Case Law Details
Janaseva Sahakari Bank Ltd. Vs State of Maharashtra (Bombay High Court)
The petitioner is a bank. It lent money to a borrower. The borrower mortgaged its property. The bank registered security interest with CERSAI. The loan was declared as NPA. The bank issued notice under section 13(2) of the SARFESAI Act. It filed securitization application. In the mean time, the sales tax and GST authorities initiated recovery action under section 79(1) of GST Act against the borrower. The sales tax authorities sought to attach the said properties by creating mutation entries in the land revenue records under the Maharashtra Land Revenue Code. The petitioner bank sought to auction the said properties, which was objected to by the Sales Tax Authorities claiming they have “first charge” over the said assets. Hence, petition came to be filed.
The Hon’ble Bombay High Court allowed the petition. It held:
(i) in terms of amended section 26E of the SARFESAI Act, the petitioner bank register its security interest with CERSAI; whereas the sales tax authorities did not register any such claim;
(ii) the secured creditor would have priority over the Sales tax department;
(iii) section 37 of the VAT Act being State Acts could not override the Central Legislation;
(iv) relies upon Full Bench judgment in the case of Janta Sahkari Bank case and Indian bank case;
(v) set aside the mutation entry in the land revenue records.
The matter was argued by Ld. Counsel Bharat Raichandani along with Associate Aman Mishra
FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT
1. Rule is made returnable forthwith. By consent of the parties matter is heard finally.
2. Petitioner Bank has filed this Writ Petition under Articles 226 and 227 of the Constitution of India, seeking to quash and set aside the various demand notices issued by the Respondent – GST and Sales Tax Department, under the provisions of Section 79 (1) (c) Maharashtra Goods and Services Tax Act, 2017 (for short ‘MGST Act’) and Section 33 (1) of Maharashtra Value Added Tax Act, 2002 (for short ‘MVAT Act’), and also challenge to impugned orders passed by Sales Tax Department in recovery proceedings, to the Talathi/Revenue Officers for recording of charge in the rights column of secured assets, which have been effectuated by virtue of Mutation Entry No.37953 and Mutation Entry No.5367.
FACTS
3. Petitioner-Bank has claimed that it is a banking society registered under the Maharashtra Co-operative Societies Act, 1960 and has formed banking consortium in respect of loan facilities availed by Respondent No.4 (M/s. Shree Ganesha Packing Co.) vide bank sanction letter dated 18th January 2014. In this transaction, Petitioner Bank is a lead bank and is a member bank of consortium as per prevailing banking laws. The consortium is a secured creditor as per the Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (for short ‘SARFAESI Act’).
4. Respondent No. 4 – borrower, was granted loan facilities by Petitioner – Bank, in the year 2013, of around Rs.7.26 crore. By a further letter dated 2nd September 2016, the Respondent No.4-borrower applied for an increase for additional term loan by Rs.1.50 crore and cash credit limit of Rs.2.50 crore, to the consortium member Banks. In turn, the consortium Banks sanctioned, renewed and approved certain more loans to the Respondent No.4 – borrower.
5. The Respondent No.4 – borrower thereafter executed loan documents including the mortgage deed. The said mortgage deed was registered with the office of Sub-Registrar, Nashik. The charge of the Petitioner – Bank was recorded by Revenue Department in the other rights column of the concerned mortgaged properties.
6. The Petitioner – Bank, on 17th March 2017, registered “Security Interest” with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (for short ‘CERSAI’).
7. As Respondent No.4 – borrower defaulted in repaying the loan dues to the Petitioner – Bank, the loan account of the Respondent No.4 – borrower, on 28th September 2018 and 30th September 2018 respectively was classified as non-performing assets (for short ‘NPA’). Pursuant thereto the Petitioner – Bank initiated recovery proceedings under SARFAESI Act by issuing a Demand Notice dated 23rd January 2019, under Section 13(2) of the SARFAESI Act, to Respondent No.4 – borrower.
8. The Petitioner – Bank thereafter received a Demand Notice dated 2nd February 2019 under Section 33(1) MVAT Act from the Sales Tax Department for recovery of certain dues amounting to Rs.13,19,849/- along with interest, which was due to Respondent No.4 – borrower/Assessee.
9. On 11th June 2019, the Petitioner – Bank issued possession notice under Section 13(4) of the SARFAESI Act, thereby informing the borrower that possession of the secured assets will be taken on 28th June 2019 at 11.30 a.m.
