Karnataka HC Rules Canara Bank’s SARFAESI Charge Prevails over Later GST Department Claim, Orders Removal of Encumbrance [Read Order]

In a recent decision, the Karnataka High Court held that Canara Bank’s registered charge under the SARFAESI Act takes precedence over a subsequent charge created by the GST ( Goods and Services Tax ) Department and directed the removal of the GST encumbrance from the property records.

Canara Bank filed a writ petition seeking a direction to remove the encumbrance created by the Commercial Tax Department over a residential flat in Belagavi that was mortgaged to the bank as security for a loan. The borrowers had taken a mortgage loan in 2017, which later turned into a non-performing asset.

The bank initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, issued notices under Sections 13(2) and 13(4), and took possession of the property in September 2024.

During this time, the bank discovered that the borrowers had also defaulted on GST dues amounting to Rs. 1.38 crore. The tax authorities had already recovered part of the dues but had additionally placed a charge on the same property and entered it in the property card.

The bank’s counsel argued that its charge, created in December 2017, was prior in time and protected under Section 26-E of the SARFAESI Act, which gives secured creditors first charge over secured assets, even above government dues. They submitted that the GST charge was created only in November 2019, so they could not override the bank’s earlier registered charge.

The State’s counsel argued that under Section 82 of the GST Act, tax dues constitute a first charge on a taxpayer’s property and that the GST Act, being a later legislation, would prevail over the SARFAESI Act.

The single-judge bench comprising Justice Suraj Govindaraj observed that both the SARFAESI Act and the GST Act contain non-obstante clauses and explained that when two such laws operate simultaneously, priority depends on the date on which each charge was created.

The court pointed out that Canara Bank’s security interest was registered in July 2017, whereas the GST charge arose only in 2019. Being earlier in time, the bank’s charge had legal priority. The court also observed that the Rainbow Papers decision dealt with insolvency matters under the IBC and did not apply to conflicts between SARFAESI and GST claims.

The court held that Canara Bank’s prior charge under the SARFAESI Act prevails over the subsequent GST charge. It directed the State authorities to remove the GST encumbrance from the property card within fifteen days and allowed the bank to proceed with the auction.

The court further ordered that if any surplus amount remained after satisfying the bank’s dues, it should be deposited with the GST Department towards the borrowers’ tax liabilities. The writ petition was accordingly allowed.

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