Secured creditor priority under SARFAESI prevails over VAT first charge when tax liability has not yet crystallised.

Section 48 of the Gujarat VAT Act creates a first charge on a dealer's property for tax, interest and penalty, but the later priority provisions in Sections 26E and 31B of the SARFAESI and recovery laws give secured creditors precedence over other debts and governmental dues. Read with the non-obstante clauses in Sections 35 and 37 of SARFAESI, the statutory scheme indicates that a bank's security interest, once enforced and possessed before the State's liability is finally assessed and crystallised, is not displaced by the State's VAT claim. The first charge can operate only after tax becomes due and payable, and cannot override the secured creditor's protected priority unless the statute clearly says so.

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Issues: Whether the secured creditor bank had priority over the State's claim to the secured assets in view of Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, as against the first charge under Section 48 of the Gujarat Value Added Tax Act, 2003.

Analysis: Section 48 of the Gujarat Value Added Tax Act, 2003 creates a first charge on the dealer's property for tax, interest and penalty, while Sections 26E and 31B, inserted by the 2016 amendment, confer priority on secured creditors over all other debts and governmental dues. The statutory scheme was read with the non-obstante clauses in Sections 35 and 37 of the SARFAESI Act and the later insertion of Section 31B of the Recovery of Debts and Bankruptcy Act, 1993. The secured creditor had already enforced its security interest and taken possession before the State's liability was finally assessed and crystallised. On that footing, the Court held that Section 48 could operate only after tax liability became due and payable, and it could not displace the bank's prior security interest.

Conclusion: The secured creditor's claim had priority and the State could not assert precedence over the secured assets.

Final Conclusion: The writ petition was allowed on the footing that the bank was entitled to proceed against and auction the secured assets, and the State's first-charge claim under the VAT law could not prevail against the bank's statutorily protected priority.

Ratio Decidendi: Where a secured creditor's security interest has been enforced and the statutory priority provisions in the later Central enactments are attracted, a State VAT first-charge provision cannot override the secured creditor's priority unless the tax liability has already crystallised and the statute clearly displaces that priority.

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