2013 (11) TMI 511 - HC - VAT and Sales Tax

Sales Tax - Recovery of tax - Banks and financial institutions - Recovery of debts - Priority as between sales tax dues and dues owed to banks and financial institutions - KGST Act, 1963 - Section 26B - Whether Section 26B, creates the first charge, and gives an overriding effect over other laws - Held that - the argument that involuntary transfers are not covered by Section 26A of the KGST Act, will not hold good. As far as the applicability of the principles governing precedence to the first charge for the tax dues are concerned, going by the decisions of the Apex Court a statutory first charge has been created by Section 26B of the KGST Act which will prevail over the mortgage created in favour of the Bank The creation of such a charge by operation of law amounts to statutory recognition of priority over private debts including mortgage, The non obstante clause in a statutory provision like the one in Section 26B will override all other laws in force which definitely will include Section 100 of the Transfer of Property Act. The absence of a provision for enforcing a charge in the KGST Act will not whittle down the effect of Section 26B of the Act. This is especially since by virtue of the operation of law the State will have prior charge over the properties in question which will prevail over all rights created by the Bank - Appellants are not entitled to succeed in the appeals. The argument whether there should be a separate provision for enforcement of the first charge raised by the learned Senior Counsel for the appellants, cannot hold good especially in the light of the non-obstante clause in Section 26B of the KGST Act and in the light of the view taken in State Bank of Bikaner & Jaipur s case 1994 (12) TMI 72 - SUPREME Court that when a first charge is created by operation of law over any property, that charge will have precedence over an existing mortgage , which is reiterated in Central Bank of India s case 2009 (2) TMI 451 - SUPREME COURT OF INDIA has upheld the Division Bench decision in later cases regarding the effect of Section 26B of the KGST Act - Decided against assessee.

Summary

Issues Involved:
1. Validity of Revenue Recovery Proceedings for Sales Tax Arrears.
2. Applicability of Section 26A and 26B of the Kerala General Sales Tax Act (KGST Act).
3. Impact of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) on Sales Tax Recovery.
4. Priority of Charges under KGST Act versus Transfer of Property Act.
5. Legal Precedence of Statutory Charges over Mortgages.

Detailed Analysis:

1. Validity of Revenue Recovery Proceedings for Sales Tax Arrears:
The appellants challenged the notices of attachment issued under the Revenue Recovery Act for the recovery of sales tax arrears. The requisition for revenue recovery was based on assessment orders issued under Section 17(3) of the KGST Act. The properties were sold by the sixth respondent Bank under the SARFAESI Act without notice of the dues to the Sales Tax Department.

2. Applicability of Section 26A and 26B of the KGST Act:
The court examined whether Section 26A, which voids transfers during the pendency of proceedings, and Section 26B, which creates a first charge on the property for tax dues, were applicable. The learned Single Judge held that for Section 26A to apply, the assessment need not be completed. The court also noted that Section 26B creates a first charge on the property, giving the State precedence over other claims, including mortgages.

3. Impact of the SARFAESI Act on Sales Tax Recovery:
The appellants argued that as purchasers for value without notice of the charge, the property should not be liable for sales tax arrears. However, the court held that the statutory first charge created by Section 26B of the KGST Act has precedence over the sale conducted under the SARFAESI Act. The non-obstante clause in Section 26B overrides other laws, including the SARFAESI Act.

4. Priority of Charges under KGST Act versus Transfer of Property Act:
The appellants contended that under Section 100 of the Transfer of Property Act, no charge shall be enforced against a purchaser for value without notice of the charge. The court, however, held that Section 26B of the KGST Act, which contains a non-obstante clause, overrides Section 100 of the Transfer of Property Act. The statutory first charge created by Section 26B takes precedence over any existing mortgage or other charges.

5. Legal Precedence of Statutory Charges over Mortgages:
The court relied on several judgments, including State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling Corporation and Central Bank of India v. State of Kerala, to affirm that a statutory first charge under Section 26B of the KGST Act prevails over existing mortgages. The court held that the statutory first charge has an overriding effect and takes precedence over private debts, including those secured by mortgages.

Conclusion:
The court dismissed the appeals, holding that the statutory first charge created by Section 26B of the KGST Act takes precedence over the mortgage created in favor of the Bank. The sale conducted by the Bank under the SARFAESI Act was subject to the statutory charge for sales tax arrears, and the absence of a provision for enforcing the charge in the KGST Act does not diminish its effect. The court upheld the validity of the revenue recovery proceedings for sales tax arrears against the properties in question.