Gujarat High Court

Canara Bank Through Authorised Officer vs Assistant Commissioner Of Commercial ... on 30 April, 2025

Author: Bhargav D. Karia

Bench: Bhargav D. Karia

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                            C/SCA/1421/2024                               JUDGMENT DATED: 30/04/2025

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                                    IN THE HIGH COURT OF GUJARAT AT AHMEDABAD

                                      R/SPECIAL CIVIL APPLICATION NO. 1421 of 2024


                       FOR APPROVAL AND SIGNATURE:

                       HONOURABLE MR. JUSTICE BHARGAV D. KARIA
                       and
                       HONOURABLE MR.JUSTICE D.N.RAY
                       ==========================================================

                                   Approved for Reporting                Yes           No

                       ==========================================================
                                   CANARA BANK THROUGH AUTHORISED OFFICER
                                                    Versus
                               ASSISTANT COMMISSIONER OF COMMERCIAL TAX & ORS.
                       ==========================================================
                       Appearance:
                       MS. AASHVI P.SHAH, ADVOCATE FOR MR. VISHWAS K SHAH(5364) for
                       the Petitioner(s) No. 1
                       MS.SHRUNJAL SHAH, AGP for the Respondent(s) No. 1,2,3,4
                       MR NEERAJ J VASU(3159) for the Respondent(s) No. 5,6
                       ==========================================================
                         CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
                               and
                               HONOURABLE MR.JUSTICE D.N.RAY

                                                     Date : 30/04/2025

                                                     ORAL JUDGMENT

(PER : HONOURABLE MR.JUSTICE D.N.RAY)

1. Heard learned advocate Ms.Aashvi P. Shah for learned

advocate Mr.Vishwas K. Shah for the Petitioner and learned

Assistant Government Pleader Ms. Shrunjal Shah for the

Respondents.

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2. With the consent of learned advocates for the respective

parties, the matter is taken up for hearing, as the issue involved is

very short. Rule returnable forthwith. Learned Assistant Government

Pleader Ms. Shrunjal Shah for the Respondents waives service of

notice of rule.

3. The brief facts of the case are as follows:

3.1 The Petitioner Bank (Canara Bank, formerly Syndicate Bank)

is a secured creditor of M/s Harikrishna Tradex Pvt. Ltd.

("Borrower"), which availed credit facilities amounting to ₹11.00 Cr11.00 Cr

on 08.07.2013; comprising a Term Loan of ₹11.00 Cr3.50 Cr, an Overdraft

of ₹11.00 Cr5.00 Cr, and an ILC Loan of ₹11.00 Cr2.50 Cr.

3.2 The credit was secured by a mortgage of two industrial non-

agricultural properties located at Mouje Pilundra, Taluka Prantij,

District Sabarkantha:

 Survey No. 977: Land admeasuring 740 sq. mtrs. (Old S. No. 194(3) Paikee 2, A/c No. 938).

 Survey No. 979: Land admeasuring 4,479 sq. mtrs. with industrial construction of 3,760 sq. mtrs. (Old S. No. 194(4) Paikee 2, A/c No. 940).

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(Collectively referred to as "Subject Properties")

3.3 The Subject Properties were purchased on 23.07.2013 by the

Borrower's Director, Mr. Hasmukhbhai J. Brahmbhatt, from partners

of M/s Sujal Agro. The mortgage was registered on 25.07.2013 with

the Sub-Registrar (Respondent No. 4) via Entry No. 792.

3.4 The Borrower's account turned Non-Performing Asset (NPA)

on 31.01.2015. A restructuring was carried out on 30.06.2015.

3.5 On 05.08.2015, the mortgage deed was formally registered in

favour of the Petitioner Bank with respect to Survey Nos. 977 and

979. Meanwhile, on 22.12.2016, Respondent No. 2; Commercial

Tax Officer, Prantij, issued an attachment order under Section 45 of

the Gujarat VAT Act, 2003, attaching the Subject Properties for dues

owed by M/s Sujal Agro Ltd. (merged into the Borrower), related to

Financial Year 2010-11.

