2025 (1) TMI 134 - HC - VAT / Sales Tax

Recovery of arrears of sales tax - priority charge over the assets - Whether the Respondent No. 5 (The Deputy Commissioner of State Tax) will have priority charge over the secured assets sold by Petitioner bank (secured creditor) under the SARFAESI Act? HELD THAT - The dicta of the Full Bench in Jalgaon Janta Sahakari Bank Ltd. 2022 (9) TMI 163 - BOMBAY HIGH COURT is squarely applicable to the present proceedings. In the ratio of the said judgment it has been held that even where there is an attachment order of the State Tax authorities prior to the secured assets attachment, without any further steps being taken towards issuing a proclamation of sale, the State Tax Authorities cannot claim priority over the dues payable to the secured creditor, whose security interest is registered with CERSAI. In the present case, the order of attachment issued by the State Tax Department is dated 11th December, 2018. It is thereafter that steps have been taken to attach the immovable property. As noted above, the registration of the Bank Security Interest with CERSAI is dated 18th December, 2014 which is much prior to the order of attachment issued by the State Tax Department. Conclusion - The claim of secured creditor that is the Petitioner Bank, will have preference over the claim of Respondents (State Tax Department). Petition disposed off.

1. ISSUES PRESENTED and CONSIDERED

The core legal question considered in this judgment is whether the Deputy Commissioner of State Tax (Respondent No. 5) has a priority charge over the secured assets sold by the Petitioner Bank (secured creditor) under the SARFAESI Act.

2. ISSUE-WISE DETAILED ANALYSIS

Relevant legal framework and precedents:

The legal framework primarily revolves around the SARFAESI Act, particularly Section 26E, which grants priority to secured creditors over other debts, including taxes owed to the government. The court also considered the Recovery of Debt Due to Bank and Financial Institutions Act, 1993, and the Maharashtra Land Revenue Code. The Full Bench decision in Jalgaon Janta Sahakari Bank Ltd. v. Joint Commissioner of Sales Tax was pivotal, clarifying the priority of secured creditors.

Court's interpretation and reasoning:

The court emphasized the non-obstante clause in Section 26E of the SARFAESI Act, which prioritizes secured creditors over government dues. It noted that the Petitioner Bank had registered its security interest with CERSAI before the State Tax Department's attachment order, thus entitling it to priority.

Key evidence and findings:

The Petitioner Bank registered its security interest with CERSAI on November 18, 2014, while the State Tax Department's attachment order was issued on December 11, 2018. The court found that the State Tax Department did not take steps to register its claim with CERSAI, which is mandatory for claiming priority.

Application of law to facts:

The court applied Section 26E of the SARFAESI Act and the precedent set by the Full Bench in Jalgaon Janta Sahakari Bank Ltd. to determine that the Petitioner Bank's claim had priority over the State Tax Department's dues. The registration of the security interest with CERSAI was a decisive factor.

Treatment of competing arguments:

The State argued that the Tax Department's attachment should have priority due to the earlier attachment order. However, the court dismissed this, citing the non-obstante clause in Section 26E and the lack of CERSAI registration by the State Tax Department.

Conclusions:

The court concluded that the Petitioner Bank, as a secured creditor with a registered interest, has priority over the State Tax Department's claim. The writ petition was allowed, granting the Petitioner Bank the right to enforce its security interest.

3. SIGNIFICANT HOLDINGS

Preserve verbatim quotes of crucial legal reasoning:

The court quoted Section 26E of the SARFAESI Act: "Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority."

Core principles established:

The judgment reinforced the principle that secured creditors with registered interests have priority over government dues, as per Section 26E of the SARFAESI Act. The importance of CERSAI registration was highlighted as a prerequisite for claiming priority.

Final determinations on each issue:

The court determined that the Petitioner Bank's registered security interest takes precedence over the State Tax Department's attachment. The writ petition was allowed, and the Petitioner Bank was entitled to enforce its security interest and receive the sale proceeds deposited in court.

In conclusion, the judgment underscores the supremacy of the SARFAESI Act's provisions in prioritizing secured creditors' claims over government dues, provided the security interest is duly registered with CERSAI.

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