SARFAESI and RDB Act Prevail Over TN General Sales Tax Act in Public Interest: Madras HC Grants Relief to Indian Bank [Read Order]

In a recent ruling, the Madras High Court has held that the provisions of the SARFAESI Act and the Recovery of Debts and Bankruptcy Act ( RDB Act ) would prevail over the Tamil Nadu General Sales Tax Act ( TNGST Act ), granting relief to Indian Bank in a dispute concerning priority of claims over secured assets.

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The decision came in a batch of writ petitions filed by Indian Bank challenging recovery proceedings initiated by the Commercial Taxes Department under Section 26 of the TNGST Act against lease rentals payable to the defaulting assessees, Shree Raghavendra Engineering Industries and Shree Balajee Industries.

Indian Bank, a nationalised bank, had granted secured credit facilities to the assessees in the early 1990s, backed by an equitable mortgage created on 29.01.1991 over a property located in Kilpauk, Chennai.

The bank, also a tenant on the mortgaged premises, had entered into a lease agreement dated 20.05.1992 and was adjusting monthly rentals towards the outstanding loan dues under express authorisation from the assessees.

However, the Commercial Taxes Department, by invoking Section 26 of the TNGST Act, issued Form B-6 notices on 06.12.2001 followed by a show-cause notice dated 08.03.2002, directing the bank to remit lease rentals to the Department towards sales tax arrears, threatening recovery under land revenue laws.

Despite being informed that the assessees had defaulted on bank loans and that a recovery proceeding was pending before the Debt Recovery Tribunal (DRT), the Department insisted on its demand. Indian Bank asserted that it was a secured creditor with an existing mortgage and that its rights, having arisen prior to any tax attachment, deserved priority under Section 26E of the SARFAESI Act and Section 34 of the RDB Act.

The Division Bench comprising Justice Dr. Anita Sumanth and Justice G. Arul Murugan carefully reviewed the timeline and documentary evidence and concluded that the mortgage and lease arrangements predated the tax recovery notices by over a decade.

The Court noted that the bank’s lease arrangement was genuine, had continued without interruption since 1992, and was part of a legitimate effort to adjust dues under the overdraft facility. The property had since been auctioned under SARFAESI proceedings, with proceeds appropriated to settle the loan account.

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On the legal question of precedence, the Court held that Section 26E of the SARFAESI Act, a specific provision with a non-obstante clause, grants secured creditors priority over all other debts, including government dues, after the registration of security interest.

Section 34 of the RDB Act similarly gives an overriding effect to its provisions. In contrast, Section 24 of the TNGST Act, while creating a charge over the taxpayer’s property, does not constitute a "first charge" or contain a non-obstante clause.

The Court extensively analysed jurisprudence on the issue, including decisions in Punjab National Bank v. Union of India, SICOM Ltd. v. Union of India, and UTI Bank v. Deputy Commissioner of Central Excise, to reiterate that Crown debts do not automatically override secured debts unless the statute clearly declares such priority. It distinguished State Tax Officer v. Rainbow Papers Ltd. and other revenue cases, observing that unlike the Gujarat VAT Act, the TNGST Act lacks language creating a statutory "first charge."

It was observed that “it is very clear that it is the provisions of Section 26E of the SARFAESI Act and Section 34 of the RDB Act would prevail over the provisions of Section 24 of the TNGST Act. Additionally, this is a case where security interest has been created by the bank as early as in 1991, prior to the charge imposed by the Sales tax Department. Section 24 of the TNGST Act does not provide for priority by creation of a first charge in respect of the demands raised under that Act. Hence, Section 26E of the SARFAESI Act and Section 34 of RDB Act would prevail, in public interest.”

The bench ruled that in the absence of an express statutory first charge in the TNGST Act, the mortgage created by Indian Bank in 1991 would prevail over the state’s sales tax dues. Accordingly, the proceedings under the General Sales tax act were quashed.

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