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2020 (12) TMI 693

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..... tions 33 and 34 of the MVAT Act on 10th March 2016 whereas attachment under Section 32 of the MVAT Act was vide letter dated 28th March, 2018 to the Petitioner. Petitioner had initiated proceedings under the provisions of the RDB Act. It has also taken steps as noted above to enforce the security interest in the said property vide notice dated 27th November 2017 under Section 13(2) of the SARFAESI Act prior to the notice dated 28th March 2018 of Respondent No.2. The facts in the case at hand being similar to the facts in the case of ASREC (INDIA) LIMITED, A COMPANY VERSUS THE STATE OF MAHARASHTRA, THE OFFICE OF THE SALES TAX AND THE OFFICIAL LIQUIDATOR OF THE HIGH COURT OF BOMBAY AS THE OFFICIAL LIQUIDATOR OF M/S. CRYSTAL MIRAGE PVT. LTD. [ 2019 (12) TMI 633 - BOMBAY HIGH COURT] that decision would squarely be applicable to the facts of this case that if any Central statute creates priority of a charge in favour of a secured creditor, the same will rank above the charge in favour of a State for a tax due under the value added tax of the State. Therefore, in our view what becomes relevant in the facts of this case is the issue of priority of charge on the said assets of secured .....

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..... W-7 informed vide the Notice dated 28.03.2018 bearing Ref. No. DCST/KOL-VAT-E-008/Krishna Industries/Recovery/B-271. b. for an interim order and injunction of this Hon ble Court pending hearing and final disposal of this Petition directing the Respondent Nos.1 and 2 to; (i) forthwith remove their charge from the said Plot No.W-7; and (ii) forthwith raise their attachment on the said Plot No.W-7 informed vide the Notice dated 28.03.2018 bearing Ref. No. DCST/KOL-VAT-E-008/Krishna Industries/Recovery/B-271. (iii) forbear from interfering in any manner with the Petitioner s right to proceed under the provisions of the SARFAESI Act to enforce its security interest in the said Plot No.W-7 of the Respondent No.3. c. Ad-interim reliefs in terms of prayer (b) above; d. for costs of this petition; e. for such other and further reliefs as the nature and circumstances of the case may require and this Hon ble court may deem fit and proper. 4. Before we proceed to deal with the controversy at hand, brief facts of the case are set out as under. 5. Petitioner is a Bank, constituted and functioning under the State Bank of India Act 1955 with its Corporate .....

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..... lic possession of the said Plot No.W-7 was taken on 21st February, 2018 and the physical possession was taken on 29th May, 2019. 9. Petitioner received notice dated 28th March 2018 bearing Ref. No. DCST/ KOL- VAT- E- 008/ Krishna Industries /Recovery /B271 from Respondent No.2 informing the Petitioner regarding the attachment of the said Plot No.W-7 under the provisions of Section 32 of the MVAT Act in pursuance of which proceedings under the MLRC were initiated by them for recovery of VAT dues. Petitioner also received a communication / notice dated 28th March 2018 being Ref.No.DC/E-008/KOP/213/F-318/REC/B-270 issued under Section 33(1) of the MVAT Act requiring to pay Respondent No.2 any amount due from the Petitioner to or held by the Petitioner for or on behalf of Respondent No.3 upto the amount of sales tax arrears as detailed in the said notice. Provisions of Section 37 of the MVAT Act regarding first charge of the State in respect of liability under the MVAT Act subject to any provision regarding creation of first charge in any Central Act was also brought to the notice of the Petitioner. Provisions of Section 38 of the MVAT Act regarding transfers or parting of possessio .....

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..... 7; 85,56,784/- alongwith further interest and that they had first charge/claim of sales tax. 14. It is however submitted in the Petition that sale of Plot No.W-7 stands cancelled and as such the said auction sale has become irrelevant for the purpose of this writ petition. 15. Respondent No.2 has published public notice on 24 th September 2019 in the newspaper Pudhari, Kolhapur edition to the general public that (i) the Respondent No.3 was in arrears of sales tax dues as detailed therein, (ii) that they had a first charge on the movable/ immovable assets of the Respondent No.3 as per the provisions of the relevant Statute, (iii) that any transaction of purchasing/renting of assets of the Respondent No.3 without the No Objection of the Respondent No.2 shall be presumed to have been done with an intention to avoid payment of sales tax dues and that such transaction shall be declared as void in terms of the relevant provisions of law. 16. Petitioner states and submits that the aforesaid act of the Respondent No.2 in placing their charge/attaching the said Plot No.W-7, not raising/removing the same despite being appraised and informed of the correct position in law, is per .....

