2017 (10) TMI 1346 - HC - VAT and Sales Tax

Recovery of Dues - priority of debt - registration of security interest - letter vide reference No. A7/119/2014, dated 04.04.2017 - Gazette Notification No. EG No. 190/2016, dated 06.12.2016. Held that - 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, etcetera - It is not in dispute that the assets, over which security interest is created by way of registration originally in favour of the Andhra Bank which was later assigned to the petitioner, are still standing in the name of respondent No.3 / the guarantors. Therefore, the question of Section 26-E of the Act being prospective or retrospective does not arise as regards the assets, which remained intact without being sold by any creditor as on the date of coming into force of the said provision. Therefore, the petitioner has priority over all other debts including revenues, taxes, cesses, etcetera payable to the Central or State Governments or local authorities. The demand made by respondents 1 and 2, impugned in this Writ Petition, is declared as illegal and unenforceable - petition allowed.

Summary

Issues:
1. Priority of secured creditors for debt recovery under SARFAESI Act.
2. Legality of demand made by tax authorities for payment of sales tax dues.

Analysis:

Issue 1: Priority of secured creditors for debt recovery under SARFAESI Act
The petitioner filed a Writ Petition seeking a mandamus to declare the action of the tax authorities in demanding payment of sales tax dues from the petitioner, who had stepped into the shoes of the creditor bank after an assignment agreement. The petitioner argued that as per Sections 26-C and 26-E of the SARFAESI Act, debts due to any secured creditor shall be paid in priority over all other debts and revenues. The tax authorities contended that since the debt was incurred before the provision came into force, the petitioner cannot claim priority. The Court analyzed the provisions and held that after the registration of security interest, the debts due to a secured creditor shall be paid in priority over all other debts and revenues. The Court found that the assets over which security interest was created were still with the borrower, and hence the petitioner had priority over other debts, including taxes.

Issue 2: Legality of demand made by tax authorities for payment of sales tax dues
The Commercial Tax Officer asserted the right of the tax department to recover the debt from the borrower. However, the Court, after considering the submissions, declared the demand made by the tax authorities as illegal and unenforceable. The Court allowed the Writ Petition, stating that upon satisfaction of the petitioner's debt, the tax authorities could take appropriate action for the remaining amount. The Court disposed of the interim relief applications filed by the petitioner as infructuous.

In conclusion, the judgment clarified the priority of secured creditors for debt recovery under the SARFAESI Act and declared the tax authorities' demand for sales tax dues as illegal. The Court's decision emphasized the importance of following legal provisions regarding debt recovery and highlighted the rights of secured creditors in such matters.