TaxTMI 
TaxTMI 
2020 (12) TMI 693
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....ions of Section 32 of the Maharashtra Value Added Tax Act, 2002 (the "MVAT Act") and proceedings under the Maharashtra Land Revenue Code ("MLRC") initiated by the Respondent No.2 for recovery of VAT dues of Respondent No.3 as detailed in the communication dated 28th March 2018 from Respondent No.2 even though the said property has been mortgaged by Respondent No.3 in favour of the Petitioner. In short, Petitioner is claiming priority of charge on the said property as secured creditor in respect of secured debt owed by Respondent No.3 to Petitioner over the sales tax dues payable by Respondent No.3 to Respondent No.2. 3. Petitioner has filed this petition seeking the following reliefs: a. for Writ of Mandamus or Writ direction or Order in the nature of Mandamus, any other Writ, direction or Order directing the Respondent Nos.1 and 2 to: (i) forthwith remove their charge from the Plot No.W-7; and (ii) forthwith raise their attachment on the said Plot No.W-7 informed vide the Notice dated 28.03.2018 bearing Ref. No. DCST/KOL-VAT-E-008/Krishna Industries/Recovery/B-271. b. for an interim order and injunction of this Hon'ble Court pending hearing and final disposal of this Peti....
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....ge charge is duly registered with the Central Registry of the Securitisation Asset Reconstruction and Security Interest of India (the "CERSARSI"), though the same is disputed by the Respondent No.2. 8. Since Respondent No.3 failed to regularly maintain their loan accounts with Petitioner, it is submitted that the Petitioner initiated proceedings under the Recovery of Debts and Bankruptcy Act 1993 (the "RDB Act") by filing Original Application for recovery of bank dues of Rs. 2.49 crores from the Respondent No.3 i.e., M/s.Krishna Industries, which is pending adjudication before the Debts Recovery Tribunal (DRT) at Pune as well as under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the "SARFAESI Act") to enforce their security interest in the mortgaged and hypothecated assets. Notice dated 27th November, 2017 was issued under Section 13(2) of the SARFAESI Act; symbolic possession of the said Plot No.W-7 was taken on 21st February, 2018 and the physical possession was taken on 29th May, 2019. 9. Petitioner received notice dated 28th March 2018 bearing Ref. No. DCST/ KOL- VAT- E- 008/ Krishna Industries /Recovery /B271 from ....
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..... 12. By the Petitioner's advocate's letter dated 18th September 2019, Respondents were informed that the Petitioner had already auctioned the property and had confirmed the sale but was unable to transfer the said property in the name of the auction purchaser due to non-issuance of NOC by the Respondent No.2. By the said Advocate's letter, Respondent No.2 was called upon to issue NOC for recording the property in the name of the auction purchaser, further stating that in case the sale proceeds received from the said property were more than the Petitioner's dues/claim, the same would be handed over to the Respondent No.2 for settlement of its claim. 13. Despite the above, Respondent No.2 failed to favourably respond or raise the charge/attachment on the said Plot No.W-7 and that by letter dated 11th September 2019 Respondent No.2 intimated that VAT dues of Respondent No.3 as on 06th September 2019 were Rs. 85,56,784/- alongwith further interest and that they had first charge/claim of sales tax. 14. It is however submitted in the Petition that sale of Plot No.W-7 stands cancelled and as such the said auction sale has become irrelevant for the purpose of this writ petition. 15. R....
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....ce Respondent No.3 had failed to pay the dues as per demand notices served on it, recovery action under Sections 33 and 34 of the MVAT Act for pending VAT and CST dues of Rs. 85,56,789/- were initiated on 10th March 2016. For recovery of the said dues, proceedings under the MLRC were initiated pursuant to notice dated 17th March 2016, 2nd March 2017 and 20th March 2018. Claim for the property was lodged vide letter dated 20th March 2018 with MIDC Kolhapur for an amount of Rs. 22,54,133/-. It is contended that pursuant to Section 37 of the MVAT Act, the State authorities have first charge on the said property with respect to any amount of tax, penalty, interest etc. Further contention is that the recovery proceedings initiated by the Respondent No.2 were before the notification of amendment including Section 26-E in the SARFAESI Act which came to be notified prospectively on 24th January 2020. In the meanwhile, Respondent Nos.1 and 2 had already asserted the claim of the State Government for recovery of dues of Respondent No.3. It is therefore submitted that in view of the prospective nature of the amendment and the decision of the Bombay High Court being after initiation of recover....