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..... uary 2020. In the meanwhile, Respondent Nos.1 and 2 had already asserted the claim of the State Government for recovery of dues of Respondent No.3. It is therefore submitted that in view of the prospective nature of the amendment and the decision of the Bombay High Court being after initiation of recovery proceedings, the State Government has priority charge over the bank dues. Accordingly, it is contended that the petition be rejected. 19. Mr. Vivek Sawant, learned counsel for the Petitioner submits that rejoinder affidavit is not required and the matter can be argued on the basis of pleadings on record. He has placed reliance upon the provisions of Section 31-B of the RDB Act and Section 26-E of the SARFAESI Act to submit that the act of the Respondent No.2 in placing their charge/attaching the said Plot No.W-7, not raising / removing the same despite being appraised and informed of the correct position in law, is per se, illegal, unlawful, unreasonable and in violation and breach of the statutory provisions. He would submit that the said Plot No.W-7 of the borrower (Respondent No.3) on which Respondent No.2 has levied charge/attachment was already mortgaged in favour of the P .....

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..... . As the Petitioner has failed to disclose any such registration, the debts due to the Petitioner cannot be paid in priority over the tax dues. According to her, Section 26-E of the SARFAESI Act is not applicable to the facts of this case as the said section has been notified on 24th January, 2020 and is effective prospectively. She would submit that the Respondent Nos.1 and 2 have already asserted the claim of the State Government for recovery of tax dues and that the attachment has been initiated to protect the interest of the revenue. She reiterates that the notification making Section 26-E effective prospectively is with effect from 24th January 2020 whereas the case of the Petitioner falls prior to the notification of the amendment. She would submit that the contentions of the Petitioner-Bank are therefore liable to be rejected. 21. We have heard learned counsel for the parties and also perused the papers and proceedings in the matter. 22. This is a case where Petitioner had lent monies to Respondent No.3, inter-alia, on the basis of security of the equitable mortgage of the said property created on 13th January 2014 and extended on 22nd February 2014. Since there was fa .....

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..... (iv) any right or interest in the security, whether full or part underlying such debt or receivables; or (v) any beneficial interest in property, whether movable or immovable, or in such debt, receivables, whether such interest is existing, future, accruing, conditional or contingent; or (va) any beneficial right, title or interest in any tangible asset given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of such asset or an obligation incurred or credit otherwise provided to enable the borrower to acquire such tangible asset; or (vb) any right, title or interest on any intangible asset or licence or assignment of such intangible asset, which secures the obligation to pay any unpaid portion of the purchase price of such intangible asset or an obligation incurred or credit otherwise extended to enable the borrower to acquire such intangible asset or obtain licence of the intangible asset; or] ( vi) any financial assistance; 27. Thus, from a combined reading of the aforesaid definitions, it is clear that Petitioner is a secured creditor as it has a debt / .....

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..... eation of charge/security interest as well as lodging of the claim and dates of commencement of recovery proceedings to stake a claim of first charge over the said property. Petitioner s mortgage was created on the said property on 13th January 2014 and as secured creditor it has claimed priority of charge over the charge of the Sales Tax Department. We find that Respondent No.2 had claimed first charge on the said property, inter alia, stating that it had initiated recovery proceedings under Sections 33 and 34 of the MVAT Act on 10th March 2016 whereas attachment under Section 32 of the MVAT Act was vide letter dated 28th March, 2018 to the Petitioner. Petitioner had initiated proceedings under the provisions of the RDB Act. It has also taken steps as noted above to enforce the security interest in the said property vide notice dated 27th November 2017 under Section 13(2) of the SARFAESI Act prior to the notice dated 28th March 2018 of Respondent No.2. 31. Answering Respondents have relied on Section 37 of the MVAT Act which is quoted as under:- 37. Liability under this Act to be the first charge.- Notwithstanding anything contained in any contract to the contrary, but .....

