Statutory first charge prevails over secured debt, while auction purchaser cannot be saddled with undisclosed sales tax encumbrance.

A statutory first charge for sales tax dues prevails over a secured creditor's claim under the SARFAESI regime, including the non obstante clause in section 35, where the Tamil Nadu VAT framework creates priority in favour of the State. The document also states that an auction purchaser who paid the bid amount on the basis of the bank's assurance that the tax issue would be cleared cannot later be saddled with that encumbrance. In that situation, the purchaser may insist on execution of the sale deed free from the sales tax burden, failing which refund of the sale consideration is available.

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Issues: (i) whether sales tax arrears of the borrower had priority over the secured creditor's claim under the SARFAESI regime; and (ii) whether the auction purchaser was entitled to a sale deed free from the sales tax encumbrance or, in the alternative, refund of the sale consideration.

Issue (i): whether sales tax arrears of the borrower had priority over the secured creditor's claim under the SARFAESI regime.

Analysis: The auction was conducted subject to existing and future statutory dues being borne by the purchaser, but the Bank had also consistently informed the tax authorities that its claim was paramount. The Court relied on the statutory priority created under the Tamil Nadu Value Added Tax regime and on the settled principle that a statutory first charge in favour of the State prevails over the claim of a secured creditor, notwithstanding the non obstante clause in section 35 of the SARFAESI Act, 2002.

Conclusion: The sales tax arrears had priority over the Bank's dues and prevailed against the secured creditor's claim.

Issue (ii): whether the auction purchaser was entitled to a sale deed free from the sales tax encumbrance or, in the alternative, refund of the sale consideration.

Analysis: The auction purchaser paid the bid amount on the basis of the Bank's assurance that the sales tax issue would be taken care of and that the sale would be confirmed. On that footing, the Court held that the Bank could not resile from its undertaking after accepting the consideration and could not insist on passing the burden of the tax encumbrance to the purchaser. The Court therefore recognised the purchaser's right either to obtain conveyance free of encumbrances or to recover the sale consideration.

Conclusion: The petitioner was entitled to insist on execution of the sale deed free of the sales tax encumbrance, failing which refund of the sale consideration had to be made.

Final Conclusion: The writ petition was disposed of by protecting the auction purchaser from the Bank's attempted shift of the sales tax burden, while preserving the State's priority over the tax dues.

Ratio Decidendi: A statutory first charge for sales tax dues prevails over a secured creditor's claim under SARFAESI, and a bank that induces an auction purchaser by assuring clearance of the tax issue cannot later repudiate that undertaking to saddle the purchaser with the encumbrance.

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