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....d (Supra). 20. Learned AGP Ms. Vyas on behalf of Respondent Nos.1 and 2 reiterates the stand taken in the reply-affidavit. She further submits that the decision of the Bombay High Court in ASREC (India) Limited (supra) has been challenged in the Supreme Court and is pending. Although there is no stay, she submits that the hearing of this case may be deferred in view of the filing of SLP. Referring to Section 26-B of SARFAESI Act, she submits that the Petitioner has not registered any security interest with the Central Registry of Securitisation and Asset Reconstruction and Security Interest of India ("CERSARSI") as required under Section 26-D of the SARFAESI Act which provides that no secured creditor shall be entitled to exercise the rights of enforcement of securities under the SARFAESI Act unless the security interest has been registered with the Central Registry. As the Petitioner has failed to disclose any such registration, the debts due to the Petitioner cannot be paid in priority over the tax dues. According to her, Section 26-E of the SARFAESI Act is not applicable to the facts of this case as the said section has been notified on 24th January, 2020 and is effective prosp....
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.... financial institution; or (iii) an asset reconstruction company whether acting as such or managing a trust set up by such asset reconstruction company for the securitisation or reconstruction, as the case may be; or (iv) debenture trustee registered with the Board appointed by any company for secured debt securities; or (v) any other trustee holding securities on behalf of a bank or financial institution. 26. Section 2(l) of the SARFAESI Act referred to above defines "financial asset" as under: (l) "financial asset" means debt or receivables and includes- (i) a claim to any debt or receivables or part thereof, whether secured or unsecured; or (ii) any debt or receivables secured by, mortgage of, or charge on, immovable property; or (iii) a mortgage, charge, hypothecation or pledge of movable property; or (iv) any right or interest in the security, whether full or part underlying such debt or receivables; or (v) any beneficial interest in property, whether movable or immovable, or in such debt, receivables, whether such interest is existing, future, accruing, conditional or contingent; or (va) any beneficial right, title or interest in any tangible asset given ....
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....encement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code. 30. From a plain and conjoint reading of Section 31-B of the RDB Act and Section 25-E of the SARFAESI Act it is clear that by virtue of the non-obstante language contained therein, the rights of secured creditors to realise secured debts by sale of assets over which security interest is created, shall have priority over Government dues including revenues, taxes, cesses and rates due to the Central/State Government or to the Local Authority. We also note the reference in the pleadings to the dates of creation of charge/security interest as well as lodging of the claim and dates of commencement of recovery proceedings to stake a claim of first charge over the said property. Petitioner's mortgage was created on the said property on 13th January 2014 and as secured creditor it has claimed priority of charge over the charge of the Sales Tax Department. We find that Respondent No.2 had claimed first charge on the sai....
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....rein had been substituted as applicant on the assignment of debt in the proceedings under the RDB Act. In that case also physical possession of the concerned property was taken over by the Petitioner therein pursuant to Section 13(2) notice under the SARFAESI Act. In short, similar issue as in this case arose in that case regarding the priority of charge. Referring to the provisions Section 31-B of the RDB Act, Section 37 of the MVAT Act, the SARFAESI Act as well as to the decisions of the Rajasthan High Court in the matter of G.M.G. Engineers & Contractor Pvt. Ltd., of the High Court of Madhya Pradesh reported in (2018) 55 GSTR 210(MP) Bank of Baroda Vs. Commissioner of Sales Tax, M.P. Indore & Anr., the Full Bench Decision of the Madras High Court reported in AIR 2017 Madras 67, in Assistant Commissioner Vs. Indian Overseas Bank & Ors. of the High Court of Gujarat in Special Civil Application No.17891 of 2018 Kalupur Commercial Co-operative Bank ltd. Vs. State of Gujarat., this Court agreed with the consistent view taken in the above decisions and held that if any central statute creates priority of charge in favour of the secured creditor, the same will rank above the charge in ....