10. Subsequently, on 28th June 2019 the Petitioner – Bank took symbolic possession of the secured assets by preparing panchanama and affixing the possession notice. So also, the Petitioner – Bank published possession notice dated 2nd July 2019 in daily newspapers, thereby informing that the symbolic possession of the secured assets had been taken on 28th June 2019.
11. The Petitioner – Bank thereafter received from Respondent No.2 an order of provisional attachment of properties under Section 83 of MGST Act, dated 12th December 2019, for attaching the property of the borrower.
12. The Sales Tax Department thereafter issued Demand Notice under Section 79 (1)(c)(i) dated 11th November 2020 with regard to their recovery against the Respondent no.4/borrower/assessee. The Petitioner – Bank, replied to the said Demand Notice thereby denying the allegations, and bringing on record the correct facts.
13. On 24th January 2020, the amended SARFAESI Act came into force, thereby inserting in the Principal SARFAESI Act, after Section 26-A, Chapter IV-A- Registration by Secured Creditors and other creditors. By the said amendment Section 26B to 26E were inserted.
14. In the meanwhile, the Petitioner – Bank approached the District Magistrate, Nashik, under Section 14 of the SARFAESI Act, by filing Securitisation Application No.233 of 2020, on 10 November 2020. The Additional District Magistrate vide order dated 25th February 2021 passed an order for possession of the secured assets. Pursuant thereto possession notice was issued by Tahsildar, Nashik, on 1st November 2021. The Petitioner – Bank took over the possession of the secured assets, vide panchanama dated 18th November 2021.
15. On 22nd November 2021, the Petitioner – Bank received the demand notice for recovery of arrears of dues, for the assessment period from 1st April 2017 to 31st June 2021 under Section 33(1) of MVAT Act, from Respondent no.3. Thereafter, the Petitioner – Bank received Demand Notice dated 9th March 2022 for a further assessment period, and also received two more Demand Notices dated 10th August 2022 and 23rd November 2022 from GST Department. According to the Petitioner-Bank, they replied to each and every Demand Notices received by them.
16. Shortly thereafter the Petitioner – Bank issued a communication dated 10th January 2023 to Respondent No.3 (Sales Tax Department), thereby objecting to the orders passed for recording the charge of Revenue Department in the Others Rights Column of the secured assets and further called upon Respondent No.3 (Sales Tax Department) to withdraw the orders passed by them.
17. The Petitioner – Bank thereafter issued a re-auction sale notice dated 9th March 2023 under Section 13 (4) of the SARFAESI Act for auctioning of secured assets. Respondent No.3 (Sales Tax Department) responded by its letter dated 15th March 2023, objected to the sale of the secured assets through auction of Respondent no.4/borrower/assessee on the ground that the Respondent No.3 (Sales Tax Department) has already started recovery proceedings under MLRC 1966 and had attached the immovable property/secured assets of Respondent No.4/borrower/assessee by issuing order of attachment.
18. The present Writ Petition has been filed by the Petitioner – Bank against the State of Maharashtra, GST Department, Sales Tax Department and against the borrower, arrayed as Respondent No.4. In the present Writ Petition, the Petitioner – Bank has prayed for quashing the Demand Notices issued by the Respondent nos. 2 and 3 and also for quashing and setting aside the impugned order passed by Respondent No.3 (Sales Tax Department).
19. Respondent No.2 (GST Department) and Respondent No.3 (Sales Tax Department) filed their affidavit-in-reply dated 13th February 2024, thereby opposing the prayers made in the Writ Petition. In the said reply, the Respondent nos.2 and 3 stated that the State Tax Department has already taken steps to initiate recovery proceedings under the Maharashtra Land Revenue Code, 1966 (for short ‘MLRC’). The immovable property of the taxpayer has been attached and a lien has been placed on Flat No.21 & 22, situated in Shriram Anand Sankul Soceity, Nashik, as well as the land and building located on Gat No.477, Gonde Shivar, Nashik. The State Tax Department is pursuing the recovery of debts from the taxpayer – Respondent No.4, amounting to Rs.98,15,407/-. As per the provisions of Section 37 of the MVAT, which establishes the precedence of a secured creditor in favour of Sales Tax dues. It was prayed that the Writ Petition should be dismissed with costs.
20. Mr. Bharat Raichandani, advocate appeared for the Petitioner – Bank, made his submissions:-
(i) He submitted that the Petitioner – Bank on 17th March 2017 registered, Security Interest with CERSAI. The Respondent Nos.2 and 3 have not registered their purported claim against Respondent No.4, with CERSAI. Hence, after the amendment to Section 26 of the SARFAESI Act, under the provisions of Section 26-E, the debts due to Petitioner – Bank get priority over the dues of Respondent Nos. 2 and 3.
