The Bombay High Court has ruled that the dues of a secured creditor (Bharat Co Operative Bank – Petitioner), shall have priority over all other dues including all revenue, taxes, cesses and other rates payable to the Central Government or State Government or Local Authority. Reference was made to a Full Bench decision of this Court in the case of Jalgaon Janta Sahakari Bank Ltd. vs. Joint Commissioner of Sales Tax [(2022) SCC online Bom 1767].
The Court elucidated that the secured creditor’s dues have priority over governmental dues if the security interest was registered with CERSAI prior to the government’s claim. This priority is established by Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
While reiterating that the word ‘priority’ was advisedly used by Parliament to obviate any confusion, the Court said that the priority of the secured creditor is not limited to state-level taxes (like MVAT) but also applies to central-level taxes (like GST). Accordingly, the Court quashed the demand notices as well as the prohibition orders.
The Division Bench comprising Justice Manish Pitale and Justice Shreeram V. Shirsat observed that the AGP, representing the State-Authorities, conceded that the full bench judgment would only apply to the petition concerning MVAT dues, and said judgment would not apply to cases were the demand notices were for GST, a central legislation.
The Bench noted the “sweeping observations” in the full bench judgment, which stated that the dues of a secured creditor shall have priority over all other dues, including all revenues, taxes, cesses, and other rates payable to the Central Government or State Government or local authority.
The Bench deemed the distinction between central and state legislation, as argued by the AGP, to be “artificial” and unacceptable in light of the clear position of law. The Bench also noted that a large number of similar petitions are being filed and advised that the concerned departments should issue a Standard Operating Procedure (SOP) to prevent the issuance of such notices where a secured creditor has a prior CERSAI registration.
Briefly, the case involves petitions filed by Bharat Co Operative Bank Mumbai Ltd. In this case, the Petitioner-Bank’s security interests were registered with the CERSAI. Subsequently, the Deputy Commissioner of State Tax issued demand notices and a letter instructing a housing society not to issue a No-Objection Certificate (NOC) for the secured property, claiming priority for Goods and Services Tax (GST) dues. The state authorities also issued a prohibitory order and a demand notice, seeking to restrain the bank from dealing with the property and claiming priority for Maharashtra Value Added Tax (MVAT) dues.
Case Relied On:
• Jalgaon Janta Sahakari Bank Ltd. vs. Joint Commissioner of Sales Tax [(2022) SCC online Bom 1767]
Appearances:
Advocates Namita Shetty and L.S. Shetty, for the Petitioner/ Taxpayer
AGP Himanshu Takke, along with Advocates Dilip Shinde, Moham Kumbhar, Mukund Mone, Dhruv Bhinde, and Shreyash Chaturvedi, for the Respondent/ Revenue
