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2019 (7) TMI 1684 - HC - VAT / Sales TaxRecovery of Sales tax and VAT dues - validity of action of the State s Revenue Machinery (the Revenue) in taking possession of and attempting to sell certain properties for alleged arrears of Sales Tax and Value Added Tax from its respective owners which are claimed by them to be their secured assets - HELD THAT - Even though the KGST Act/KVAT Act creates a First Charge in favour of the Revenue to recover the arrears of tax the afore provisions of the SARFAESI Act and RDB Act make the secured dues entitled to be paid in priority over such taxes and in fact elevates the rights of the secured creditor to recover such dues also to a position of priority - the cumulative effect is that whoever sells the property or in whatever manner it is sold the secured debts will require to be paid off first and all others will have to wait for their turn. Viewed in this purlieu the predication of the learned Additional Advocate General that the First Charge of the Revenue over the properties will be extinguished only if they sell the property first pails into insignificance because the statutory right of the Revenue is at the best to bring the property to sale and nothing more. Irrefragibly when the secured creditors have a right in priority to have their debts extinguished obviously their right to proceed against the property would also rank high than that is claimed by the Revenue. The assertion of the Revenue that their Charge will continue over the property until it is sold by them hence is rendered without forensic support to stand on. Whether Section 26E of the SARFAESI Act and Section 31B of the RDB Act create an overriding and first right in favour of the Banks/Financial Institutions to recover their dues over and above the rights of the Revenue created through the KGST Act/KVAT Act? - HELD THAT - This enquiry has been rendered relatively easy for this Court because in CENTRAL BANK OF INDIA VERSUS STATE OF KERALA AND OTHERS 2009 (2) TMI 451 - SUPREME COURT the Hon ble Supreme Court considered the right of the Banks/Financial Institutions as regards recovery of their dues prior to the afore two provisions being introduced in the SARFAESI Act and in the RDB Act. The conclusions of the Hon ble Supreme Court are unequivocally worded that in the absence of these provisions in the respective Statutes the Banks/Financial Institutions cannot claim any priority over the Revenue s First Charge on the properties concerned for recovery of dues of Sales Tax/Value Added Tax. The provisions of Section 11(2) of the EPF Act are only bolstered and supported by the provisions of Sections 529 and 529A of the Companies Act. This view certainly does not support the submissions of the learned Additional Advocate General since arrears of tax revenue have not been in any manner protected either by the SARFAESI Act or by the RDB Act. Petition allowed.
Issues Involved:
1. Conflict between the rights of secured creditors under the SARFAESI Act and RDB Act versus the State's claim of 'First Charge' under the KGST Act and KVAT Act. 2. The legal interpretation of 'First Charge' versus 'priority of debts'. 3. The effect of non-notification of Section 26E of the SARFAESI Act. 4. The applicability of Section 37 of the SARFAESI Act regarding the coexistence of other laws. 5. The rights of auction purchasers under the SARFAESI Act and RDB Act. Detailed Analysis: 1. Conflict between the rights of secured creditors under the SARFAESI Act and RDB Act versus the State's claim of 'First Charge' under the KGST Act and KVAT Act: The core issue in these writ petitions is the conflict between the rights of secured creditors under Section 26E of the SARFAESI Act and Section 31B of the RDB Act, and the State's claim of 'First Charge' over properties for tax arrears under Section 26B of the KGST Act and Section 38 of the KVAT Act. The court examined these provisions and found that the SARFAESI Act and RDB Act unequivocally declare that the debts due to secured creditors shall be paid in priority over all other debts, including taxes. The KGST Act and KVAT Act, on the other hand, assert a 'First Charge' over the properties for tax arrears. The court concluded that the secured creditors' rights under the SARFAESI Act and RDB Act prevail over the State's 'First Charge' due to the later enactment of these provisions by the Parliament, which takes precedence under Articles 246(1) and 254 of the Constitution of India. 2. The legal interpretation of 'First Charge' versus 'priority of debts': The court delved into the legal definitions of 'Charge' and 'Mortgage' under the Transfer of Property Act and concluded that a 'Charge' does not create any right over the property but allows the charge holder to deal with the property similarly to a simple mortgagee. The court emphasized that the terms 'First Charge' and 'priority in payment of debts' are virtually synonymous, both granting the holder the privilege of recovery before anyone else. Consequently, even though the KGST Act and KVAT Act create a 'First Charge' in favor of the Revenue, the provisions of the SARFAESI Act and RDB Act elevate the rights of secured creditors to recover their dues in priority over such taxes. 3. The effect of non-notification of Section 26E of the SARFAESI Act: The court addressed the argument regarding the non-notification of Section 26E of the SARFAESI Act. It referred to the Supreme Court's judgment in Mar Appraem Kuri Company Limited, which clarified that the concepts of 'primacy of legislation' and 'repugnancy' are invoked as soon as the Parliament 'makes' a Statute, even before it is notified. Therefore, the court held that the non-notification of Section 26E does not affect the priority of secured creditors' rights. Additionally, Section 31B of the RDB Act, which has been notified, provides the same priority to secured creditors, rendering the Revenue's argument moot. 4. The applicability of Section 37 of the SARFAESI Act regarding the coexistence of other laws: The court examined whether the provisions of the KGST Act, KVAT Act, or the Kerala Revenue Recovery Act (RR Act) could obtain protection under Section 37 of the SARFAESI Act. It referred to the Supreme Court's judgment in Madras Petrochem Limited, which clarified that Section 37 of the SARFAESI Act does not bar the application of other laws but limits their scope to laws related to the securities market. Consequently, the court concluded that the Revenue cannot claim protection under Section 37 of the SARFAESI Act to recover tax arrears in priority over secured creditors. 5. The rights of auction purchasers under the SARFAESI Act and RDB Act: The court addressed the rights of auction purchasers who had bought properties under the SARFAESI Act and RDB Act. It held that auction purchasers are entitled to own and possess the properties free of all charges and encumbrances, as the secured creditors' rights to recover their debts in priority prevail over any attachments made by the Revenue. The court directed the Revenue authorities to effect the transfer of registry of the properties in favor of the auction purchasers and to permit them to remit the property tax, notwithstanding the attachments effected by the Revenue. Conclusion: The court allowed the writ petitions filed by the Banks and Financial Institutions, quashing the actions of the State's Revenue Machinery in taking possession of and attempting to sell the properties for tax arrears. It declared that the secured creditors' rights under the SARFAESI Act and RDB Act take precedence over the State's 'First Charge' under the KGST Act and KVAT Act. The court also directed the Revenue authorities to register the sale certificates in favor of the auction purchasers and to permit them to remit the property tax, thereby affirming the priority of secured creditors' rights in recovering their dues.
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