(ii) Section 35 of the SARFAESI in clear terms mentioned that the provisions of SARFAESI override the provisions of other laws.
(iii) Section 37 of the SARFAESI Act clearly provides that the provisions of the SARFAESI Act shall be in addition to and not in derogation of other Acts.
(iv) Hence, the Full Bench of this Court in Jalgaon Janta Sahakari Bank Ltd. and another vs. Joint Commissioner of Sale Tax Nodal 9, Mumbai and another1 has clarified the provisions as far as priority of claim of secured creditors are concerned, they should have registered their Security Interest, with CERSAI. Section 26-E is clear on that issue. Therefore, this Court sitting in Division Bench is bound by the judgment of Jalgaon Janta Sahakari Bank Ltd. and another (supra) which is passed by Full Bench. Hence, the Writ Petition should be allowed in terms of prayer Clauses (I), (II) and (III).
21. Mr. N. K. Rajpurohit appeared on behalf of the respondent nos.1, 2 and 3 and made his submissions.
(i) He submitted that as per the records of the respondents, the State Tax Department is currently pursuing the recovery of dues from Respondent No.4, amounting to Rs.98,15,407/-, along with accrued interest as per Section 30 of the MVAT Act.
(ii) He submitted that as per the provisions of Section 37 of MVAT Act, the Sales Tax Department will have precedents with regard to the Sales Tax dues, over the bank dues. He submitted that MVAT Act was promulgated by the State Legislature in accordance with List – II, Entry No.54 of the Constitution of India.
(iii) He submitted that the Tax Department has already attached the subject properties pursuant thereto the relevant Talathi has recorded charge in the rights column of secured assets, pursuant to which the Mutation Entry No.37953 and Mutation Entry No.5367 has been recorded.
(iv) He submitted that there is no question of Bank having first charge over the subject properties, in view of MVAT Act.
(v) He submitted that hence, this Writ Petition should be dismissed with costs.
ANALYSIS AND CONCLUSSION:-
22. We have heard counsel for both the sides and with their help we have gone through the documents on record including the provisions of SARFAESI Act.
23. There is no dispute that the Petitioner-Bank has, as on 17th March 2017, registered the Security Interest with CERSAI. So also, there is no dispute that the respondents (GST Department and MVACT) have not registered with the CERSAI. Section 26-E of the SARFAESI Act reads as under:-
“26-E. Priority to secured creditors. – Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, 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.”
24. The Full Bench of this Court in Jalgaon Janta Sahakari Bank Ltd. and another (supra) has clarified the position of law as per Section 26-E. In paragraphs 78, 79, 84, 85, 88 and 150 of the said judgment it has held as under:-
“78. Section 26-E, also beginning with a non-obstante clause, is unambiguous in terms of language, effect, scope and import. A ‘priority’ in payment over all other dues is accorded to a secured creditor in enforcement of the security interest, if it has a CERSAI registration, except in cases where proceedings are pending under the provisions of the Insolvency and Bankruptcy Code, 2016.
79. The disabling provision in section 26D and the enabling provision in section 26-E, both begin with non-obstante clauses, as noticed above. The scheme of Parts III and IV-A of the SARFAESI Act envisages benefits to a secured creditor who is diligent and obtains CERSAI registration while depriving a secured creditor of even taking recourse to Chapter III without the requisite registration.
84. The fact that the BST Act and the MVAT Act, which are under consideration, expressly make it subordinate or subservient to any Central legislation creating first charge cannot be ignored. The 2016 Amending Act being of recent origin, the first query that arises in this regard is : did the Parliament not know that there is a plethora of legislation in the country, both Central and State, that speaks of creation of ‘first charge’ in favour of a department of the Central/State Government? The reply cannot but be in the affirmative. The next query that would obviously follow is : whether the word ‘priority’ appearing in section 26E of the SARFAESI Act, i.e., “… 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” (italics for emphasis by us), was used without a purpose? This reply has to be in the negative.
85. Priority means precedence or going before (Black’s Law Dictionary). In the present context, it would mean the right to enforce a claim in preference to others. In view of the splurge of ‘first charge’ used in multiple legislation, the Parliament advisedly used the word ‘priority over all other dues’ in the SARFAESI Act to obviate any confusion as to inter-se distribution of proceeds received from sale of properties of the borrower/dealer. If a secured asset has been disposed of by sale by taking recourse to the Security Interest (Enforcement) Rules, 2002 it would appear to be reasonable to hold, particularly having regard to the non-obstante clauses in sections 31 B and section 26E, that the dues of the secured creditor shall have ‘priority’ over all other including all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.
