2024 (7) TMI 1309 - HC - VAT and Sales Tax

Challenge to attachment orders - Priorty charge over dues - Respondent No. 2 (The Deputy Commissioner of Sales Tax) will have priority charge over the secured assets sold by Petitioner bank (secured creditor) under the SARFAESI Act or not - HELD THAT - Section 26E of the SARFAESI Act very clearly mentions that the secured creditors shall be paid in priority over all other debts and taxes. In the present proceedings it is Petitioner Bank who has registered its claim against the secured assets with CERSAI earlier i.e. 4/10/2022, in view of the law as laid down by the Full Bench of this Court, in Jalgaon Janta Sahakari Bank Ltd. 2024 (5) TMI 188 - BOMBAY HIGH COURT and as per Section 26E of the SARFAESI Act, the Petitioner Bank (secured creditor) will have priority over the revenues and taxes of the State Government. The present Writ Petition filed by Petitioner Bank (secured creditor) deserves to be allowed - the Respondent No. 2 (the Deputy Commissioner of Sales Tax, Pune) would be free to take such steps as they deem fit against the Respondent No.6 for recovery of Sales Tax dues as per law. Petition allowed.

Summary

Issues Involved:
1. Priority of claim over secured assets between the Petitioner Bank (secured creditor) and the Sales Tax Department.
2. Validity of attachment orders issued by the Deputy Commissioner of Sales Tax.

Issue-wise Detailed Analysis:

1. Priority of Claim Over Secured Assets:
The primary issue addressed was whether the Deputy Commissioner of Sales Tax (Respondent No. 2) had a priority claim over the secured assets sold by the Petitioner Bank under the SARFAESI Act. The Petitioner Bank had registered its mortgage charge with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) on 4/10/2022. The Respondent No. 2 registered its claim for arrears of sales tax on 20/2/2023 and 28/2/2023, subsequent to the Petitioner Bank's registration.

The Full Bench of the High Court in *Jalgaon Janta Sahakari Bank Ltd. vs. Joint Commissioner of Sale Tax Nodal 9, Mumbai* clarified the priority of secured creditors. According to Section 26E of the SARFAESI Act, which begins with a non-obstante clause, secured creditors with CERSAI registration have priority in payment over all other dues, including taxes payable to the Central or State Government. The judgment emphasized that the word "priority" was used deliberately to ensure that secured creditors' claims take precedence over other debts and taxes.

2. Validity of Attachment Orders:
The Petitioner Bank challenged the attachment orders dated 14/9/2022 and 15/9/2022 issued by the Deputy Commissioner of Sales Tax. The Sales Tax Department argued that their claim over the secured assets, in the form of arrears of sales tax, had priority. They cited the judgment in *Purushottam Prabhakar Chavan vs. CST*, which was deemed not applicable as it also referenced the precedence of secured creditors' claims as established in *Jalgaon Janta Sahakari Bank Ltd.*

The court found that the Petitioner Bank had registered its claim with CERSAI before the Sales Tax Department. Section 26E of the SARFAESI Act clearly states that secured creditors shall be paid in priority over all other debts and taxes. Consequently, the attachment orders issued by the Deputy Commissioner of Sales Tax were invalid as they did not have priority over the secured creditor's registered claim.

Judgment:
The court ruled in favor of the Petitioner Bank, allowing the writ petition. The attachment orders dated 14/9/2022 and 15/9/2022 were quashed and set aside. The court declared that the Petitioner Bank had the right to enforce the security by selling the secured assets, unhindered by the sales tax claim made by the Sales Tax Department. The Authorized Officer of the Petitioner Bank was permitted to complete the auction sale process and transfer unencumbered rights in respect of the secured assets.

Conclusion:
The judgment reaffirmed the priority of secured creditors' claims over other debts and taxes when registered with CERSAI, as per Section 26E of the SARFAESI Act. The Sales Tax Department's attachment orders were invalidated, and the Petitioner Bank was granted the right to proceed with the sale of the secured assets. The court allowed the writ petition and made the rule absolute in terms of the prayer clauses sought by the Petitioner Bank.