2020 (6) TMI 85 - HC - VAT / Sales Tax

Payment of amount due to the Government - priority of charge arising out of sales tax arrears, vis-a-vis the arrears due to others including the petitioner mortgagee - sale of the defaulter's properties - creation of rights between the mortgagor and mortgagee bank - right in personam - HELD THAT - Definitely, the sales tax arrears take precedence over the claims of an existing mortgagee also. In the present case, the respondent issued the notice along with Form B6 on 18.09.2006 to the petitioner, demanding the arrears of sales tax to the tune of ₹ 4,80,05,508/- payable by the company, which, according to the petitioner, was received only on 12.10.2006. In the mean while, the auction was confirmed in favour of M/s.Annam Steels Pvt. Ltd and the sale certificate was issued to them under the SARFAESI Act on 26.09.2006 and the available sale proceeds were distributed to all the secured creditors and the other lenders by 30.09.2006. But, in terms of the decision in STATE BANK OF BIKANER AND JAIPUR VERSUS NATIONAL IRON AND STEEL ROLLING CORPORATION AND OTHERS 1994 (12) TMI 72 - SUPREME COURT , the demand raised by the respondent prior to the appropriation of the sale proceeds, will have precedence over the claims of the petitioner - mortgagee. Hence, the petitioner is bound to pay the sale proceeds realised by them towards partial fulfillment of the demand raised by the respondent - Petition dismissed.

Summary

Issues:
1. Priority of charge arising out of sales tax arrears.
2. Legal validity of notice issued for recovery of sales tax arrears from sale proceeds.
3. Rights and obligations of mortgagee bank in relation to sales tax dues.

Analysis:
1. The case involves a petition seeking a writ of Certiorari to quash a notice demanding payment of sales tax arrears from sale proceeds. The respondent argued that the State has priority in recovering statutory dues over other creditors, citing Section 24 of the TNGST Act. The petitioner contended they are not liable for the company's debts. The key issue is the priority of the charge arising from sales tax arrears compared to other claims, including the petitioner's mortgagee rights.

2. The Supreme Court precedent establishes that sales tax dues take precedence over other claims, including those of mortgagees. The Court cited cases where the Sales Tax Department's charge was held to have priority over mortgage claims. The judgment emphasized that a statutory charge for sales tax arrears prevails over existing mortgages, giving the State preferential rights for recovery. In this case, the respondent issued a notice demanding payment of sales tax arrears before the sale proceeds were distributed, granting precedence to the State's claim over the petitioner's as a mortgagee.

3. The Court dismissed the writ petition, upholding the precedence of sales tax arrears over the rights of the mortgagee bank. The judgment concluded that the petitioner is obligated to remit the sale proceeds towards the demand raised by the respondent for sales tax arrears. The decision reaffirmed the legal principle that statutory dues, such as sales tax arrears, hold priority over the claims of mortgagees, even in cases of property auctions and distribution of sale proceeds.