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2009 (7) TMI 1154 - HC - VAT and Sales TaxWhether the State Government can claim priority over another person, whose debt is also a secured debt? Held that - Security agreement is already existing between the bank and borrower, as defined under section 2(zb) which means an agreement, instrument or any other document or arrangement under which security interest is created in favour of the secured creditor including the creation of mortgage by deposit of title deeds with the secured creditor. If the status of the State is looked into, it will be evident that it can claim priority of debt over others in regard to the arrears of tax due to the State. This apart, the assets being secured assets with the Bank, having its secured interest over the property, the Bank being a secured creditor and its debt being a secured debt, we hold that the principle of first charge/ priority of State over the property will not be applicable in the present case. We, accordingly, set aside the impugned judgment dated september 17, 2008 Reported as Indian Bank v. Commercial Tax Officer 2008 (9) TMI 882 - MADRAS HIGH COURT passed by the learned single Judge made in W.P. No. 18975 of 2007 and also the gazette Notification No. 01 dated January 5, 2007 and consequential order bearing No. NK.A3.2310/2002 dated March 16, 2007 so far as it relates to the land which was the secured assets of the bank and which has already been sold. W.P. allowed.
Issues Involved:
1. Priority of State Government's tax claim over secured creditors under the SARFAESI Act, 2002. 2. Validity of auction conducted by the bank under the SARFAESI Act, 2002. 3. Interpretation of Section 24 of the Tamil Nadu General Sales Tax Act, 1959 (TNGST Act). Issue-wise Detailed Analysis: 1. Priority of State Government's Tax Claim Over Secured Creditors: The core issue revolves around whether the State Government's claim for unpaid sales tax has priority over the secured interest of the bank under the SARFAESI Act, 2002. The State argued that under Section 24(1) and (2) of the TNGST Act, any tax arrears become an immediate charge on the property, giving it priority over all other claims. The bank countered that as a secured creditor, its claim should have precedence. 2. Validity of Auction Conducted by the Bank: The bank conducted an auction of the mortgaged property under Section 13(4) of the SARFAESI Act, 2002, and sold it to a third party. The State Government later issued proceedings to recover unpaid sales tax from the auction proceeds, declaring the auction void. The bank challenged this, asserting that the auction was conducted lawfully under the SARFAESI Act, 2002. 3. Interpretation of Section 24 of the TNGST Act: The legal question here is whether Section 24 of the TNGST Act, which creates a statutory charge on the property for unpaid taxes, overrides the provisions of the SARFAESI Act, 2002. The State argued that the statutory charge created by Section 24 gives it priority over the bank's secured interest. Comprehensive Analysis: Priority of State Government's Tax Claim Over Secured Creditors: The court referred to previous judgments, including the Division Bench decision in M. Nagarajan v. Deputy Commercial Tax Officer, Tindivanam, and the Supreme Court's ruling in Central Bank of India v. State of Kerala. It was held that the SARFAESI Act and the DRT Act do not create a first charge in favor of the bank. However, the court also noted that the common law principle of crown debts, which allows the State to claim priority, applies only to unsecured debts. The court concluded that the State's claim for unpaid taxes does not have priority over the secured debts of the bank. Validity of Auction Conducted by the Bank: The bank had taken possession of the mortgaged property and conducted an auction under the SARFAESI Act, 2002. The court found that the auction was conducted in compliance with the SARFAESI Act, and the bank, as a secured creditor, had a legitimate claim over the proceeds. The State's subsequent claim for unpaid taxes from the auction proceeds was not upheld, as it did not have priority over the bank's secured interest. Interpretation of Section 24 of the TNGST Act: The court examined Section 24 of the TNGST Act and concluded that while it creates a statutory charge for unpaid taxes, this charge does not override the secured interest of the bank under the SARFAESI Act, 2002. The court relied on the Supreme Court's interpretation in Union of India v. SICOM Ltd., which stated that statutory dues can claim priority only over unsecured debts, not secured ones. Conclusion: The court set aside the impugned judgment dated September 17, 2008, and the gazette notification and consequential order issued by the State Government. It was held that the bank, being a secured creditor, had a valid claim over the secured assets, and the State's claim for unpaid taxes did not have priority. The writ appeal was allowed, and the bank's auction and subsequent sale of the property were upheld. There was no order as to costs.
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