1. Dispute over priority of claims between a secured creditor under the SARFAESI Act, 2002 and the State for tax dues under the Punjab VAT Act, 2005. (Para 1 , 2 )
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2023 Supreme(SC) 1260
SUPREME COURT OF INDIA
ANIRUDDHA BOSE, SUDHANSHU DHULIA, AUGUSTINE GEORGE MASIH, JJ.
Punjab & Sind Bank – Appellant
Versus
The State Of Punjab & Anr. - Respondents
Civil Appeal No. 6751 of 2023
Decided on : 07-12-2023.
Important Points
The Court held that a statutory first charge for tax dues under Section 35 of the Punjab Value Added Tax Act, 2005, prevails over a secured creditor's claim under the SARFAESI Act, 2002, as the overriding provision of the latter does not negate specific state tax priority laws.
Subject
Civil Law - Tax Law
Act Referred
Headnote
Punjab & Sind Bank - Priority of State's Claim over Bank's Charge - Punjab Value Added Tax Act, 2005, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - Section 35 of the 2005 Act, Section 35 of the 2002 Act, Section 26E of the 2002 Act - The court examined the implication of Section 35 of the Punjab Value Added Tax Act, 2005 and Section 35 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and held that the State's claim of priority in respect of dues under the 2005 Act superseded the bank's claim based on a charge created over the immovable property of the defaulting borrower. The court also considered the provision of Section 26E of the 2002 Act, which was subsequently amended, and held that it would not be applicable in this case as the State action had commenced earlier. The court affirmed the judgment of the High Court, finding no error in it.
Fact of the Case:
The Punjab & Sind Bank appealed against a judgment of the Punjab & Haryana High Court, which upheld the State's claim of priority in respect of dues under the Punjab Value Added Tax Act, 2005 over the bank's claim based on a charge created over the immovable property of a defaulting borrower.
Finding of the Court:
The court affirmed the judgment under appeal, finding no error in it and dismissing the appeal.
Issues: The priority of the State's claim over the bank's charge, the implication of Section 35 of the 2005 Act and Section 35 of the 2002 Act, and the applicability of Section 26E of the 2002 Act.
Ratio Decidendi: The court held that the State's claim of priority under Section 35 of the 2005 Act prevailed over the bank's charge, and the subsequent amendment of Section 26E of the 2002 Act would not be applicable in this case.
Final Decision: The appeal was dismissed, and the judgment of the High Court was affirmed.
Legal Category Hierarchy
Advocates:
Advocate Appeared:
For the Appellant : Ms. Seema Gupta, Adv., Ms. Tina Garg, AOR
For the Respondent: Mr. Shadan Farasat, Ms. Natasha Maheshwari, Mr. Karan Bharihoke, Mr. Rishabh Sharma, Adv.
Advocate Appeared:
For the Appellant : Ms. Seema Gupta, Adv., Ms. Tina Garg, AOR
For the Respondent: Mr. Shadan Farasat, Ms. Natasha Maheshwari, Mr. Karan Bharihoke, Mr. Rishabh Sharma, Adv.
Table of Contents
2. Bank claimed primacy based on the overriding provisions of the SARFAESI Act, 2002, while the State asserted first charge over property under the Punjab VAT Act, 2005. (Para 2 , 3 )
3. The court found no inconsistency between the overriding clause of the SARFAESI Act and the specific first-charge provision of the VAT Act at the material time. (Para 5 , 6 , 7 , 8 )
4. A statutory provision creating a first charge for State tax dues prevails over the general overriding provisions of the SARFAESI Act in the absence of inconsistency. (Para 6 , 7 )
5. Appeal dismissed and the High Court judgment sustaining the State's priority of claim is affirmed. (Para 9 , 10 )
6. Does Section 26E of the SARFAESI Act, 2002 apply retrospectively to disputes arising before its introduction?
No, the operation of Section 26E, which grants priority to secured creditors over government taxes and revenues, is prospective and does not apply to actions commenced prior to its introduction. (Para 4 , 5 )
7. Does the overriding provision of Section 35 of the SARFAESI Act, 2002 automatically supersede a State's statutory first charge on tax dues?
No, the overriding provision only applies if there is an inconsistency. A specific statutory provision creating a first charge for State tax dues is not necessarily inconsistent with the SARFAESI Act and can prevail. (Para 6 , 7 )
8. How is the priority of crown debt treated when a specific statutory first charge for tax dues exists?
While the common law principle of priority of crown debt typically applies only against unsecured creditors, a specific statutory provision creating a first charge gives the State's claim precedence over secured creditors. (Para 6 )
JUDGMENT :
The Punjab & Sind Bank is in appeal before us against a judgment of the Punjab & Haryana High Court delivered on 24.04.2015 holding in substance sustaining the State’s claim of priority in respect of dues under the Punjab Value Added Tax Act, 2005 (hereinafter called “the 2005 Act”) of a corporate entity, M/S Sumit Engineering Pvt. Ltd., superseding the bank’s claim based on a charge created over the immovable property of that entity (being respondent no.2 in this appeal). The said respondent, however, goes unrepresented before us when the appeal is taken up for hearing. The proceeding under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter called “the 2002 Act”) was initiated on 06.09.2013 as the respondent no.2 had made default in repayment of borrowed amount, which was in principle approximately Rupees 2.60 crores apart from interest. On the other hand, the sum owed to the State on account of dues under the 2005 Act was little above Rupees 4.50 crores.
2. The State claimed first charge over the property. By a communication dated 23.05.2014, the Assistant Collector-cum Excise and Taxation Officer intimated the Bank of initiation of proceeding against the respondent no.2 under the Land Revenue Act, 1887 for recovery of the aforesaid tax dues. The bank was also apprised of attachment of the property of the defaulting respondent. The provision of Section 35 of the 2005 Act was also brought to the notice of the said respondent. It is a letter which was subject of the writ petition brought by the bank before the High Court. Section 35 of the 2005 Act, which stipulates:
“35. Notwithstanding anything to the contrary contained in any contract or law for the time being in force, any amount of tax, penalty, interest and any other sum, payable by a taxable, registered or any other person under this Act, shall be the first charge on the property of such person from the date on which the amount becomes due and payable.”
3. The bank on the other hand relied on Section 35 of the 2002 Act, in support of their claim of primacy over the assets of the defaulting borrower. This provision reads:
“The provisions of this Act to override other laws. The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.
4. Notice under Section 13(2) of the 2002 Act was issued on 06.09.2013. The 2002 Act was subsequently amended with effect from 24.01.2020 upon introduction of Section 26E. This provision reads:
“26E. Priority to secured creditors. Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.
Explanation. For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code.”
There is a Full Bench judgment of the Bombay High Court in the case of Jalgaon Janta Sahakari Bank Ltd. & Anr. vs. Joint Commissioner of Sales Tax Nodal 9, Mumbai & Anr., reported in 2022 (5) Maharashtra Law Journal 691, in which it has been held that the operation of Section 26E of the 2002 Act would be prospective.
5. As the State action had commenced in the year 2014, the provision of Section 26E of the 2002 Act would not be applicable in this case. The said provision, having prospective effect cannot come to the aid of the bank. Thus, we will have to examine the implication of Section 35 of
