2020 (12) TMI 693 - HC - VAT and Sales Tax

Court upholds secured creditor's priority over state tax dues in mortgage dispute.

The court ruled in favor of the Petitioner Bank, a secured creditor, determining that their charge over the mortgaged property took precedence over state ... Priority of debt - secured creditor or state taxes?, which is prior - Attachment of property - recovery of sales tax dues payable by Respondent - Section 32 of the Maharashtra Value Added Tax Act, 2002 (MVAT Act) and proceedings under the Maharashtra Land Revenue Code - HELD THAT:- Petitioner is a secured creditor as it has a debt / receivable due to it which has been secured by mortgage - From a plain and conjoint reading of Section 31-B of the RDB Act and Section 25-E of the SARFAESI Act it is clear that by virtue of the non-obstante language contained therein, the rights of secured creditors to realise secured debts by sale of assets over which security interest is created, shall have priority over Government dues including revenues, taxes, cesses and rates due to the Central/State Government or to the Local Authority. Respondent No.2 had claimed first charge on the said property, inter alia, stating that it had initiated recovery proceedings under Sections 33 and 34 of the MVAT Act on 10th March 2016 whereas attachment under Section 32 of the MVAT Act was vide letter dated 28th March, 2018 to the Petitioner. Petitioner had initiated proceedings under the provisions of the RDB Act. It has also taken steps as noted above to enforce the security interest in the said property vide notice dated 27th November 2017 under Section 13(2) of the SARFAESI Act prior to the notice dated 28th March 2018 of Respondent No.2. The facts in the case at hand being similar to the facts in the case of ASREC (INDIA) LIMITED, A COMPANY VERSUS THE STATE OF MAHARASHTRA, THE OFFICE OF THE SALES TAX AND THE OFFICIAL LIQUIDATOR OF THE HIGH COURT OF BOMBAY AS THE OFFICIAL LIQUIDATOR OF M/S. CRYSTAL MIRAGE PVT. LTD. [2019 (12) TMI 633 - BOMBAY HIGH COURT] that decision would squarely be applicable to the facts of this case that if any Central statute creates priority of a charge in favour of a secured creditor, the same will rank above the charge in favour of a State for a tax due under the value added tax of the State. Therefore, in our view what becomes relevant in the facts of this case is the issue of priority of charge on the said assets of secured debt over tax dues and not whether the charge is first or not in time. Non-registered mortgage - HELD THAT:- Even if the Petitioner’s mortgage was not registered under Section 26-D of the SARFAESI Act, the alleged non registration, would not affect the legal position on the issue of priority. The mortgage of the secured creditor viz. the Petitioner Bank gets prior charge over the charge of the Respondents for tax/VAT dues - Petition allowed - decided in favor of petitioner. Issues Involved:1. Priority of charge between secured creditor and state tax dues.2. Legality of attachment of the property by the Sales Tax Department.3. Validity of actions taken by the secured creditor under SARFAESI Act and RDB Act.4. Applicability of Section 31-B of the RDB Act and Section 26-E of the SARFAESI Act.5. Effectiveness of amendments to SARFAESI Act and RDB Act on the priority of charges.Detailed Analysis:1. Priority of Charge between Secured Creditor and State Tax Dues:The primary issue was whether the secured creditor (the Petitioner Bank) or the state tax dues had priority over the mortgaged property (Plot No.W-7). The court examined the definitions and provisions under the RDB Act and the SARFAESI Act. Section 31-B of the RDB Act and Section 26-E of the SARFAESI Act were pivotal, both containing non-obstante clauses that prioritize the rights of secured creditors over all other debts, including government dues. The court concluded that the secured creditor’s charge takes precedence over the state tax dues.2. Legality of Attachment of the Property by the Sales Tax Department:The Sales Tax Department (Respondent No.2) had attached the property under Section 32 of the MVAT Act for recovery of VAT dues. The court found that the attachment was subject to any provision regarding the creation of a first charge in any Central Act, as per Section 37 of the MVAT Act. Since the Petitioner’s mortgage was prior in time and had priority under the Central Acts, the court deemed the attachment by the Sales Tax Department illegal and set it aside.3. Validity of Actions Taken by the Secured Creditor under SARFAESI Act and RDB Act:The Petitioner had initiated proceedings under the RDB Act and the SARFAESI Act to enforce its security interest. The court noted that the Petitioner had taken possession of the property and conducted an e-auction (though later cancelled). The court upheld the actions taken by the Petitioner under these Acts, emphasizing that the secured creditor’s rights to realize secured debts have priority over government dues.4. Applicability of Section 31-B of the RDB Act and Section 26-E of the SARFAESI Act:The court addressed the applicability of these sections, which were introduced by amendments in 2016 and 2020, respectively. Despite the Respondents’ contention that these sections were effective prospectively, the court held that Section 31-B of the RDB Act itself was sufficient to give priority to the secured creditor over the Respondents’ tax dues, irrespective of the prospective applicability of Section 26-E of the SARFAESI Act.5. Effectiveness of Amendments to SARFAESI Act and RDB Act on the Priority of Charges:The court referenced multiple judgments, including those from the Rajasthan High Court, Madhya Pradesh High Court, and Full Bench of the Madras High Court, which consistently held that central statutes creating priority for secured creditors override state statutes creating first charges for tax dues. The court agreed with these precedents, reinforcing that the amendments to the SARFAESI Act and the RDB Act effectively prioritize secured creditors’ charges over state tax dues.Conclusion:The court concluded that the Petitioner Bank, as a secured creditor, had a prior charge over the mortgaged property (Plot No.W-7) compared to the state tax dues. The attachment by the Sales Tax Department was deemed illegal and was quashed. The court upheld the priority of the secured creditor’s charge under Section 31-B of the RDB Act and Section 26-E of the SARFAESI Act, ensuring that the secured creditor’s rights to realize secured debts were protected over government dues. The writ petition was allowed, and the rule was made absolute in favor of the Petitioner.