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Gujarat HC: Co-operative Bank has Overriding charge over the Tax Authorities, SARFAESI Act Applicable

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Kalupur Commercial Co-operative Bank Ltd. (The Petitioner) is a Multi-State Scheduled Bank having its place of business at “Kalupur Bhavan” at Ahmedabad. They filed a Writ Petition against the State of Gujarat (The First Respondent) i.e. specifically against the Tax Collecting Officer (The Second Respondent). The Petitioners are engaged in Banking Business and had given loans, to a certain Borrower, of Rs. 60 Crore, taking certain immovable properties as Mortgage in return, and duly filing the same under the SARFAESI Act. Upon the default of payment by the Borrower, the Petitioners initiated an Action against them seizing their Properties, only to later release them by the order of Court. While eventually, the Petitioners acquired the possession of the properties, a tussle emerged between them and the Taxing Authorities, who had attached the properties for the purpose of recovering tax from the Borrower taking assistance from the VAT Act, 2003. The Issue that transpired was that “Who had a Prior overriding charge over the Properties? The Bank or The Tax Authorities

Arguments of the Counsel

The Taxing Authorities contended the case by invoking a few legal provisions, in order to argue that the SARFAESI Act didn’t apply to the Petitioners since they were a Co-operative Bank despite an amendment in the Act. The Petitioners refuted this argument by citing an early case decided by the Gujarat High Court itself,  stating that the provisions of SARFAESI would apply to Co-operative Banks like the Petitioners. That they therefore by virtue of this Act applying on Banks like itself, would render them eligible to claim an overriding Charge over the Property. The Bank is continuing this line of argument began auctioning the properties of the Borrower. Further, that the Tax Authorities can claim right only over the excess sale proceeds, if any, from the sale of mortgaged properties by the Petitioners after adjusting the sale proceeds towards the secured dues of the Petitioners.

Decision of the Court

The Gujarat HC, finally declared that the Bank had the first charge over the properties mortgaged from the Borrower by virtue of Section 26E of the SARFAESI Act and not of the State Government by virtue of Section 48 of the VAT Act, 2003. The Court emphasised on the interpretation of the language of Section 48 of the VAT Act, explaining that it is plain and simple and that the phrase “any amount payable by a dealer or any other person on account of tax, interest or penalty” therein assumes significance, the reason being that amount could be said to be payable by a dealer on account of tax, interest or penalty once the same is “assessed” in the assessment proceedings and the amount is determined accordingly by the authority concerned. Without any assessment proceedings, the amount cannot be determined, and if the amount is yet to be determined, then prior to such determination there cannot be any application of Section 48 of the VAT Act.

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