attachment order as contemplated with beat of drum or other customary mode or its copy being affixed on some conspicuous part of the secured asset and also on the notice board of concerned Talathi office. Therefore it cannot be said that Respondent No. 8 had either constructive or actual notice of the State dues. In that view of the matter Respondent No. 8 can not be held bound to pay the State dues and it can not be said that the encumbrance will continue on the secured asset. Conclusion - The Petitioner-Bank has a priority over Respondent Nos. 1 and 2 who do not have charge over the secured asset sold to the Respondent No. 8. The Petitioner-Bank having sold the secured asset to the Respondent No. 8 during the enforcement of the security interest under the provisions of SARFAESI Act it gives clear title to the Respondent No. 8 free from encumbrance claimed by the Respondent Nos. 1 and 2 Tax Authority. Petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

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

(a) Whether the secured creditor (Petitioner-Bank), having registered its security interest under the SARFAESI Act with CERSAI prior to the attachment order by the Sales Tax/M-VAT Department, has priority over the State's claim and charge on the secured asset.

(b) Whether the encumbrance or charge recorded by the Sales Tax/M-VAT authorities over the secured asset, subsequent to the security interest registration and sale under SARFAESI Act, can continue to subsist and bind the auction purchaser.

(c) Whether the State's attachment order and charge over the secured asset, without compliance with statutory procedural requirements such as proclamation under the Maharashtra Land Revenue Code and registration with CERSAI, can create a valid and enforceable charge against the secured asset sold under SARFAESI.

(d) Whether the auction purchaser, who bought the secured asset on an "as is where is, whatever there is" basis, is bound by the State's encumbrance and liable to pay the State's dues or can claim clear title free from such encumbrances.

(e) The effect and applicability of Section 26E of the SARFAESI Act, particularly its retrospective or prospective operation, in relation to the priority of secured creditors over State dues.

(f) The legality and validity of the encumbrance recorded by the State authorities in the revenue records and the consequent impact on mutation entries and permissions for construction on the secured asset.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Priority of Secured Creditor under SARFAESI Act vis-`a-vis State's Charge

The legal framework revolves around the SARFAESI Act, particularly Sections 13(2), 13(4), and Section 26E (inserted by amendment in 2016 and enforced from 24/01/2020), and the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) registration requirements. The Maharashtra Value Added Tax Act, 2002 (M-VAT Act) and Maharashtra Land Revenue Code, 1960 (MLR Code) also provide the statutory backdrop for the State's claim and attachment procedures.

The Court referred extensively to the Full Bench judgment in Jalgaon Janta Sahakari Bank Ltd, which clarified that once a secured creditor registers its security interest with CERSAI, it obtains priority over all other debts, including dues to the State such as taxes and cesses. The Court emphasized that the legislature's use of the term "priority" in Section 26E was deliberate to resolve conflicts between multiple charges and dues on the same property.

The Court rejected the State's argument that its charge would continue to follow the property irrespective of sale, holding that the secured creditor's charge, being registered earlier, has precedence. The Court noted that the State's attachment order dated 02/02/2015 was subsequent to the security interest registration dated 09/07/2011, and therefore the secured creditor's rights prevail.

Further, the Court observed that the State's claim to a "first charge" under the M-VAT Act and the recovery as arrears of land revenue is subject to compliance with procedural safeguards, including proclamation and registration, which were not fulfilled here.

(b) Validity of State's Encumbrance and Requirement of Procedural Compliance

The Court examined the procedural requirements under the MLR Code and the Maharashtra Realisation of Land Revenue Rules, 1967, which mandate that attachment and sale of immovable property for recovery of land revenue dues must be preceded by a proclamation made public by customary modes such as beating of drums and affixing notices.

The Court found that the State authorities had not produced evidence of any such proclamation or compliance with the statutory procedure. The attachment order was not registered with CERSAI as required under Section 26B(4) of the SARFAESI Act after its enforcement from 24/01/2020. This non-compliance was held to be fatal to the State's claim of continuing charge on the property.

The Court relied on the Full Bench's reasoning that without proper proclamation and registration, the State's charge cannot be considered effective against third parties, including auction purchasers.

(c) Effect of Sale under SARFAESI Act on Title and Encumbrances

The Petitioner-Bank sold the secured asset by e-auction under the SARFAESI Act, issuing a Sale Certificate and executing registered title documents in favor of the Respondent No. 8 (auction purchaser). The sale was expressly on an "as is where is, whatever there is" basis.

The Court considered whether the auction purchaser is bound by the State's encumbrance. It held that since the auction purchaser had no actual or constructive notice of the State's charge-due to lack of proclamation and registration-the purchaser cannot be held liable for the State's dues or encumbrances.

