2023 (3) TMI 1066 - HC - VAT and Sales Tax

Court prioritizes registered mortgage over unregistered claims, invalidates attachment order, affirms secured creditor status.

The court ruled in favor of the Petitioner Bank, holding that their registered mortgage with CERSAI granted priority over the Sales Tax Department's ... Recovery of Outstanding dues of Bank and tax dues under the VAT / sales tax act - Priority of claims - Attachment order - Right of Auction Purchaser of property - borrowers failed and neglected to clear the outstanding dues to the Petitioner Bank - Seeking directions to issue NOC to the Petitioners for effecting the transfer of the Secured Assets in its name, without any requirement of making payment of the dues of the Respondent No.3 and/or NOC of Respondent No.3. Whether the Petitioner Bank having registered mortgage of the secured asset with Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI) will have priority to make its claim over the claims/charge of the Sales Tax Department arising out of the dues under the Maharashtra Value Added Tax Act, 2002 (MVAT) against the borrower to enforce the mortgaged writ property in favour of the Petitioner and more particularly, when the Sales Tax Deparatment had not registered its claim with CERSAI? HELD THAT:- The issue as to who will have priorty in view of Section 26E of SARFAESI Act was referred to the Full Bench of this Court in case of Jalgaon Janta Sahakari Bank Ltd. & Anr. [2022 (9) TMI 163 - BOMBAY HIGH COURT] where Full Bench considered Section 26-C of the SARFAESI Act and held that the proviso to Section 26-C also declares that a secured creditor, who has registered the security interest or other creditor who has registered the attachment order in its favour, shall have priority of claims over subsequent security interest created over the property in question, any transfer by way of sale, lease, assignment or licence of such property or attachment order subsequent to such registration. This Court noted that since the equitable mortgage could be created without registration, the transaction between the lender and the borrower largely remained secret. There was no way anyone else could get an inkling thereof, until the provisions of CERSAI registration were enacted. This Court held that to curb such problems and other undesirable consequences, the Parliament designed Chapter IV-A in such a manner to include provisions which, on the one hand, would disable any secured creditor to exercise the right of enforcing security interest under Chapter III of the SARFAESI Act without the CERSAI registration (section 26D) and, on the other, enable the secured creditor, if it has the CERSAI registration, to claim priority over all other debts and all revenues, taxes, etc. It is held that Section 26E, also beginning with a non-obstante clause, is unambiguous in terms of language, effect, scope and import. A ‘priority’ in payment over all other dues is accorded to a secured creditor in enforcement of the security interest, if it has a CERSAI registration, except in cases where proceedings are pending under the provisions of the Insolvency and Bankruptcy Code, 2016. This Court held that such registration would constitute public notice thereof. The Full Bench of this Court has held that the dues of the secured creditor shall have priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority in view of Section 26E of the SARFAESI Act. This Court held that Section 26E of the SARFAESI Act is a subsequent legislation, as it was notified on 24th January, 2020. Subject to compliance of the terms of Chapter IV-A, Section 26E of the SARFAESI Act would, thus, override any provision in the MGST Act and the BST Act in case of a conflict with the SARFAESI Act. This Court held that Section 26D which also refers with a non-obstante clause, prohibits a secured creditor from exercising the rights for enforcement of security interest conferred by Chapter III, unless the secured interest created in its favour by the borrower has been registered with the CERSAI. It has further held that not only therefore registration with the CERSAI has been made a mandatory pre-condition for invocation of the provisions contained in Chapter III of the SARFAESI Act, the provisions relating to debts that are due to any secured creditor being payable to such creditor in priority over all other debs and revenue, taxes etc. is available to be invoked only after the registration of security interest. It leads to the irresistable and inevitable conclusion that unless the security interest is registered, neither can the borrower seek enforcement invoking the provisions of Chapter III of the SARFAESI Act nor does the question of priority in payment would arise without such registration. The auction purchaser have participated in the e-auction conducted by the Petitioner Bank who had priority over the secured asset in view of registration of the equitable mortgage under Section 26E of the Securitization Act with CERSAI - the Petitioner Bank is not liable to take cognizance of the claim of Respondent No.1 over the secured asset in view of the Petitioner bank having priority over the secured asset and thus, is not liable to pay any taxes or other liabilities out of sale proceeds of the secured asset to the Respondent No.1. The Auction Purchasers’ claim their rights from the Bank having priority over the secured asset which was not liable to pay any taxes to the Respondent No.1 Authority. The principles laid down by the Full Bench on this aspect clearly applies to the facts of the present case. The submission of the learned special counsel for the Respondent No.1 Authority that the Petitioner cannot waive their right to forfeit the earnest money deposit and to accept the balance consideration amount subsequently, depending upon the outcome of this petition filed by the Petitioner Bank, cannot be agreed upon - there is no substance in the submission made by the learned Special Counsel for Respondent No.1. If the Petitioner Bank has waived its right to forfeit the Earnest Money Deposit which is permissible in law, Respondent No.1 Authority cannot object to right of Petitioner not to waive. The auction purchasers had never received any actual notice of the lien or constructive notice from the Respondent No.1 Authority in respect of the said writ property and thus is not liable to pay any tax separately towards the tax dues of the dealer of Respondent No.1 Authority. Attachment order set aside - Society to issue such NOC in favour of such auction purchasers for transfer of Secured Asset in their favour without insisting for payment of the Sales Tax dues payable by the dealer, if any, however, on compliance with all other formalities, expeditiously - petition disposed off. Issues Involved:1. Priority of claims between secured creditors and state tax authorities.2. Validity of attachment orders by state tax authorities.3. Rights and obligations of auction purchasers in property transactions involving secured assets.Summary:Priority of Claims:The primary issue was whether the Petitioner Bank, having registered its mortgage with the Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI), had priority over the claims of the Sales Tax Department for dues under the Maharashtra Value Added Tax Act, 2002 (MVAT). The court held that the Petitioner Bank's registration of the mortgage with CERSAI in 2012 gave it priority over the Sales Tax Department's claims, which were not registered with CERSAI. The court referenced the Full Bench decision in Jalgaon Janta Sahakari Bank Ltd. & Anr., which established that a secured creditor with CERSAI registration has priority over state tax claims.Validity of Attachment Orders:The court examined the attachment order dated 22nd April 2022 issued by the Sales Tax Department. It was determined that the attachment order was invalid because the Sales Tax Department had not registered its claim with CERSAI, whereas the Petitioner Bank had done so in 2012. The court emphasized that the provisions of the SARFAESI Act, being a Central Act, would prevail over the MVAT Act in case of any inconsistency, as per Article 254 of the Constitution of India.Rights and Obligations of Auction Purchasers:The auction purchasers had participated in the e-auction conducted by the Petitioner Bank and were declared the highest bidders. They faced issues in obtaining a No Objection Certificate (NOC) from the society due to the Sales Tax Department's attachment order. The court held that the auction purchasers were not liable to pay the Sales Tax Department's dues since the Petitioner Bank had priority over the secured asset. The court also noted that the auction purchasers had not received any actual or constructive notice of the tax lien from the Sales Tax Department.Conclusion:The court quashed the attachment order dated 22nd April 2022 and directed the society to issue the NOC to the auction purchasers without insisting on payment of the Sales Tax dues. The court affirmed that the Petitioner Bank's rights as a secured creditor, registered with CERSAI, had priority over the state tax claims. The rule was made absolute in favor of the Petitioner Bank and the auction purchasers, with no order as to costs.