Charges from the sales tax department would be lawful when the first charge of the assessee was recognised as secured creditors

Fact and issue of the case

The judgment has been divided into the following sections to facilitate analysis:

	Particulars	Paragraphs
A	Challenge and Question for determination	1-2
B	Facts	3-23
C	Reply affidavit on behalf of the State Government	24-27
D	Submissions on behalf of the Petitioners	28
E	Submissions on behalf of Respondent State/Sales Tax Dept.	29-33
F	Reasons and Conclusion	34-67

A] Challenge and Question for determination:-

This petition under Article 226 of the Constitution of India, quite peculiarly is filed by three petitioners. Petitioner nos. 1 and 2 are auction purchasers in an auction held by petitioner no. 3- a non-banking financial institution under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short “SARFAESI Act”).

The question which falls for determination in the present proceedings is whether petitioner nos. 1 and 2 who are auction purchasers in a securitization auction held by petitioner no.3, are liable to discharge the sales tax dues, for the recovery of which, the property as purchased by them, was attached by the Sales Tax Department prior to the auction; and/or whether petitioner nos. 1 and 2 have purchased an encumbered property ?

B] Facts:-

The facts are required to be noted in some detail:- One Taurus Auto Dealers Pvt. Ltd. had borrowed an amount of Rs.7,71,00,000/- from petitioner 3. Also, there were borrowings by the Directors of the said Company namely Shri Rajiv Shambhunath Malviya and Mrs. Samata Rajiv Malviya and its associate concern M/s. International Tyres (for short “borrowers”). The Loan Agreements were dated 25 February, 2010, 29 July, 2010, 30 June, 2011, 29 February, 2012 and 13 May, 2013.

An equitable mortgage by deposit of title deeds of an immovable property with an intent to create security for the due repayment of the loans was created by the directors of the company, in respect of the property described as “ All that piece and parcel of the Sub Plot No.5 5, Final Plot No.425, bearing C.T.S. No.91, S.No. 542 admeasuring about 760 sq.mtrs at Village Gultekadi, Taluka Haveli, Dist.Pune – 411 037, within the city limits of Pune Municipal Corporation (for short “the said property”).

The borrowers defaulted in repayment of the loans. Consequently, petitioner no. 3 issued a notice under section 13(2) of the SARFAESI Act calling upon the borrowers and its directors to make payment of an amount of Rs.6,37,57,162/- within 60 days from the receipt of the said notice, failing which petitioner no. 3 being the secured creditor, shall exercise powers conferred on it under section 13 of the SARFAESI Act for enforcing the security interest in the secured assets, namely, by sale of the said property .

The borrowers, however, persisted in their default by not honouring the demand notice. Consequently, on 14 March, 2017, the authorized officer of petitioner no. 3 published a possession notice in the local news paper, whereby formal possession of the subject property was taken over by the authorized

It appears that the respondents, namely the Sales Tax Department of the Government of Maharashtra, through its Deputy Commissioner issued an “Attachment Order” dated 11 August, 2017 exercising powers under Section 34 of the Maharashtra Value Added Tax Act, 2022 (for short “MVAT Act”) whereby the said property as mortgaged with petitioner no. 3, was sought to be attached to recover sales tax dues of Rs.10,31,38,003/- of the borrower/dealer M/s. Taurus Auto Dealers Pvt. Ltd. The sales tax dues pertained to the period 1 June, 2014 to 31 March, 2015.

Thereafter, petitioner no. 3 applied to the learned District Magistrate, Pune seeking orders to enable petitioner no. 3 to take physical possession of the property. The learned District Magistrate passed an order dated 22 December, 2017 under section 14 of SARFAESI Act under which physical possession of the said property was taken over by petitioner no. 3.

In so far as the sales tax dues of the dealer were concerned, the Deputy Commissioner of Sales Tax issued a demand notice dated 14 March 2018 to petitioner no. 3, inter alia recording that there is a lien on the property for recovery of the sales tax dues. Petitioner no. 3 was accordingly directed not to transfer the said property, as the same would be in violation of Section 38 of the MVAT Act. In such notice, the Deputy Commissioner recorded that the borrower/dealer had not paid the sales tax dues despite follow up, and various notices issued by the Sales Tax Department, hence, a recovery action as per the provisions of Maharashtra Land Revenue Code, 1966 (for short “MLRC”) was already initiated against the borrowers. It was stated that the said property was already attached and the order of attachment in Form IV dated 11 August, 2017 was issued. The notice also recorded that section 37 of the MVAT Act was being applied, which ordained that liability under MVAT Act, shall be the first charge over the property of the dealer/borrower.

