2023 (2) TMI 135 - HC - VAT and Sales Tax

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 ... Recovery of tax dues - Right of auction purchaser of the property - Auction of property by the Secured Creditor (Bank) - Seeking lifting of attachment over the property - existence of encumbrance in the nature of government dues of unpaid sales tax - Section 45 of the Gujarat Value Added Tax Act - HELD THAT:- The settled position of law is that the VAT and sales tax dues has no precedence over the dues of the bank for recovery of which the bank exercise powers under the SARFAESI Act. The bank was secured creditor. Section 26 E of the SARFAESI Act provides for priority of secured creditor, stating that notwithstanding anything contained in any other law, after the registration of security interest, the debts due to unsecured creditor shall be paid in priority of all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority - The charge sought to be created by the sales tax authorities in no way could discount the a priori rights of the bank to recover its dues as the bank was secured creditor. The dues in the nature of sales tax or VAT payable by the original owner cannot claim priority over the dues of the secured creditor. The principle that the state debt or crown debt has no prior claim or the dues payable to the secured creditor is no longer res integra. In BANK OF BIHAR VERSUS STATE OF BIHAR [1971 (4) TMI 96 - SUPREME COURT], the supreme court laid down certain well known principles which were followed by the supreme court in its own judgment in DENA BANK VERSUS BHIKHABHAI PRABHUDAS PAREKH AND CO. AND OTHERS [2000 (4) TMI 36 - SUPREME COURT]. The law laid down is that the preferential right of the Crown to recover the debt over the creditors is limited to the class of unsecured creditors. The charge in respect of the property in question created for sales tax dues is of no avail and has no efficacy in law. The property in question was sold by the bank which was a secured creditor, to enforce its secured debt under the SARFAESI Act, of which the petitioners were successful auction purchaser. They were issued sale certificate which was registered to finally become absolute owner of the property. In exercising their capacity as owners, they executed further sale deed dated 15.2.2021 which was registered with the office of Sub-Registrar at No.1169 on 16.2.2021, however the Sub-Registrar refused to return the sale registered sale deed in view of the order of the respondent No.5 Sales Tax Authority on the ground that it had created charge over the properties for the sales tax dues. The respondent No.3 Sub Registrar was wholly unjustified in passing order dated 6.3.2021 to keep the document No.1169 dated 16.2.2021 which was sale deed executed by the petitioners, keeping the same pending and not returning the same to the petitioners - Since the petitioner had purchased in the auction sale conducted by the bank under the provisions of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 the property travelled in favor of the petitioner free from any encumbrances, order of sales tax officer registering the charge over the property in relation to the sales tax and Value Added Tax payable by original owner of the property had no efficacy in law. Petition allowed. 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.