Secured creditor priority prevails over VAT first charge, and the State may recover only any surplus sale proceeds.

After registration of the security interest, the secured creditor's priority under the SARFAESI Act and the RDB Act prevails over the State's tax claim. The Court held that Section 26E of the SARFAESI Act and Section 31B of the RDB Act, read with their non-obstante clauses, give precedence to secured debts over the VAT Act's first-charge provisions, and that the State's VAT claim crystallises only after assessment. It further held that, once the properties were sold under the SARFAESI mechanism, the State could not proceed against the purchasers and could recover only any surplus remaining after satisfaction of the secured debt.

---

---

Issues: (i) whether the Bank, as a secured creditor, had priority over the State's tax dues in respect of the mortgaged properties; (ii) whether the State's claim under the VAT Act could override the priority conferred by the SARFAESI Act and the RDB Act; (iii) whether the State could proceed against the purchasers of the properties sold under the SARFAESI Act and claim only the excess sale proceeds.

Issue (i): whether the Bank, as a secured creditor, had priority over the State's tax dues in respect of the mortgaged properties.

Analysis: Section 26E of the SARFAESI Act and Section 31B of the RDB Act confer priority on secured creditors after registration of the security interest. The Court held that these provisions, introduced later in point of time, express the legislative intent to give precedence to secured debts over government dues. It also held that the VAT charge under Section 48 would arise only after assessment and crystallisation of the tax liability, and not merely from an uncrystallised claim or provisional attachment.

Conclusion: The Bank's right as a secured creditor had priority over the State's claim.

Issue (ii): whether the State's claim under the VAT Act could override the priority conferred by the SARFAESI Act and the RDB Act.

Analysis: The Court read the non-obstante clauses in the Central enactments as giving them overriding effect. It distinguished earlier law on State first charge, holding that after the amendments introducing Section 26E and Section 31B, the secured creditor's priority prevails. The Court further held that there was no repugnancy in the sense urged by the State, but the later Central enactments governed priority in respect of secured assets.

Conclusion: The State's first-charge claim under Section 48 of the VAT Act did not override the secured creditor's statutory priority.

Issue (iii): whether the State could proceed against the purchasers of the properties sold under the SARFAESI Act and claim only the excess sale proceeds.

Analysis: Once the secured assets were sold under the SARFAESI mechanism and the secured debt satisfied in priority, any residual amount alone could be available for the State's dues. The Court held that proceeding against purchasers would be inconsistent with the statutory priority granted to secured creditors and would undermine sale realizations under the SARFAESI regime.

Conclusion: The State could claim only the excess sale proceeds, if any, and could not proceed against the purchasers.

Final Conclusion: The writ petition succeeded, the impugned attachment and communication were set aside, the Bank's first charge over the mortgaged properties was declared, and the State's recovery was confined to any surplus remaining after satisfaction of the secured debt.

Ratio Decidendi: After registration of security interest, the statutory priority accorded to secured creditors under the SARFAESI Act and the RDB Act prevails over a State sales-tax first charge, and the State's claim can operate only against any surplus remaining after satisfaction of the secured debt.

---