CASE TITLE:
State Bank of India Versus State of H. P. & Ors.
COURT:
High Court of Himachal Pradesh
BENCH:
Hon’ble Mr. Justice Tarlok Singh Chauhan & Hon’ble Mr. Justice Satyen Vaidya
DATE OF JUDGEMENT:
15.12.2023
PARTIES:
PETITIONER: State Bank of India
RESPONDENT: State of H. P. & Ors.
SUBJECT
This legal case involves a dispute over the priority of claims on a property mortgaged by M/s Arvind Casting Pvt. Ltd. to a bank. The petitioner, a secured creditor, seeks the removal of liens entered by the Excise and Taxation Department and Income Tax Department over the property. The respondents argue for priority based on statutory charges. The court, citing relevant legal precedents, affirms the secured creditor's first charge and orders the removal of the contested liens.
IMPORTANT PROVISIONS
• Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act):
- Section 26 D: Deals with the entry of the lien of the secured creditor in the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI).
- Section 26 E: Specifies the rights of secured creditors and the first charge on secured assets.
• Himachal Pradesh Value Added Tax Act, 2005 (HPVAT Act):
- Section 26: Deals with the priority of the State's claim as the first charge over the property.
• H.P. Land Revenue Act, 1954:
- Mentioned in the context of declaring the arrear as land revenue and its recoverability.
• Central Excise Act, 1944:
- Section 11E: Inserted w.e.f. 08.04.2011, relates to the priority of realization of duty under the Central Excise Act over secured debts.
• Recovery of Debts and Bankruptcy Act, 1993 (RDB Act):
- Section 31B: Pertains to the first charge on the property in favor of banks/financial institutions for recovering their debts.
• Kerala Value Added Tax Act, 2003 (KVAT Act):
- Section 38: Specifies that tax payable is the first charge on the property of the dealer.
• Amendment to SARFAESI Act in 2016:
- Section 26E, introduced by the amendment, establishes the first charge on secured assets in favor of secured creditors.
BRIEF FACTS
• The case involves a dispute over the priority of claims between different departments of the State, including Excise and Revenue, and a secured creditor (petitioner-Bank) about a property mortgaged by M/s Arvind Casting Pvt. Ltd. ("the Unit").
• The Unit availed financial assistance/loan facilities from the petitioner-Bank and mortgaged its property in Himachal Pradesh in February 2013.
• The petitioner-Bank's lien on the mortgaged property was registered in the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) in March 2013.
• In 2014, the Unit's loan account was classified as a Non-Performing Asset (NPA), leading to recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act).
• Notices under Section 13(2) and 13(4) of the SARFAESI Act were issued in July 2014, and the District Magistrate granted assistance to the Bank under Section 14, enabling the physical possession of the secured assets in July 2015.
• Prior to the Bank taking possession, the Excise and Taxation Department and the Income Tax Department entered liens (Rapat Nos. 459 and 173) over the secured assets, which the Bank contested through repeated requests for removal.
• The petitioner filed a petition seeking the removal of the liens and challenging their legality, citing the property as a secured asset under Section 26-E of the SARFAESI Act.
• The State respondents argued for their priority claim over the property, asserting charges under the Himachal Pradesh Value Added Tax Act, 2005, and the Central Sales Tax Act, 1956.
• The Deputy Commissioner-cum-District Magistrate stated that the liens were entered in good faith to safeguard the State's revenue.
• The petitioner-Bank's secured creditor status and first charge over the property were not disputed by the State respondents.
• The court referred to authoritative pronouncements, including a Supreme Court case (Punjab National Bank vs. Union of India) establishing the precedence of secured creditors' rights over other claims.
• The court highlighted the overriding effect of the SARFAESI Act on other laws, emphasizing the first charge created by secured creditors.
• The court discussed a similar case involving Section 38 of the Kerala Value Added Tax Act, noting the priority of secured creditors over local statutory "first charge" in favor of revenue.
• Referring to recent judgments, the court affirmed that secured creditors have preference over the State in recovering debts from the debtor's property.
• The court concluded by directing the respondents to remove the red entry in the revenue record, declaring the liens (Rapat Nos. 459 and 173) illegal and unsustainable, based on the rights established by the SARFAESI Act and legal precedents.
QUESTIONS RAISED
1. Whether the rights of a secured creditor, who has a first charge over a property under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), take precedence over the claims and charges asserted by various State departments, such as Excise and Taxation Department, under their respective statutes?
