Secured creditor priority prevails over later VAT charge where tax liability had not crystallised before SARFAESI enforcement.

The Gujarat High Court noted that a statutory first charge under the Gujarat VAT Act arises only when the tax liability is finally assessed and becomes due and payable. Where the property had already been mortgaged, enforced under the SARFAESI framework, and sold before the VAT charge was created and mutated, the secured creditor's priority prevailed. The Court applied the overriding priority provisions in section 26E of the SARFAESI Act and section 31B of the Recovery of Debts and Bankruptcy Act, and held that the State's later VAT claim could not defeat the secured creditor's rights. The revenue charge entries were therefore liable to be deleted.

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Issues: Whether the charge created under the Gujarat Value Added Tax Act, 2003 could override the rights of the secured creditor under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Security Interest (Enforcement) Rules, 2002.

Analysis: The property had already been mortgaged and proceeded against under the SARFAESI regime, and the sale in favour of the petitioners was completed before the State created and mutated the VAT charge. The governing legal position was that the State's first charge under section 48 of the Gujarat Value Added Tax Act, 2003 arises only when the tax liability is finally assessed and becomes due and payable. Until such crystallisation, no operative statutory charge can defeat the secured creditor's enforcement rights. The Court applied the later and overriding statutory scheme under section 26E of the SARFAESI Act, 2002, along with the supporting priority provisions in section 31B of the Recovery of Debts and Bankruptcy Act, 1993, and held that the secured creditor's rights prevail over the State's claim. The Court also relied on the distinction between a transfer made after tax has become due and a prior mortgage and sale under the SARFAESI mechanism.

Conclusion: The VAT charge could not override the secured creditor's prior claim and the petitioner was entitled to deletion of the revenue charge entries.

Final Conclusion: The secured asset sold under the SARFAESI framework was held to be free from the State's later VAT charge, and the impugned encumbrance entries were ordered to be removed.

Ratio Decidendi: A statutory first charge under the VAT law does not prevail over a secured creditor's priority where the tax liability had not crystallised before enforcement and sale under the SARFAESI regime, and the later non obstante priority provisions governing secured creditors apply with overriding effect.

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