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TMI Blog2023 (3) TMI 1066X X X X Extracts X X X X X X X X Extracts X X X X ..... m with CERSAI? HELD THAT:- The issue as to who will have priorty in view of Section 26E of SARFAESI Act was referred to the Full Bench of this Court in case of Jalgaon Janta Sahakari Bank Ltd. Anr. [ 2022 (9) TMI 163 - BOMBAY HIGH COURT ] where Full Bench considered Section 26-C of the SARFAESI Act and held that the proviso to Section 26-C also declares that a secured creditor, who has registered the security interest or other creditor who has registered the attachment order in its favour, shall have priority of claims over subsequent security interest created over the property in question, any transfer by way of sale, lease, assignment or licence of such property or attachment order subsequent to such registration. This Court noted that since the equitable mortgage could be created without registration, the transaction between the lender and the borrower largely remained secret. There was no way anyone else could get an inkling thereof, until the provisions of CERSAI registration were enacted. This Court held that to curb such problems and other undesirable consequences, the Parliament designed Chapter IV-A in such a manner to include provisions which, on the one hand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise without such registration. The auction purchaser have participated in the e-auction conducted by the Petitioner Bank who had priority over the secured asset in view of registration of the equitable mortgage under Section 26E of the Securitization Act with CERSAI - the Petitioner Bank is not liable to take cognizance of the claim of Respondent No.1 over the secured asset in view of the Petitioner bank having priority over the secured asset and thus, is not liable to pay any taxes or other liabilities out of sale proceeds of the secured asset to the Respondent No.1. The Auction Purchasers claim their rights from the Bank having priority over the secured asset which was not liable to pay any taxes to the Respondent No.1 Authority. The principles laid down by the Full Bench on this aspect clearly applies to the facts of the present case. The submission of the learned special counsel for the Respondent No.1 Authority that the Petitioner cannot waive their right to forfeit the earnest money deposit and to accept the balance consideration amount subsequently, depending upon the outcome of this petition filed by the Petitioner Bank, cannot be agreed upon - there is no substance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for quashing and setting aside the attachment order dated 22nd April, 2022 passed by the Assistant Commissioner of State Tax (hereinafter referred to as Authority ). The Petitioner in Writ Petition (L) No. 21538 of 2022 has prayed for a writ of Certiorari for quashing and setting aside the attachment order dated 22nd April, 2022 passed by the Authority and further seeks an order and direction against Respondent No.2 Society to issue NOC to the Petitioners for effecting the transfer of the Secured Assets in its name, without any requirement of making payment of the dues of the Respondent No.3 and/or NOC of Respondent No.3. Facts and Submissions in Writ Petition (L) 20484 of 2022 3. It is the case of the Petitioner Bank that during the period between 2004 and 2009, Respondent Nos. 2 to 11 (hereinafter referred to as Borrowers ) availed various credit facilities from the Petitioner Bank to an aggregate extent of Rs. 3944.85 lacs, as set out in paragraph 4 of the Writ Petition. Respondent Nos.4 to 8 have created equitable mortgage of residential Flat No. 182, 18th Floor, along with two open parking spaces at Abhilasha Premises Co-operative Housing Society Ltd., Jolly Maker ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The e-auction was conducted on 10th March, 2022. 8. The Respondent Nos.12 and 13 (hereinafter referred as auction purchasers ) participated in the said e-auction and submitted a bid of Rs.7.55 crore along with 10% Earnest Money Deposit of Rs. 75 lacs. On 10th March, 2022, the Petitioner Bank confirmed the auction purchasers as highest bidder. The auction purchasers paid 25% EMD of Rs.1,88,75,000/- They requested for grant of extension of time until 30th April, 2022 for payment of balance 75% of the bid amount. The Petitioner Bank granted extension vide letter dated 25th March, 2022. 