Court affirms secured creditor's priority over sales tax, sets aside property attachment for unpaid dues

The court ruled in favor of the petitioners, setting aside the Sub Registrar's order dated 6.3.2021 and the communication dated 14.10.2019 by the Assistant Commissioner of State Tax. It affirmed the priority of the secured creditor's rights under the SARFAESI Act over sales tax dues and declared the attachment of the property for unpaid sales tax dues legally ineffective. The petition was allowed, and the rule was made absolute.

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Issues Involved:

1. Validity of the order dated 6.3.2021 by the Sub Registrar, Jamnagar.
2. Validity of the communication dated 14.10.2019 by the Assistant Commissioner of State Tax.
3. Priority of secured creditor's rights under the SARFAESI Act over sales tax dues.
4. Legality of the attachment of property for unpaid sales tax dues.
5. Justification for the Sub Registrar's refusal to return the sale deed.

Issue-wise Detailed Analysis:

1. Validity of the order dated 6.3.2021 by the Sub Registrar, Jamnagar:
The petitioners challenged the order dated 6.3.2021 by the Sub Registrar, Jamnagar, which kept pending document No.1169 dated 16.2.2021, citing an encumbrance due to unpaid sales tax dues. The court found this order unjustified, as the petitioners had purchased the property in an auction conducted by Axis Bank under the SARFAESI Act, and thus the property was free from any encumbrances. The court set aside the order dated 6.3.2021.

2. Validity of the communication dated 14.10.2019 by the Assistant Commissioner of State Tax:
The petitioners also sought to set aside the communication dated 14.10.2019 by the Assistant Commissioner of State Tax, which directed the registration of a charge on the property for the recovery of VAT and other taxes. The court held that the sales tax authority's order to create a charge over the property had no legal efficacy since the property was sold by a secured creditor (Axis Bank) under the SARFAESI Act. Consequently, the communication dated 14.10.2019 was set aside.

3. Priority of secured creditor's rights under the SARFAESI Act over sales tax dues:
The court emphasized that under Section 26E of the SARFAESI Act, the dues of secured creditors take precedence over all other debts, including taxes payable to the government. The bank, as a secured creditor, had a prior claim over the property, which it sold in an auction to recover its dues. The court reaffirmed that the dues of the sales tax authorities could not override the rights of the secured creditor.

4. Legality of the attachment of property for unpaid sales tax dues:
The court addressed the attachment of the property by the sales tax authorities for unpaid dues of Rs.2,18,36,751/-. It was found that the original owner had no interest in the property after the auction sale by the bank, and the petitioners had become the absolute owners. The court noted that the sales tax authorities acted in collusion with the original owner, who had no objection to the attachment. The attachment was deemed legally ineffective against the petitioners' secured ownership.

5. Justification for the Sub Registrar's refusal to return the sale deed:
The Sub Registrar's refusal to return the sale deed was based on the sales tax authority's attachment order. The court held that this refusal was unjustified since the petitioners were the rightful owners of the property, free from any encumbrances, following the auction conducted under the SARFAESI Act. The Sub Registrar was directed to return the sale deed to the petitioners.

Conclusion:
The court ruled in favor of the petitioners, setting aside the Sub Registrar's order dated 6.3.2021 and the communication dated 14.10.2019 by the Assistant Commissioner of State Tax. It affirmed the priority of the secured creditor's rights under the SARFAESI Act over sales tax dues and declared the attachment of the property for unpaid sales tax dues legally ineffective. The petition was allowed, and the rule was made absolute.

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