2021 (6) TMI 1170 - HC - VAT and Sales Tax

Bank's registered mortgage takes priority over State's VAT dues on secured property

THE LAKSHMI VILAS BANK LTD. Versus STATE OF GUJARAT

Gujarat HC ruled in favor of petitioner bank against State Government regarding priority of charges over mortgaged property. Court held that bank's ... Recovery of VAT dues - removal of first charge of Government - priority over the movable and immovable properties of borrower of petitioner bank as secured creditor - bank can proceed further to auction the properties to recover its dues or not - HELD THAT:- The position prevailing on record is that the properties in question have been mortgaged with the petitioner bank undisputedly by registered mortgage deed and encumbrance certificate has also been issued to the petitioner bank incorporating the charge of the bank over the property. It is also not in dispute that the petitioner has taken all steps strictly under the provisions of the Act to realize the dues of the mortgaged property and it is only at that stage, the respondent No.4 has come out with a plea that they have got first charge over the property to realize their dues. This Court is of the opinion that a case is made out by the petitioner to call for an interference. Accordingly, the impugned communication dated 21.4.2020 issued by the respondent No.4 is hereby quashed and set aside and consequently, it is held that since the petitioner bank is having a clear charge over the property by virtue of the aforesaid circumstance, it has got first priority over the secured assets and not the State Government by virtue of the provisions of the VAT Act, 2003. The petition stands allowed. Issues Involved:1. Priority of secured creditor's charge over government dues.2. Legality of the impugned communication dated 21.04.2020 by the Assistant Commissioner, Commercial Tax.3. Petitioner's right to auction the mortgaged property to recover dues.Issue-wise Detailed Analysis:1. Priority of Secured Creditor's Charge Over Government Dues:The petitioner bank sanctioned a loan to M/s. Jay Steel Industries, secured by a mortgage deed registered on 28.11.2011. The borrower defaulted, and the bank initiated proceedings under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), including issuing notices under Sections 13(2) and 13(4) and obtaining an order for physical possession under Section 14. Despite this, the Assistant Commissioner, Commercial Tax claimed a first charge over the property for VAT dues via a communication dated 21.04.2020.The court noted that the petitioner bank had an undisputed registered mortgage deed and encumbrance certificate establishing its charge over the property. The court referenced previous decisions, including Bank of Baroda Vs. State of Gujarat and Kalupur Commercial Bank Ltd., which established that a secured creditor's charge takes precedence over government dues under Section 48 of the VAT Act, 2003, especially in light of Section 26E of the SARFAESI Act.2. Legality of the Impugned Communication Dated 21.04.2020:The impugned communication from the Assistant Commissioner claimed a first charge over the property for VAT dues. The petitioner argued that this was contrary to established legal precedent, which the court confirmed. The court cited relevant judgments, such as the Division Bench decision in Special Civil Application No.17891 of 2018, which clarified that Section 48 of the VAT Act applies only after tax liability is assessed and becomes due. The court found that the petitioner's secured charge, established prior to the VAT assessment, had priority.3. Petitioner's Right to Auction the Mortgaged Property to Recover Dues:The petitioner bank followed all necessary steps under the SARFAESI Act to auction the property. The court reiterated that the bank's charge had priority over the government's claim for VAT dues. Consequently, the court quashed the impugned communication and upheld the petitioner's right to auction the property to recover its dues, with any excess amount to be adjusted towards the state's VAT dues.Conclusion:The court concluded that the petitioner bank's secured charge had priority over the government's VAT claim. The impugned communication was quashed, and the petitioner was allowed to auction the property to recover its dues. The judgment reaffirmed the precedence of secured creditors' rights under the SARFAESI Act over government claims under the VAT Act.