Secured creditor priority over VAT charge limits auction purchaser liability and displaces revenue encumbrances on sold assets
A statutory VAT charge under section 48 of the Gujarat Value Added Tax Act, 2003 was analysed against a secured creditor's priority under the SARFAESI framework. The text states that, once the secured creditor complies with the registration requirements under the securitisation regime, its enforcement rights prevail over the State's first charge for tax dues. It also states that an auction purchaser of the secured asset cannot be made liable for undisclosed VAT encumbrances, and that after sale and realisation of value, the State's claim lies against the sale proceeds rather than the transferred property. Revenue mutation entries based on the VAT charge were treated as unsustainable.
Issues: (i) Whether the statutory charge under section 48 of the Gujarat Value Added Tax Act, 2003 could prevail over the rights of a secured creditor enforcing security interest under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. (ii) Whether an auction purchaser of the secured asset could be compelled to discharge the sales tax/VAT dues and whether the mutation entries recording such charge could continue after the secured asset was sold.
Issue (i): Whether the statutory charge under section 48 of the Gujarat Value Added Tax Act, 2003 could prevail over the rights of a secured creditor enforcing security interest under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
Analysis: The statutory framework under sections 13(2), 13(4), 26B, 26D and 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, together with the Security Interest (Enforcement) Rules, 2002, gives priority to a secured creditor after compliance with the registration requirements. Section 48 of the Gujarat Value Added Tax Act, 2003 creates a first charge on property, but the Court followed the earlier Gujarat view that such charge cannot displace the secured creditor's priority in the circumstances of recovery under the securitisation regime. The later discussion of the Supreme Court's decision on liquidation under the Insolvency and Bankruptcy Code, 2016 was confined to that context and did not require a departure from the earlier Gujarat position.
Conclusion: The secured creditor's priority was held to prevail and the VAT charge was not allowed to override it.
Issue (ii): Whether an auction purchaser of the secured asset could be compelled to discharge the sales tax/VAT dues and whether the mutation entries recording such charge could continue after the secured asset was sold.
Analysis: The sale notice and sale deed showed a sale on an "as is where is, whatever there is basis", but the Court held that the purchaser cannot be saddled with liability for a statutory charge unless the encumbrance is properly disclosed so as to amount to notice of the burden. Once the secured creditor sold the asset and realised the value of the property, the charge could not continue to operate against the transferred property. The outstanding contest, if any, was between the State and the secured creditor over the sale proceeds, not against the auction purchaser. Consequently, the revenue mutation entries founded on the VAT charge could not survive.
Conclusion: The auction purchaser was not liable to pay the VAT dues, and the charge entries in the revenue record were directed to be removed.
Final Conclusion: The petition succeeded, the State's charge over the property was quashed, and the auction purchaser obtained the property free from the asserted VAT encumbrance.
Ratio Decidendi: In a sale by a secured creditor under the securitisation framework, a State tax charge under the VAT law does not bind the auction purchaser unless the encumbrance is duly disclosed and, once the secured asset is sold and the value realised, the State's remedy lies against the sale proceeds rather than against the purchaser or the transferred property.