Being aggrieved by the said notice dated 14 March, 2018 of the Deputy Commissioner, petitioner no. 3 approached this Court by filing Writ Petition 4860 of 2019. In such Writ Petition, petitioner no. 3 inter alia contended that being a secured creditor, the dues of petitioner no.3 as recoverable from the borrower would rank above the dues of the State Government under the MVAT Act and/or the first charge on the said property would be that of petitioner no. 3 and for such reason, the notice dated 14 March, 2018 issued by the Deputy Commissioner of Sales Tax was illegal. Petitioner no. 3 prayed for the following reliefs in the said writ petition :-

a) That Honorable High Court may please be directed to the Tahsildar Pune City to take possession of the said property.

b) That Honourable High Court may please be declared the letter/notice dated 14.03,2018 issued by the Respondent.No.6 is null and void.

c) That during the pendency of the present Petition, the petitioner may please be stayed and Respondent No.6 may please be restrained from taking the possession of the said property.”

The said petition was disposed of by a Division Bench of this Court by an order dated 10 January, 2020, whereby the notice of the Deputy Commissioner of Sales Tax dated 14 March, 2018 was quashed and set aside observing that the issue was covered by a decision of the Division Bench in the case of ASREC (India) Ltd. vs. State of Maharashtra & Ors.1. The said order passed by the Division Bench reads thus:-

The Petitioner is the secured creditor and has received a letter dated 14,03.2018 issued by the Deputy Commissioner of Sales Tax informing that on account of sales tax dues there is a lien on the property in favour of rhe State Government.

This Bench has resolved the issue as per the Judgment dated 13 December, 2019 passed in Writ Petition 1039 of 2017 pari passu. It was held that the dues of a secured debtor rank above the dues of the State Government under the Maharashtra Sales Tax or a Value Added Tax.

Thus, the Petition is disposed of quashing the letter dated 14.03.2018.

Needless to state that if there is any surplus amount available after the sale of the secured asset, the same shall be transmitted by the Petitioner to Sales Tax Department, State of Maharashtra. ”

It may be observed that in ASREC’s case (supra), a Division bench of this Court considering the provisions of Section 37 of MVAT Act vis-a-vis the applicability of Section 31 B of the Recovery of Debt and Bankruptcy Act, 1993 (for short “RDB Act”) and Section 26-B to Section 26-E of the SARFAESI Act, observed that by virtue of the provisions of the Central Act (SARFAESI Act), any priority or charge created in favour of any party, shall prevail, so as have the first charge of the secured creditor. This for the reason that Section 37 of the MVAT Act when commences with a non-obstante clause, it recognizes, that the same shall be subject to any provision regarding creation of the first charge under any Central Act. The Court observed that similar was the position under Section 31 B of the RDB Act, which was introduced by an amendment in the year 2016, with effect from 2 September, 2016, by virtue of which priority was accorded to secured creditors with respect to the secured assets. The Division Bench also rejected a contention as urged on behalf of the Sales Tax Department, that Chapter IVA inserted in the SARFAESI Act comprising Sections 26-B to 26-E warrants record to be made in the Central Register by Central Registry creating a security interest and unless such security interest is recorded in the Central Register, the priority of interest contemplated by Section 26E would not be applicable. The Division bench rejecting such contention observed that such contention would be opposed to what has been held by the Court as also different High Courts, that if any Central Statute creates priority of a charge in favour of a secured creditor, the same will rank above the charge in favour of the State for recovery of the tax due under the MVAT Act. In rejecting such contention, the Court observed thus: “

The only contention which needs to be noted which was made by learned counsel for Respondent Nos. 1 and 2 which was not made before the four learned Benches of the four High Courts in their opinions above noted, is that Chapter IVA which was inserted in SARFAESI 2002 comprising Sections 26B to 26E warrants a record to be made in the Central Register by the Central Registry creating a security interest. As per learned Counsel as per Sub-section (2) of Section 26B which is a part of Chapter IVA a secured creditor has to ensure that the security interest is recorded in the record of the Central Registry. The argument therefore was that unless this is done, the priority of interest contemplated by Section 26E would not be applicable.

