Secured creditor priority prevails over State tax first charge; Revenue attachment yields to statutory debt realisation rights.

A statutory first charge under State tax laws yields to the later parliamentary scheme under SARFAESI and the RDB Act, which gives secured creditors priority in realisation of secured debts over other dues, including taxes. The text explains that a tax charge is only a right to payment from property and does not displace that statutory priority. It also states that the Revenue cannot insist on a prior revenue-recovery sale as a condition for losing its charge, and that section 37 of SARFAESI does not preserve a conflicting State recovery mechanism against sections 26E and 31B. The Revenue is limited to any surplus after satisfaction of the secured debt.

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Issues: (i) Whether the statutory first charge claimed by the Revenue under the KGST and KVAT enactments prevails over the priority conferred on secured creditors under section 26E of the SARFAESI Act and section 31B of the RDB Act. (ii) Whether the Revenue can insist on sale of the secured assets through the revenue recovery process as a condition for extinguishing its charge and whether section 37 of the SARFAESI Act saves such claim.

Issue (i): Whether the statutory first charge claimed by the Revenue under the KGST and KVAT enactments prevails over the priority conferred on secured creditors under section 26E of the SARFAESI Act and section 31B of the RDB Act.

Analysis: A statutory charge does not create a right in rem over the property but only a right to payment out of the property in preference to others. The provisions of section 26E of the SARFAESI Act and section 31B of the RDB Act confer priority on secured creditors for realisation of secured debts over all other debts, including taxes and other government dues. The Revenue's first charge under the State tax enactments therefore cannot override the later parliamentary enactments. The court also held that the absence of notification of section 26E would not assist the Revenue because section 31B was notified and, in any event, parliamentary primacy and repugnancy principles operate from the making of the law.

Conclusion: The secured creditors' priority prevails over the Revenue's first charge, and the Revenue's claim is subordinate.

Issue (ii): Whether the Revenue can insist on sale of the secured assets through the revenue recovery process as a condition for extinguishing its charge and whether section 37 of the SARFAESI Act saves such claim.

Analysis: The Revenue's contention that its charge survives unless it itself sells the property was rejected because the first charge is only a right to priority in payment and not an exclusive right to sell first. Section 37 of the SARFAESI Act was held not to preserve the State's tax recovery mechanism against the priority created by sections 26E and 31B. The court therefore accepted that the banks and auction purchasers were entitled to proceed de hors the Revenue's attachment, with the Revenue entitled only to any surplus after satisfaction of the secured debt.

Conclusion: The Revenue cannot insist on prior sale through revenue recovery, and its attachment or recovery steps must yield to the secured creditors' statutory priority.

Final Conclusion: The petitions challenging the Revenue's actions were substantially allowed, secured creditors and auction purchasers were permitted to proceed with the properties free of the Revenue's attachments, and the Revenue was confined to claiming any surplus remaining after satisfaction of the secured debts.

Ratio Decidendi: A statutory first charge under State tax laws yields to the later parliamentary mandate granting secured creditors priority in realisation of secured debts, and the Revenue cannot defeat that priority by insisting upon first sale under revenue recovery proceedings.

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