2022 (1) TMI 57 - HC - VAT and Sales Tax

Secured Creditors Prevail Over State Tax: SARFAESI Act Upheld

Reliance Asset Reconstruction Company Limited Versus State Of Gujarat

Reliance Asset Reconstruction Company Limited Versus State Of Gujarat - TMI Issues Involved:1. Priority of charge between the secured creditor under the SARFAESI Act and the State Government under the Gujarat Sales Tax Act.2. Validity of the charge created by the Sales Tax Department over the secured assets.3. Rights of the petitioner as a secured creditor under Section 26E of the SARFAESI Act.Issue-wise Detailed Analysis:1. Priority of Charge between the Secured Creditor under the SARFAESI Act and the State Government under the Gujarat Sales Tax Act:The core issue was whether the Central legislation (SARFAESI Act) will prevail over Section 48 of the Gujarat Value Added Tax (VAT) Act, 2003, which provides the State with a first charge over the property for tax dues. The Court examined the precedence of secured creditors' rights under Section 26E of the SARFAESI Act, which was introduced to give priority to secured creditors over all other debts, including government dues. The Court referred to several judgments, including the case of Kalupur Commercial Cooperative Bank Ltd. vs. State of Gujarat and Ski Specialties Pvt. Ltd. vs. State of Gujarat, which established that Section 26E of the SARFAESI Act, being a later enactment with a non-obstante clause, takes precedence over the State's charge under Section 48 of the VAT Act.2. Validity of the Charge Created by the Sales Tax Department over the Secured Assets:The Court noted that the Sales Tax Department had created a charge over the property for outstanding dues amounting to Rs. 4,17,40,000/-. However, this charge was created after the mortgage deed was executed in favor of the bank and after the bank had taken possession of the property under the SARFAESI Act. The Court emphasized that the mortgage deed was executed on 20.03.2010, and the physical possession of the property was taken by the bank on 04.02.2014. The charge by the Sales Tax Department was only created in 2018, which was subsequent to the bank's actions. Therefore, the Court concluded that the bank's charge had priority.3. Rights of the Petitioner as a Secured Creditor under Section 26E of the SARFAESI Act:The Court held that the petitioner, having acquired the rights, title, and interest in the property through a registered deed of assignment dated 07.02.2017, is a secured creditor. Under Section 26E of the SARFAESI Act, the secured creditor has a first charge over the property, which overrides any other charge, including those by the State for tax dues. The Court reiterated that Section 26E gives priority to the secured creditor over all other debts, including government dues, once the security interest is registered.Conclusion:The Court concluded that the petitioner, as a secured creditor under the SARFAESI Act, has the first charge over the property, and this charge takes precedence over the State's charge under the VAT Act. The Court directed the respondent authorities to remove the charge created by the Sales Tax Department on the property. The judgment underscores the supremacy of the secured creditors' rights under the SARFAESI Act over State tax dues, provided the security interest is registered and the due process under the SARFAESI Act is followed.