2018 (12) TMI 146 - HC - VAT and Sales Tax

Preference of Charge on Mortgaged property - TNGST Act - who holds first charge as to whether the crown debt / the revenue to the government under the fiscal laws or the claim of secured creditors under SARFESAI Act? - Held that - The issue is laid to rest by the decision of the Hon ble Supreme Court in the case of Central Bank of India vs. State of Kerala & Others 2009 (2) TMI 451 - SUPREME COURT OF INDIA where it was held that the statutory charge prevail over mortgage charge over any pledged property. The crown debt is treated as unsecured and mortgage rights will get priority only when the statute does not create a charge under the Act. It is also settled that the non obstante clauses of the Tamil Nadu General Sales Tax Act, 1959, and the SARFESAI Act are not at conflict with each other as both the statutes can be given effect harmoniously through purposive interpretation. Accordingly, those statutes under which a charge is created on the assets will have priority over mortgage rights under any other Act. And those statutes where charges are not created will be accorded a status of unsecured debts and will have low priority over the secured creditors under the SARFESAI Act - The Tamil Nadu General Sales Tax Act, 1959, having created charge on the assets of the assessee by virtue of Section 24, the interest of revenue cannot be separated from the assets of the defaulters. Petition dismissed - decided against petitioner.

Summary

Issues:
1. Auction purchase of property under SARFAESI Act.
2. Liability of auction purchasers for government dues.
3. Conflict between revenue recovery and SARFAESI Act.
4. Priority of charges on property under different statutes.

Analysis:
1. The petitioners, joint auction purchasers of a property under SARFAESI Act, claimed ownership of certain properties originally owned by a firm that defaulted on a loan from Indian Overseas Bank. The bank classified the property as a Non-performing Asset, leading to its auction. The petitioners participated in the auction, were declared the highest bidders, and obtained a Sale Certificate. However, the respondent issued a notice demanding payment for dues owed by the defaulting firm, threatening action under the Tamil Nadu Revenue Recovery Act. The petitioners filed writ petitions challenging this notice, which were heard together.

2. The respondent argued that statutory notices were issued regarding the government dues attached to the property, and the auction purchasers were made aware of these obligations. The petitioners contended that the respondent had no first charge over the property, as the bank held the primary security interest under SARFAESI Act. They claimed no fraud or collusion in their purchase and sought to quash the impugned order demanding payment.

3. The court considered the conflict between revenue recovery laws and the SARFAESI Act, citing the Supreme Court decision in Central Bank of India vs. State of Kerala & Others. The court clarified that statutory charges created by fiscal laws take precedence over mortgage charges, with crown debts treated as unsecured. It was established that the Tamil Nadu General Sales Tax Act, 1959, created a charge on the assets, ensuring that revenue interests cannot be separated from the defaulters' assets.

4. Ultimately, the court dismissed the writ petition, emphasizing that the statutory charge under the Sales Tax Act prevailed over mortgage rights, in accordance with the legal precedence set by the Supreme Court. The court held that the statutes could be harmonized through purposive interpretation, with charges taking priority over mortgage rights. Consequently, the petitioners' claim was rejected, and the case was closed without costs.