2024 (8) TMI 1201 - HC - VAT and Sales Tax

Bank's security interest registered with CERSAI takes priority over later GST and Sales Tax Department dues under Section 26-E SARFAESI Act

The Bombay HC ruled that a bank's security interest registered with CERSAI on 17th March 2017 has priority over GST and Sales Tax Department dues. The ... Priority of secured creditor under Section 26-E of SARFAESI Act - Registration of security interest with CERSAI - Precedence of central law over State law in case of conflict - Priority of State tax claims under Section 37 of MVAT Act (displaced by Section 26-E)Priority of secured creditor under Section 26-E of SARFAESI Act - Registration of security interest with CERSAI - Whether a secured creditor who registered its security interest with CERSAI prior to the State recording its charge is entitled to priority over State tax claims. - HELD THAT: - The Court noted that the Petitioner-Bank registered its security interest with CERSAI on 17th March 2017 and that the State respondents had not registered their purported claims with the Central Registry. Section 26-E, beginning with a non-obstante clause, accords priority to debts due to any secured creditor after registration of security interest with CERSAI. The Full Bench decision in Jalgaon Janta Sahakari Bank Ltd. was applied to hold that diligence in obtaining CERSAI registration entitles a secured creditor to precedence in enforcement of the security interest. The amended statutory scheme and the notified Rules make the registration requirement operative, and where a secured creditor has preregistered, subsequent attachment or claims by a department not filed with CERSAI cannot defeat that priority. [Paras 23, 24, 25, 26]The Petitioner-Bank, having registered its security interest with CERSAI prior to the State's attachment, is entitled to priority over competing State tax claims.Precedence of central law over State law in case of conflict - Priority of State tax claims under Section 37 of MVAT Act (displaced) - Whether Section 37 of the MVAT Act, giving precedence to Sales Tax dues, can override the priority conferred by Section 26-E of the SARFAESI Act. - HELD THAT: - The Court observed that the SARFAESI Act is a Central enactment and Section 26-E (inserted by the 2016 amendment and enforced from 24 January 2020) expressly provides that debts due to a secured creditor after CERSAI registration shall be paid in priority over revenues, taxes and other dues. The MVAT Act is a State enactment; where a conflict arises, the Central provision conferring priority to a secured creditor prevails. Given that the Bank's CERSAI registration predates the attachment relied upon by the Sales Tax Department, Section 26-E displaces Section 37 to the extent of inconsistency. [Paras 27, 28]Section 26-E of the SARFAESI Act prevails over Section 37 of the MVAT Act insofar as it confers priority to a duly registered secured creditor; therefore the State tax claim cannot supersede the Bank's priority.Quashing of demand notices and recording of charge in rights column - Whether the demand notices, recovery orders and the recording of charge (Mutation Entries) by the State respondents against the secured assets should be set aside. - HELD THAT: - Applying the conclusions on priority and the absence of CERSAI registration by the State respondents, the Court found that the demand notices and the actions recording the State's charge on the secured assets conflicted with the Bank's prior registered security interest and statutory priority under Section 26-E. Reliance was placed on the Full Bench and the Division Bench decisions cited and the Court's own prior order. The respondents remain free to pursue recovery from the borrower by appropriate means, but the impugned steps which affect the Bank's priority were unsustainable. [Paras 28, 29]The demand notices, the impugned recovery orders and the recording of charge in the rights column (mutation entries) are quashed and set aside; the writ petition is allowed.Final Conclusion: Writ petition allowed. In view of the Bank's prior CERSAI registration and the priority accorded by Section 26-E of the SARFAESI Act, the Bank's secured claim has precedence over the State tax claims; the impugned demand notices, recovery orders and mutation entries are quashed and set aside. Respondent departments remain free to pursue recovery from the borrower by lawfully available means. Issues Involved:1. Whether the Petitioner-Bank's registered security interest with CERSAI has priority over the dues claimed by the GST and Sales Tax Departments.2. The applicability and precedence of Section 26-E of the SARFAESI Act over Section 37 of the MVAT Act.3. The validity of the demand notices and orders of attachment issued by the GST and Sales Tax Departments.Detailed Analysis:1. Priority of Registered Security Interest:The Petitioner-Bank argued that under Section 26-E of the SARFAESI Act, its registered security interest with CERSAI on 17th March 2017 should have priority over the dues claimed by the GST and Sales Tax Departments. The court noted that Section 26-E of the SARFAESI Act clearly states that 'the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.' The Full Bench in Jalgaon Janta Sahakari Bank Ltd. v. Joint Commissioner of Sale Tax Nodal 9, Mumbai and another clarified that a secured creditor with a CERSAI registration has priority over other claims, including tax dues. The court found no dispute that the Petitioner-Bank had registered its security interest, while the GST and Sales Tax Departments had not.2. Applicability and Precedence of Section 26-E of the SARFAESI Act:The court examined the contention that Section 37 of the MVAT Act gives precedence to Sales Tax dues over bank dues. However, it was noted that the SARFAESI Act, being a Central Act, prevails over the MVAT Act, a State Act. The court referred to the Full Bench decision in Jalgaon Janta Sahakari Bank Ltd., which emphasized that the SARFAESI Act's provisions, including Section 26-E, take precedence over conflicting state laws. The court also cited its earlier decision in Indian Bank v. State of Maharashtra, reiterating that the secured creditor's registered interest takes priority over state tax claims.3. Validity of Demand Notices and Orders of Attachment:The Petitioner-Bank challenged the demand notices and orders of attachment issued by the GST and Sales Tax Departments. The court found that the GST and Sales Tax Departments had not registered their security interests with CERSAI, which is a prerequisite for claiming priority under the SARFAESI Act. The court concluded that the Petitioner-Bank's registered security interest, being earlier in time and compliant with the SARFAESI Act, had priority over the subsequent attachments and claims by the GST and Sales Tax Departments.Conclusion:The court held that the Petitioner-Bank's registered security interest with CERSAI has priority over the dues claimed by the GST and Sales Tax Departments. The provisions of Section 26-E of the SARFAESI Act override Section 37 of the MVAT Act. Consequently, the demand notices and orders of attachment issued by the GST and Sales Tax Departments were quashed. The court made the rule absolute in terms of the prayer clauses (I), (II), (III), and (IV) of the Writ Petition, allowing the Petitioner-Bank's claims and dismissing the respondents' objections. The GST and Sales Tax Departments were permitted to pursue recovery against the borrower as per law.