2024 (5) TMI 1044 - HC - VAT and Sales Tax

Priority of secured creditors u/s 26-E of the SARFAESI Act 2002 over State Tax Authorities claims - provisions of Chapter IV-A and more particularly Section 26-E of the SARFAESI Act 2002 which was brought into force on 24th January 2020 - HELD THAT - Once a security interest of the secured creditor is registered with CERSAI and its registration is prior to any other registration then that secured creditor would get priority towards the sale proceeds of that particular asset over all other debts and all revenues taxes cesses and other rates payable to the Central Government State Government or local authority. In the facts of the present case the Petitioner bank s borrowers had availed of financial assistance. To secure the same on 15th July 2015 the borrowers created a mortgage on the secured asset by deposit of title deeds. The intimation of mortgage was also given to the Joint Sub-Registrar Haveli-22 Pune on the very same date. Thereafter on 25th July 2015 the Petitioner bank duly registered its charge on the secured asset with CERSAI. In contrast the State Tax Authorities have issued an attachment order only on 11th February 2021 and have not even registered the same as contemplated under Section 26-B (5) of the SARFAESI Act 2002. The Full Bench of this Court in the case of Jalgaon Janta Sahakari Bank Ltd v/s Joint Commissioner of Sales Tax Nodal 2022 (9) TMI 163 - BOMBAY HIGH COURT and a Division Bench judgment of this Court in the case of Indian Overseas Bank (supra). In fact in Indian Overseas Bank 2024 (3) TMI 1134 - BOMBAY HIGH COURT this Court has clearly held that once the security interest is enforced the State Tax Authorities would have to look to the sale proceeds to satisfy their claim subject to the priority of the secured creditor but cannot chase the very same asset which is sold by the Petitioner bank under the SARFAESI Act 2002 in the hands of the purchaser. The petition is allowed.

Summary

Issues:
1. Priority of the Petitioner-Bank over State Tax Authorities regarding a secured asset and sale proceeds.
2. Interpretation of Section 26-E of the SARFAESI Act, 2002.
3. Dispute over attachment order passed by State Tax Authorities.
4. Application of relevant case laws in determining priority of creditors.

Analysis:
The Writ Petition sought relief from the Court to issue a writ of Mandamus to remove the lien/charges on a property recorded with the Respondent-State and to record/register a Sale Certificate/Sale Deed without encumbrances. The Petitioner-Bank's borrowers had availed financial assistance and created a mortgage on a secured asset. The Petitioner-Bank registered its charge with CERSAI, while the State Tax Authorities recorded their claim on the property card later. The dispute centered around the priority of the Petitioner-Bank over State Tax dues as per Section 26-E of the SARFAESI Act, 2002.

The Court analyzed the provisions of Chapter IV-A of the SARFAESI Act, particularly Section 26-E, which grants priority to secured creditors over other debts and government dues. It emphasized that once a security interest is registered with CERSAI, the secured creditor holds priority over subsequent claims. The Court referenced case laws like Jalgaon Janta Sahakari Bank Ltd and Indian Overseas Bank to support its interpretation of the law.

The State Tax Authorities had issued an attachment order, claiming a right to surplus proceeds after the Petitioner-Bank's dues were settled. However, the Court held that the Petitioner-Bank's priority was established by timely registration of its security interest, rendering the State Tax Authorities' claim subordinate. The Court rejected the argument that State Authorities could enforce their charge on the same asset post-enforcement by the secured creditor, emphasizing the absurdity and legal inconsistency of such an approach.

Ultimately, the Court allowed the Writ Petition, directing the Petitioner-Bank to pay any surplus proceeds to the State Tax Authorities after settling its dues. The judgment clarified the priority of secured creditors over government dues and emphasized the importance of timely registration of security interests. The ruling was made absolute without costs, with a directive for the Petitioner-Bank to provide accounts statements to the State Tax Authorities regarding the appropriation of sale proceeds.