Bank of Baroda Vs Assistant Commissioner of Sales Tax (Bombay High Court)
The Bombay High Court considered a writ petition filed by Bank of Baroda under Article 226 of the Constitution of India seeking to quash the order dated 18 March 2020 passed by the Assistant Commissioner of Sales Tax attaching a secured asset and to set aside the department’s charge over the said asset. The attachment order restrained the borrower, Haresh Dharmani, Proprietor of M/s. Gajanan India Chemco, from transferring or creating any charge over the scheduled property. A copy of the attachment order had also been marked to the Bank.
The Bank stated that it was a secured creditor under Section 2(1)(zd) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). It had sanctioned various credit facilities to the borrower between September 2009 and 2012. The borrower created a first mortgage over the secured asset in favour of the Bank on 29 November 2010, which was subsequently extended on 10 October 2012. The Bank registered its security interest with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) on 30 June 2012. The borrower’s account was declared a Non-Performing Asset on 31 March 2013. A demand notice under Section 13(2) of the SARFAESI Act was issued on 23 September 2013, and after the borrower failed to repay the dues, the Bank took symbolic possession of the secured asset on 22 September 2014.
The Sales Tax Department stated that an investigation conducted between 23 September 2013 and 1 October 2013 revealed that Gajanan India Chemco was an unregistered dealer under the Maharashtra Value Added Tax Act, 2002 (MVAT Act). The department alleged that substantial financial transactions had been carried out through the borrower’s bank account. Assessment orders dated 31 March 2015 and 18 November 2019 were passed under Section 23(4) of the MVAT Act for assessment years 2006-07 to 2013-14, raising a tax liability of ₹1,43,54,91,326/-. As the dealer failed to discharge this liability, the department initiated recovery proceedings and attached the immovable property under Section 34 of the MVAT Act on 18 March 2020. The department further relied upon the amendment to Section 37 of the MVAT Act made on 18 December 2024 with retrospective effect from 1 April 2005, contending that the amendment gave the State first charge over the property.
The Bank argued that the controversy was fully covered by the Full Bench decision in Jalgaon Janta Sahakari Bank Ltd. & Anr. Vs. Joint Commissioner of Sales Tax Nodal 9, Mumbai & Anr. It submitted that since its security interest had been registered with CERSAI well before the department’s attachment order, it enjoyed statutory priority over the State’s tax dues. It also contended that the department had not registered any charge with CERSAI and therefore could not claim priority over the secured asset.
The department opposed the petition and relied upon amended Section 37 of the MVAT Act, submitting that because of the retrospective amendment, State dues were entitled to priority over other claims. It maintained that the attachment had been validly issued under Sections 34 and 37 of the MVAT Act read with the Maharashtra Land Revenue Code, 1966.
The High Court examined amended Section 37 of the MVAT Act and held that the controversy was squarely governed by the Full Bench decision in Jalgaon Janta Sahakari Bank Ltd. The Court noted that the Full Bench had authoritatively held that, following the introduction of Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, secured creditors enjoy statutory priority in realization of dues from the sale of secured assets over all other debts, including government revenues, taxes, cesses and rates, subject to compliance with statutory conditions such as registration of the security interest. The Full Bench had also rejected the contention that statutory “priority” was inferior to a “first charge” created under State enactments and had held that the statutory priority under the SARFAESI Act and the RDDB Act overrides charges created under Sections 37 and 38C of the MVAT Act and the Bombay Sales Tax Act.
Applying these principles, the High Court found that the Bank had registered its security interest with CERSAI on 30 June 2012, much before the department issued the attachment order on 18 March 2020. The Court observed that the amendment to Section 37 of the MVAT Act merely removed the earlier express subordination to Central legislation and did not alter the legal position settled by the Full Bench. The Court also noted that the department had not registered its charge with CERSAI. It therefore held that the Bank had priority in realization of its dues over the dues claimed by the department and that the department could not claim first charge over the secured asset.
