2019 (9) TMI 1018 - HC - VAT / Sales Tax

Secured Creditors' Rights Upheld: Court Quashes VAT Notice, Prioritizes Bank's First Charge Over Properties.

The HC quashed the attachment notice and communication by VAT authorities, affirming the Bank's first charge over properties under Section 26E of the ... Attachment of mortgaged properties - first charge of the Bank over the properties mortgaged with the Petitioners - recovery of sales tax dues from the assets of the defaulter by State Government - SARFAESI Act - case of the writ applicants is that the Bank has the first charge over the properties mortgaged by M/s. M.M. Traders by virtue of Section 26E of the SARFAESI Act - charge of the State Government under Section 48 of the Act overridden by Section 26E of the SARFAESI Act. Whether the Central Legislation would prevail over Section 48 of the Gujarat Value Added Tax Act, 2003? HELD THAT:- The plain reading of Section 48 of the VAT Act indicates that it starts with a non-obstante clause 'notwithstanding anything to the contrary contained in any law for the time being in force. Section 48 of the VAT Act creates first charge on the property - The issue as regards the claim of priority of the secured creditor vis-a-vis the first charge of the property under the State Legislation was considered by the Supreme Court in the case of Central Bank of India vs. State of Kerala & ors, [2009 (2) TMI 451 - SUPREME COURT]. The Supreme Court, in the said decision took the view that if the State Act creates first charge on the property, then the secured creditors cannot have the claim against the statutory provision. The Supreme Court also took into consideration Section 100 of the Transfer of Property Act, 1882. Indisputably, the judgment of the Apex Court in the case of Central Bank of India was prior to the amendment in the Act, 2002 and 1993 respectively. However, what is important are the observations of the Supreme Court as contained in para-126 of this decision. The Supreme Court observed that while enacting the DRT Act, the Parliament was aware of the law laid down by the Supreme Court, wherein priority of the State dues was recognized. If the Parliament intended to create the first charge in favour of the Banks, Financial Institutions or other secured creditors on the property of the borrower, then it would have incorporated a provision like Section 529A of the Companies Act or Section 11(2) of the EPF Act and ensured that notwithstanding the series of judicial pronouncements, the dues of Banks, Financial Institutions and other secured creditors should have priority over the State's statutory first charge in the matter of recovery of the dues of sales tax etc. - In our prima facie opinion, such observations probably might have weighed with the Parliament which ultimately might have led to the introduction of Section 31B in the RDB Act, 1993 and 26E in the SARFAESI Act, 2002. When two or more laws or provisions operate in the same field and each contains a non-obstante clause stating that its provision will override those of any other provisions or law, stimulating and intricate problems of interpretation arise. In resolving such problems of interpretation, no settled principles can be applied except to refer to the object and purpose of each of the two provisions, containing a non-obstante clause. Two provisions in same Act each containing a non-obstante clause, requires a harmonious interpretation of the two seemingly conflicting provisions in the same Act. We are conscious of the fact that in the case on hand there is no conflict between two special statutes enacted by the Parliament. The conflict is with the State Act and the Central Act. We are trying to understand the true purport and effect of Section 26E of the SARFAESI Act which came to be enacted later in point of time and also the effect of Section 31B of the RDB Act which came to be enacted later in point of time. In other words, what necessitated the introduction of the two provisions in the two enactments and what object the two provisions would subserve. Section 31B has been inserted in the Recovery of Debts and Bankruptcy Act, 1993 by the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, w.e.f. 1.9.2016, which contains a non-obsante clause and which expressly provides that the secured debts shall be paid in priority over all other debts and Government dues including the State taxes - Apart from the fact that Section 31B of the RDB Act is a later enactment, the language of the said provision also clearly indicates the intention of the Parliament to give precedence even over the Government dues notwithstanding anything to the contrary in any other law. While it is true that the Bank has taken over the possession of the assets of the defaulter under the SARFAESI Act and not under the RDB Act, Section 31B of the RDB Act, being a substantive provision giving priority to the “secured creditors”, the same will be applicable irrespective of the procedure through which the recovery is sought to be made. This is particularly because Section 2(la) of the RDB Act defines the phrase “secured creditors” to have the same meaning as assigned to it under the SARFAESI Act. Moreover, Section 37 of the SARFAESI Act clearly provides that the provisions of the SARFAESI Act shall be in addition to, and not in derogation of inter-alia the RDB Act. Thus, an interpretation that, while the secured creditors will have priority in case they proceed under the RDB Act they will not have such priority if they proceed under the SARFAESI Act, will lead to an absurd situation and, in fact, would frustrate the object of the SARFAESI Act which is to enable fast recovery to the secured creditors. The insertion of Section 31B of the RDB Act will give priority to