2008 (9) TMI 882 - HC - VAT and Sales Tax

Statutory sales tax charge prevails over bank's secured claim in property sale dispute.

Indian Bank Versus Commercial Tax Officer, Ranipet and others

The court held that the statutory charge for sales tax dues under the TNGST Act has priority over the bank's claim as a secured creditor under the ... Whether the crown's preferential right or a crown debt is subservient to the right of the secured creditor? Whether the sale made under the Securitisation Act is absolute and free of all encumbrances which are known and unknown to the secured creditor? Held that:- In the present case section 13(4) possession notice was issued by the Bank on December 15, 2006. By the time possession notice under section 13(4) was issued. Property was already attached and the order of attachment and notice of sale was served on August 1, 2006 itself. Despite attachment and notice of sale of land for the outstanding sales tax dues having been served upon, in an illegal manner, bank has proceeded under section 13 of the Securitisation Act and sold the property of second respondent firm for recovery of its outstanding dues. The subsequent sale proceedings of the bank is illegal and unauthorised. Since, first respondent has statutory charge which is having priority over all other claims against the property, petitioner-bank cannot successfully challenge the impugned proceedings of the first respondent. Despite, recovery process for the outstanding sales tax dues, the action of the bank in proceeding under the SARFAESI Act is unauthorised and the petitioner bank is not entitled to the reliefs sought for in the writ petition. W.P. dismissed. Issues Involved:1. Priority of Crown Debt versus Secured Creditor's Rights.2. Validity of Sale under SARFAESI Act and its Impact on Encumbrances.Detailed Analysis:1. Priority of Crown Debt versus Secured Creditor's Rights:The petitioner-bank argued that the secured creditor's rights under the SARFAESI Act should have priority over the crown debt, citing the Supreme Court judgment in Transcore v. Union of India. The bank contended that the SARFAESI Act, being a special and later enactment, should override the provisions of the Tamil Nadu General Sales Tax Act (TNGST Act). The bank also referenced several cases, including Dena Bank v. Bhikhabhai Prabhudas Parekh & Co., to assert that crown debt cannot prevail over a secured creditor's rights.The first respondent (Commercial Tax Officer) countered that under section 24(1) and (2) of the TNGST Act, any tax assessed and due creates a statutory charge on the property, which has priority over other claims. This statutory charge, they argued, should prevail over the provisions of the SARFAESI Act.The court examined the statutory provisions and relevant case law, including the Supreme Court's rulings in State Bank of Bikaner & Jaipur v. National Iron Steel Rolling Corporation and Central Bank of India v. State of Tamil Nadu. It was held that the statutory charge created under the TNGST Act has precedence over the claims of secured creditors.2. Validity of Sale under SARFAESI Act and its Impact on Encumbrances:The petitioner-bank conducted an auction sale under the SARFAESI Act and sold the property to the third respondent. The third respondent claimed to be a bona fide purchaser without knowledge of any encumbrances, as no such encumbrances were reflected in the encumbrance certificate.The court noted that the property was already under attachment by the sales tax department before the bank initiated action under the SARFAESI Act. The attachment and proposed auction were published in the Vellore District Gazette, which constituted constructive notice to all parties, including the third respondent.The court held that the bank's subsequent sale under the SARFAESI Act was unauthorized and illegal as the property was already under a statutory charge for sales tax dues. The statutory charge had priority, and the bank could not proceed with the sale without addressing the existing encumbrance.Conclusion:The court concluded that the statutory charge for sales tax dues under the TNGST Act has priority over the bank's claim as a secured creditor under the SARFAESI Act. The bank's sale of the property was deemed unauthorized and illegal. The writ petition was dismissed, upholding the first respondent's statutory charge and the priority of the crown debt.