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..... reported in AIR 2017 Madras 67, in Assistant Commissioner Vs. Indian Overseas Bank Ors . of the High Court of Gujarat in Special Civil Application No.17891 of 2018 Kalupur Commercial Co-operative Bank ltd. Vs. State of Gujarat., this Court agreed with the consistent view taken in the above decisions and held that if any central statute creates priority of charge in favour of the secured creditor, the same will rank above the charge in favour of the State for its dues under the value added tax of the State. The relevant paragraphs of the decision in the case of ASREC (India) Limited (Supra) are quoted as under : 12. A perusal of Section 37 of MVAT Act, 2002 reveals that though it commences with a non-obstante clause, but it recognizes that the same shall be subject to any provision regarding creation of the first charge in any Central Act. Therefore, if, by virtue of any provision under a Central Act, any priority or charge is created in favour of any party the same shall prevail. 13. The claim of the Petitioner is based on Section 31B of RDB Act, 1993 which reads as follows - 31B. Notwithstanding anything contained in any other law for the time being in force .....

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..... y the respondent/ Commercial Department has been issued on 19.07.2017. The Amendment Act, 2016, which incorporates Section 31B reads as under: - 31B Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority. Explanation.- For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016, in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code. 9. Thus, the aforesaid statutory provisions makes it very clear that the dues of the banks are to be recovered at the first instance. Section 33 of the MP VAT Act, 2002 reads as under: - 33: Tax to be first charge (1) Notwithstanding anything to .....

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..... f the amendment in the Central Act, this Court is of the considered opinion that by no stretch of imagination, the State Government can be permitted to auction the property in question as Bank of Baroda has priority charge over the said property in light of the amendment which has been quoted above. 17. Considering a pari materia provision in the Value Added Tax Act in the State of Tamil Nadu, in Indian Overseas Bank Case (supra) the Full Bench of the Madras High Court took a similar view. 18. Considering another pari materia provision in the Gujarat Value Added Tax 2003, in Kalupur Commercial Co.operative Bank Ltd. (Supra), a Division Bench of the Gujarat High Court held as under: 35. While it is true that the Bank has taken over the possession of the assets of the defaulter under the SARFAESI Act and not under the RDB Act, Section 31 B of the RDB Act being a substantive provision giving priority to the secured creditors , the same will be applicable irrespective of the procedure through which the recovery is sought to be made. This is particularly because Section 2(la) of the RDB Act defines the phrase secured creditors to have the same meaning as assigned to .....

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..... reating a security interest. As per learned Counsel as per Sub-section (2) of Section 26B which is a part of Chapter IVA a secured creditor has to ensure that the security interest is recorded in the record of the Central Registry. The argument therefore was that unless this is done, the priority of interest contemplated by Section 26E would not be applicable. 21. The argument is without any substance because the law declared in the four opinions above referred to is that if any Central Statute creates priority of a charge in favour of a secured creditor, the same will rank above the charge in favour of a State for a tax due under the Value Added Tax of the State. But we note the fact that the security interest has been entered in the record of the Central Registry 34. In our considered view the facts in the case at hand being similar to the facts in the case of ASREC (India) Limited (Supra) that decision would squarely be applicable to the facts of this case that if any Central statute creates priority of a charge in favour of a secured creditor, the same will rank above the charge in favour of a State for a tax due under the value added tax of the State. Therefore, in o .....

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..... ses of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016, in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code. 3. There is, thus, no doubt that the rights of a secured creditor to realise secured debts due and payable by sale of assets over which security interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority. This section introduced in the Central Act is with ''notwithstanding'' clause and has come into force from 01.09.2016. 4. The law having now come into force, naturally it would govern the rights of the parties in respect of even a lis pending. 5. The aforesaid would, thus, answer question (a) in favour of the financial institution, which is a secured creditor having the benefit of the mortgaged property. 6. In so far as question (b) is concerned, the same is stated to relate only to auction sal .....

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..... Petitioner s mortgage was not registered under Section 26-D of the SARFAESI Act, in view of our above discussion on Section 31-B of the RDB Act, the alleged non registration, would not affect the legal position on the issue of priority. 39. In view of the above and being in respectful agreement with the views expressed in the cases cited above, we hold that the mortgage of the secured creditor viz. the Petitioner Bank gets prior charge over the charge of the Respondents for tax/VAT dues. 40. We therefore quash and set aside the attachment /charge on the said Plot No. W-7 under Section 32 of the MVAT Act as well as notices issued in relation thereto by Respondent No.2. 41. Before parting with the record we would like to state that we are conscious of the decision of the Supreme Court in the case of Central Bank of India Vs. State of Kerala [2009] 4 SCC 94 wherein the Supreme Court took the view that if the State Act creates first charge on the property, then secured creditor cannot have claim against the statutory provision. The Supreme Court was considering the provisions of Section 38-C of the Bombay Sales Tax Act 1959 and Section 26-B of the Kerala General Sales Tax .....

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