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.... the effect of first charge, the language of Section 26E of the Act of 2002 and Section 31B of the Act of 1993 would have been different as indicated by the Apex Court in the case of Central Bank of India (supra). It should have been with non-obstante clause and that secured creditors would have priority over the first charge created under a State legislation. The amendment made by Parliament is to give priority to the secured creditors vis a vis State dues without speaking about the first charge." 16. Dealing with a pari materia provision in the Value Added Tax Act in Madhya Pradesh, in Bank of Baroda Case (Supra) , the Madhya Pradesh High Court held as under:- "8. In the present case, undisputedly a notice of sale by the respondent/ Commercial Department has been issued on 19.07.2017. The Amendment Act, 2016, which incorporates Section 31B reads as under: - "31B Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues inclu....
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....priority over all other debts and government dues in including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authorities. Not only this, it also has an overriding effect over all other enactments including the provisions the provisions of MP VAT Act, Central Sales Tax Act, Entry Tax Act and any other Tax Act. Though, an attempt has been made to demonstrate before this Court that the amendment will not dis-entitle to recover the dues by them as the dues are outstanding since 2012, nothing prevented the State Government to recover the dues since 2012 and the State Government woke up from slumber only after the amendment came into force and by virtue of the amendment in the Central Act, this Court is of the considered opinion that by no stretch of imagination, the State Government can be permitted to auction the property in question as Bank of Baroda has priority charge over the said property in light of the amendment which has been quoted above." 17. Considering a pari materia provision in the Value Added Tax Act in the State of Tamil Nadu, in Indian Overseas Bank Case (supra) the Full Bench of the Madras High Court took a similar view....
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....uced, section 33-C operated in respect of all charge that where then in force and gave sales tax dues precedence over them ...." 19. We respectfully agree with the consistent view taken by three Division Benches of three High Courts and the view taken by the Full Bench of the fourth High Court. 20. The only contention which needs to be noted which was made by learned counsel for Respondent Nos. 1 and 2 which was not made before the four learned Benches of the four High Courts in their opinions above noted, is that Chapter IVA which was inserted in SARFAESI 2002 comprising Sections 26B to 26E warrants a record to be made in the Central Register by the Central Registry creating a security interest. As per learned Counsel as per Sub-section (2) of Section 26B which is a part of Chapter IVA a secured creditor has to ensure that the security interest is recorded in the record of the Central Registry. The argument therefore was that unless this is done, the priority of interest contemplated by Section 26E would not be applicable. 21. The argument is without any substance because the law declared in the four opinions above referred to is that if any Central Statute creates priority ....
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....Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, Section 41of the same seeking to introduce Section 31B in the Principal Act, which reads as under:- "31B. Notwithstanding anything contained in any other law for the time being in force, the rights of secured creditors to realise secured debts due and payable to them by sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority. Explanation. - For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016, in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code." 3. There is, thus, no doubt that the rights of a secured creditor to realise secured debts due and payable by sale of assets over which security interest is created, would have priority over all debts and Government ....
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....B Act they will not have such priority if they proceed under the SARFAESI Act, will lead to an absurd situation and, in fact, would frustrate the object of the SARFAESI Act which is to enable fast recovery to the secured creditors." 38. Again, coming to another issue raised by the Respondents with respect to Section 26-D of the SARFAESI Act, which provides that the secured creditor shall not be entitled to exercise rights of enforcement of securities under Chapter-III unless the security interest created in its favour by the borrower has been registered with the Central Registry, we are of the view that even if the Petitioner's mortgage was not registered under Section 26-D of the SARFAESI Act, in view of our above discussion on Section 31-B of the RDB Act, the alleged non registration, would not affect the legal position on the issue of priority. 39. In view of the above and being in respectful agreement with the views expressed in the cases cited above, we hold that the mortgage of the secured creditor viz. the Petitioner Bank gets prior charge over the charge of the Respondents for tax/VAT dues. 40. We therefore quash and set aside the attachment /charge on the said Plot No. ....