The Bombay High Court has held that a bank’s registered security interest takes priority over competing sales tax dues under Section 26E of the SARFAESI Act and that, in the circumstances of the case, the auction purchaser is entitled to receive the property free from the tax department’s encumbrance.
The Bench of Justice Manish Pitale and Justice Shreeram V. Shirsat has observed that the statutory use of the expression “first charge” does not, by itself, defeat the priority conferred by Section 26E of the SARFAESI Act and Section 31B of the debt recovery legislation, wherever those provisions apply.
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The department had asserted outstanding dues of ₹12,17,02,580 against the borrower and instructed the industrial estate not to transfer the lease rights without its consent. Rejecting its claim to priority, the Court directed the industrial estate to immediately complete the transfer formalities in favour of the purchaser.
The dispute concerned land and a building measuring 1,683 square metres at Indrayani Industrial Estate in Takwe Budruk, Maval taluka, Pune district.
The borrower had mortgaged the property to Union Bank of India to secure credit facilities. The bank registered its security interest with the Central Registry of Securitisation Asset Reconstruction and Security Interest of India, commonly known as CERSAI, on June 22, 2012.
Following the borrower’s default, the bank initiated proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. It obtained an order for possession in February 2020 and subsequently offered the property for public auction.
Agarwal emerged as the successful bidder at the auction held on January 29, 2025. After payment of the entire consideration, the bank issued a sale certificate on February 10, 2025.
He then approached Indrayani Industrial Co-operative Estate Limited for transfer of the lease rights. The industrial estate declined the request, citing communications from the tax authorities asserting a first charge over the property.
The industrial estate referred to a notice dated January 13, 2017, recording sales tax dues of ₹9,15,86,419 against the borrower. A subsequent notice dated January 10, 2023, stated that the outstanding dues were ₹12,17,02,580 and prohibited transfer of the lease rights without the department’s consent.
The purchaser challenged these notices and sought directions for completion of the transfer.
He argued that the bank’s registered security interest enjoyed statutory priority under Section 26E of the SARFAESI Act. Having purchased the secured asset and paid the entire sale consideration, he contended that the department’s claim could not obstruct transfer of the property.
The tax authorities, however, maintained that their first charge had been recorded before the auction and that the bank knew of the outstanding dues. They relied on Sections 32 and 37 of the Maharashtra Value Added Tax Act, 2002, as well as the attachment proceedings initiated against the property.
The department also argued that the auction had been conducted on an “as is where is” basis and that the auction conditions expressly disclosed the tax dues and attachment.
In its affidavit, Union Bank of India stated that both the auction website and the newspaper publication had disclosed the existence of the tax dues.
The bank also relied on a condition requiring intending bidders to independently investigate encumbrances, title and third-party claims before submitting their bids. At the same time, it maintained that, as a secured creditor, it had priority over the Sales Tax Department in realising its security.
Despite these disclosures and the department’s objections, the Court held that the applicable statutory priority and the facts concerning registration and attachment supported the purchaser’s claim.
The Bench relied on the Full Bench ruling in Jalgaon Janta Sahakari Bank Ltd. v. Joint Commissioner of Sales Tax, which addressed competing claims between secured creditors and government revenue authorities.
The Court explained that Section 26E gives qualifying secured creditors priority over other debts, including revenues, taxes, cesses and rates payable to the Central Government, State Government or a local authority.
Applying that position, the Bench noted that the bank had registered its security interest with CERSAI on June 22, 2012. The tax authorities had shown no CERSAI registration preceding that date. Their attempts to register the charge with CERSAI began only in 2025.
The department’s affidavit referred to recording a first charge for pending sales tax dues on June 6, 2015. However, the bank’s registration preceded that claim.
The Court consequently held that the bank’s dues enjoyed priority over the department’s competing dues.
The Bench also examined whether the tax authorities had demonstrated compliance with the procedures necessary to support their attachment claim.
Drawing on the Full Bench ruling and the decision in M/s. Neon Laboratories v. Deputy Commissioner of Sales Tax, the Court noted that merely issuing an attachment order would not suffice in the circumstances addressed by those precedents. The prescribed procedure under the Maharashtra Land Revenue Code and the applicable rules also had to be followed.
The Court found that the department’s affidavit did not state whether further steps had been taken beyond recording the charge. These included the prescribed public proclamation, customary modes of publicity, and affixing copies at conspicuous places on the property and the concerned Talathi office notice board.
The absence of averments establishing compliance provided an additional reason for rejecting the department’s claim to priority.
The department also relied on the amended Section 37 of the MVAT Act, which provides for a first charge over a dealer’s property for amounts payable under that legislation.
The Bench rejected the argument by referring to the earlier decision in Bank of Baroda v. Assistant Commissioner of Sales Tax.
Accordingly, the amended MVAT provision did not alter the result in the present case.
Having recognised the bank’s priority, the Court held that the benefit extended to the purchaser of the secured asset.
The Bench observed that Agarwal had purchased the property from the bank and paid the entire consideration. In those circumstances, he was equally entitled to an encumbrance-free property.
The Court therefore quashed the impugned tax notices and the attachment order dated January 17, 2017. It directed Indrayani Industrial Co-operative Estate Limited to forthwith transfer the rights in the secured asset and immediately complete the necessary formalities.
The concerned State authorities, bank and borrower were directed to take consequential steps within four weeks of the order.
The Court expressly clarified that allowing the petition did not extinguish the department’s entitlement to recover its lawful dues.
If any surplus remained from the auction proceeds after satisfaction of the bank’s dues, the bank was directed to notify the tax authorities. The department would be entitled to the residual proceeds, if any.
The authorities were also permitted to proceed against the borrower’s other assets or properties in accordance with law.
The ruling thus resolved the competing claims over the auctioned property while preserving the department’s lawful recovery remedies elsewhere.
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