the secured creditors even over the subsisting charges under other laws on the date of the implementation of the new provision, i.e. 1.9.2016. Section 48 of the VAT Act would come into play only when the liability is finally assessed and the amount becomes due and payable. It is only thereafter if there is any charge, the same would operate. The authority under the VAT Act passed the assessment order later in point of time - The language of Section 48 of the VAT Act is plain and simple and the phrase 'any amount payable by a dealer or any other person on account of tax, interest or penalty' therein assumes significance. The amount could be said to be payable by a dealer on account of tax, interest or penalty once the same is assessed in the assessment proceedings and the amount is determined accordingly by the authority concerned. Without any assessment proceedings, the amount cannot be determined, and if the amount is yet to be determined, then prior to such determination there cannot be any application of Section 48 of the VAT Act. We have no hesitation in coming to the conclusion that the first priority over the secured assets shall be of the Bank and not of the State Government by virtue of Section 48 of the VAT Act, 2003. The impugned attachment notice dated 22.01.2018 and the impugned communication dated 19.04.2018 issued by the respondent No.2 is hereby quashed and set aside - Application allowed. Issues Involved:1. Quashing of attachment notice and communication issued by the VAT authorities.2. Determination of first charge over mortgaged properties between the Bank and VAT authorities.3. Rights of the Bank to adjust sale proceeds towards secured dues.4. Prohibition on VAT authorities from proceeding against purchasers of properties sold under the SARFAESI Act.Detailed Analysis:1. Quashing of Attachment Notice and Communication:The writ applicants, a Multi-State Cooperative Scheduled Bank and its Chief Manager, sought to quash the attachment notice dated 22.1.2018 and the communication dated 19.4.2018 issued by the VAT authorities. The Bank argued that these notices were issued in relation to tax dues of M/s M.M. Traders under the Gujarat VAT Act, 2003, and were affixed on properties already mortgaged to the Bank. The Bank contended that the VAT authorities' claim of first charge over the properties was without jurisdiction and illegal, as the Bank had a registered security interest under the SARFAESI Act, which should have priority.2. Determination of First Charge Over Mortgaged Properties:The central issue was whether the Bank or the VAT authorities had the first charge over the mortgaged properties. The Bank argued that Section 26E of the SARFAESI Act, which was introduced later, provided that the debts due to secured creditors would have priority over all other debts and government dues, including taxes. The Bank also cited Section 31B of the Recovery of Debts and Bankruptcy Act, 1993, which similarly prioritizes secured debts over government dues. The VAT authorities, however, claimed first charge under Section 48 of the VAT Act, which also contains a non-obstante clause.3. Rights of the Bank to Adjust Sale Proceeds Towards Secured Dues:The Bank had initiated recovery proceedings under the SARFAESI Act due to defaults by the borrower. The Bank argued that it had the right to adjust the sale proceeds from the auction of the mortgaged properties towards the outstanding dues of the borrower. The Bank contended that the VAT authorities could only claim rights over any excess sale proceeds after the Bank's secured dues were satisfied.4. Prohibition on VAT Authorities from Proceeding Against Purchasers:The Bank also sought a declaration that the VAT authorities could not proceed against the purchasers of the properties sold under the SARFAESI Act. The Bank argued that holding purchasers liable for the secondary charge would deflate the sale value of the properties, thereby encroaching on the statutory first charge of the Bank.Court's Analysis and Judgment:Quashing of Attachment Notice and Communication:The Court quashed the impugned attachment notice and communication issued by the VAT authorities, holding that the Bank had the first charge over the properties by virtue of Section 26E of the SARFAESI Act.Priority of Charges:The Court held that Section 26E of the SARFAESI Act and Section 31B of the RDB Act, both containing non-obstante clauses, provided that the debts due to secured creditors would have priority over all other debts, including government dues. The Court noted that these provisions were introduced later and were intended to give precedence to secured creditors, thus overriding the earlier provisions of the VAT Act.Adjustment of Sale Proceeds:The Court agreed with the Bank's contention that it had the right to adjust the sale proceeds towards the secured dues. The VAT authorities could only claim rights over any excess sale proceeds after the Bank's dues were satisfied.Prohibition on Proceeding Against Purchasers:The Court declared that the VAT authorities could not proceed against the purchasers of the properties sold under the SARFAESI Act. The Court reasoned that holding purchasers liable for the secondary charge would deflate the sale value of the properties, thereby encroaching on the statutory first charge of the Bank.Conclusion:The Court allowed the writ application, quashing the attachment notice and communication issued by the VAT authorities. It declared that the Bank had the first charge over the properties by virtue of Section 26E of the SARFAESI Act, and the VAT authorities could only claim rights over any excess sale proceeds. The Court also prohibited the VAT authorities from proceeding against the purchasers of the properties sold under the SARFAESI Act.