Accordingly, the High Court allowed the writ petition, quashed and set aside the attachment order dated 18 March 2020 in respect of the secured asset, and also quashed the department’s charge over the secured asset. The Court further directed that if, upon sale of the secured asset, the Bank recovered an amount exceeding its debt, the excess amount should be paid to the Sales Tax Department, and the amount realized from the sale should be communicated to the department. Rule was made absolute with no order as to costs.
Cases Discussed
- Jalgaon Janta Sahakari Bank Ltd. & Anr. Vs. Joint Commissioner of Sales Tax Nodal 9, Mumbai & Anr. (Bombay High Court – Full Bench), Writ Petition No.2935 of 2018, judgment dated 30th August 2022.
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. Invoking the jurisdiction of this Court under Article 226 of the Constitution of India, the Petitioner-Bank of Baroda (“the Bank”, for short) prays for quashing and setting aside the impugned order dated 18th March 2020 in respect of the secured asset and for setting aside the charge, if any, of the Respondent No.1- Assistant Commissioner of Sales Tax (“department”, for short) over the said secured assets.
2. By the impugned order dated 18th March 2020, the department ordered Mr./Mrs. Haresh Dharmani, Proprietor of M/s. Gajanan India Chemco (“borrower”, for short), prohibiting and restraining them from transferring or charging the property as specified in the Schedule, by sale, gift or otherwise. Clause 7 of the said notice dated 18th March 2020 stipulates that the copy is marked to the Manager of the Bank for information.
3. The facts of the present case in brief are as under :-
The Bank is a secured creditor under Section 2(1)(zd) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”, for short). The Bank sanctioned various credit facilities to the borrower between the period from September 2009 to 2012.
4. Pursuant to the above sanction, the borrower has created first mortgage of the secured asset in favour of the Petitioner on 29th November 2010 and thereafter the mortgage was extended on 10th October 2012. The Petitioner has registered its charge with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (“CERSAI”, for short) portal on 30th June 2012. The borrower’s account was declared as Non-Performing Asset (“NPA”, for short) on 31st March 2013.
5. Demand notice under Section 13(2) of the SARFAESI Act was issued to the borrower on 23rd September 2013. As the borrower failed to make repayment of the outstanding dues, the Petitioner has taken symbolic possession of the secured asset on 22nd September 2014.
6. The Respondent No.1-department passed an order of attachment of the secured asset on 18th March 2020. The Bank intimated to the department on 4th August 2020 that the Bank has priority over the dues of the department. This Petition is filed in January 2025 for quashing and setting aside the order of attachment dated 18th March 2020 passed by the department.
7. An affidavit-in-reply of Smt. Prerna Deshbhratar (IAS), Joint Commissioner of State Tax, Investigation-A Branch, Mumbai has been filed on behalf of the department. A stand is taken in the affidavit that an investigation visit was conducted by the department from 23rd September 2013 to 1st October 2013 in the case of Gajanan India Chemco (unregistered dealer – URD) owned by the borrower. It was noticed during investigation that the dealer was not registered under the Maharashtra Value Added Tax Act, 2002 (“MVAT Act”, for short) and Mr. Haresh Dharmani operates bank account of the company wherein huge deposits and withdrawals were noticed. Mr. Haresh Dharmani in his statement has accepted that these are financial transactions and are operated by him.
8. By orders dated 31st March 2015 and 18th November 2019, the dealer was assessed under Section 23(4) of the MVAT Act for the periods from 2006-07 to 2013-14 and liability at Rs.1,43,54,91,326/- has been raised by the then officer. As the dealer has failed to discharge the said liability, recovery action has been initiated against the dealer and order of attachment of immovable property has been issued as per Section 34 of the MVAT Act on 18th March 2020. This order of attachment is in respect of the property situated at 2-A, the Sindhi Immigration Co-operative Housing Society Limited, Chembur, Mumbai (“the property”, for short) owned by Mr. Haresh Dharmani, Proprietor of Gajanan India Chemco (Unregistered dealer-URD).
