2024 (7) TMI 1547 - HC - VAT / Sales Tax

Section 48 VAT charges don't survive bank auction sales under SARFAESI Act, secured creditors have priority over State

Gujarat HC held that statutory charges created by the State for VAT/sales tax dues under Section 48 of VAT Act do not survive after auction sale of ... Priority of the charge of the respondent State over the sale proceeds realized by the respondent no. 6-Bank on sale of the secured assets - recovery of outstanding dues of the borrower under Section 13(2) and 13(4) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 read with the Security Interest (Enforcement) Rules, 2002 - Liability of the auction purchaser to discharge statutory dues - Validity and subsistence of statutory charge post-auction sale. Whether the charge mutated in the revenue records by the Sales Tax/ VAT Department as per provision of Section 48 of the VAT Act would continue even after the auction sale conducted by the respondent no. 6 Bank while exercising the powers under the provision of Securitisation Act and Securitisation Rules or not? HELD THAT:- The Division Bench of this Court in case of Kalupur Commercial Cooperative Bank [2019 (9) TMI 1018 - GUJARAT HIGH COURT] after analyzing provisions of Section 31B of the RDB Act and provisions of Section 26E of the SARFAESI Act with regard to the preferential right of the State to recover the debts over the other creditors held 'The language of Section 48 of the VAT Act is plain and simple and the phrase 'any amount payable by a dealer or any other person on account of tax, interest or penalty' therein assumes significance. The amount could be said to be payable by a dealer on account of tax, interest or penalty once the same is assessed in the assessment proceedings and the amount is determined accordingly by the authority concerned. Without any assessment proceedings, the amount cannot be determined, and if the amount is yet to be determined, then prior to such determination there cannot be any application of Section 48 of the VAT Act.' The Full Bench of the Bombay High Court has therefore rightly held that Section 31B of the RBD Act can only be invoked when there is determination of debt due and payable as provided under the RDB Act with the intervention of the Court and in that scenario, it was observed with regard to the decision of this Court in case of Kalupur Commercial Cooperative Bank. The secured creditor with a view to recover its dues after taking possession of secured assets under Section 13(4) of the SARFAESI Act is required to follow the procedure prescribed in Rule 8 and Rule 9 of the Securitisation Rules for conducting the auction sale. As per the Clause (f) of Sub-Rule 7 of the Rule 8, the secured creditor is required to disclose as a part of terms and conditions which are necessary for a purchaser to know the nature and value of the property. The respondent no. 6-Bank which is secured creditor is therefore bound by the provision of Rule 8 (7)(f) of the Rules to disclose the nature and value of the property - In absence of such disclosure by the secured creditor made in the auction sale notice, as a part of terms and conditions of the sale and only mentioning “as is where is, whatever basis” is not sufficient so as to enable the participants in the auction sale to put to notice about the charge subsisting on the property which is put to auction sale. The auction purchaser shall not be duty bound to make any payment, even if the charge subsist over the property, except what is stated in the sale agreement or sale deed executed between the parties. It would be useful to refer to provisions of Section 100 of the Transfer of Property Act as extracted herein above which provides for the ‘charge’ which means that where immovable property of one person is by act of parties or operation of law made security for payment of money to another and transaction does not amount to a mortgage, the latter person is said to have a charge on the property and all the provisions would apply which applied to simple mortgage would apply to the charge. Therefore, once the secured creditor has realised its dues by sale of the property, then further charge would not subsist over such property as the entire value of the property would stand realised. In such circumstances, the question, therefore would arise as to whether the respondent State would be entitled to recover any amount from the Bank, having the priority over the charge for sale consideration which was realized on the sale of the property, as the property once sold, then charge would be shifted to the sale consideration realized and therefore it would be between the respondent State and the secured creditor as to who will have first right to recover such sale consideration. It may happen that even though the secured creditor may have the first charge over the property and respondent State might have sold the property then in that circumstances also the question would arise whether the secured creditor would be entitled to recover such sale consideration from the State Authority by virtue of first charge over the property - In such circumstances, as held by this Court in case of Kalupur Commercial Cooperative Bank and as per the decision of the Full Bench