Statutory priority of secured creditor prevails over sales tax arrears, with tax recovery limited to residue after debt satisfaction.

A State Financial Corporation's statutory priority over mortgaged and hypothecated assets prevailed over arrears of sales tax because the sales tax charge was not expressed as a first charge, while the Financial Corporations Act gave overriding effect and required sale proceeds to be applied first to recovery expenses and then to the corporation's debt. The tax department could recover only from any residue left after that priority was satisfied. Mere takeover of possession by the corporation did not make it jointly and severally liable as transferee for tax arrears; that statutory exposure arose, if at all, at the stage of actual sale, when the purchaser could be treated as transferee and the sale notice should disclose the tax charge.

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Issues: (i) whether arrears of sales tax under the Karnataka Sales Tax Act, 1957 could override the prior claim of the State Financial Corporation over the mortgaged and hypothecated assets under the State Financial Corporations Act, 1951; (ii) whether the Corporation, while taking over and selling the secured assets, became jointly and severally liable for the tax arrears under the sales tax transfer provisions.

Issue (i): whether arrears of sales tax under the Karnataka Sales Tax Act, 1957 could override the prior claim of the State Financial Corporation over the mortgaged and hypothecated assets under the State Financial Corporations Act, 1951.

Analysis: The sales tax statute created a charge on the assessee's properties for outstanding tax, but that charge was not expressed to be a first charge. The Financial Corporations Act conferred overriding effect through its non obstante clause, and section 29 required sale proceeds of secured assets to be applied first towards expenses of recovery and then towards discharge of the corporation's debt. Only the residue, if any, remained available to the owner and could be reached for tax recovery.

Conclusion: The Corporation's claim had priority over the sales tax arrears, and the tax department could proceed only against the residuary amount after satisfaction of the Corporation's dues.

Issue (ii): whether the Corporation, while taking over and selling the secured assets, became jointly and severally liable for the tax arrears under the sales tax transfer provisions.

Analysis: Mere taking over possession under section 29 did not make the Corporation the transferee or owner for all purposes. The deeming provision treating the Corporation as owner was limited. Liability under the sales tax transfer provision would arise only at the stage of actual sale, where the purchaser would stand in the position of transferee and the assessee in the position of transferor. At that stage, the department could insist that the sale notice disclose the tax charge and the purchaser's possible liability.

Conclusion: The Corporation was not directly liable as transferee on takeover of possession, but the purchaser on eventual sale could be exposed to the statutory liability contemplated by the sales tax provision.

Final Conclusion: The impugned order was modified so that the Corporation could sell the assets, apply the proceeds in the statutory order of priority, and the revenue could recover the tax arrears only from the remaining residue or by other permissible modes.

Ratio Decidendi: Where a State Financial Corporation exercises its statutory power over secured assets, the special priority scheme under the Financial Corporations Act prevails over a general tax charge unless the tax statute creates an overriding first charge.

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