CERSAI-Registered Bank Dues Take Priority Over State Tax Demands: Bombay High Court

The Bombay High Court on 28 January held 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.

A Division Bench of Justice Manish Pitale and Justice Shreeram V. Shirsat 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.

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: Ms. Namita Shetty with L.S. Shetty

Appearance for Respondents: Mr. 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