Bombay High Court Upholds SARFAESI Act, Prioritises Banks over Maharashtra VAT Act

Bombay High Court Upholds SARFAESI Act, Prioritises Banks over Maharashtra VAT Act

The Bombay High Court granted a writ petition filed by Punjab National Bank (PNB) against the assistant commissioner of state tax.

The Court ruled that the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act takes precedence over the Maharashtra Value Added Tax (MVAT) Act. Consequently, the Bank has priority over mortgaged assets.

“It is submitted that under Section 26E of the SARFAESI Act, a charge was required to be registered. The charge was registered by the Bank with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) prior to March 2020. The (MVAT) authority did not register their charge under the said provision prior to the date of registration of the charge of the Bank in respect of the secured asset. The attachment of the said secured asset levelled by the MVAT authority after the sale of the secured asset by the Bank is thus ex-facie, illegal and without the authority of law,” a division bench of Justices MM Sathaye and RD Dhanuka said in its recent order.

The assistant commissioner of state tax, MVAT, passed an attachment order which was subsequently quashed by the bench. The bench ruled that PNB is not obligated to take note of the tax authority’s claim related to dues under the MVAT Act concerning the secured asset.

The Court observed that in case of any inconsistency between the SARFAESI Act and the state enactment of the MVAT Act, the provisions of the SARFAESI Act would supersede those of the MVAT Act, in line with Article 254 of the Constitution. The HC further noted that the MVAT Act is a state legislation.

The case pertains to credit facilities worth ₹39.45 crore availed by Bokadia Spinning Mills (P) Ltd, for which the Jain family established an equitable mortgage of residential flat no. 182 and two open parking spaces at Abhilasha Premises Cooperative Housing Society (CHS) Ltd in Mumbai’s Cuffe Parade area in favour of PNB.

Subsequently, in 2010, when the credit facility became irregular, PNB classified the loan accounts of the borrowers as non-performing assets (NPA). The Bank then recalled the credit facilities and issued a notice under Section 13(2) of the SARFAESI Act, requesting payment of ₹21.41 crore, which was outstanding as of August 31, 2011. However, despite the notice, the borrowers did not make any payment to the lender.

PNB issued a notice on November 26, 2011, and subsequently took symbolic possession of the mortgaged flat owned by the Jains on March 21, 2012. On March 30, 2012, PNB registered the mortgage with CERSAI. Following an order from the chief metropolitan magistrate, PNB took physical possession of the flat on September 19, 2019, and published notices for the e-auction of the property.

Sonoo Menghani and Hemlata Menghani made the highest bid of ₹7.55 crore for the flat and paid 25 per cent of the amount as an earnest money deposit (EMD) to PNB. However, as of June 15, 2022, PNB was yet to recover outstanding dues of ₹1.04 crore from the borrowers, excluding interest.

The Jains, who were the proprietors of TUFF Enterprises, defaulted on payment of ₹4.62 crore towards sales tax dues. Consequently, on April 22, 2022, MVAT passed an order attaching the flat that was mortgaged by the borrowers with PNB.

In addition, Abhilasha Premises CHS informed both PNB and the Menghanis that it would issue a no-objection certificate (NOC) for transferring the flat only after the payment of society dues and sales tax dues. The CHS also registered its encumbrance with the sub-registrar of cooperative societies for the secured asset.

The society informed PNB on March 28, 2022, about the pending society dues of ₹23.21 lakh, as well as the sales tax department’s claim of ₹4.24 crore.

On April 8, 2022, PNB sent a letter to the society, reiterating its priority as the secured creditor over the flat under Section 26E of the SARFAESI Act. PNB also requested the society to issue the NOC to the Menghanis for registering the flat. The Menghanis expressed their willingness to pay the society dues to register the flat in their name.

However, Abhilasha Premises CHS declined to issue the NOC, stating that the sales tax department had prohibited the society from transferring the flat effectively. As a result, the Menghanis were unable to obtain the NOC from the CHS, prompting the lender to approach the Bombay High Court.

In the meantime, PNB informed the buyers of the flat on May 4, 2022, that it would be forfeiting the EMD of ₹1.89 crore as they did not pay the remaining bid amount. However, on May 13, 2022, the Menghanis contested PNB’s action, expressing their willingness to pay the outstanding 75 per cent of the amount only after the sales tax dues issue was resolved and the clear title of the flat was transferred to them by PNB. Following this, the flat buyers filed a case in the debt recovery tribunal before approaching the HC.

The Court cited a decision by the full bench of Bombay High Court in Jalgaon Janta Sahakari Bank Ltd, wherein it was held that the debts of the secured creditor must be given precedence over all other debts, as well as all taxes, cesses, revenues, and other rates payable to the Union, state government, or local authority, under Section 26E of the SARFAESI Act.

The High Court bench reaffirmed that the provision to Section 26-C of the SARFAESI Act specifies that a secured creditor who has registered the security interest or another creditor who has registered the attachment order in their favour, shall have priority in claims over any subsequent security interest established on the property, as well as any transfer by way of sale, lease, assignment, or license of such property or attachment order, following such registration.

During the hearing, the MVAT authority argued that PNB’s advertisement stated that the auction sale would be conducted on an “as is where is, as is what is, whatever there is basis,” and therefore the buyers are responsible for paying all statutory dues, including registration charges, stamp duty, taxes, statutory liabilities, arrears of property tax, and electricity dues.

The division bench held that even if such clauses were included in the advertisement, they would not give any priority to the MVAT authority’s claim over taxes, as it would conflict with Section 26E of the SARFAESI Act.

“The auction purchasers had never received any actual notice of the lien or constructive notice from the MVAT authority in respect of the said writ property and thus is not liable to pay any tax separately towards the tax dues of the dealer of the authority,” the High Court bench said.