The argument is without any substance because the law declared in the four opinions above referred to is that if any Central Statute creates priority of a charge in favour of a secured creditor, the same will rank above the charge in favour of a State for a tax due under the Value Added Tax of the State. But we note the fact that the security interest has been entered in the record of the Central Registry.”

Observation of the court

In the aforesaid circumstances, we are not inclined to accept the submissions as urged by Mr.Godbole that the orders passed by the Division Bench of this Court dated 10 January 2020 in Writ Petition No.4860 of 2019 created any indefeasible rights in petitioner No.3 to sell the property free from encumbrances. Also Mr.Godbole’s contention that petitioner Nos.1 and 2 have purchased the property free from encumbrances or without any charge of the sales tax department, cannot be accepted.

In so far as Mr.Godbole’s contention referring to paragraph 21 of the decision in ASREC’s case (supra), namely, that as in the present case, the sales tax department did not register its charge with the Central Registry and hence the charge / attachment cannot be recognized, as held by the Division Bench, also is not well founded. As noted in paragraph 20 of the decision of the Division Bench in ASREC’s case (supra), the contention as urged on behalf of the respondent therein was to the effect that by virtue of insertion of Chapter IVA in the SARFAESI Act, comprising Section 26-B to 26-E, it was necessary that a record be made in the Central Register by the Central Registry of the creatgion of a security interest, as per sub-section (2) of Section 26-B. The Division Bench in paragraphs 20 of the said decision had noted the contention as urged on behalf of the respondent that Chapter IVA which was inserted in SARFAESI 2002 comprising Sections 26-B to 26-E warranted a record to be made in the Central Register by the Central Registry creating a security interest. It was contended that as per sub-section (2) of Section 26-B which is a part of Chapter IVA a secured creditor has to ensure that the security interest is recorded in the record of the Central Registry. The contention therefore was that unless this was done, the priority of interest contemplated by Section 26-E would not be applicable. The Division Bench, however, in paragraph 21 observed that the said argument was without any substance because the law declared in the four opinions of the High Courts as referred to by the Division Bench, had held, that if any Central Statute creates priority of a charge in favour of a secured creditor, the same will rank above the charge in favour of a State for a tax due under the Value Added Tax of the State.

The observations of the Division Bench in paragraphs 20 and 21 in ASREC’s case would not assist the petitioners for more than one reason. Firstly, the said observations of the Division Bench have been held to be not the correct position in law, in the decision of the Full Bench in Jalgaon Janta Sahakari Bank Ltd. (supra). The Full Bench examined the correctness of the observations of the Division Bench as made in paragraph 21 in ASREC’s case (supra). In such context, the Full Bench framed the following question which reads thus:-

“e. Whether the priority of interest contemplated by secton 26E of the SARFAESI Act could be claimed by a secured creditor without registration of the security interest with the Central Registry? Depending on the answer to this qeustion, whether correct proposition of law has been laid down (extracted infra) in paragraph 21 of the Division Bench decision reported in 2020(2) Bom. C. R. 243 (OS) (ASREC (India) Limited Vs. State of Maharashtra and Ors.) and in paragraph 35 of the Division Bench decision, reported in 2021(2) Mh.LJ 721 (State Bank of India vs. the State of Maharashtra and ors.)?”

In answering the said question, the Full Bench observed that on the face of the express provisions of Section 26-D and 26-E of the SARFAESI Act and in the absence of any discussion on the object of Chapter IV-A by the Division Bench in ASREC’s case (supra), the law as declared in paragraph 21 in ASREC (India) Ltd.’s case was contrary to the statutory mandate, hence, paragraph 21 of such decision did not represent the correct position in law. The Full Bench thus held that the view expressed by the Division Bench to such extent was not the correct exposition of law and to that extent, the Full Bench overruled paragraph 21 of ASREC’s judgment.

