The Karnataka High Court (Dharwad Bench) ruled that the charge created under the SARFAESI Act prior in time to the charge under the GST Act would prevail over the GST Act and vice versa. The ruling came after noting that the transaction under the GST Act is not reflected in public records, and the GST order in the present case was passed on April 16, 2019, and the entry was made on November 06, 2019, while the charge in favour of the petitioner bank under the SARFAESI Act was created on July 15, 2017 and was already entered into the property card.
The Court clarified that the decision of the Apex Court in the case of State Tax Officer vs Rainbow Papers Limited [Civil Appeal No. 1661 of 2020], which talks of the precedence of taxing authorities over the claims of secured creditors, including financial institutions, under the IBC, still holds the field; however, the said precedent would be applied only after considering the date of creation of the charge. Accordingly, the Court ruled that in the present case, the bank’s charge takes precedence over that of the GST authorities.
A Single Judge Bench of Justice Suraj Govindraj observed that the claim under the GST Act is not directly enforceable until the tax authorities have made an assessment and an entry is made on public records, like the encumbrance certificate or property card. In contrast, a secured creditor’s claim under the SARFAESI Act is based on a charge on the property, which is usually available in the public domain and can be acted upon by third parties.
The Single Judge elaborated that the dispute arises when two or more of these enactments are invoked concerning the same property or security, and then it becomes necessary to determine the priority of charges and the order of recovery under the conflicting enactments. The Bench therefore concluded that the priority of the charge must be determined based on the order in which the charges were created.
Briefly, in this case, the Respondents 4 and 5 had availed a mortgage loan from the petitioner bank for their partnership concern, and a residential flat was provided as security for the loan. When the loan became an NPA, a notice under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) was issued calling upon Respondents No. 4 and 5 to clear the outstanding loan amount of Rs. 42.09 lacs. Since the loan was not repaid, possession of the mortgaged property, along with the keys, was taken.
In the meantime, it came to light that Respondents No. 4 and 5 also owed certain amounts to the Commercial Taxes Department as GST to the tune of Rs. 1.38 crores. Therefore, the Respondent No.1 recovered Rs. 80.54 lacs by the sale of various assets, but also created a charge/encumbrance on the said apartment. Aggrieved, the petitioner bank claimed that it had a prior charge and the said property was secured, and possession thereof had been taken in terms of the SARFAESI Act. The petitioner, therefore, requested Respondents No. 2 and 3 to remove the charge/encumbrance reflected in the property card, to enable the bank to conduct and complete the auction. Since no action was taken by the respondents, the petitioner approached the High Court seeking an official release.
Case Relied On:
Indian Bank vs. The Commercial Tax Officer, Ambattur Assessment Circle – (2025) 3 MLJ 784
Appearances:
Advocates Santosh Kumar B. Malligawad and B. Dinkar Shetty, for the Petitioner/ Taxpayer
AGA Sharad V. Magadum, for the Respondent/ Revenue