3.6 On 18.05.2022, the Petitioner issued a demand notice under

Section 13(2) of the Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest Act, 2002 (SARFAESI

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Act) after account again turned NPA on 30.11.2015. On 17.03.2023,

Respondent No. 2 claimed outstanding dues of ₹11.00 Cr1,08,38,795/- with

18% interest from M/s Sujal Agro Ltd., raising objections to the

proposed auction unless these dues were recovered.

3.7 On 18.03.2023, the Petitioner responded rejecting the

objection, invoking Section 26E of the SARFAESI Act :- "secured

creditor shall have priority over government dues."

3.8 Similar correspondences followed with tax authorities on

28.03.2023, 29.03.2023, 05.04.2023, and 06.04.2023, reiterating

that:

 The Bank's claim has priority under S.26E.  No stay is operating under S.17 of the SARFAESI Act.  Auction proceedings will continue.

3.9 On 24.04.2023, upon obtaining 7/12, Village Form 8A and 6

for Survey Nos. 977 and 979, the Petitioner discovered charge

entries by tax authorities.

3.10 E-Auction Sale Notice under the SARFAESI Act was

published on 28.04.2023 for auction to be conducted on 16.05.2023.

On 16.05.2023, Respondents No. 5 and 6 emerged as the successful

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auction purchasers and paid the entire consideration. Certificate of

Sale was issued in their favour on 22.06.2023.

3.11 On 03.11.2023, Petitioner wrote to Respondent No. 1 (with

copies to Respondents 2 and 3), requesting:

 Removal of tax charge.

 Acknowledgment that full consideration was paid by auction purchasers.

 Recovery of ₹11.00 Cr1,08,38,795/- from directors of M/s Sujal Agro Ltd.

 Clarification that Bank's dues still remain unsatisfied post- auction.

3.12 Reminder letters were sent on 21.11.2023 to Respondents No.

1, 2, and 3, highlighting:

 Discovery of additional charge of ₹11.00 Cr63,08,000/- dated 16.03.2016 on Survey No. 980.

 Auction purchaser's entitlement to charge-free property.  State's inaction may compel the Petitioner to initiate legal recourse.

 Reiteration to remove charge within 15 days.

4. Hence, the present Writ Petition is filed seeking quashing of

the attachment orders other reliefs as under:

"9.1 Be pleased to issue appropriate writ, order or direction to

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quash and set aside charge of the Commercial Tax Department to the tune of Rs. 63,08,000/- and 1,08,38,795/- (approximately) plus interest for the properties mentioned in Paragraph 2.5 of this Petition;

"9.1A: Be pleased to quash and set aside the impugned Attachment Order dated 22.12.2016, issued by the Respondent No. 2 herein. (Annexure-P/16)"

9.2 Be pleased to further direct Respondent No. 4 to register the sale deed for the properties mentioned in Paragraph 2.5 of this Petition;

9.3 Be pleased to further direct Respondent no.3 to mutate revenue entry in favour of Respondent no. 5 and 6 as purchasers of properties mentioned in Paragraph 2.5 of this Petition;

9.4 Pending admission, hearing and final disposal, be pleased to

(i) Quash and set aside charge of the Commercial Tax Department to the tune of Rs. 63,08,000/- and 1,08,38,795/- (approximately) plus interest for the properties mentioned in Paragraph 2.5

(ii) Direct Respondent No. 4 to register the sale deed for the properties mentioned in Paragraph 2.5;

(iii) Direct Respondent no.3 to mutate revenue entry in favour of Respondent no. 5 and 6 as purchasers of properties mentioned in Paragraph 2.5 of this Petition;

9.5 Be pleased to grant Ex-parte Ad-interim relief in terms of para 9.5 of this Petition;

9.6 Costs of this Petition be awarded,

9.7 Such further and other relief, order or direction which may be just, fit, proper and equitable in the facts and circumstances of the Petition."

