Court’s Decision
The Karnataka High Court (Dharwad Bench), in a detailed judgment delivered by Justice Suraj Govindaraj, upheld the supremacy of a secured creditor’s charge under the SARFAESI Act, 2002, over subsequent encumbrances created by the Goods and Services Tax (GST) Department.
The Court allowed the writ petition filed by Canara Bank, holding that the Bank’s mortgage, created on 15 July 2017, had a prior and superior charge on the secured asset — a residential flat in Belagavi — compared to the GST Department’s attachment made much later in November 2019.
Justice Govindaraj observed:
“When a charge under the SARFAESI Act is created and registered prior in time, it takes precedence over all subsequent charges, including those under the GST Act.”
Consequently, the Court directed the Commercial Tax Department to remove the encumbrance within 15 days, enabling the Bank to proceed with the auction under SARFAESI. The Court, however, ensured that if the auction yields surplus proceeds after loan recovery, the excess must be remitted to the GST authorities.
Facts
The borrowers had obtained a mortgage loan from Canara Bank in December 2017, offering their Flat No. A-502, Sky Park Complex, Belagavi as collateral. The account turned non-performing (NPA) on 1 December 2020, leading the Bank to issue statutory notices under Sections 13(2) and 13(4) of the SARFAESI Act. Possession of the property was taken on 17 September 2024.
During this time, the GST Department raised a tax demand of ₹1.38 crore against the borrowers, recovering part of it by selling other assets but also marking a charge on the mortgaged property in the land records on 6 November 2019.
Canara Bank protested this encumbrance through representations dated 17 November 2024 and 24 December 2024, citing its prior registered mortgage and statutory priority under Section 26-E of the SARFAESI Act. When the authorities failed to act, the Bank approached the High Court seeking a writ of mandamus to remove the GST encumbrance.
Issues
- Whether the Bank’s registered mortgage under the SARFAESI Act takes precedence over the GST Department’s later charge.
- Whether the GST Act, 2017, as a subsequent legislation containing a non-obstante clause, overrides the priority of secured creditors.
- Whether the High Court should intervene to direct the removal of encumbrance from the land records.
Petitioner’s Arguments
The Bank argued that the SARFAESI Act provides statutory priority to secured creditors through Section 26-E, which overrides all other claims, including taxes. It emphasized that the Bank’s charge, created and registered in July 2017, was well before the GST Department’s encumbrance of November 2019, thereby making its lien superior both in law and chronology.
Counsel relied on several precedents reinforcing secured creditors’ priority:
- Sri Abdul Khader v. Sadath Ali Siddiqui (Karnataka High Court) – Held that Section 26-E grants absolute precedence to secured creditors, even over statutory dues.
- State Bank of India v. Deputy Commercial Tax Officer (Telangana High Court) – Affirmed that banks have priority over GST claims under Section 31B of the RDB Act, despite non-obstante clauses in the GST law.
- Indian Bank v. Commercial Tax Officer (Madras High Court) – Clarified that SARFAESI and RDB Acts prevail over the TNGST Act, emphasizing public interest and the necessity of upholding secured creditors’ rights.
The Bank maintained that the non-obstante clause in Section 26-E gives it complete predominance and that taxing authorities cannot override a prior registered security interest.
Respondent’s Arguments
The State’s counsel (AGA) contended that the GST Act, being a later and comprehensive fiscal statute, prevails over earlier laws like SARFAESI. Citing Section 82 of the GST Act, he argued that all tax dues constitute a “first charge” on the property, except in cases governed by the Insolvency and Bankruptcy Code (IBC).
He relied on the Supreme Court’s decision in State Tax Officer v. Rainbow Papers Ltd. (2022), where it was held that statutory dues owed to the government cannot be overridden by financial creditors’ claims under the IBC. Thus, by analogy, the GST Department’s claim should supersede that of Canara Bank.
The State contended that public revenue must take priority and that allowing banks to override tax liabilities would undermine the state’s fiscal stability.
Analysis of the Law
Justice Govindaraj conducted a detailed comparison of the relevant statutory provisions — Section 26-E of SARFAESI, Section 34 of the RDB Act, Section 82 of the GST Act, and Section 53 of the IBC.
- Section 26-E (SARFAESI): Grants secured creditors priority over all other debts, including taxes, subject only to IBC proceedings.
- Section 34 (RDB Act): Gives overriding effect to recovery proceedings under the Act over any inconsistent law.
- Section 82 (GST Act): Declares that tax dues are a “first charge” on the property, except as otherwise provided under the IBC.
- Section 53 (IBC): Establishes a hierarchy where secured creditors and government dues rank equally in liquidation proceedings.
The Court observed that while all these statutes contain non-obstante clauses, their application depends on the sequence of creation of rights. The SARFAESI charge, being registered in 2017, predated the GST attachment, making it the first valid and public charge.
“When two conflicting claims arise under separate statutes, the determining factor must be the chronology of creation of such charges and their reflection in public records.”
The Court rejected the State’s argument that the GST Act automatically overrides SARFAESI merely because it is a later enactment, clarifying that priority of charge is a factual, not chronological, supremacy of statutes.
Precedent Analysis
- Sri Abdul Khader v. Sadath Ali Siddiqui (Karnataka HC, 2021) – Affirmed that secured creditors have precedence over government dues, owing to the non-obstante clause in Section 26-E.
- State Bank of India v. Deputy Commercial Tax Officer (Telangana HC, 2023) – Held that even where the GST Act contains its own non-obstante clause, banks’ claims prevail under SARFAESI and RDB Acts.
- Indian Bank v. Commercial Tax Officer (Madras HC, 2025) – Confirmed that SARFAESI and RDB provisions override tax claims when the bank’s security interest predates the tax assessment.
- State Tax Officer v. Rainbow Papers Ltd. (Supreme Court, 2022) – Interpreted priority under IBC, not directly applicable to SARFAESI-GST conflicts, but clarified that chronology and nature of proceedings determine precedence.
The Court harmonized these precedents, concluding that SARFAESI prevails where the bank’s mortgage was created and registered earlier in time.
Court’s Reasoning
Justice Govindaraj reasoned that the SARFAESI charge, registered on 15 July 2017, was publicly recorded and therefore created a legally enforceable security interest that predates the GST Department’s encumbrance of November 2019.
“The GST Department’s charge, though statutory, arises only after assessment and entry in public records. In contrast, a SARFAESI security interest is registered immediately upon creation and enjoys priority from that date.”
The Court emphasized that public notice of the charge is key to determining priority. Since the Bank’s charge existed first and was duly recorded, it must prevail over later government claims.
Conclusion
The High Court allowed the petition and directed:
- Removal of the GST encumbrance on the property within 15 days.
- The Bank is entitled to auction the flat and recover dues in accordance with law.
- Any surplus funds after satisfaction of the Bank’s claim must be deposited with the GST Department for appropriation toward tax dues.
“The charge created earlier in time would have precedence. The SARFAESI charge, being prior and registered, prevails over the later statutory charge under the GST Act.”
Implications
- Establishes that secured creditors’ rights under SARFAESI override subsequent tax attachments under GST.
- Clarifies that priority depends on the timing of charge creation, not on which law was enacted later.
- Reinforces the public registration of mortgages as a decisive factor for establishing enforceable priority.
- Ensures a balanced approach — allowing banks to recover dues first while preserving government’s right to claim residual proceeds.
