19 Dec 2020
Case : State Bank of India v. State of Maharashtra and oOs. Writ petition (St.) No. 92816 of 2020
Court : Bombay High Court
Bench : Justice Ujjal Bhuyan and Justice Abhay Ahuja
Decided on : 19 Dec 2020
Article 226 of the Constitution of India
State Bank of India Act, 1955
Sections 32, 33(1) and 37 of the Maharashtra Value Added Tax Act, 2002
Maharashtra Land Revenue Code, 1966
Sections 2(la) and 31-B of the Recovery of Debts and Bankruptcy Act, 1993
Sections 2(1)(zd), 2(l) and 26-E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI ) Act, 2002
Brief Facts and Procedural History:
1. On the request of Respondent No. 3 (M/s Krishna Industries), the Petitioner had sanctioned various credit facilities in favour of Respondent No. 3. To avail of the sanctioned credit facilities, Respondent No. 3 from time to time executed in favour of the Petitioner various security documents including security by way of mortgage/charge over, inter-alia, the said property being the piece and parcel of land known as Plot No. W-7 in Gokul Shirgoan Industrial Area in Kolhapur.
2. Petitioner asserted that the mortgage charge is duly registered with the Central Registry of the Securitisation Asset Reconstruction and Security Interest of India, though the same is disputed by the Respondent No. 2 (Deputy Commissioner of Sales Tax).
3. Since Respondent No. 3 failed to regularly maintain their loan accounts with Petitioner, the Petitioner initiated proceedings under the Recovery of Debts and Bankruptcy Act, 1993 by filing Original Application for recovery of bank dues of Rs. 2.49 Crores from the Respondent No. 3, 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 (SARFAESI Act) to enforce their security interest in the mortgaged and hypothecated assets. Notice dated 27 November 2017 was issued under Section 13(2) of the SARFAESI Act, 2002; symbolic possession of the said Plot was taken on 21 February 2018 and the physical possession was taken on 29 May 2019.
4. Petitioner received a notice dated 28 March 2018 from Respondent No. 2 informing the Petitioner regarding the attachment of the said Plot under Section 32 of the Maharashtra Value Added Tax Act, 2002 in pursuance of which proceedings under the Maharashtra Land Revenue Code were initiated by them for recovery of value-added tax (VAT) dues.
5. Petitioner also received a notice issued under Section 33(1) of the Maharashtra Value Added Tax Act, 2002 requiring payment to Respondent No. 2 any amount due from the Petitioner to or held by the Petitioner for or on behalf of Respondent No. 3 upto the amount of sales tax arrears as provided.
6. Petitioner conducted an e-auction on 17 July 2019 under the provisions of the SARFAESI Act, 2002 and sold the said property being Plot No. W-7 through e-auction for Rs.89.25 Lakhs.
7. By the Petitioner’s advocate’s letter dated 18th September 2019, the Respondent No. 2 was informed of the aforesaid e-auction sale and was requested to remove the charge on the said property and issue a No Objection Certificate (NOC) to enable the completion of the transaction within time, 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.
8. Respondent No. 2 failed to raise the attachment on the said Plot and by letter dated 11 September 2019 Respondent No. 2 intimated that value-added tax dues of Respondent No. 3 as of 06 September 2019 were Rs.85,56,784/- along with further interest and that they had first charge/claim of sales tax virtue of Section 37 of the Maharashtra Value Added Tax Act, 2002.
9. The sale of Plot No. W-7 got cancelled and as such the auction sale had become irrelevant for the writ petition.
10. Petitioner filed a petition under Article 226 of the Constitution of India to challenge the attachment of Plot No. W-7. Petitioner claimed priority of charge on the said property as a secured creditor in respect of a secured debt owed by Respondent No. 3 to Petitioner over the sales tax dues payable by Respondent No. 3 to Respondent No. 2 under Maharashtra Land Revenue Code.
The Issue of the Case:
Whether the Financial Institution, which is a secured creditor, or the department of the government concerned, would have the 'Priority of Charge' over the mortgaged property in question, with regard to the tax and other dues?
The Observations of the Court:
1. From a combined reading of Section 2(1)(zd) of the SARFAESI Act. 2002 and Section 2(la) of the Recovery of Debts and Bankruptcy Act, 1993, Petitioner is a secured creditor as it has a debt/ receivable due to itself which has been a secured by a mortgage on the said Plot No. W-7.
2. From a plain and conjoint reading of Section 31-B of the Recovery of Debts and Bankruptcy Act, 1993 and Section 26-E of the SARFAESI Act, 2002 it is clear that by virtue of the non-obstante language contained therein, the rights of secured creditors to realise secured debts by the 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.
3. Supported by the decision of the Full Bench of the Madras High Court in Assistant Commissioner v. Indian Overseas Bank & Ors (AIR 2017 Madras 67), the Supreme Court in ASREC (India) Limited v. State of Maharashtra & Ors (Writ Petition No. 1039 of 2017), held that if any central statute creates a priority of charge in favour of the secured creditor, the same will rank above the charge in favour of the State for its dues under the value-added tax of the State. Therefore, in the facts of this case what becomes relevant is the issue of priority of charge on the said assets of secured debt over tax dues and not whether the charge is first in time or not.
4. Section 31-B of the Recovery of Debts and Bankruptcy Act, 1993 itself would be sufficient to give priority to a secured creditor over the Respondent’s charge for claiming tax dues.
5. In Kalupur Commercial Co-operative Bank Ltd. Vs. State of Gujarat (Special Civil Application No. 17891 of 2018) it was observed that Section 31B of the Recovery of Debts and Bankruptcy Act, 1993, being a substantive provision giving priority to the "secured creditors", the same will be applicable irrespective of the procedure through which the recovery is sought to be made. This is particularly because Section 2(la) of the Recovery of Debts and Bankruptcy Act, 1993 defines the phrase "secured creditors" to have the same meaning as assigned to it under the SARFAESI Act, 2002. Moreover, Section 37 of the SARFAESI Act, 2002 provides that the provisions of the SARFAESI Act, 2002 shall be in addition to, and not in derogation of inter-alia the Recovery of Debts and Bankruptcy Act, 1993.
6. Even if the Petitioner’s mortgage was not registered under Section 26-D of the SARFAESI Act, 2002, in view of Section 31-B of the Recovery of Debts and Bankruptcy Act, 1993, the alleged non-registration, would not affect the legal position on the issue of priority.
The Decision Held by the Court:
The Honourable Bombay High Court allowed the petition held that:
1. The attachment or charge on the said plot No, W-7 under Section 32 of the Maharashtra Value Added Tax Act, 2002 is quashed.
2. The Rule is made absolute in the above terms.