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5 Ms.Aashvi P.Shah, learned advocate appearing for Mr.

Vishwas K.Shah, learned Counsel for the Petitioner has submitted

that the attachment Order dated 22.12.2016 issued by the

Respondent No.2-Commercial Tax Officer, Prantij is bad in law,

inasmuch as, the action under the SARFAESI Act, 2002 had already

been initiated against the borrower and therefore, further attachment

by the Respondents is unjustified and contrary to Section 26E of the

SARFAESI Act, which explicitly grant priority to the debts of the

secured creditors as well as other dues including taxes and revenues

payable to Government Authorities.

6. Ms. Shrunjal Shah, learned Assistant Government Pleader

appearing for the Respondent is unable to controvert the submissions

made by learned Counsel for the Petitioner.

7. DISCUSSION & FINDINGS :-

7.1 This Court in the case of Kalupur Commercial Co-operative

Bank Ltd. Vs. State of Gujarat reported in AIRONLINE 2019

GUJ 418, has held as under :-

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"47. Thus, the dictum of law as laid by the Supreme Court in the aforesaid decision is that the State's preferential right to the recovery of debts over other creditors is confined to ordinary or unsecured creditors. The Supreme Court took the view that the Common Law of England or the principles of equity and good conscience (as applicable to India) do not accord the Crown a preferential right for the recovery of its debts over a mortgagee or pledgee of the goods or a secured creditor. It is true that ultimately the bank was not granted any relief, but the same was not granted in the peculiar facts of the case. Otherwise, the principle of law as explained is very clear. In no uncertain terms, the Supreme Court held that the appellant, i.e. the bank, was right in submitting that on the date on which the State of Karnataka proceeded to attach and sell the property of the partners of the firm mortgaged with the bank, it could not have appropriated the sale proceeds to the sales-

tax arrears payable by the firm, thereby defeating the bank's security. In taking such view, the Supreme Court relied on its earlier decision in the case of CST vs. Radhakishan, (1979) 43 STC 4 : AIR 1979 SC 1588.

48. In the case of Stock Exchange, Bombay v. V.S.Kandalgaonkar, reported in (2014)51 taxmann.com 246 (SC), it was held by the Bombay High Court that, "By virtue of lien on securities under rule 43 of Bombay Stock Exchange Rules, BSE being secured creditor of defaulting member would have priority over dues of Income - tax department." While dealing with the tax recovery under Section 226 of the Income- tax Act, 1961, read with Sections 8 and 9 of the Securities Contracts (Regulation) Act, 1956, it was held by the Apex Court that collection and recovery of tax has to be based on proper appreciation of facts of the case. While deciding Other modes of recovery (Priority over debts), the Apex Court duly considered the power of Central Government to direct rules to be made or to make rules and observed that a membership card is only a personal permission from Stock Exchange to exercise rights and privileges that may be given subject to Rules, Bye-Laws and Regulations of Exchange and moment a member is declared a defaulter, his right of nomination shall cease and vest in Exchange because even personal privilege given is at that point taken away from defaulting member. It therefore held that by virtue of rule 43 of Bombay Stock Exchange Rules security

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provided by a member shall be a first and paramount lien for any sum due to Stock Exchange. Thus, Bombay Stock Exchange being secured creditor would have priority over Govt. dues and if a member of BSE was declared a defaulter, Income-tax department would not have priority over all debts owned by defaulter member. The first thing to be noticed is that the Income Tax Act does not provide for any paramountancy of dues by way of income tax. This is why the Court in the case of Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. [2005] 5 SCC 694 (para 19) held that Government dues only have priority over unsecured debts and in so holding the Court referred to a judgment in Giles v. Grover (1832) (131) English Reports 563 in which it has been held that the Crown has no precedence over a pledgee of goods. In the present case, the common law of England qua Crown debts became applicable by virtue of Article 372 of the Constitution which states that all laws in force in the territory of India immediately before the commencement of the Constitution shall continue in force until altered or repealed by a competent legislature or other competent authority. In fact, in Collector of Aurangabad v. Central Bank of India [1967] 3 SCR 855 after referring to various authorities held that the claim of the Government to priority for arrears of income tax dues stems from the English common law doctrine of priority of Crown debts and has been given judicial recognition in British India prior to 1950 and was therefore "law in force" in the territory of India before the Constitution and was continued by Article 372 of the Constitution (at page 861, 862). In the present case, as has been noted above, the lien possessed by the Stock Exchange makes it a secured creditor. That being the case, it is clear that whether the lien under Rule 43 is a statutory lien or is a lien arising out of agreement does not make much of a difference as the Stock Exchange, being a secured creditor, would have priority over Government dues.

