SARFAESI Act & RDB Act Prevail Over Section 24 of TNGST Act: Madras HC [Read Order]

The Madras High Court stated that provisions of Section 26E of the SARFAESI Act and Section 34 of the Recovery of Debts and Bankruptcy Act would prevail over the provisions of Section 24 of the Tamil Nadu General Sales Tax Act, 1959.

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Since the assessees, Indian Bank, were beneath on their sales tax, any money owed to the assessee from the defaulting assessee or that may become due to the assessee from the defaulting assessee, or any money held by the assessee because of the defaulting assessee, must be paid immediately to the Sub-Treasury Officer in favor of the Commercial Tax Officer. In a letter dated January 2, 2002, the bank informed the Commercial Tax Authorities that the assessees who were in default had not only used the bank's credit facilities but also had defaulted on them.

Notice of show cause was given. The Bank promised the Commercial Taxes Department that any excess money would be paid to the Department if their demands persisted after the bank's needs were fully satisfied. The section 26E of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, which states that financial institutions and secured creditors have priority over all other creditors with regard to the outstanding debts, was cited by the assessee's attorney.

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In a related instance, the petitioner/assessee, a nationalized bank, approved a loan to another assessee and acquired overdraft facilities for the assessees. By depositing title deeds, the assessees established an equitable mortgage over their half undivided share of the land as security. The formation of an equitable mortgage was verified, and the assessee deposited title documents with the bank. The bank had been a tenant of the assessees, taking up space in the ground level, basement, and first floor.

After examining Section 26E of the SARFAESI Act, the bench concluded that, in terms of the SARFAESI Act and the issue of priority, Section 26E—a specialized section—would be applicable. In contrast, Section 34 of the RDB Act has general provisions.

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Section 26E of the SARFAESI Act and Section 34 of the RDB Act would take precedence over Section 24 of the TNGST Act, according to the bench's opinion. Furthermore, the bank established a security interest in this matter as early as 1991, before the sales tax department brought the allegation.

A creditor who has a legally recognized claim on a borrower's assets (known as a security interest) is entitled to first dibs on repayment, according to Section 26E of the SARFAESI Act, 2002. According to Section 34 of the Recovery of Debts and Bankruptcy Act, 1993, the provisions of this Act will take precedence over any provisions that clash with those of other laws or instruments that are now in effect.

According to Section 24 of the Tamil Nadu General Sales Tax Act, 1959, the tax must be paid within the time frame given in the assessment notice, which cannot be fewer than 21 days after the notice is sent. In the event of default, the entire amount owed becomes payable and will be charged to the person who is responsible for paying the tax.

The Division Bench of Justices Anita Sumanth and G. Arul Murugan observed that due to the fact that Section 34 of the RDB Act is merely a general provision, Section 26E of the SARFAESI Act will provide the necessary impetus for determining the priority of a charge of security interest in favor of the Financial Institution when compared to Section 34 of the RDB Act.

To Read the full text of the Order CLICK HERE

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