The Bombay High Court has held that once a secured creditor has a valid and prior registered security interest, the creditor’s dues enjoy statutory priority under Section 26E of the SARFAESI Act over State tax and revenue claims, including those asserted under the MGST Act and amended Section 37 of the MVAT Act. The State cannot defeat this priority merely by using “first charge” language or a non-obstante clause in State legislation.
The Court also clarified that where the State relies on an attachment predating the SARFAESI amendment, it must prove not only attachment but also all further statutory steps such as proclamation in accordance with law. In the absence of such proof, the secured creditor’s statutory priority prevails. Further, an auction purchaser who buys a secured asset in a SARFAESI sale and receives a sale certificate cannot be deprived of the benefit of that purchase by continued State encumbrances in revenue records. The State cannot pursue the very same asset again after the secured creditor has enforced its security and sold the property.
The Division Bench comprising Justice Manish Pitale and Justice Shreeram V. Shirsat observed that the objections were already answered in the case of Jalgaon Janta Sahakari bank Ltd vs. Joint Commissioner of Sales Tax [2022 SCC OnLine Bom 1767], where the Full Bench had specifically considered Section 82 of the MGST Act and framed the issue whether a secured creditor has a prior right over the Government department to appropriate sale proceeds of a secured asset. The Full Bench had explained that there is “no magic” in the expression “first charge” and that the statutory “priority” created by Section 26E of the SARFAESI Act and Section 31B of the RDDB Act is enough to override competing State claims, including claims for taxes, cesses and other rates.
The Court specifically rejected the State’s submission that phrases like “notwithstanding anything to the contrary contained in any law” in State tax enactments could defeat the secured creditor’s priority. The Court further said the law is categorically settled that dues of the secured creditor shall have priority over all other dues, including revenues, taxes, cesses and rates payable to the Central Government, State Government or local authority.
On the objection relating to pre-24 January 2020 attachment orders, the Court said mere issuance of an attachment order is not enough. It held that the State must also show compliance with the Maharashtra Land Revenue Code and the 1967 Rules, including public proclamation in the prescribed manner. Only if attachment and lawful proclamation had both taken place before the enforcement dates under the SARFAESI Act or RDDB Act could the State possibly claim priority. In the present batch, the State failed to demonstrate such compliance in its reply affidavits.
The Court also dealt with the State’s reliance on the amended Section 37 of the MVAT Act. It referred to the Division Bench judgment in Bank of Baroda v. Assistant Commissioner of Sales Tax [Writ Petition (L) No. 3959 of 2025], which had already held that even after amendment, Section 37 does not override the statutory priority of a secured creditor whose security interest is duly registered under the SARFAESI regime. The Court noted that this view had also been followed recently in Leon Laboratories.
As to auction purchasers, the Court rejected the argument that because the sale was on an “as is where is whatever is” basis, the purchaser could not challenge the State’s action. The Court held that once the auction purchaser pays the full consideration and receives a sale certificate, the purchaser is entitled to enjoy the property free from such State-created boja/encumbrance, and the State cannot continue to burden the asset in revenue records.
Briefly, the petitions raised a common issue on whether statutory dues claimed by State departments can override the rights of secured creditors under the SARFAESI framework. The petitioners argued that the controversy was already settled by the Full Bench judgment in Jalgaon Janta Sahakari Bank Ltd. v. Joint Commissioner of Sales Tax, which held that dues of secured creditors under the SARFAESI Act have priority over State tax dues. They submitted that, in light of that ruling and later Division Bench decisions following it, the State’s objections were no longer sustainable.
The State nevertheless opposed the petitions on three broad grounds. First, it relied on Section 82 of the MGST Act and the wording “notwithstanding anything to the contrary contained in any law.” Second, it relied on the amendment to Section 37 of the MVAT Act. Third, it argued that some attachment orders were issued before 24 January 2020, the date from which the relevant SARFAESI amendment became operative, and therefore those earlier State claims should survive.