9. It is the case of the Petitioner Bank that as on 15th June,2022, the total outstanding dues recoverable by the Petitioner Bank was Rs.1,04,49,933.76 due and payable by the borrowers and further interest at the contractual rate. It is the case of the Petitioner Bank that in the meantime, the Respondent No.1 Authority passed the impugned order on 22nd April, 2022 attaching the said Secured Asset. It is the case of the Petitioner Bank that since at the time of filing of this Writ Petition, the Petitioner Bank could not file the said CERSAI report and under bonafide belief, created a new registrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the society and the sales tax dues as informed to them by the society. The Petitioner Bank accordingly addressed a letter dated 25th March, 2022 to the Society informing about the sale of the Secured Asset to the auction purchasers and also informed that under Section 26E of the SARFAESI Act, the Petitioner Bank requested to issue No Objection Letter to the auction purchasers. 15. On 28th March, 2022, the society informed the Petitioner Bank about the pending society dues of Rs.23,21,452/- and also informed about the claim of Sale Tax Department of Rs.4,24,89,312/-. On 8th April, 2022, the Petitioner Bank addressed a letter to the Society, reiterating that the Petitioner Bank has priority over the said Secured Asset being the Secured Creditor under Section 26E of the SARFAESI Act and requested the Society to issue No Objection Letter to the auction purchasers for registration of the said Secured Asset. The auction purchasers have shown their willingness to pay the society dues, so as to get Secured Asset registered in favour of the flat purchasers. 16. On 21st April, 2022, the auction purchasers addressed a letter to the Petitioner Bank that the title of the Secured Asset ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o.1 Authority and also the Additional Affidavit filed by the Petitioner Bank. She submitted that admittedly, the Secured Asset was mortgaged in favour of the Petitioner Bank by the borrowers, who had availed various credit facilities from the Petitioner Bank to an aggregate extent of Rs. 3944.85 lacs during the period between 2004 and 2009 and became defaulters and the Petitioner Bank had already taken symbolic possession of the Secured Asset on 21st March, 2022. 21. In pursuance to the action initiated by the Petitioner Bank under Section 14 of the SARFAESI Act, the Chief Metropolitan Magistrate passed an order for taking physical possession of the Secured Asset in favour of the Petitioner Bank. The Petitioner Bank has taken physical possession on 19th September,2019. It is submitted by the learned counsel for the Petitioner Bank that the security asset was subsequently sold by the e-auction on 10th March, 2012 in which the auction purchasers was found to be successful bidder and also paid 25% Earnest Money Deposit of Rs.1,88,75,000/- to the Petitioner Bank. 22. It is submitted by the learned counsel for the Petitioner Bank that the Petitioner Bank has already registered the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order date 22nd April, 2022 issued by the Authority. 25. Learned counsel for the Petitioner Bank placed reliance on various paragraphs of the judgment delivered by the Full Bench of this Court on 30th August, 2022 in case of Jalgaon Janta Sahakari Bank Ltd. and Anr. Vs. Joint Commissioner of Sales Tax Nodal 9, Mumbai and Anr. in Writ Petition No. 2935 of 2018 and batch of Petitions. He submitted that the Petitioner Bank came to know about the alleged encumbrance on the secured asset only after the sale was conducted in respect of the secured asset in favour of the auction purchasers. The attachment of the secured asset took place only after the auction of the secured asset. The auction purchasers were informed about such charge alleged to have been created by the Respondent No.1 Authority upon the secured asset from the society much later. She submitted that in view of the impugned order passed by the Respondent No.1 Authority, the Petitioner Bank could not recover the balance 75% amount of the sale proceeds and could not confirm the sale in favour of the auction purchasers. 26. Learned counsel for the Petitioner Bank invited our attention to the correspondence exchanged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent No.1 Authority. Admittedly, no such notice was issued by the Respondent No.1 Authority upon the society in respect of Flat No.182 i.e. the secured asset. It is submitted that even the said order of attachment dated 16th December, 2017 was passed in respect of Flat No.181 and not passed in respect of Flat No.182. 30. It is submitted that the Petitioner Bank had already informed the society on 8th February, 2022 about the Mortgage of the said secured asset with the Petitioner Bank and also about the physical possession thereof with the Petitioner Bank. Petitioner Bank informed that it was in a process of sale of the said secured asset under the provisions of the SARFAESI Act and requested the society to inform the pending society s dues as on the date of the said letter and the charges of transferring the property. She submitted that even at that stage the society did not inform about the alleged encumbrance upon the secured asset. 