2. Whether the provisions of Section 26E of the SARFAESI Act, introduced by an amendment in 2016, granting a first charge to secured creditors, have an overriding effect over local statutory "first charge" claims made by State departments, particularly in the context of revenue recovery and taxation, as reflected in the actions taken by the Excise and Taxation Department in entering red entries in the revenue records?
ARGUMENTS ADVANCED BY THE PETITIONER
• The petitioner, State Bank of India, had provided financial assistance/loan facilities to M/s Arvind Casting Pvt. Ltd., and the Unit mortgaged its property in Himachal Pradesh to the petitioner-Bank in February 2013. Subsequently, in 2014, the Unit's loan account was classified as a Non-Performing Asset (NPA), leading to the initiation of recovery proceedings under the SARFAESI Act.
• The petitioner-Bank, as a secured creditor, entered its lien in the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) in March 2013.Notices under Section 13(2) and 13(4) of the SARFAESI Act were issued in 2014, and the District Magistrate granted assistance to the Bank under Section 14, enabling the physical possession of the secured assets in 2015.
• The Excise and Taxation Department, followed by the Income Tax Department, entered liens on the property in July 2015 and February 2018, respectively.
• The petitioner-Bank requested the removal of these liens, but the respondents did not comply, leading to the filing of the petition.
• The petitioner argues that, based on legal precedents and the SARFAESI Act, the petitioner-Bank, being a secured creditor with a first charge on the property, has precedence over the claims of the Excise and Taxation Department and other respondents.
• The petitioner cites relevant judgments, including the Supreme Court's decision in Punjab National Bank vs. Union of India, emphasizing the priority of secured creditors' rights over other claims.
• The petitioner urges the court to order the removal of the red entries in the revenue records, asserting the illegality of the respondents' actions in obstructing the petitioner-Bank's rights as a secured creditor under the SARFAESI Act.
ARGUMENTS ADVANCED BY THE RESPONDENT
• The Unit (M/s Arvind Casting Pvt. Ltd.) is indebted to the State of Himachal Pradesh, specifically under the Himachal Pradesh Value Added Tax Act, 2005, and the Central Sales Tax Act, 1956, with a recoverable amount of Rs. 21,37,47,875.
• The Unit failed to pay the assessed amount despite several notices, leading to the initiation of recovery proceedings. The debt was declared as arrear of land revenue and was sought to be recovered under the H.P. Land Revenue Act, 1954.
• The Excise and Taxation Department, as well as the Income Tax Department, entered red entries (Rapat No. 459 in 2015 and Rapat No. 173 in 2018) over the secured assets of the petitioner-Bank, claiming a first charge over the property.
• The respondent authorities argue that their claim has legal backing under Section 26 of the Himachal Pradesh Value Added Tax Act, giving them a first charge over the property.
• The respondent emphasizes that the charge claimed by the State is broader than a mortgage and, under Section 100 of the Transfer of Property Act, a charge created by operation of law has precedence over an existing mortgage.
• The respondent relies on legal principles, asserting that the rights of the State to recover debts, especially crown debts, generally prevail over the rights of a secured creditor.
• The respondent contends that the actions taken, including the red entries, were done with bonafide intention to safeguard the revenue of the State Government in larger public interest. They maintain that the State's claim should have precedence over the petitioner-Bank's mortgage.
ANALYSIS BY THE COURT
In this case, M/s Arvind Casting Pvt. Ltd. availed financial assistance from the petitioner-Bank, mortgaging its property. The Unit defaulted, leading to SARFAESI Act proceedings. The Excise and Taxation Department and Income Tax Department subsequently entered charges on the property. The petitioner-Bank, a secured creditor, sought removal of these charges. The court, relying on precedents, affirmed the petitioner's first charge rights established in 2013. It emphasized that secured creditors' rights prevail over government claims, citing relevant legal provisions. The court directed the removal of charges entered by government departments, affirming the petitioner's priority.
CONCLUSION
In conclusion, the court, in this legal case, upheld the rights of the petitioner-Bank as a secured creditor with a first charge over the property mortgaged by M/s Arvind Casting Pvt. Ltd. The court relied on key legal provisions, including those in the SARFAESI Act, emphasizing the priority of secured creditors over government claims. Citing precedents, especially the Supreme Court's judgment in Punjab National Bank vs. Union of India, the court established the precedence of secured creditors' rights over crown debts and unsecured claims. The court directed the removal of the contested charges entered by the Excise and Taxation Department and Income Tax Department, affirming the legality of the petitioner-Bank's position and emphasizing the overriding effect of the SARFAESI Act on other laws.
