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

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 dues. The bank auctioned property for Rs.3,41,00,000 after mortgage executed in 2012-2013, while state's charge was created later in 2015-2018. Court directed that bank's charge overrides state's claim under Section 48 GVAT 2003, following precedent in PATTECH FITWELL case. Revenue authorities must record sale certificate and mutation entry in favor of successful bidder.

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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 Records
The 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 Act
The 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 Charge
The 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 Sale
The 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 Purchaser
The 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.

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