of the Bombay High Court, the secured creditor would have the first charge in view of the priority of the charge as prescribed in Section 26E of the SARFAESI Act and Section 31B of the RBD Act as the case maybe. Now the question would arise whether the subsequent decision of the Hon’ble Apex Court in case of Rainbow Papers Ltd. [2022 (9) TMI 317 - SUPREME COURT] would be applicable to the issue as to the priority of the charge of the secured creditor visa-vis the provision of Section 48 of the VAT Act or not as in the said decision the Hon’ble Apex Court has considered the provisions of the IBC vis-a-vis the provision of Section 48 of the VAT Act. It would be therefore necessary to revisit the provisions of IBC as extracted herein above to ascertain whether the contention of the respondent State that in view of the decision of the Hon’ble Apex Court in case of Rainbow Papers Ltd, the decision of this Court in case of Kalupur Commercial Cooperative Bank requires relook or not. From the above observations of the Hon’ble Apex Court, it is clear that the Apex Court has considered the provisions of Section 53 of the IBC vis-a-vis Section 48 of the VAT Act and has come to the conclusion that Section 53 of the IBC does not override the provisions of Section 48 of the VAT Act and outstanding dues of the State Act as per the provisions of Section 48 of the VAT Act would be at pari passu with the dues of the secured creditor as provided under Section 53(1)(d)(2). Thus, the charge in respect of the property in question created for sales tax dues or VAT dues is of no avail and has no efficacy in law in view of the provisions of SARFAESI Act and the RDB Act. The property in question was sold by respondent no. 6-Bank under the provisions of SARFAESI Act and the petitioners were successful purchasers and the sale certificate is issued and sale deed is also executed by which the petitioners have become absolute owners of the property and therefore considering the existing position of law, the charge created by the respondent State over the property in question in the year 2018, cannot be sustained and is accordingly quashed and set aside and as a consequence the mutation entries in revenue records also stands deleted. Petition allowed. Issues Involved:1. Priority of charge under the Gujarat Value Added Tax Act, 2003 versus the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.2. Liability of the auction purchaser regarding statutory dues.3. Validity and subsistence of statutory charge post-auction sale.Issue-wise Detailed Analysis:1. Priority of Charge:The primary issue was whether the statutory charge under Section 48 of the Gujarat Value Added Tax Act, 2003, which creates a first charge on the property for tax dues, has precedence over the charge of a secured creditor under Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The court referred to the judgment in Kalupur Commercial Co-operative Bank Ltd. vs. State of Gujarat, which held that Section 26E of the SARFAESI Act provides priority to the secured creditor over all other debts, including government dues. This position was reinforced by Section 31B of the Recovery of Debts and Bankruptcy Act, 1993, which also grants priority to secured creditors. The court found no reason to deviate from this established legal position, despite arguments to the contrary based on the Full Bench decision of the Bombay High Court in Jalgaon Janta Sahakari Bank Ltd. and the Supreme Court's decision in Rainbow Papers Ltd.2. Liability of Auction Purchaser:The court examined whether the auction purchaser is liable for the statutory dues of the previous owner, given that the sale was conducted on an 'as is where is' basis. It was noted that the secured creditor must disclose any encumbrances known to them at the time of sale. The court found that if the auction purchaser had no constructive notice of the charge, they could not be held liable for the statutory dues. The court held that the auction purchaser in this case was not liable for the VAT dues, as the charge should have been disclosed by the secured creditor, and the sale was conducted without such disclosure.3. Validity and Subsistence of Statutory Charge Post-Auction Sale:The court considered whether the statutory charge under the VAT Act subsists after the auction sale conducted by the secured creditor. It was held that once the secured creditor realizes its dues through the sale of the property, the statutory charge does not subsist on the property. The court relied on Section 100 of the Transfer of Property Act, which implies that a charge on the property ceases once the property is sold and the sale proceeds are appropriated. Therefore, the statutory charge created by the VAT Department was quashed, and the corresponding mutation entries in the revenue records were ordered to be deleted.The judgment reaffirmed the precedence of secured creditors' rights under the SARFAESI Act over statutory charges created under state legislation, provided the secured creditor complies with the procedural requirements of the SARFAESI Act. The auction purchaser was absolved from liability for the statutory dues, emphasizing the importance of transparency and disclosure by secured creditors during the auction process.