31. Learned counsel for the Petitioner Bank invited our attention to the averments made by the society in the Affidavit in Reply filed in Writ Petition (L) No. 21538 of 2022, filed by the auction purchasers, stating that the as per the recor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecured asset in the manner known to law and followed it up with a proclamation, prior to rights of the Bank as secured creditor, who had registered the security interest with CERSAI, were crystallized. 35. Learned counsel for the Petitioner Bank placed reliance on the judgment in case of Jalgaon Janta Sahakari Bank Ltd. and Anr. (supra), and more particularly paragraph 299 and 300 of the said judgment and submitted that the Respondent No.1 Authority did not claim that they had registered the charge/attachment order with the CERSAI to adhere to the mandate contained in Section 26B(4) of the SARFAESI Act. Non-registration of the claim and/or order of attachment entails the consequences envisaged by sub-section (2) of Section 26C of the SARFAESI Act. She submitted that the Petitioner Bank thus cannot be deprived of the right of priority under Section 26E of the SARFAESI Act. Since the Petitioner Bank has already registered the security interest with the CERSAI and since the Respondent No.1 Authority had failed to register its claim and/or order of attachment, the claim of the Respondent No.1 Authority becomes subservient to the right of the Petitioner Bank as secured creditor. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h December, 2022 and also the Additional Affidavit filed by the auction purchasers. He submitted that the auction purchasers had visited the secured asset on four occasions. He relied upon the Affidavit filed by Rahul Kapoor, residing in the same building, in which the said secured asset is situated. He averred in the said Affidavit that when he had visited the secured asset, along with the auction purchasers, he could not see any notice of the State Tax Department or any other Government from time to time over the secured asset, intimating lien/charge on the secured asset. The society never informed the auction purchasers about the charge or dues of the Sales Tax or any Government department on the secured asset. 40. It is submitted by the learned counsel that the auction purchasers relied upon the Search Report submitted by Mr. Rakesh P. Mali stating that he had taken search in the office of the Sub-Registrar in respect of the Secured Asset from 2008 to 2022 and found NIL encumbrance. He also relied upon the Search Report submitted by Mr. S.G. Angchekar, Search Clerk from 2003 to 2022 and found that during the said period from 2003 to 2022, there was no encumbrance on record a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Maharashtra Land Revenue Code which in this case are not complied by the Respondent No.1 Authority before levying the impugned attachment of the secured asset. It is submitted that right of the auction purchasers is based on the rights of the Petitioner Bank and thus knowledge of the auction purchasers about the sales tax dues, if any, is of no significance. 45. Mr. Sonpal learned Special Counsel for the Respondent No.1 Authority, invited our attention to the prayers in both the Writ Petitions. He submitted that auction of the writ property was admittedly held on 10 March, 2022 whereas Security Interest was registered by Petitioner Bank with CERSAI on 23 June, 2022. He submitted that on the date of effecting Sale of the writ property, the security interest of the Petitioner Bank was not registered with CERSAI. Thus, Petitioner Bank cannot claim any priority of its claim over the sale proceeds of the said property above the Respondent No.1 Authority. 46. Learned Special Counsel invited our attention to the Section 37 of the Maharashtra Value Added Tax Act and submitted that Respondent No.1 Authority has first charge on the property of the dealer/borrower i.e. Respondent No. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen there is no defence taken by the borrowers at any stage. The auction purchasers has failed to pay balance consideration of the Sale to the Petitioner Bank. The Petitioner Bank has acted in terms of Rule 9 of the Securitization (Enforcement of Security Interest) Rules and forfeited the Earnest Money Deposit made by auction purchasers. He submitted that Petitioner Bank has forfeited Earnest Money Deposit, therefore, the Petitioner Bank does not have any power to revoke forfeiture and only option that remains with the Petitioner Bank is to re-advertise sale and enforce Security Interest. 