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2024 (3) TMI 1134 - HC - VAT and Sales TaxRecovery of dues - Attachment of assets - dues of MVAT Authorities have charge in priority to the secured creditors or not - HELD THAT - A plain reading of Section 26-E would show that once a secured creditor registers its security interest (under Section 26-B), notwithstanding any other law in force, the debts owed to the secured creditor shall be paid in priority over all other debts including taxes payable to the State Government. The registration of security interest referred to in Section 26-E of the SARFAESI Act, is the registration of such interest with CERSAI under Section 26-B. The formulation of the two provisions in the SARFAESI Act and the MVAT Act respectively, is a conscious policy choice of balancing of interests of competing creditors who have finite assets to pursue in enforcing recovery of their claims. Dues owed to banks, if not paid, can have a harsher and wider adverse social impact. A collapse of banks would not only hurt the interests of various depositors but also inflict a wider deleterious impact on other segments of the economy. Potentially, it would be tax-payers funds that would have to be infused into the banks to bail them out to avoid such adverse social impact. On the other hand, if the banks are given a priority in recovery, and in the process, the secured assets are sold without hindrance to an auction purchaser, such asset would continue to be put to economic use, which would also generate tax revenues. In addition, other assets that are not the subject matter of a security interest registered prior in time can continue to be proceeded against in enforcement proceedings to recover tax dues. The issue at hand has been extensively analysed in the case of Jalgaon Janta Sahakari Bank 2022 (9) TMI 163 - BOMBAY HIGH COURT . Examining multiple fiscal statutes that create a statutory charge over assets of an assessee and their interplay with Section 26-E of the SARFAESI Act where such assessee has created a security interest in favour of secured creditors, the Full Bench of this Court held that where Section 26-E is attracted, the position in law is not that dues owed to a department of the State Government would have to be paid first. The Full Bench repelled exactly the same argument we were presented with that Section 26-E only provides a priority but does not actually create a first charge , whereas provisions akin to Section 37 of the MVAT Act create a first charge. The Full Bench held that the secured creditor whose security interest is registered with CERSAI prior in time, would get precedence over the dues owed to the State. The Full Bench ruled that such a formulation is a conscious choice made by the legislature. The assertion of the MVAT Authorities that they had priority over secured creditors was totally misconceived and without basis in law. Statutory authorities enforcing law must necessarily refrain from conducting themselves in a manner that conflicts with the law declared by a Full Bench of a constitutional court. There are no hesitation in declaring that none of the attachment orders can result in the MVAT Authorities stealing a march in priority over the registered security interest enjoyed by the Petitioner-led consortium of banks. The impugned attachment orders of the MVAT Authorities dated 24th February, 2022, 7th April, 2022 (issued to the Borrower) and 31st July, 2023 (issued to the Petitioner) would not confer any priority over the registered security interest enjoyed by the Petitioner-led consortium banks over the Secured Assets - The Petitioner has the first priority in respect of enforcement against the Secured Assets by reason of Section 26-E and having a prior registration of the security interest with CERSAI. The Petitioner is therefore entitled to enforce such security interest enjoying priority over the MVAT Authorities. Petition allowed.