Godbole has next contended that the Sales Tax Department was required to register the charge with the Central Registry as per the provisions of sub-section (4) of Section 26-B of the SARFAESI Act and as the same was not complied, the State Government cannot assert any charge in respect of the suit property. It may be observed that this issue was also one of the questions for consideration before the Full Bench in Jalgaon Janta Sahakari Bank Ltd. (supra) in which the Full Bench has framed the question (f) which reads thus:- “f. When, and if at all, can it be said that the statutory first charge under the State legislation, viz. the BST Act, the MVAT Act and the MGST Act, as the case may be, stands displaced having regard to introduction of Chapter IV-A of the SARFAESI Act from 24th January 2020?”

Analyzing the provisions of the SARFAESI Act as also the MVAT Act, the Full Bench has held that the attachment orders issued post 24 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. Insofar as the attachment orders which were issued prior to coming into force the 2011 Rules as amended, the Court observed that insofar as recovery as initiated under the MLRC is concerned, not only the provisions contained therein but also the provisions contained in the 1967 Rules were required to be complied with, and the proclamation has to be made in the required form and must be as specified in the 1967 Rules. It was observed that these are the requirements as the transferee needs to have actual and constructive notice of such charge. The observations of the Full Bench in the context of the procedure under the 1967 Rules to be followed, reads thus:-

If there has been an attachment and a proclamation thereof has been made according to law prior to 24th January 2020 or 1st September 2016, i.e. the dates on which Chapter IV-A of the SARFAESI Act and Section 31B of the RDDB Act, respectively, were enforced, the department may claim that its dues be paid first notwithstanding the secured dues of the secured creditors; but in the absence of an order of attachment being made public in a manner known to law, i.e. by a proclamation, once Chapter IV-A of the SARFAESI Act or section 31B, as the case may be, has been enforced, the dues of the secured creditor surely would have ‘priority’. In other words, if the immovable property of the defaulter is shown to have been attached in accordance with law prior to Chapter IV-A of the SARFAESI Act, or for that matter section 31B of the RDDB Act, being enforced, and such attachment is followed by a proclamation according to law, the ‘priority’ accorded by section 26E of the former and section 31B of the latter would not get attracted.”

Thus, Mr. Godbole’s contention that unless the charge was registeredwith the CERSAI after 24 January 2020, it is only then the State could enforce its charge, would be required to be rejected. In fact, such submission of Mr.Godbole militates against the position petitioner No.3 had taken before this Court in the proceedings of Writ Petition No.4860 of 2019 on which the Division Bench has passed an order on 10 January 2020 allowing the petition. Petitioner No.3 cannot take a contrary position. In any event, it is not open for petitioner No.3 to raise such contention inasmuch as petitioner No.3 clearly recognized the valid charge of the Sales Tax Department in respect of the property in question, as seen not only from the proceedings of the said writ petition filed by petitioner No.3 before this Court but also from the terms and conditions of the auction which was undertaken by petitioner No.3 in selling the property to petitioner Nos.1 and 2. In any case such contention would not in any manner lead this court to conclude that the charge of the Sales Tax Department would get extinguished. It would be too far fetched to reach such conclusion as canvassed by Mr. Godbole.

The foregoing discussion would lead us to conclude that this is a clear case in which the Sales Tax Department had a charge on the said property as purchased by petitioner Nos.1 and 2, in view of attachment order dated 11 August 2017, which has remained to be valid and subsisting. Further the position in law is also clear that after the recognition of the first charge of petitioner No.3 as a secured creditor, the charge of the Sales Tax Department to recover the sales tax dues would be valid and subsisting, which would empower the Sales Tax Department to enforce the same.

Resultantly, the petition lacks merit. It is accordingly rejected. No costs.

Notes

1 Writ Petition No. 1039 of 2017 decided on 13 December, 2019

2 Writ Petition No. 7971 of 2019 decided on 18.02.2021

3 Writ Petition No. 2935 of 2018 decided on 30 August, 2022

4 AIR 1936 All 879

5 AIR 1970 SC 1041

6(197 1) 1 SCC 754

7AIR 1939 ALL 415

8AIR 2001 ALL 334

9 (2009) 4 SCC 486