49. The two decisions referred to above, one of the Supreme Court and another of the Bombay High Court, as such may not be helpful to the Bank because the principal issue in the case on hand is with regard to the statutory charge which is created by the State enactment. The Bombay High Court was dealing with a matter under the Income Tax Act and under the Income Tax Act, there is

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no provision analogous to Section 48 of the VAT Act which creates a statutory charge.

50. There is one another important argument of Mr. Sheth which is quite appealing and we are at one with Mr. Sheth on the same. Indisputably, the Bank put forward its claim over the secured assets of the Bank for the first time on 01.10.2016 and that too by way of provisional attachment of the properties under Section 45 of the VAT Act, keeping in mind the dues that may be determined in future. It is not in dispute that there were no crystallized dues as on 01.10.2016 and, therefore, there was no question of there being any charge under Section 48 of the VAT Act which could only be in respect of the actual dues. It is also not in dispute that prior to the dues being crystallized in the case of the defaulting dealer, the Bank had already taken over the possession of the properties of the dealer, and by that time, Section 31B of the RDB Act had already been enforced by the Central Government. It is preposterous to suggest that the charge over the property under Section 48 of the State Act would come into force from the assessment of the earlier financial years and what is relevant in the present case is that the dues and resultantly the charge under Section 48 of the VAT Act came into existence after the implementation of Section 31B of the RDB Act.

51. Section 48 of the VAT Act would come into play only when the liability is finally assessed and the amount becomes due and payable. It is only thereafter if there is any charge, the same would operate. The authority under the VAT Act passed the assessment order later in point of time.

52. The language of Section 48 of the VAT Act is plain and simple and the phrase 'any amount payable by a dealer or any other person on account of tax, interest or penalty' therein assumes significance. The 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

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cannot be any application of Section 48 of the VAT Act. We may also refer to Section 47 of the VAT Act. Section 47 of the VAT Act is with respect to transfer of property by the dealer to defraud the Revenue. According to Section 47, if a dealer creates a charge over his property by way of sale, mortgage, exchange or any other mode of transfer after the tax has become due, then such transfer would be a void transfer. The reason why we are referring to Section 47 is that the phrase therein 'after any tax has become due from him' assumes significance. The same is suggestive of the fact that before the assessment proceedings, or, to put it in other words, before a particular amount is determined and becomes due to be payable if there is any transfer of property of the dealer, such transfer would not be a void transfer. Therefore, the condition precedent is that the tax should become due and such tax which has become due shall be payable by a dealer. Once this part is over, then Section 48 of the VAT Act would come into play.

53. One of us, J.B. Pardiwala, J., sitting as a Single Judge, had the occasion to consider this issue in the case of Bank of Baroda, Through its Assistant General Manager Prem Narayan Sharma vs. State of Gujarat & Ors., Special Civil Application No.12995 of 2018, decided on 16.09.2019. We may quote the relevant observations made in the said judgment.

"It is preposterous to suggest in the case on hand that as the assessment year was 2012-13, Section 48 could be said to apply from 2012-13 itself. Even in the absence of Section 26E of the SARFAESI Act or Section 31B of the RDB Act, Section 48 of the VAT Act would come into play only after the determination of the tax, interest or penalty liable to be paid to the Government. Only thereafter it could be said that the Government shall have the first charge on the property of the dealer."

