While allowing a writ petition filed by Punjab National Bank (PNB) against the assistant commissioner of state tax, the Bombay High Court (HC) ruled that the Bank has priority over mortgaged assets since the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act overrides the Maharashtra Value Added Tax (MVAT) Act.
In an order last week, a division bench of justice MM Sathaye and justice RD Dhanuka says, "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."
The bench quashed an attachment order passed by the assistant commissioner of state tax, MVAT, holding that PNB is not liable to take cognisance of the tax authority's claim arising out of dues under the MVAT Act over the secured asset.
The HC remarked that, even if there is any inconsistency between the SARFAESI Act and MVAT Act, then in view of Article 254 of the Constitution, the provisions of the SARFAESI Act would prevail over the provisions of the MVAT Act which is a state enactment.
The case is related to credit facilities worth Rs39.45 crore obtained by Bokadia Spinning Mills (P) Ltd for which the Jain family created an equitable mortgage of residential flat no. 182, along with two open parking spaces at Abhilasha Premises Cooperative Housing Society (CHS) Ltd in Mumbai's Cuffe Parade area in favour of PNB.
However, after the credit facility became irregular, in 2010, PNB classified the loan accounts of the borrowers as non-performing assets (NPA). It recalled the said credit facilities and issued a notice under Section 13(2) of the SARFAESI Act seeking payment of Rs21.41 crore due as of 31 August 2011. However, the lender did not receive any payment from the borrowers.
After issuing a notice on 26 November 2011, PNB, on 21 March 2012, took symbolic possession of the flat mortgaged by the Jains. On 30 March 2012, PNB registered the mortgage with CERSAI. After securing an order from the chief metropolitan magistrate (CMM), on 19 September 2019, PNB took physical possession of the flat and published notices for the e-auction of the property.
Sonoo Menghani and Hemlata Menghani submitted the highest bid of Rs7.55 crore for the flat and paid 25% of the amount as an earnest money deposit (EMD) to PNB. As of 15 June 2022, PNB has outstanding dues recoverable from the borrowers of Rs1.04 crore, excluding interest.
The Jains, as proprietors of TUFF Enterprises, had committed default in payment of Rs4.62 crore towards sales tax dues. It resulted in MVAT on 22 April 2022 passing an order attaching the flat mortgaged by the borrowers with PNB.
Separately, Abhilasha Premises CHS told PNB and the Menghanis that it would issue a no-objection certificate (NOC) to transfer the flat only if the society dues and sales tax dues are paid. The CHS also registered its encumbrance with the sub-registrar of cooperative societies for the secured asset.
On 28 March 2022, the society informed the Bank about the pending society dues of Rs23.21 lakh as well as the claim of the sales tax department of Rs4.24 crore.
On 8 April 2022, PNB sent a letter to the society, reiterating that the lender has priority over the flat being a secured creditor under Section 26E of the SARFAESI Act. PNB also requested the society to issue an NOC to the Menghanis for registration of the flat. The Menghanis have shown their willingness to pay the society dues to get the flat registered in their favour.
However, Abhilasha Premises CHS refused to issue an NOC stating that the sales tax department had prohibited the society from effectively transferring the flat. Since the Menghanis could not obtain an NOC from the CHS, the lender decided to approach the Bombay HC.
Meanwhile, on 4 May 2022, PNB informed the flat buyers that it has decided to forfeit the EMD of Rs1.89 crore since they failed to pay the balance bid amount. On 13 May 2022, the Menghanis objected to the action by PNB, stating that they are willing to pay the balance 75% amount provided that the issue of the sales tax dues was resolved and the clear title of the said flat is passed on to them by PNB. After filing a case in the debt recovery tribunal, the flat buyers approached the HC.
The Court also referred to a ruling by the full bench of Bombay HC in Jalgaon Janta Sahakari Bank Ltd where it was held that the dues of the secured creditor should have priority over all other debts and all revenues, taxes, cesses and other rates payable to the Union or state government or local authority in view of Section 26E of the SARFAESI Act,
The HC reiterated that the proviso to Section 26-C of the SARFAESI Act declares that a secured creditor, who has registered the security interest or another creditor who has registered the attachment order in its favour, shall have priority of claims over subsequent security interest created over the property in question, any transfer by way of sale, lease, assignment or licence of such property or attachment order following to such registration.
During the hearing, MVAT authority contended that the advertisement issued by PNB itself made it clear that the auction sale would be on "as is where is, as is what is, whatever there is basis" and, thus, the buyers are liable to pay all the statutory dues including registration charges, stamp duty, taxes, statutory liabilities, arrears of property tax, and electricity dues.
However, the division bench opined that such clauses in the advertisement would not confer any priority of the claim of taxes in favour of the MVAT authority, contrary to Section 26E of the SARFAESI Act.
Further, "The auction purchasers (the Menghanis) 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 HC says.
