Priority of secured debt prevails over state tax arrears absent an express statutory first charge

State tax arrears do not override a prior secured debt unless the statute expressly creates a first charge over the property. The Court held that the sales tax provision conferred priority only in general terms and did not displace the bank's earlier mortgage-backed security interest. Because the property had been mortgaged long before the State's recovery claim arose, the secured creditor's right remained superior under the recovery and securitisation framework. The auction notice issued to enforce the State's claim was therefore without jurisdiction and was quashed.

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Issues: Whether the State's claim for sales tax arrears had priority over the secured debt of the bank and the consequent auction sale of the mortgaged property could be sustained.

Analysis: The Court examined the doctrine of priority of State debts and held that arrears of tax may prevail over unsecured debts, but not over secured debts unless the statute expressly creates a first charge over the property. It noted that the sales tax provision relied upon by the State conferred priority over other claims, but did not create a first charge in the manner found in other statutes. The property had been mortgaged to the bank long before the sales tax deferral arrangement arose, and the bank's secured interest therefore remained superior. The statutory scheme under the recovery laws and the securitisation law did not displace the secured creditor's prior right in the absence of an express first charge in favour of the State.

Conclusion: The State could not claim priority over the bank's secured debt, and the auction notice issued by the respondents was without jurisdiction and liable to be set aside.

Final Conclusion: The writ petition succeeded because the secured creditor's right prevailed over the State's tax recovery claim, and the impugned auction notice was quashed.

Ratio Decidendi: A State's tax dues have priority over unsecured debts only where the statute clearly creates such priority or a first charge, but they do not override a prior secured debt in the absence of express statutory language to that effect.

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