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2025 (5) TMI 1816 - HC - VAT / Sales TaxRecovery of dues - priority of charges - Bank as a secured creditor under the Recovery of Debts and Bankruptcy Act 1993 (RDB Act) has priority over the secured assets for recovery of its dues or not - first charge over the property of the unofficial respondent Nos. 3 to 6 - HELD THAT - The issue that was being considered by the Apex Court in the case of Central Bank of India(supra) was whether the provisions of Section 38-C of the Bombay Sales Tax Act 1959 and Section 26-B of the Kerala General Sales Tax Act 1963 and similar other provisions contained in other state legislations by which first charge had been created on the dealer or such other person liable to pay sales tax was inconsistent with the provisions contained in the RDB Act 1993 for recovery of debt and whether by virtue of the non obstante clause contained in Section 34 (1) of DRT Act and Section 35 of the Securitisation Act the two Central legislations would have primacy over State legislations. In the case arising from Kerala a suit had been preferred by the Central Bank of India before a civil Court for recovery of approximately Rupees Twelve Lakhs advanced to Kerala Refineries (P) Ltd. The borrower who had executed a mortgage in regard to the immovable properties for securing repayment but had failed to discharge its liability. This suit was later on transferred to the Debt Recovery Tribunal which decreed the same. The recovery certificate was issued in favour of the bank whereafter the Recovery Officer issued a Notice for sale of the movable and immovable properties of the borrower. The bank challenged the Notice of the Tahsildar by way of petition under Article 226 which was dismissed by the learned single Judge which order was upheld also by a Division Bench. The Apex Court in Central Bank of India vs. State of Kerala and others 2009 (2) TMI 451 - SUPREME COURT dealing with the issue in particular reference to Section 34 of the DRT Act and Section 26-B of the Kerala General Sales Tax Act 1963 held that there was no provision in either DRT Act or SARFAESI Act created a first charge in favour of the banks financial institutions or secured creditors for the properties of the borrower. There is a specific provision providing for priority in favour of the secured creditors to realize the secured debts due and payable to them over all other debts and Government dues there are no hesitation to hold that the right of the petitioner Bank to recover its dues by sale of the secured asset would have priority over the arrears which were sought to be recovered by the respondent State under the provisions of the A.P. Value Added Tax Act 2005. Petition allowed.
1. ISSUES PRESENTED and CONSIDERED
The principal legal questions considered by the Court are: (a) Whether the petitioner Bank, as a secured creditor under the Recovery of Debts and Bankruptcy Act, 1993 (RDB Act), has priority over the secured assets for recovery of its dues, vis-`a-vis the claim of the Commercial Taxes Department under the A.P. Value Added Tax Act, 2005 (A.P. VAT Act), which asserts a first charge over the property of the VAT dealer. (b) Whether the provisions of Section 31-B and Section 34 of the RDB Act, which confer priority and overriding effect to secured creditors, prevail over the preferential claim created by Section 26 of the A.P. VAT Act for recovery of tax dues. (c) The applicability and effect of the Supreme Court's precedent in Central Bank of India vs. State of Kerala and others, particularly with respect to the interplay between central legislations (DRT Act and SARFAESI Act) and state legislations creating first charge on dealer's property for tax dues. 2. ISSUE-WISE DETAILED ANALYSIS Issue (a) and (b): Priority of secured creditors under RDB Act versus Government's first charge under A.P. VAT Act The legal framework central to this issue comprises: - Section 31-B of the RDB Act, inserted by Act No. 44 of 2016 with effect from 01.09.2016, which states: "Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority." - Section 34 of the RDB Act, which provides an overriding effect to the provisions of the Act over any inconsistent law, stating: "Save as provided under sub-section (2), the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act." - Section 26 of the A.P. VAT Act, 2005, which creates a first charge on the property of a VAT dealer for any amount of tax, penalty, interest, or other sums payable under the Act, stating: "Notwithstanding anything to the contrary contained in any law for the time being in force, any amount of tax, including deferred tax which is treated as a loan extended by the Government to the dealer, penalty, interest and any other sum payable by a VAT dealer or TOT dealer or any other dealer under the Act, shall be the first charge on the property of the VAT dealer or TOT dealer or any other dealer as the case may be." The Court's interpretation focused on the interplay between these provisions. The petitioner Bank contended that Section 31-B and Section 34 of the RDB Act confer statutory priority and overriding effect to secured creditors, thereby superseding the Government's first charge under the VAT Act. The respondent State, relying on Section 26 of the VAT Act, argued that the Government's claim enjoys first charge and