2024 (5) TMI 61 - HC - VAT and Sales Tax

Recovery of Tax Dues versus Secured Creditors - Continued assertion of rights by the State of Maharashtra against the purchaser of two properties auctioned - priority of security interest and its enforcement over the Secured Assets - enforcement of a mortgage created by an erstwhile owner of the properties - HELD THAT - Once an enforcement of a security interest is effected against a secured asset, the enforcement of the subsequently registered security interest would lead to an entitlement to any surplus or residual proceeds arising out of the enforcement of the prior security interest, and by no stretch could the subservient security interest be regarded as a fresh and wholesome security interest to be enforced again against either the asset in question or against the purchaser of such asset. Following directions and declarations have been issued - a) SBI enjoys priority of security interest and its enforcement over the Secured Assets, as compared with the interests of the State; b) SBI having sold the Secured Assets pursuant to the enforcement measures under the SARFAESI Act (not only by reason of the priority under Section 26-C(2) but also by reason of Section 26-E of the SARFAESI Act), was entitled to be paid in priority over the State tax authorities. By a conjoint reading of the two provisions, the enforcement against the Secured Assets led to a clean and clear title free from the purported encumbrance claimed by the State s tax authorities being vested in the Petitioner, who is the purchaser of the Secured Assets in the auction; c) The State s tax authorities are indeed entitled to any residual proceeds from the sale towards discharge of the Borrower s dues owed to them. Towards this end, SBI is directed to provide to the State, a statement of accounts in respect of the dues owed by the Borrower to SBI and the appropriation of sale proceeds by SBI pursuant to the auction of the Secured Assets; d) Consequently, mutation entries indicating an interest enjoyed by the State s tax authorities over the Secured Assets towards tax dues are directed to be removed within a period of two weeks from today. The registrar s office is also directed to register the transfer of the Secured Asset from the erstwhile owners to the Petitioner in accordance with law, within a period of two weeks from today; and e) Nothing contained in this judgement is an expression of an opinion on the right of the State s tax 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. The Writ Petition is disposed of accordingly.

Summary

Issues Involved:
1. Priority of Security Interest
2. Proposition of Continued Enforcement
3. Directions and Declarations

Summary:

Priority of Security Interest:
The primary issue is whether the State's tax authorities can enforce their right to recover tax dues against the purchaser of properties auctioned by SBI, despite the bank having a prior registered mortgage. The court reiterated that "where a secured creditor has registered his security interest with CERSAI prior in time," the priority of security interests follows the order of registration. According to Section 26-C(1) and 26-C(2) of the SARFAESI Act, the claim of the creditor who registers prior has priority over any subsequent security interest. The mortgage in favor of SBI was created in 2010 and registered in 2012, thus having priority over the State's tax authorities' claims. The court cited previous judgments, including Union Bank of India vs. Deputy Commissioner of Sales Tax and Indian Overseas Bank vs. Deputy Commissioner of State Tax, affirming that the State's tax authorities cannot claim priority over the dues payable to the secured creditor.

Proposition of Continued Enforcement:
The State's argument that subsequent security interests can be enforced after the prior interest is not consistent with Section 26-C(2) of the SARFAESI Act. The court clarified that enforcement of a subsequent security interest is subservient to the prior one and can only claim any surplus proceeds from the prior enforcement. The court rejected the argument that subsequent interests could continue enforcement against the same asset, as it would render the concept of priority meaningless and create absurd situations where multiple enforcements against the same asset would deter potential buyers.

Directions and Declarations:
The court issued several directions:
a) SBI enjoys priority of security interest over the State.
b) The Petitioner, as the purchaser, holds a clean and clear title free from the State's encumbrances.
c) The State's tax authorities are entitled to any residual proceeds from the sale. SBI must provide a statement of accounts to the State.
d) Mutation entries indicating the State's interest over the properties must be removed within two weeks. The registrar must register the transfer of the properties to the Petitioner within the same period.
e) The judgment does not affect the State's right to enforce against other assets not subject to a registered security interest under the SARFAESI Act.

The court made the rule absolute and set a compliance reporting date for 18th June, 2024. The judgment will be signed digitally, and concerned parties will act on a digitally signed copy.