Secured Creditors have priority over Tax Authorities under CERSAI : High Court of Bombay
Case Title : Purushottam Prabhakar Chavan v Deputy Commissioner of Sales Tax(GST)
Case no : Writ Petition No. 3477 of 2024Purushottam Prabhakar Chavan Versus Deputy Commissioner of Sales Tax (GST)
Order no : 3rd May, 2024
Quorum : Hon’ble Justice B.P. Colabawalla & Somashekar Sundareshan JJ
FACTS OF THE CASE
The Lender bank between the dates of 31st May 2010 and 31st January 2010 provided credit facilities to several properties including Walkeshwar Flats and Nashik Properties. Walkeshwar Flats was owned by Mrs Praffullata Shah and the said property served as security for loan, and after her demise the loans on that property became a non-performing asset. Despite that the lender banks claimed possession over the property by invoking SARFAESI Act.
The DCST claimed the property under MVAT Act due to the taxes owned by one of the borrowers. Recovery proceedings were initiated and the DCST secured the assets. The lender bank registered a mortgage on the property using CERSAI.
Later on the said property was Auctioned and won by the Petitioner but due to conflicting claims the petitioner faced problems getting the ownership of the property.
ISSUES
Whether as a matter of law, the Petitioner, the auction purchaser of the Walkeshwar Flat under the SARFAESI Act, is a valid recipient of free and marketable title to it ?
LEGAL PROVISIONS
- Article 226 of the Indian Constitution : Clearly states that every High Court has the powers throughout the territories in relation to which it exercises jurisdiction to issue writ or any order to any person or authority.
- Section 37 of Maharashtra Value Added Tax Act, 2002 : would override any provision of contract that creates a charge, it would be subservient to any provision in a Central Act that gives first charge to some other entity
- Section 26-E of the SARFAESI Act : after the commencement 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.
CONTENTION OF THE PARTIES
The contentions of the Directorate of Commercial Taxes are establishing their right to enforce tax dues against the Walkeshwar Flat, particularly in relation to Bharat Shah’s liability as a partner of SMI in the mortgage of the property. The DSCT argue that Bharat, as a legal heir of Mrs. Praffullata, inherits the property, thereby providing a basis for the DCST to assert their claim against it. However, the petitioner argues against this stance by emphasizing the priority of enforcement established by the Lender Bank through SARFAESI Act, including registration of the mortgage under CERSAI and obtaining physical possession of the said property.
The petitioner contends that the DCST’s attachment orders were after the Lender Bank’s actions and are therefore priority can be established by the Lender Bank’s registered security interest. They rely on the case of Jalgaon Janta, to support their argument that security interests registered with CERSAI take precedence over attachment orders by tax authorities.
Overall, the petitioner asserts that the legal framework supports their claim to priority in enforcement against the Walkeshwar Flat, and any further action by the DCST would be after the rights established by the Lender Bank’s actions under the SARFAESI Act.
COURT’S ANALYSIS AND JUDGMENT
The court looked into the contentions of both the parties and admitted the Petition with no costs imposed. The court ruled that attachment orders predating January 24, 2020, do not grant priority to the DCST over the Walkeshwar Flat. As the DCST did not register with CERSAI nor issue a proclamation of sale, the Lender Bank’s priority remains intact, passing to Encore ARC. Consequently, the petitioner gains a clear title, unaffected by the DCST’s claim. Any attachment related to tax dues by SMI on the property is nullified, allowing the petitioner to register it unopposed.
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JUDGMENT REVIEWED BY – Nagashree N M