The Gujarat High Court ( HC ) has held that Value Added Tax ( VAT ) and sales tax dues have no Priority over dues of Secure Creditors who exercise powers under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ( SARFAESI ).
Odhavjibhai Mohanbhai Gadhiya, the petitioner challenged the order dated 6.3.2021 passed by respondent No.3- the Sub Registrar, Jamnagar.
M/s. Galaxy Enterprise, the respondent took a loan facility from respondent No.10 Axis Bank in form of cash credit for 5 crores on 30.4.2011. for which an open land bearing measuring 341 sq. mtrs at Jamnagar was mortgaged. The loan account was declared to be a Non-Performing Asset, under which the Axis Bank filed proceedings on 24.6.2016 before the Debt Recovery Tribunal for recovery of dues.
It was submitted that the order passed by respondents Nos.4 and 5 was bad in law since the petitioners became owners of the property. A sale certificate under auction purchased by the petitioners was issued and it was registered, it was submitted.
The Axis bank also issued a notice under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) to the original borrower- respondent No.6.
The notice was challenged by respondents Nos.6 to 9 by filing Securitization Application before the Debt Recovery Tribunal. The tribunal did not grant any stay. The Axis Bank took possession of the properties on 28.6.2016. This action of the bank was again challenged before the tribunal but the tribunal did not grant a stay against the bank proceedings for auction.
It was observed that the VAT and sales tax dues have no precedence over the dues of the bank for recovery of which the bank exercises powers under the SARFAESI Act. The bank was a secured creditor.
Section 26 E of the SARFAESI Act provides for the priority of the secured creditor, stating that notwithstanding anything contained in any other law, after the registration of security interest, the debts due to the unsecured creditor shall be paid in priority of all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.
Further viewed that the dues like sales tax or VAT payable by the original owner cannot claim priority over the dues of the secured creditor.
A two-member bench consisting of Justice N V Anjaria and Justice Bhargav D Karia observed that respondent No.10 Axis Bank had held an auction in the exercise of powers derived from the provisions of the SARFAESI Act to sell the property mortgaged with it, to recover its dues. Notice under Section 13(2) was issued, possession was taken and the auction by the law was conducted.
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