88. Bare perusal of the 2016 Amending Act would show that the dues of the Central/State Governments were in the specific contemplation of the Parliament while it amended the RDDB Act and the SARFAESI Act, both of which make specific reference to debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority and ordains that the dues of a secured creditor will have ‘priority’, i.e., take precedence. Significantly, the statute goes quite far and it is not only revenues, taxes, cesses and other rates payable to the State Government or any local authority but also those payable to the Central Government that would have to stand in the queue after the secured creditor for payment of its dues.
150. The contention that rules are yet to be framed for making subsection (4) of section 20B operational is wholly incorrect. By a notification dated 24th January 2020 issued by the Department of Financial Services in the Ministry of Finance, Govt. of India, published in the Gazette of India of even date, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest(Central Registry) (Amendment) Rules, 2020 were duly notified whereby amendments were incorporated in the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Central Registry) Rules, 2011 (hereafter ‘2011 Rules’, for short). In view of the amendments that have now been incorporated in the 2011 Rules with effect from the date Chapter IV-A of the SARFAESI Act was made effective and enforceable, the relevant department of the State Government despite attachment orders being issued by the competent authority can only avoid compliance of sub-section (4) of section 26B at its own peril. We hold that attachment orders issued post 24 th January 2020, if not filed with the Central Registry, any department of the Government to whom a person owes money on account of unpaid tax has to wait till the secured creditor by sale of the immovable property being the secured asset mops up its secured dues.”
(Emphasis supplied)
25. We have in our earlier order, passed in Indian Bank thr. Chief Manager vs. State of Maharashtra & ors.2 relying on Jalgaon Janta Sahakari Bank Ltd. and another (supra) also held that once the secured creditors have registered their Secured Interest prior to the Sale Tax Department registering their Secured Interest for its claim, Section 26-E comes into play. Paragraph 21 reads as under:-
21. Section 26E of the SARFAESI Act, start with “Notwithstanding anything contained in any other law …………..”. Section 26E of the SARFAESI Act very clearly mentions that the secured creditors shall be paid in priority over all other debts and taxes. In the present proceedings it is Petitioner Bank who has registered its claim against the secured assets with CERSAI earlier i.e. 4/10/2022, in view of the law as laid down by the Full Bench of this Court, in Jalgaon Janta Sahakari Bank Ltd. (supra) and as per Section 26E of the SARFAESI Act, the Petitioner Bank (secured creditor) will have priority over the revenues and taxes of the State Government.
26. The Respondents (GST Department and MVAT) have not registered their Security Interest with CERSAI. The Petitioner – Bank on 17th March 2017, have registered their Security Interest with CERSAI. The amended Section 26D, makes it mandatory for secured creditors to register their security interest, to be entitled to exercise the rights of enforcement of securities.
27. As far as the argument of the respondents is concerned with regard to precedence of Sales Tax dues, over the Bank dues in view of Section 37 of MVAT Act. We are of the view that sub-section (2) of Section 37 of MVAT Act was introduced on 15th April 2017 by Mah. 31 Act of 2017. The MVAT Act is a State Legislature. The SARFAESI Act is a Central Legislature and Section 26-E was inserted by Act 44 of 2016 and was enforced in the Principal SARFAESI Act on 24th January 2020. The SARFAESI Act being the Central Act, the same will prevail over the State Act i.e. MVAT Act.
28. In the present case, the order of attachment issued by the Sales Tax Department is dated 19th April 2022. It is thereafter that steps have been taken to attach the immovable property. It is on this basis that the respondents seek to rely upon the provisions of Section 37 of MVAT Act. As noted above, the registration of the Bank Security Interest with CERSAI is dated 17th March 2017 which is much prior to the order of attachment.
In view of the clear position of law under Section 26-E of the SARFAESI Act and further the ratio as laid down by the Full Bench of this Court in Jalgaon Janta Sahakari Bank Ltd. and another (supra) and the judgment of the Division Bench of this Court in Indian Bank thr. Chief Manager (supra), we have no hesitation to hold that the claim of secured creditor that is the Petitioner – Bank, will have preference over the claim of Respondents (GST Department and the Sales Tax Department).
29. Hence the Writ Petition succeeds. Rule is made absolute in terms of prayer clauses (I), (II), (III) and (IV). No costs.
30. The Respondent No.2 (GST) and Respondent No.3 (Sales Tax Department) would be free to take such steps as they deem fit against Respondent No.4, for recovery of their dues as per law.
Notes:
1 2022(5) Mh.L.J.691
2 CWP No.962 of 2023 decided on 16/7/2024.
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