2024 (5) TMI 188 - HC - VAT and Sales Tax

Attachment by the sales tax authorities over an apartment in Mumbai - priority of charges - whether as a matter of law, the Petitioner, the auction purchaser of the Walkeshwar Flat under the SARFAESI Act, is a valid recipient of free and marketable title to it? - HELD THAT - The Lender Bank had first priority in enforcement against the Walkeshwar Flat with effect from 24th January, 2020, having been the first to register with CERSAI, which was done on 2nd January, 2020 - Encore ARC, which conducted the auction on 28th February, 2023, acquired the entitlement to priority from the Lender Bank along with the assignment of the loans to the borrowers with attendant security interests on 21st March, 2020 - Although the DCST has repeatedly issued orders of restraint, there is no evidence of registration with CERSAI. The DCST has fairly stated on oath in an additional affidavit filed pursuant to directions by this Court, that no proclamation of sale has been issued. Therefore, in view of the law laid down in Jalgaon Janta, it cannot be said that there is a competing charge in favour of the DCST over the Walkeshwar Flat. The attachment orders issued prior to 24th January, 2020 are of no assistance in giving priority to the DCST in claims over the Walkeshwar Flat. With no registration with CERSAI having been made by the DCST, and no proclamation of sale having been issued, the Lender Bank s entitlement to priority has not been undermined. That entitlement flowed to Encore ARC. The consequences of such priority has led to the Petitioner having a free and marketable title free of the encumbrance claimed by the DCST. Any attachment sought to have been issued in respect of value added tax and central sales tax dues owed by SMI, insofar as it relates to the Walkeshwar Flat, is hereby quashed and set aside. The Petitioner is entitled to have the Walkeshwar Flat registered in his name and the DCST can have no objection to such registration. Petition allowed.

Summary

Issues Involved:
1. Validity of the sales tax authorities' attachment over the Walkeshwar Flat.
2. Priority of claims between the sales tax authorities and the secured creditor (Encore ARC).
3. Legal implications of the demise of Mrs. PY Shah on the attachment.
4. Application of Chapter IVA of the SARFAESI Act on the priority of claims.
5. Impact of prior legal proceedings on the current writ petition.

Summary:

Validity of the Sales Tax Authorities' Attachment:
The core issue is whether the Petitioner, as the auction purchaser of the Walkeshwar Flat under the SARFAESI Act, holds a valid and marketable title. The attachment by the sales tax authorities over the Walkeshwar Flat, purchased by the Petitioner from Encore ARC, is challenged. The attachment was issued due to tax dues owed by SMI, a partnership firm of which Bharat, the son of Mrs. PY Shah, is a partner.

Priority of Claims:
The conflict is resolved by Chapter IVA of the SARFAESI Act, effective from 24th January 2020, which gives priority to registered security interests over other claims, including tax dues. Multiple judgments, including Jalgaon Janta Sahakari Bank & Anr. Vs. Joint Commissioner of Sales Tax Nodal 9, Mumbai & Anr., have declared that secured creditors with registered security interests have priority over tax authorities.

Legal Implications of Mrs. PY Shah's Demise:
Mrs. PY Shah, who provided third-party security, passed away, and her estate, including the Walkeshwar Flat, is in contention. The DCST asserts rights against Bharat as a legal heir. However, the DCST does not have a statutory right to move against third-party security providers or their estates unless they are partners in the defaulting firm.

Application of Chapter IVA of the SARFAESI Act:
The Lender Bank registered the mortgage over the Walkeshwar Flat with CERSAI on 2nd January 2020. The priority of claims stipulated in Section 26-C(2) came into effect on 24th January 2020. The DCST did not register their attachment order with CERSAI, thus the Lender Bank's claim has priority. Various enforcement measures under the SARFAESI Act were taken by the Lender Bank, including physical possession of the Walkeshwar Flat before the DCST's attachment.

Impact of Prior Legal Proceedings:
The Lender Bank's prior writ petition challenging a demand notice by the DCST was dismissed due to non-appearance. However, the change in law on 24th January 2020, which altered the priority of claims, supports the Petitioner's case.

Conclusions and Directions:
1. The Lender Bank had first priority in enforcement against the Walkeshwar Flat from 24th January 2020, having registered with CERSAI on 2nd January 2020.
2. Encore ARC, which conducted the auction, acquired this priority along with the assignment of loans and security interests.
3. The DCST's repeated restraint orders are ineffective due to lack of registration with CERSAI and no proclamation of sale.
4. The attachment orders issued before 24th January 2020 do not give priority to the DCST over the Walkeshwar Flat.
5. The Petitioner is entitled to have the Walkeshwar Flat registered in his name, free from the DCST's claims.
6. The DCST can claim any residual proceeds from the sale of the Walkeshwar Flat, after discharging Encore ARC's dues, proportional to Bharat's share in Mrs. PY Shah's estate.
7. The DCST retains the right to pursue other assets of SMI and its partners, subject to no conflicting priority by secured creditors under Chapter IVA of the SARFAESI Act.

The Writ Petition is allowed, and the rule is made absolute with no order as to costs.