In a significant case, the Bombay High Court the charge of the sales tax department to recover sales tax dues would be valid after recognition of the first charge of the assessee as a secured creditor.
Shailesh K. Bothra, Mukesh C. Karwa, Cholamandalam Investment & Finance Co. Ltd, the petitioners 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 (SARFAESI Act”).
One Taurus Auto Dealers Pvt. Ltd. had borrowed an amount of Rs.7,71,00,000/- from petitioner no. 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 (“borrowers”).
The borrowers defaulted on 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 the sale of the said property.
The Sales Tax Department of the Government of Maharashtra issued an “Attachment Order” dated 11 August 2017 exercising powers under Section 34 of the Maharashtra Value Added Tax Act, 2022 (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.
It was submitted that once the defaulter’s property is auctioned by the secured creditor, the said property will no longer remain as the property of the defaulter, the State, therefore, cannot make any claim against the property.
The priority does not mean that if the property is auctioned at the maximum value then it will again be re-auctioned with the second creditor in line. It is submitted that such proposition as canvassed by the respondents will create an anomalous situation where the property will continuously get re-auctioned and there will not be any end to the said position.
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.
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.
A division bench comprising Justice G S Kulkarni & Justice Jitendra Jain observed that the 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.
Further held that “after the recognition of the first charge of petitioner 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.”
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