51. It is submitted by the learned Special Counsel that under Rule-9(4)(5) of the Security (Enforcement of Security Interest) 2002, if the auction purchasers committed default in payment in respect of purchase price, even if, any extension can be granted by Petitioner Bank for payment of balance amount, such extension would not be beyond the period of three months. He submitted in this case auction purchasers have not paid balance amount within a period of three months from the date of auction, and the Petitioner-Bank having forfeited Earnest Money Deposit, the entire sale transaction stands ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice is with the auction purchasers and therefore, they can not avoid discharge of such Tax liability. 56. It is submitted by the learned special counsel for the Respondent No.1 Authority that Section 26E of the Securitization Act only provides for the distribution of the sale proceeds in priority to secured creditors and does not adversely affect the encumbrances capable of being enforced against the buyers of the property. He submitted that the Auction Purchaser never made any inquiry before bidding for sale with the society or tax authorities to ascertain the dues of the Respondent No.1 Authority. 57. By letter dated 17th April, 2015, the Respondent No.1 Authority had already intimated to the Society to keep lien of the Government on the property of the dealer. The Society was well aware of the dues of the MVAT Department and either party to sale in auction could have ascertained upon enquiry with the society under due diligence encumbrances on the said flat. The learned special counsel for the Respondent No.1 Authority placed reliance on the judgment of Nagpur Bench of this Court delivered on 18th February, 2021 in Writ Petition No. 7971 of 2019 in case of [Medineutrina ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the learned special counsel for the Respondent No.1 Authority that the Petitioner Bank had forfeited the earnest money deposited by the auction purchasers and others and auction sale in favour of the flat purchasers by the Petitioner Bank stood cancelled is concerned, the Petitioner Bank through their Advocate s letter dated 29th June, 2022 addressed to the auction purchaser had clearly informed that, the Petitioner Bank had filed Writ Petition (L) No. 20484/2022 before this Court for lifting the attachment of the Respondent No.1 Authority and to seek necesary direction against the Respondent No.1 Authority to confirm the sale in favour of the Petitioner subject to receipt of balance 75% bid amount immediately upon passing of such direction. 63. The Petitioner Bank advised the Auction Purchasers to make necessary arrangement and keep the balance 75% bid amount ready to pay the Petitioner Bank immediately upon passing of directions of this Court in this Petition. She submitted that it is thus clear that the Petitioner Bank agreed to accept the balance 75% of the consideration amount from the auction purchaser on the attachment levied by the Respondent No.1 Authority on writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to withdraw or to press the order of forfeiting the earnest money deposit. The Petitioner Bank did not press the forfeiture order and approached for setting aside the attachment order and agreed to accept the balance 75% amount from the auction purchasers. 68. Learned counsel for the Petitioner Bank invited our attention to notice dated 22nd April, 2022 addressed by Respondent No.1 Authority to the Petitioner Bank informing that there were outstanding Sales Tax dues to the tune of Rs.4,62,27,317/- againt M/s. Tuff Enterprises and for recovery of the said amount, the Sales Tax Department initiated recovery proceeding under Section 33 and 34 of the Maharashtra Value Added Tax Act, 2002. In the said Departmental Order, Respondent No.1 Authority invoked Section 37 and 38 of the Maharashtra Value Added Tax,2002 and requested the Petitioner Bank to prohibit any kind of transfer of property by way of sale, mortage, gift, exchange or parts any possession of any of the assets of the dealer and threatened to take appropriate action under the provisions of MVAT Act, 2002 invoking the provisions under the Indian Penal Code and Code of Criminal Procedure against the Petitioner Bank. 69. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion that fell for consideration of this Court is to whether the Petitioner Bank having registered mortgage of the secured asset with Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI) will have priority to make its claim over the claims/charge of the Sales Tax Department arising out of the dues under the Maharashtra Value Added Tax Act, 2002 (MVAT) against the borrower to enforce the mortgaged writ property in favour of the Petitioner and more particularly, when the Sales Tax Deparatment had not registered its claim with CERSAI. 