Issues Involved:
1. Legality of the attachment of assets by MVAT Authorities. 2. Priority of debt repayment between secured creditors and MVAT Authorities. 3. Interpretation of Section 26-E of the SARFAESI Act and Section 37 of the MVAT Act. Summary: Issue 1: Legality of the attachment of assets by MVAT Authorities This petition challenges attachments of assets made, and consequential actions taken, by Respondent No. 1, Deputy Commissioner of State Tax, GST Department, Government of Maharashtra and Respondent No. 2, the State Tax Officer, Raigad Division, under the Maharashtra Value Added Tax Act, 2002 ("MVAT Act"). Such attachment and consequential enforcement are directed against immovable property that was mortgaged way back in 2014, by Respondent No. 3, Savair Energy Ltd. ("Borrower") in favour of a consortium of banks led by the Petitioner, Indian Overseas Bank ("IOB"). Issue 2: Priority of debt repayment between secured creditors and MVAT AuthoritiesFor reasons set out in this judgement, we hold that such enforcement action by Respondent Nos. 1 and 2 ("MVAT Authorities") is in direct conflict with the explicit provisions of Section 26-E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("SARFAESI Act") read with Section 37 of the MVAT Act. Section 26-E of the SARFAESI Act, which is a non-obstante provision, confers a superior charge in favour of secured creditors, in priority over claims of the MVAT Authorities. The mortgage in favour of the Petitioner-led consortium of banks was created and registered with CERSAI in 2014, giving priority to such secured creditors. Therefore, Section 37 of the MVAT Act itself makes it clear that the statutory charge created thereunder would be subject to anyone enjoying priority under Section 26-E of the SARFAESI Act, which, in this case, is enjoyed by the Petitioner-led consortium. Issue 3: Interpretation of Section 26-E of the SARFAESI Act and Section 37 of the MVAT ActSection 26-E of the SARFAESI Act states that once a secured creditor registers its security interest, notwithstanding any other law in force, the debts owed to the secured creditor shall be paid in priority over all other debts including taxes payable to the State Government. The "registration of security interest" referred to in Section 26-E of the SARFAESI Act, is the registration of such interest with CERSAI under Section 26-B. Section 37 of the MVAT Act, on its own showing, points to the manner of its reconciliation and harmonious construction with Section 26-E of the SARFAESI Act. Therefore, while Section 37(1) would override any provision of contract that creates a charge, it would be subservient to any provision in a Central Act that gives first charge to some other entity. Analysis and Findings:The net effect of the aforesaid facts, and applying the law declared to the facts at hand, would be that the statutory charge of the MVAT Authorities would give way to the priority enjoyed by the Petitioner-led consortium. Therefore, in a sale of a mortgaged asset, where the mortgage in favour of a secured creditor is registered prior in time with CERSAI, and the MVAT Authorities too have a charge, the proceeds of the enforcement of the mortgage would first go towards discharging the dues owed to the secured creditor. We have no hesitation in declaring that none of the attachment orders can result in the MVAT Authorities stealing a march in priority over the registered security interest enjoyed by the Petitioner-led consortium of banks. Directions and Declarations:a) The impugned attachment orders of the MVAT Authorities dated 24th February, 2022, 7th April, 2022 (issued to the Borrower) and 31st July, 2023 (issued to the Petitioner) would not confer any priority over the registered security interest enjoyed by the Petitioner-led consortium banks over the Secured Assets; b) The Petitioner has the first priority in respect of enforcement against the Secured Assets by reason of Section 26-E and having a prior registration of the security interest with CERSAI. The Petitioner is therefore entitled to enforce such security interest enjoying priority over the MVAT Authorities; c) The Petitioner is entitled to enforce the mortgage over the Secured Assets without hindrance and disturbance from the MVAT Authorities, who cannot claim against the Petitioner, except to seek any excess residual amounts from the proceeds of the enforcement of the mortgage over the Secured Assets, after extinguishing the dues owed by the Borrower to the mortgagees constituting the Petitioner-led consortium; d) If the sale of the Secured Assets realises any amount in excess of the amounts owed by the Borrower to the Petitioner-led consortium of banks, the MVAT Authorities may make a claim for such residual excess amount towards the dues owed by the Borrower to the MVAT Authorities; e) The demand notice dated 4th August, 2023 asking the Petitioner to pay the tax dues allegedly owed by the Borrower is misconceived, unsustainable and without legal basis, and is hereby quashed and set aside; f) Consequently, any mutation entries purporting to mark an encumbrance in favour of the MVAT Authorities in the land records shall be invalid. Accordingly, Respondent Nos. 1, 2 and 5 shall cause such entries, if any, to be removed from the land records within a period of two weeks from today; and g) Nothing contained in this judgement is an expression of an opinion on the right of the MVAT Authorities to undertake enforcement action in accordance with law against any other assets, properties and persons that are not subject matter of a registered security interest registered in favour of any secured creditor under the SARFAESI Act, and which may therefore be amenable to enforcement for recovery of tax arrears owed by the Borrower. h) It is clarified that the MVAT dues of the Borrower cannot be sought to be recovered from any purchaser of the Secured Assets, who acquire them from the Petitioner-led consortium under the SARFAESI Act. Rule is made absolute in the aforesaid terms. The writ petition is disposed of accordingly. Although the petition stands disposed of, we place the same for reporting compliance on 12th April 2024.
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