Bombay High Court Urges SOP To Stop GST, MVAT Notices Against Properties With Prior CERSAI-Registered Security Interest

Observing that such petitions are being filed “in large numbers”, the Bombay High Court has advised State tax departments to frame a Standard Operating Procedure (SOP) to prevent issuance of demand notices where banks already have prior CERSAI registration of their security interests.

A Division Bench of Justices Manish Pitale and Shreeram V. Shirsat made the observation while allowing two writ petitions filed by Bharat Co-operative Bank Mumbai Ltd challenging GST and MVAT demand notices, a prohibitory order and related communications

After holding that the bank's registered security interests had priority over the State's tax claims, the court said:

"Considering the fact that such Writ Petitions are being filed in large numbers in this Court wherein the case of the Petitioners is covered by the law laid down in the aforesaid full bench of this Court, it would be advisable that the concerned departments issue a Standard Operating Procedure (SOP), so that demand notices are not issued where the secured creditors / banks already have CERSAI registration of their security interest much prior in point of time and where demand notices have been issued, they are withdrawn forthwith."

The court was hearing two writ petitions filed by Bharat Co-operative Bank (Mumbai) Ltd., challenging demand notices, prohibitory orders, and other communications issued by State tax authorities in respect of mortgaged properties.

It reiterated that that where a bank's security interest is registered with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) prior in time, its dues will have priority over tax demands raised by State authorities, including GST and MVAT dues.

The Bench noted:

“Priority means precedence or going before (Black's Law Dictionary). In the present context, it would mean the right to enforce a claim in preference to others. In view of the splurge of 'first charge' used in multiple legislation, the Parliament advisedly used the word 'priority over all other dues' in the SARFAESI Act to obviate any confusion as to inter-se distribution of proceeds received from sale of properties of the borrower/dealer. If a secured asset has been disposed of by sale by taking recourse to the Security Interest (Enforcement) Rules, 2002 it would appear to be reasonable to hold, particularly having regard to the non-obstante clauses in Sections 31-B and 26-E, that the dues of the secured creditor shall have 'priority' over all other including all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority.”

The Bank contended that its security interests were registered with CERSAI well before the issuance of the tax demands, and therefore the State could not claim priority over the secured creditor.

The State argued that in one petition, since the demand arose under GST laws, the Full Bench ruling of the Bombay High Court in Jalgaon Janta Sahakari Bank Ltd. v. Joint Commissioner of Sales Tax (2022 SCC Online Bom 1767) would not apply, as that decision dealt with MVAT dues.

Rejecting this, the Court held that the Full Bench had clearly laid down that once a secured creditor has a valid and prior CERSAI registration, its dues take precedence over all other dues, including taxes payable to the Central or State Government.

Quoting paragraph 85 of the Full Bench judgment, the Court reiterated that the term “priority” in Sections 26E and 31B of the SARFAESI Act means the secured creditor's claim must be enforced in preference to all others, including government revenue claims.

Applying this principle, the Bench held that the artificial distinction sought to be made between GST and MVAT dues could not be accepted. Since the Bank's security interests were registered with CERSAI well before the issuance of the tax demands, the Bank's dues would prevail in both writ petitions.

Accordingly, the Court quashed the impugned demand notices, prohibitory orders and communications issued by the State tax authorities, and allowed both writ petitions.

Appearance for Petitioner: Advocates Namita Shetty with L.S. Shetty

Appearance for Respondents: Advocates Himanshu Takke, AGP, or Respondent Nos. 1 and 2, Mr. Dilip Shinde with Moham Kumbhar and Mukund Mone, for Respondent Nos. 7 and 8, Mr. Dhruv Bhinde i/by Shreyash Chaturvedi, for Respondent Nos. 3 and 4