2022 (6) TMI 1471 - HC - VAT and Sales Tax

Bank's secured charge under Section 26-E SARFAESI Act takes priority over state revenue dues on mortgaged property

The Cosmos Co. Op. Bank Ltd. Versus State of Gujarat

Gujarat HC held that a secured creditor bank has first charge over mortgaged property under Section 26-E SARFAESI Act, taking priority over state revenue ... Recovery of dues - priority of dues - first charge over the property mortgaged by the respondents No.4 to 7 under Section 26-E SARFEASI Act or not - HELD THAT:- The writ-applicant Bank undisputedly auctioned the subject property on 25.2.2021 and PRA Realities LLP being the highest bidder submitted the bid of Rs.3,41,00,000/- and in accordance with the sale notice has deposited the entire amount as per the Rules. The writ-applicant Bank is the secured creditor and having auctioned the subject property under the SARFEASI Act, the writ-applicant would have first charge over the subject property. The ratio as laid down in PATTECH FITWELL TUBE COMPONENTS VERSUS THE STATE OF GUJARAT [2022 (6) TMI 202 - GUJARAT HIGH COURT] squarely covers the present issue. The dues of the secured creditor i.e. writ-applicant Bank shall have priority over the dues of the respondent No.2 over the subject property. In the facts of the present case, in the revenue records undisputably the charge of respondent No.1 is at a later point of time i.e. 14.12.2015 and 7.6.2018 which is subsequent to the mortgage with the writ-applicant Bank i.e. 8.6.2012 and 26.10.2013, being the secured creditor. In view of above, as per the provisions of Section 26-E SARFEASI Act also, the balance tilts in favour of the writ-applicant Bank and then in favour of the present writ-applicant. Accordingly, there is no hesitation in holding and declaring that the respondent No.1 State authorities cannot claim first charge over the subject property. It is hereby directed that the writ-applicant shall have the first charge over the property mortgaged by the respondents No.4 to 7 under Section 26-E SARFEASI Act and the same would overwrite the charge of the respondent No.3 under Section 48 of the GVAT, 2003. The respondent authority is further directed to post and certify a mutation entry to record the certificate of sale dated 19.3.2021 for the subject land. The writ-application succeeds and is hereby allowed. Issues Involved:1. Validity of the attachment order and charges recorded in the revenue records.2. Priority of charges between the Petitioner's secured debt under the SARFAESI Act and the Respondent's tax dues under the VAT Act.3. Authority of the Respondent to claim preferential charge over the secured creditor's claim.4. Legality of the auction and subsequent sale of the mortgaged property.5. Rights of the auction purchaser regarding the subject property.Detailed Analysis:Issue 1: Validity of the Attachment Order and Charges in Revenue RecordsThe petitioner sought the quashing of the attachment order and charges recorded in the revenue records through Revenue Entry Nos. 6995, 6996, and 7594. The court noted that these entries were made to recover the VAT dues from the borrower (Respondent No. 3). The petitioner argued that these entries should be set aside as they were subsequent to the mortgage with the petitioner bank.Issue 2: Priority of Charges Between SARFAESI Act and VAT ActThe petitioner argued that under Section 26-E of the SARFAESI Act, the secured creditor's debts have priority over all other debts, including taxes payable to the government. The court referred to various judgments, including the Supreme Court's ruling in Punjab National Bank Vs. Union of India, which emphasized that secured creditors' claims under the SARFAESI Act have precedence over government dues unless explicitly stated otherwise in the relevant statute. The court concluded that the SARFAESI Act's provisions override those of the VAT Act, thereby giving the petitioner bank's secured debt priority over the respondent's tax dues.Issue 3: Authority of the Respondent to Claim Preferential ChargeThe respondent relied on Section 48 of the Gujarat Value Added Tax Act, 2003, which provides that tax dues shall be the first charge on the property. However, the court held that Section 35 of the SARFAESI Act overrides this provision, as it does not specifically claim a first charge over secured debts. The court cited the Full Bench decision of the Madras High Court in UTI Bank Ltd. Vs. Dy. Commissioner Central Excise, which held that in the absence of a specific provision claiming a first charge, the secured creditor's claim prevails.Issue 4: Legality of the Auction and Subsequent SaleThe court noted that the petitioner bank conducted the auction under the SARFAESI Act after taking possession of the secured assets. The auction was held on 25.2.2021, and PRA Realities LLP emerged as the highest bidder, paying the entire amount of Rs. 3,41,00,000/-. The sale was confirmed, and a Sale Certificate was issued on 19.3.2021. The court found that the auction and subsequent sale were conducted in accordance with the SARFAESI Act and its rules.Issue 5: Rights of the Auction PurchaserThe court held that the auction purchaser, PRA Realities LLP, acquired the property free from any encumbrances, as the secured creditor's claim takes precedence over the respondent's tax dues. The court directed the respondent authority to record the sale certificate in the revenue records and complete the mutation process within 15 days.Conclusion:The court declared that the petitioner bank, as a secured creditor under the SARFAESI Act, has the first charge over the mortgaged property. The respondent's claim under the VAT Act does not have priority. The court quashed the attachment orders and directed the respondent authority to update the revenue records accordingly. The writ application was allowed, and the rule was made absolute to the extent specified.