Sarulatha Mani Mudaliyar Vs Tax Recovery Officer (Madras High Court)
A recent judgment by the Madras High Court in the case of Sarulatha Mani Mudaliyar Vs Tax Recovery Officer has reaffirmed the precedence of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act over tax claims. The court directed the registration of a property sale certificate, previously stalled due to an Income Tax Department attachment.
The petitioner in this writ petition challenged a letter dated December 17, 2015, issued by the Tax Recovery Officer to the Sub Registrar, which cited an Income Tax Department attachment as the reason for refusing to register a sale certificate dated July 3, 2024. The sale certificate was issued by a secured creditor (third respondent) in favor of the petitioner following proceedings under the SARFAESI Act.
The core of the dispute was the priority of claims: whether the Income Tax Department’s attachment, executed in 2015, took precedence over the mortgage created in 2011, which formed the basis for the secured creditor’s action under the SARFAESI Act.
Judicial Precedents and Court’s Reasoning: The Madras High Court referenced several judicial precedents to support its decision. A significant ruling cited was from a Division Bench of the Madras High Court in W.P.Nos.19742 of 2021, dated September 27, 2023. This ruling, in turn, relied on a Full Bench decision of the Madras High Court in Assistant Commissioner (CT) Anna Salai-III Assessment Circle vs Indian Overseas Bank and Another [AIR 2017 Mad 67 (FB)].
The Full Bench in Assistant Commissioner (CT) Anna Salai-III Assessment Circle vs Indian Overseas Bank had specifically addressed two critical issues: a) Whether a financial institution, as a secured creditor, or a government department (concerning tax and other dues) holds “Priority Charge” over a mortgaged property. b) The status and rights of a third-party purchaser of such a mortgaged property.
The Full Bench unequivocally held that the rights of secured creditors to realize secured debts by selling assets with security interest would have priority. Such debts are to be paid in priority over all other debts and government dues, including revenues, taxes, cesses, and rates owed to the Central Government, State Government, or Local Authority.
Further reinforcing this position, the Madras High Court also referred to a Full Bench judgment of the Bombay High Court in Jalgaon Janta Sahakari Bank Ltd. and Anr vs. Joint Commissioner of Sales and Anr [2022 Online SCC Bom 1767]. This judgment affirmed that a secured creditor holds priority charge under Section 26E of the SARFAESI Act, 2002, provided the security interest is registered under Section 26B of the same Act. The secured creditor in the present case claimed their security was indeed registered under Section 26B.
Based on these precedents, the Madras High Court concluded that secured creditors possess a priority charge over claims made by Sales Tax, Commercial Tax, and Income Tax departments.
The court also clarified the procedure for registering sale certificates in such scenarios. It stated that if an auction is conducted by secured creditors and the sale certificates are presented for registration, the Registering Authority should register them, irrespective of any attachment by Sales Tax, Income Tax, or Commercial Tax Departments.
Regarding the disposition of auction proceeds, the court added that if secured creditors receive an excess amount beyond their dues, they are obligated to remit the surplus to the respective departments. However, if the amount received does not exceed their outstanding dues, they are not required to remit any amount to the departments, and no prosecution can be initiated against the authorized officer or the secured creditor’s officer for non-remittance.
Application to the Present Case: In the current case, the mortgage over the property was established on November 16, 2011. The Income Tax Department’s attachment occurred later, in 2015. Given that the mortgage predates the attachment, the court determined that the attachment would not be binding on the secured creditor, who initiated proceedings under the SARFAESI Act.
The court reiterated that the secured creditor’s priority of charge superseded the revenue department’s claim. Consequently, the communication from the Tax Recovery Officer dated December 17, 2015, which instructed the Sub Registrar to refuse registration, was deemed to be without legal standing.
Court’s Directive: In light of these findings, the Madras High Court allowed the writ petition. It directed the Sub Registrar (second respondent) to register the sale certificate dated July 3, 2024, issued by the secured creditor (third respondent) in favor of the petitioner, provided all other registration formalities were in order. The court also ordered that there would be no costs for the petition.
FULL TEXT OF THE JUDGMENT/ORDER OF MADRAS HIGH COURT