74. We have heard learned counsel for the parties in both the Petitions and also the Respondents at length and have considered their rival submissions in the later part of the judgment. 75. Some of the admitted facts are as under; The borrowers and/or guarantors (Original Respondent Nos.2 to 11) had availed various credit facilities from the Petitioner Bank since 2004. Respondent No.4 borrower/dealer had created equitable mortgage on the writ property being residential Flat No. 182, 18th Floor, along with two open parking spaces at Abhilasha Premises Cooperative Housing Society Ltd., Jolly Maker Apartm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t any tax, penalty, interest, fine or sum forfeited, which remains unpaid after the service of notice under sub-section (4), or any instalment not duly paid, or any amount due or payable under this Act, shall be recoverable as an arrears of land revenue. 80. Under Section 37 of the MVAT Act, it is provided that Liability under this Act to be the first charge- Notwithstanding anything contained in any contract to the contrary, but subject to any provision regarding creation of first charge in any Central Act for the time being in force, any amount of tax, penalty, interest, sum forfeited, fine or any other sum payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer or, as the case may be, person. 81. Section 37(2) provides that the first charge as mentioned in sub-section (1) shall be deemed to have been created on the expiry of the period specified under sub-section (4) of Section 32 for the payment of tax, penalty, interest, sum forfeited, fine or any other amount. 82. In the Affidavit in Reply filed by Respondent No.1 Authority, it is admitted that the advances given by the Petitioner Bank to Respondent Nos. 2 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f, the order shall not prejudice any rights acquired in respect of the property concerned or financial asset before the transaction is actually registered. 85. The issue as to who will have priorty in view of Section 26E of SARFAESI Act was referred to the Full Bench of this Court in case of Jalgaon Janta Sahakari Bank Ltd. Anr. (supra.). The Full Bench of this Court considered the following questions:- (a) Having regard to the statutory provisions under consideration, does a secured creditor (as defined in the SARFAESI Act and the RDDB Act) have a prior right over the relevant department of the Government [under the BST Act/ MVAT Act/ MGST Act] to appropriate the amount realized by the sale of a secured asset? (b) Whether, despite section 26E in the SARFAESI Act or section 31B of the RDDB Act being attracted in a given case, dues accruing to a department of the Government ought to be repaid first by reason of first charge created over any property by operation of law (viz. The legislation in force in Maharashtra) giving such dues precedence over the dues of a secured creditor? (c) Are the provisions, inter alia, according priority in payment of dues to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndesirable consequences, the Parliament designed Chapter IV-A in such a manner to include provisions which, on the one hand, would disable any secured creditor to exercise the right of enforcing security interest under Chapter III of the SARFAESI Act without the CERSAI registration (section 26D) and, on the other, enable the secured creditor, if it has the CERSAI registration, to claim priority over all other debts and all revenues, taxes, etc. 88. It is held that Section 26E, also beginning with a non-obstante clause, is unambiguous in terms of language, effect, scope and import. A priority in payment over all other dues is accorded to a secured creditor in enforcement of the security interest, if it has a CERSAI registration, except in cases where proceedings are pending under the provisions of the Insolvency and Bankruptcy Code, 2016. This Court held that such registration would constitute public notice thereof. The Full Bench of this Court has held that the dues of the secured creditor shall have priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority in view of Section 26E of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be taken by the secured creditors under the SARFAESI Act to ensure that the property over as a secured interest is free from any encumbrances whatsoever at the time it is so offered initially, to avail financial credit by the owners. 