2023 (1) TMI 1369 - HC - VAT and Sales Tax

Recovery of dues - priority of dues - whether the dues of secured financial institution will have priority over State tax dues or not? - HELD THAT - In the instant case, it is an undisputed fact that respondent No.1 Bank of Baroda is a secured creditor. Therefore, the Bank has valid first charge over the properties in question by way of mortgage and has first right to sell the same in view of priority under Section 26E of the Act and recovered its dues from it. The petitioners are the bona fide purchasers, purchased the properties in question from the public e-auction held by the bank and paid full and total sale consideration to the bank and the bank has issued sale certificate in favour of the petitioners and also handed over the peaceful and vacant possession to the petitioners. Indisputably, the charge created by respondent No.3 State Authority is later point of time. Therefore, the debts due to Bank of Baroda a secured creditor shall be paid in priority over other debts/taxes payable to the State Government. The petitioners have no concern with the dues of the State Authorities. Moreover, now it is well settled legal position that the mortgagor bank has priority to recover the dues against any charges of the State Government or Central Government, more particularly the mortgage is created prior to the registration of such charge by the Authority. It is held that the SARFAESI Act is meant for enforcement of security interest which is created in favour of the secured creditor financial institution, and provides specific mechanism / provision for the financial assets and security interest. Any other provision(s) would not defeat the provision of Section 26E of the SARFAESI Act and also the object and purpose of the SARFAESI Act. This Court holds that the petitioners are the bona fide purchasers and are the absolute owners of the properties in question with legal and valid title. Consequently, the sale deed registered by the Authority concerned is legal and valid document - the present petition is partly allowed.

Summary

Issues Involved:
1. Quashment of attachment in revenue records.
2. Determination of absolute ownership and legal title of the petitioners.
3. Priority of secured financial institution dues over State tax dues.

Issue-wise Detailed Analysis:

1. Quashment of Attachment in Revenue Records:
The petitioners sought to quash the attachment in the revenue records created by the State Tax Officer (respondent No.3) via Revenue Entry No.15661 and 18595 dated 22.09.2020. These entries were made for the recovery of dues. The properties in question were initially mortgaged to the Bank of Baroda (respondent No.1) by the erstwhile owner on 31.01.2014. The petitioners purchased these properties in a public e-auction conducted by the Bank of Baroda on 12.05.2022. After purchasing the properties, the petitioners discovered the charges created by respondent No.3. The court concluded that the attachment entries made by respondent No.3 were subsequent to the mortgage creation by respondent No.1 and thus were null and void.

2. Determination of Absolute Ownership and Legal Title of the Petitioners:
The petitioners argued that they are the absolute owners of the properties with legal and valid title, having purchased them in a public e-auction free from all encumbrances. The court found that the petitioners are bona fide purchasers who paid the total sale consideration of Rs.2,21,14,810/- to the Bank of Baroda. The bank issued a sale certificate and handed over possession of the properties to the petitioners. The sale deed was executed on 14.07.2022. The court held that the petitioners are the absolute owners of the properties with legal and valid title, and the sale deed is a legal and valid document.

3. Priority of Secured Financial Institution Dues Over State Tax Dues:
The primary issue was whether the dues of a secured financial institution (Bank of Baroda) have priority over State tax dues. The court referenced Section 26E of the SARFAESI Act, which grants priority to secured creditors over all other debts and government dues. The court cited multiple precedents, including the Kalupur Commercial Cooperative Bank Ltd. vs. State of Gujarat case, which affirmed that the debts due to secured creditors shall be paid in priority over all other debts, including state taxes. The court emphasized that the SARFAESI Act is a special legislation meant for the enforcement of security interests created in favor of secured creditors and that any other provisions should not defeat the purpose of Section 26E of the SARFAESI Act. The court concluded that the Bank of Baroda, as a secured creditor, had a valid first charge over the properties, and the State tax dues did not have priority over the bank's dues.

Conclusion:
The court held that the petitioners are bona fide purchasers and the absolute owners of the properties with legal and valid title. The attachment entries made by the State Tax Officer were quashed, and the revenue authority was directed to remove the attachment in the revenue records. The court affirmed that the dues of the secured financial institution (Bank of Baroda) have priority over State tax dues, in accordance with Section 26E of the SARFAESI Act. The petition was partly allowed, and the rule was made absolute to the extent of the orders passed.