preferential status over the property of the dealer. Key evidence included the loan agreement and mortgage deeds executed in 2014 by the partnership firm and partners in favour of the Bank, the recovery decree and certificate issued by the Debt Recovery Tribunal (DRT), and the attachment order by the Recovery Officer. The valuation reports indicated the secured properties' value, reinforcing the Bank's secured interest. Applying the law to the facts, the Court noted that Section 31-B was introduced only in 2016, postdating the Supreme Court's earlier ruling in Central Bank of India vs. State of Kerala. The Court emphasized that this specific statutory provision now explicitly grants priority to secured creditors over Government dues, including taxes. The Court treated the competing arguments by analyzing the legislative intent and the chronological development of the statutory framework. While the VAT Act grants a first charge to the Government, the subsequent insertion of Section 31-B in the RDB Act creates a statutory priority for secured creditors, which the Court found to be decisive in the present case. Conclusion: The Court held that the Bank's rights as a secured creditor under Section 31-B read with Section 34 of the RDB Act have priority over the Government's claim under the VAT Act, thereby entitling the Bank to recover its dues by sale of the secured assets before the Government's dues are satisfied. Issue (c): Applicability of Supreme Court precedent in Central Bank of India vs. State of Kerala The Supreme Court had earlier considered a similar conflict between the provisions of the DRT Act and state sales tax legislations creating a first charge on dealer's property. The key legal question was whether the non obstante clauses in the DRT Act and the Securitisation Act would override the first charge created by state sales tax laws. The Supreme Court held that neither the DRT Act nor the Securitisation Act contained any provision creating a first charge in favour of banks or secured creditors. Consequently, the first charge created by the state laws was not inconsistent with the central enactments, and the non obstante clauses could not be invoked to defeat the state's priority. The Court observed: "The non obstante clauses contained in Section 34 (1) of the DRT Act and Section 35 of the Securitisation Act give overriding effect to the provisions of those Acts only if there is anything inconsistent contained in any other law or instrument having effect by virtue of any other law. In other words, if there is no provision in the other enactments which are inconsistent with the DRT Act or Securitisation Act, the provisions contained in those Acts cannot override other legislations." "The Court could have given effect to the non obstante clauses contained in Section 34 (1) of the DRT Act and Section 35 of the Securitisation Act vis a vis Section 38C of the Bombay Act and Section 26B of the Kerala Act and similar other State legislations only if there was a specific provision in the two enactments creating first charge in favour of the banks, financial institutions and other secured creditors but as the Parliament has not made any such provision in either of the enactments, the first charge created by the State legislations on the property of the dealer or any other person, liable to pay sales tax etc., cannot be destroyed by implication or inference." The Court in the present case distinguished this precedent on the ground that Section 31-B of the RDB Act, introduced after the Supreme Court judgment, specifically creates priority in favour of secured creditors, thereby altering the legal landscape. The respondent State did not dispute this legal position. Thus, the Court concluded that the ratio of the Supreme Court decision does not apply to the present facts, given the statutory amendment conferring priority to secured creditors. 3. SIGNIFICANT HOLDINGS - "Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority." (Section 31-B, RDB Act) - "Save as provided under sub-section (2), the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act." (Section 34, RDB Act) - The Court held: "Applying the ratio of the judgment supra to the facts of the present case, it can be seen that now there is a specific provision providing for priority in favour of the secured creditors, to realize the secured debts, due and payable to them, over all other debts and Government dues, we have no hesitation to hold that the right of the petitioner Bank to recover its dues by sale of the secured asset would have priority over the arrears which were sought to be recovered by the respondent State under the provisions of the A.P. Value Added Tax Act, 2005." - The Court distinguished the earlier Supreme Court ruling by noting that the absence of a specific provision creating first charge in favour of secured creditors was the reason for the prior decision, but now Section 31-B explicitly provides such priority. - Final determination: The Bank, as a secured creditor under the RDB Act, has priority over the Government's claim under the VAT Act in respect of the secured assets mortgaged to the Bank, and the attachment and sale of such assets by the Bank's Recovery Officer cannot be interfered with by the tax authorities claiming first charge under the VAT Act.
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