Secured creditor priority prevails over state tax arrears where the disputed property is a secured asset.

Statutory tax arrears claimed by the State do not prevail over a bank's secured interest in secured assets under the SARFAESI framework. The governing principle applied is that, although the State may ordinarily assert priority for tax dues, that priority does not displace the rights of a secured creditor where the property is a secured asset and the debt is secured. On that basis, the State's first-charge claim was rejected and the secured creditor's claim to the attached property was held to prevail.

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Issues: (i) Whether arrears of sales tax due to the State could claim priority over the rights of a secured creditor in respect of secured assets under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

Analysis: The governing principle applied was that the State may ordinarily assert priority in respect of tax arrears, but that principle does not override the rights of a bank or other secured creditor where the property in question is a secured asset and the debt is a secured debt. In such a situation, the secured interest over the property prevails, and the State's claim of first charge does not operate against the secured creditor.

Conclusion: The State's claim to priority over the secured assets was negatived, and the secured creditor's rights were held to prevail.

Final Conclusion: The common decision accepted the secured creditor's superior claim over the attached property and rejected the revenue's attempt to enforce tax priority against the secured assets.

Ratio Decidendi: Statutory tax arrears do not displace the rights of a secured creditor over secured assets where the debt is secured and the creditor's interest attaches to the property.

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