SARFAESI Act vs GST Act: Karnataka HC Rules Canara Bank's Earlier Charge Takes Priority Over Tax Authorities [Read Order]
The Court concluded that when a charge under the SARFAESI Act was created prior to the charge under the GST Act, the SARFAESI charge would prevail.
In a recent judgment, the Karnataka High Court has held that Canara bank's charge under the SARFAESI Act takes priority over a subsequent charge created by GST authorities, emphasizing the principle of 'priority in time' for resolving conflicts between these statutes.
Canara Bank, represented by its Divisional Manager, filed Writ Petition challenging the encumbrance created by the State Tax Department over a residential flat bearing No. A-502 located on the 5th floor of the Sky Park Complex in Belagavi.
The property had been mortgaged to the bank by Respondents No. 4 and 5 as security for a loan. When the loan became a non-performing asset, the bank initiated action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), and took possession of the property on 17.09.2024. Subsequently, it was discovered that the borrowers also owed significant GST dues (Rs. 1,38,25,684/-), and the Commercial Tax Department created a charge on the same property, which was entered in the property card.
Counsel for the Petitioner Bank, Shri Santosh B Malligwad, submitted that under Section 26-E of the SARFAESI Act, the bank has a 'first, prior, and exclusive charge' on the secured asset, which takes precedence over all other debts, including taxes. He argued that the bank's security interest was created on 21.12.2017, whereas the GST authorities' charge was created later, on 6.11.2019. He relied on precedents from various High Courts, including Sri Abdul Khader's case, to support the contention that the non-obstante clause in Section 26-E gives the bank's charge complete predominance.
Per contra, Shri Sharad Magdum, learned AGA for the tax authorities, contended that the GST Act, being a subsequent enactment, should prevail over the earlier SARFAESI Act. He relied on Section 82 of the GST Act, which states that tax shall be a 'first charge on property' notwithstanding anything to the contrary, with the only exception being claims under the Insolvency and Bankruptcy Code (IBC). He placed reliance on the Supreme Court's decision in Rainbow Papers Limited to argue that statutory dues owed to the government cannot be subordinated to the claims of financial creditors.
The single bench of Justice Suraj Govindaraj analyzed the conflicting provisions of Section 26-E of the SARFAESI Act and Section 82 of the GST Act, both of which contain non-obstante clauses. The Court observed that while the Rainbow Papers case dealt with the IBC, the present conflict was specifically between SARFAESI and GST.
The Court distinguished the precedents and held that the key principle to resolve such a conflict is 'priority in time' of the creation of the charge. It was noted that the bank's charge was created and recorded in July 2017, well before the GST charge was created in April 2019 and recorded in November 2019.
“The GST order was passed on 16-04-2019, and the entry was made on 06-11-2019, while the charge in favour of the petitioner bank under the SARFAESI Act was created on 15-07-2017 and was already entered into the property card. Thus, although the Rainbow Papers’s case suggests that the claim of the GST authorities prevails over that under the IBC, in the present case, the charge created under the SARFAESI Act prevails. The principle to be applied is that if the charge under the SARFAESI Act was created prior in time to the charge under the GST Act, the charge under
SARFAESI Act would prevail, and vice versa.” , the bench viewed.
The Court concluded that when a charge under the SARFAESI Act was created prior to the charge under the GST Act, the SARFAESI charge would prevail.
The Court allowed the writ petition and issued a writ of mandamus directing the GST authorities to remove the encumbrance on the property within 15 days. The bank was permitted to proceed with the auction of the property. The Court further clarified that if any surplus amount remains after the bank's dues are fully adjusted, such surplus shall be deposited with the tax authorities to be appropriated towards the GST dues.
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