2019 (12) TMI 633 - HC - VAT and Sales Tax

Auction - outstanding dues - priority of the charge - statutory charge in favour of the Sales Tax Department - Right to proceed against the secured asset by taking recourse to SARFAESI 2002 - Section 37 of the Maharashtra Value Added Tax - Section 26E of SARFAESI 2002 - HELD THAT - A perusal of Section 37 of MVAT Act, 2002 reveals that though it commences with a non-obstante clause, but it recognizes that the same shall be subject to any provision regarding creation of the first charge in any Central Act. Therefore, if, by virtue of any provision under a Central Act, any priority or charge is created in favour of any party the same shall prevail - Section 31B in RDB Act 1993 was introduced by an Amendment in the year 2016 and was brought into force on 2nd September 2016. The non-obstante clause in the Section thus overrides any other law for the time being in force. The Section accords priority No.1 to secured creditors with respect to the secured assets. The only contention which needs to be noted which was made by learned counsel for Respondent Nos. 1 and 2 which was not made before the four learned Benches of the four High Courts in their opinions above noted, is that Chapter IVA which was inserted in SARFAESI 2002 comprising Sections 26B to 26E warrants a record to be made in the Central Register by the Central Registry creating a security interest - The argument is without any substance because the law declared in the four opinions above referred to is that if any Central Statute creates priority of a charge in favour of a secured creditor, the same will rank above the charge in favour of a State for a tax due under the Value Added Tax of the State. The sale proceeds realized are directed to be released to the petitioners by the Prothonotary Senior Master of this Court together with such interest which has accrued thereon - Petition allowed.

Issues Involved:
1. Priority of charge between secured creditors and state tax dues.
2. Applicability of Section 31B of the Recovery of Debt and Bankruptcy Act, 1993 (RDB Act) and Section 26E of SARFAESI Act, 2002.
3. Validity of the auction notice issued under the Maharashtra Land Revenue Code, 1966.

Detailed Analysis:

1. Priority of Charge:
The primary issue in this case is the priority of the charge between the secured creditors and the state tax dues. The petitioner, an assignee of the debt payable by a company under liquidation, challenged the auction notice issued by the state for recovery of tax dues. The petitioner claimed that the secured creditors have priority over the state tax dues as per Section 31B of the RDB Act, 1993, which was introduced by an amendment in 2016. Section 31B states, "Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority."

2. Applicability of Section 31B of the RDB Act and Section 26E of SARFAESI Act:
The petitioner argued that Section 31B of the RDB Act is not restricted to sales conducted under the RDB Act alone but also applies to sales conducted under other mechanisms, including the SARFAESI Act, 2002. The petitioner further contended that the statutory charge created in favor of a secured creditor overrides the state tax dues, irrespective of whether Section 26E of the SARFAESI Act has been brought into force. The respondents, however, argued that Section 26E of the SARFAESI Act had not been brought into force and that the charge created by Section 37 of the Maharashtra Value Added Tax Act, 2002, should prevail in actions under the SARFAESI Act.

3. Validity of the Auction Notice:
The auction notice issued under the Maharashtra Land Revenue Code, 1966, for the recovery of tax dues was challenged by the petitioner. The petitioner and respondent No. 2 had agreed to sell the property and deposit the sale proceeds with the court. The petitioner conducted an auction and deposited the sale proceeds with the Prothonotary and Senior Master of the Court, seeking the release of the amounts to it due to outstanding dues exceeding ?50 crores.

Court's Analysis and Judgment:
The court analyzed Section 37 of the Maharashtra Value Added Tax Act, 2002, which states that any amount of tax, penalty, interest, sum forfeited, fine, or any other sum payable by a dealer or any other person under this Act shall be the first charge on the property of the dealer or person. However, this is subject to any provision regarding the creation of the first charge in any Central Act.

The court referred to various judgments from other High Courts, including the High Court of Rajasthan, Madhya Pradesh, Gujarat, and the Full Bench of the Madras High Court, which consistently held that the rights of secured creditors under Section 31B of the RDB Act have priority over state tax dues. The court noted that the non-obstante clause in Section 31B overrides any other law for the time being in force, giving first priority to secured creditors with respect to secured assets.

The court rejected the argument that the priority of interest under Section 26E of the SARFAESI Act would not be applicable unless the security interest is recorded in the Central Registry. The court held that if any Central Statute creates priority of a charge in favor of a secured creditor, it will rank above the charge in favor of the state for tax dues under the Value Added Tax of the state.

Conclusion:
The writ petition was allowed, and the auction notice dated 30th September 2016 was quashed. The court directed the sale proceeds realized to be released to the petitioners by the Prothonotary and Senior Master of the Court, together with any accrued interest. Costs were made easy, and pending applications were disposed of as infructuous.

← Previous Next →