The Court referenced the Full Bench's answer to a similar question in Jalgaon Janta Sahakari Bank Ltd, which states that a purchaser bidding with eyes open on an "as is where is" basis cannot wriggle out of liabilities if aware, but can disprove claims if no constructive notice is proved.

Here, the absence of statutory proclamation and registration meant no constructive notice existed, thus the auction purchaser obtains clear title free of the State's encumbrance.

(d) Application and Operation of Section 26E of SARFAESI Act

Section 26E provides that secured creditors registered with CERSAI have priority over all other debts and revenues payable to the Government. The Court clarified that this provision operates prospectively from 24/01/2020.

The State argued that the attachment order predates Section 26E's enforcement and thus remains unaffected. The Court noted that while pre-existing charges may have some effect if properly proclaimed, the State failed to prove compliance with such procedural requirements.

The Court further observed that the Full Bench in Jalgaon Janta Sahakari Bank Ltd had held that dues of secured creditors rank superior to State dues post enforcement of Section 26E, and that the State's attempt to enforce multiple charges on the same asset after sale would render the concept of priority meaningless and be absurd.

(e) Treatment of Competing Arguments

The State contended that its charge continues irrespective of sale and that the secured creditor's priority is conditional, not absolute. It relied on earlier judgments and the necessity of proclamation under the MLR Code. The State also argued that the auction purchaser takes the property subject to the State's dues.

The Court rejected these contentions, holding that the priority of the secured creditor is absolute once registered with CERSAI, subject to procedural compliance by the State which was absent here. The Court distinguished the Medineutrina judgment relied upon by the State as having been overtaken by the Full Bench decision and stayed by the Supreme Court.

The auction purchaser's counsel argued that the purchaser had no constructive notice and that the State's dues cannot create a continuing charge on the asset sold. The Court agreed, emphasizing the importance of statutory compliance by the State and the protection of bona fide auction purchasers.

3. SIGNIFICANT HOLDINGS

The Court's crucial legal reasoning includes the following verbatim excerpts from the Full Bench judgment in Jalgaon Janta Sahakari Bank Ltd, which it adopted:

"The word 'priority' appearing in section 26E of the SARFAESI Act, i.e. '... 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' (italics for emphasis), was used without a purpose? This reply has to be in the negative. Priority means precedence or going before. In the present context, it would mean the right to enforce a claim in preference to others."

"If a secured asset has been disposed of by sale by taking recourse to the Security Interest (Enforcement) Rules, 2002 it would appear to be reasonable to hold... that the dues of the secured creditor shall have 'priority' over all other including all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority."

"In view of the foregoing discussion, we have no hesitation to hold that the dues of a secured creditor (subject of course to CERSAI registration) and subject to proceedings under the I&B Code would rank superior to the dues of the relevant department of the State Government."

"Simply ordering an attachment is not enough; a proclamation has to be issued in the prescribed form and such proclamation must be made public by beating of drum and such other mode as specified in section 192 of the MLR Code and rule 11(2) of the 1967 Rules before the property attached is sold."

"If there has been an attachment and a proclamation thereof has been made according to law prior to Chapter IVA of the SARFAESI Act being enforced, the department may claim that its dues be paid first notwithstanding the secured dues of the secured creditors; but in the absence of an order of attachment being made public in a manner known to law, once Chapter IV-A of the SARFAESI Act has been enforced, the dues of the secured creditor surely would have 'priority'."

"Such a proposition [that the State can enforce its charge on the asset even after sale by the secured creditor] has only to be stated to be rejected... Such an absurd proposition turns on its head, the very meaning of having a security interest over an asset in priority over others."

"Notwithstanding the duty of the authorized officer to indicate in the sale advertisement inviting bids the encumbrance(s) attached to the immovable property, if the sale is expressly made on 'as is where is, whatever there is basis', the transferee shall be duty bound to deposit money for discharge of the encumbrance(s) provided... such liability may be overcome if he is in a position to disprove the claim of the department that he had no constructive notice of the charge."

The Court's final determinations on each issue are:

(i) The Petitioner-Bank, as a secured creditor with registered charge under SARFAESI Act, has priority over the State's claim and charge on the secured asset.

(ii) The State's encumbrance recorded after the security interest registration and sale under SARFAESI Act, without compliance with statutory procedural requirements such as proclamation and registration with CERSAI, is invalid and cannot bind the auction purchaser.

(iii) The auction purchaser obtains clear title to the secured asset free from the State's encumbrance and is not liable to pay the State's dues on the property.

(iv) The State is entitled only to residual proceeds from the sale, if any, after satisfying the secured creditor's dues.

(v) The impugned communications recording encumbrance by the State authorities are quashed and the concerned authorities are directed to remove such encumbrances from the revenue records.

(vi) The State remains free to pursue recovery of its dues from other assets or persons as per law, but not by continuing encumbrance on the secured asset sold under SARFAESI.