9. The Bank replied to the order of attachment of the department on 4th September 2020. The Appellate Authority under the MVAT Act has rejected the appeals filed by the dealer against the assessment orders for the periods from 2006-07 to 2013-14 having the liability aforestated by the orders dated 3rd October 2019 and 7th July 2023. In the affidavit-in-reply it is thus the contention of the department that the State of Maharashtra has on 18th December 2024 amended Section 37 of the MVAT Act with retrospective effect and therefore, the department will have first charge over the secured asset.
10. Learned counsel for the Petitioner submitted that the issue involved in the present Petition is no longer res integra in view of the decision of the Full Bench of this Court in Jalgaon Janta Sahakari Bank Ltd. & Anr. Vs. Joint Commissioner of Sales Tax Nodal 9, Mumbai & Anr. (Writ Petition No.2935 of 2018, judgment dated 30th August 2022). It is submitted that the Full Bench of this Court has conclusively settled the legal position regarding priority of claims between secured creditors and State revenue authorities. It is submitted that the Bank has registered its security interest with CERSAI on 30th June 2012, which is very much prior to the attachment order dated 18th March 2020 of the department. It is submitted that where a secured creditor has registered its security interest under the SARFAESI Act, the claim of such secured creditor must prevail over tax or revenue dues of the State, even if such dues are declared as first charge under State laws. It is therefore submitted that the Bank has priority in realization of dues over the dues of the department and the department, having even failed to register its charge with CERSAI, cannot claim any first charge over the said secured asset.
11. Learned AGP on behalf of the department vehemently opposed the Petition. Our attention is invited to the stand taken by the department in the affidavit-in-reply filed on their behalf. Inviting our attention to amended Section 37 of the MVAT Act, it is submitted that in view of the said amendment, State dues will have priority over other dues. It is submitted that as Mr. Haresh Dharmani has defaulted in making the payment of the assessed dues, the said property was attached by the order of attachment dated 18th March 2020 passed by the department under the provisions of Sections 34 and 37 of the MVAT Act read with the provisions of the Maharashtra Land Revenue Code, 1966. It is submitted that Maharashtra State Government has made an amendment to Section 37 of the MVAT Act on 18th December 2024 and given retrospective effect to the said provision from 1st April 2005. Learned AGP was at pains to point out that in view of the said amendment, State dues will have priority over other dues.
12. Heard learned counsel for the parties.
13. Relevant in the context of the present case and as is the emphasis of the learned AGP in support of his contention that the State dues will have priority over other dues, it will be advantageous to extract amended Section 37 of the MVAT Act for convenience. Section 37 reads thus :-
“37. Liability under this Act to be the first charge –
1. Notwithstanding anything contained in any law for the time being in force, or any contract to the contrary, any amount of tax, penalty, interest, sum forfeited, fine or any other sum, payable by a dealer or any other person under this Act, shall be first charge on the property of the dealer or, as the case may be, person.
2. The first charge as mentioned in sub-section (1) shall be deemed to have been created on the expiry of the period specified in sub-section (4) of section 32 for the payment of tax, penalty, interest, sum forfeited, fine or any other amount.
14. In our opinion, the issue involved in the present case is squarely covered by the decision of the Full Bench of this Court in Jalgaon Janta Sahakari Bank Ltd. & Anr. (supra). The Full Bench has conclusively settled the legal position regarding priority of claims between secured creditors and State revenue authorities. It has been authoritatively held that “In view of the introduction of Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“RDDB Act”, for short), secured creditors have statutory priority in realization of dues from the sale of secured assets, over and above all other debts including government revenues, taxes, cesses and rates, subject only to compliance with the statutory conditions, such as registration under the SARFAESI Act.
15. The Full Bench rejected the contention that the phrase “priority in payment” under Section 26E falls short of creating a first charge. It ruled that, “Statutory priority given to secured creditors under the SARFAESI and RDDB Acts shall override any charge created under State laws, including Sections 37 and 38C of the MVAT Act and Bombay Sales Tax Act (“BST Act”, for short) respectively, in view of their express subordination to Central enactments.”