93. The Special Leave Petition filed against the said judgment by the Petitioner Medineutrina Pvt. Ltd. (Company)(supra) in the said writ petition came to be dismissed summarily. The Full Bench of this Court has dealt with the said judgment of the Division Bench in the case of Medineutrina Pvt. Ltd. (Company) (supra). The Full Bench of this Court has taken a contrary view and thus, the principles laid down by the Full Bench of this Court would be binding upon this Court and not the judgment of the Division Bench. The reliance placed by the learned counsel for Respondent No.1 Authority on the judgment of the Division Bench of this Court in case of Medineutrina Pvt. Ltd. (Company) [supra] is misplaced. 94. Mr.Sonpal, learned Special Counsel for Respondent No.1 Authorty could not dispute that the equitable mortgage in favour of the Petitioner Bank by the Original Respondent No.4 was registered with CERSAI in the year 2012 itself. In our view, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... confer any priority of the claim of taxes in favour of Respondent No.1 contrary to Section 26E of the SARFAESI Act. Be that as it may, the issue of similar clauses have been already construed by the Full Bench of this Court in case of Jalgaon Janta Sahakari Bank Ltd. Anr. (supra.). 98. In paragraphs 188 to 192 of the said judgment, this Court held that the non-registration of the claim and/or attachment order by the Sales Tax Authority under Section 26B(4) of the SARFAESI Act, can only be at the peril of the department. Mere recording of the purported charge in the record of right of the secured asset, in the absence of the the registration with CERSAI cannot be to the detriment of the auction purchaser, though the auction sale was on as is where is and as is what is basis . 99. The auction purchaser have participated in the e-auction conducted by the Petitioner Bank who had priority over the secured asset in view of registration of the equitable mortgage under Section 26E of the Securitization Act with CERSAI. In our view, the Petitioner Bank is not liable to take cognizance of the claim of Respondent No.1 over the secured asset in view of the Petitioner bank having prio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the State Government or the local authorities. The Society informed the Petitioner Bank that there was a claim of Sales Tax Department in respect of Flat No. 181 vide letter dated 28 March, 2022. 104. The learned counsel for the society during the course of his argument vehemently urged that there is no attachment levied by the Respondent No.1 Authority in respect of the Flat No. 182 which is the subject matter of the present Petition. However, out of abundant caution and in view of the fact that the said Mr. Shankarlal Jain was a common co-owner of the said Flat No.181 and the said Flat No.182, and the said Flat No. 181 and 182 are joint, having a common entrance and joint use even prior to the passing of the impugned order, Respondent No.2 Society had informed to the Petitioner Bank about the claims of the Sales Tax Department. Learned counsel submitted that the Society was ready to issue No Objection Certificate for transfer of the Flat No. 182 in favour of auction purchasers subject to the satisfaction of its dues in respect of the said Flat No.182 and the raising/discharge of the impugned order dated 22 April, 2022 and issuance of NOC by the Sales Tax Department. 105 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Manager, Sri Siddeshwara Cooperative Bank Limited (supra), clearly applies to the facts of this case. We are respectfully bound by the said principles. 109. Perusal of the correspondence exchanged between the Petitioner Bank and auction purchasers indicates that though at one stage the Petitioner Bank had addressed a letter thereto, forfeiting the earnest money deposit of 25%, the fact remains that in view of the attachment order passed by the Respondent No.1 Authority before expiry of three months, neither the Petitioner Bank could recover the balance amount nor auction purchasers could pay any such amount. The Petitioner Bank accordingly informed the auction purchasers by a letter dated 29 June, 2022 that since the Petitioner Bank had filed this writ petition before this Court to lift the attachment of the Sales Tax Department, the Petitioner Bank seeks direction against the Sales Tax Department to confirm the sale in favour of the auction purchasers and permit the balance 75% amount immediately upon passing of direction of this Court in the said writ petition. 110. We are not inclined to accept the submission of the learned special counsel for the Respondent No.1 Authority ..... X X X X Extracts X X X X X X X X Extracts X X X X
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