16. The Bank has registered its security interest with CERSAI on 30th June 2012, which is very much prior to the attachment order dated 18th March 2020 of the department. Therefore, in view of the legal position settled by the Full Bench, the Bank has priority to realize its dues.
17. The unamended Section 37 of the MVAT Act made the MVAT Act expressly subordinate or subservient to any central legislation creating first charge and by way of amendment, the State of Maharashtra has in essence only removed such subordination or subservience to the central legislation. The Full Bench discussed and dealt with similar provisions and scenario at length in paragraphs 81 to 92. The Full Bench in paragraph 82 and 83 observed thus :-
“82. Each of the aforesaid several legislations operate in their particular field. Pertinently, wherever the legislature of the State intended the particular provision to be the dominant legislation or subordinate or subservient to any other legislation, it has expressed such an intention in no uncertain terms. Section 169(1) of the MLR Code is the dominant legislation providing that the arrears of land revenue due on account of land shall be a paramount charge on the land and on every part thereof and shall have precedence over any other debt, demand or claim whatsoever, whether in respect of mortgage, judgment-decree, execution or attachment, or otherwise howsoever, against any land for the holder thereof. The municipal laws and the MRTP Act, however, despite creation of first charge on property taxes due to the Corporations and sums due to a planning authority, respectively, are expressly made subordinate to the paramount charge on a land if in respect of such land, land revenue is in arrears. Viewed from this angle, there is no magic in the words ‘first charge’. Even a ‘first charge’, by express statutory intendment, can be made subordinate or subservient to a paramount charge such as arrears of land revenue. We, therefore, are unable to accept the argument of the State/respondents that since neither the SARFAESI Act nor the RDDB Act uses the words ‘first charge’ but the word ‘priority’, such ‘priority’ cannot have precedence over ‘first charge’ created by the State legislations.
83. However, notwithstanding that section 169(1) of the MLR Code is the dominant legislation and does not expressly say that it would be subordinate or subservient to any Central Act creating ‘first charge’, nothing really turns on it. The express language of section 26E of the SARFAESI Act and section 31B of the RDDB Act, wherever applicable, is sufficient to off-set the ‘paramount charge’ created by sub-section (1) of section 169. Similarly, even if there were no express intendment in the relevant provisions of the BST Act (section 38C) and the MVAT Act (section 37) to the effect that such provisions would be subordinate to any Central Act creating ‘first charge’, the same would obviously have to be read, invoked and exercised subject to section 26E of the SARFAESI Act and section 31B of the RDDB Act, wherever applicable.”
18. We are therefore in agreement with the contention of learned counsel for the Petitioner that where a secured creditor has registered its security interest under the SARFAESI Act, the claim of such secured creditor must prevail. We have no hesitation in holding that the Bank has priority in realization of dues over the dues of the department. The department having even failed to register its charge with CERSAI cannot claim any first charge over the said secured asset.
19. The Writ Petition is thus allowed in terms of prayer clauses (a) and (b) which read thus :-
“(a) This Hon’ble Court be pleased to issue Writ of Mandamus and/or Certiorari and/or any writ in the nature of Mandamus and/or Certiorari and/or any appropriate writ, order or direction, to quash and set aside the Impugned Order dated 18th March 2020 in respect of the said Secured Asset;
(b) This Hon’ble Court be pleased to issue Writ of Mandamus and/or Certiorari and/or any writ in the nature of Mandamus and/or Certiorari and/or any appropriate writ, order or direction to quash and set aside charge, if any, of the Respondent No.1 over the said Secured Assets.”
20. It is however made clear that on sale of the secured asset, if the Bank recovers any amount exceeding the amount of debt, such excess amount should be paid to the Respondent No.1-department. The amount realized through the sale of the secured asset shall be communicated to the Respondent No.1-department.
21. Rule is made absolute in the above terms. No order as to cost.