54. In view of the aforesaid discussion, We have no hesitation in coming to the conclusion that the first priority over the secured assets shall be of the Bank and not of the State Government by virtue of Section 48 of the VAT Act, 2003."

7.2 This Court in the case of Parners of Siddheshwar Tax Fab

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& Ors. Vs. State of Gujarat & Ors. rendered in Special Civil

Application No. 2527 of 2023 on 26.07.2024 has held as under :-

"36. From the above, it is clear that the Judgment in case of Rainbow Papers Ltd. (Supra) is confined to the facts of the said case only and therefore, it would not be required to relook the decision of the Kalupur Commercial Cooperative Bank (Supra) considering the decision of the Rainbow Papers Ltd. (Supra) of the Apex Court, as the facts of the present case are in the realm of the provisions of the RDB Act (Recovery of Debts and Bankruptcy Act, 1933) and SARFAESI Act, whereas the decision of the Apex Court in case of Rainbow Papers Ltd. (Supra) was in the realm of IBC Code confined to the facts of the said case as observed in the subsequent decision of the Apex Court.

37. It is also pointed out by the learned AGP that the decision of the Rainbow Papers Ltd. (Supra) considered in review, which was disposed of by the Apex Court as per para 26 and 27 extracted herein above. In such circumstances, we are of the opinion that the subsequent decision of the Hon'ble Apex Court, in case of Rainbow Papers Ltd. (Supra) would not be applicable with regard to the applicability provision of Section 26E of the SARFAESI Act as well as provisions of Section 31B of RDB Act vis-a-vis Section 48 of the vat Act as analysed and discussed by this Court in Kalupur Commercial Cooperative Bank (Supra).

38. In view of the above analysis and facts, we would also like to refer to the subsequent decision of the Coordinate Bench in case of Odhavji Mohanbhai Gadhiya Vs. State of Gujarat (supra), wherein it is observed by this Court, that it is a settled legal position that VAT and Sales Tax dues has over the dues of no precedence the Bank for recovery of which the bank exercises powers under the SARFAESI Act and dues in nature of sales tax and VAT payable by the original owner cannot claim priority over the dues of the secured creditor and the principle that the state debt or crown debt has no prior claim ΟΥ the dues payable to the secured creditors is no longer res integra, wherein the Coordinate Bench of this Court

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has also referred to the decision of the Hon'ble Apex Court in case of Bank of Bihar Vs. State of Bihar reported in (1972) 3 SCC 196 which is followed in the decision of the Dena Bank (Supra) and the law laid down is that preferential right of the Crown to recover the debt over the creditors is limited to the class of unsecured creditors and the common law of England or the principles of equity and good conscience would not allow the Crown to have preferential right for recovery of debt over the mortgagee pledge secured creditors.

39. In view of the above legal position, the charge in respect of the property in question created for sales tax dues or VAT dues is of no avail and has no efficacy in law in view of the provisions of SARFAESI Act and the RDB Act. The property in question was sold by respondent no.6-Bank under the provisions of SARFAESI Act and the petitioners were successful purchasers and the sale certificate is issued and sale deed is also executed by which the petitioners have become absolute owners of the property and therefore considering the existing position of law, the charge created by the respondent State over the property in question in the year 2018, cannot be sustained and is accordingly quashed and set aside and as a consequence the mutation entries in revenue records also stands deleted. The petition accordingly succeeds in the aforesaid terms. Rule is made absolute to the aforesaid extent.

No order as to costs."

7.3 The aforesaid decisions in Kalupur & Siddheshwar (Supra)

have been followed in numerous decisions of this Court, namely in

the case of Ektaben Hardikbhai Mashru Vs. Authorized Officer,

State Bank of India & Ors. (Special Civil Application No. 26715

of 2022) and in the case of Dineshkumar Chandulal Thakar Vs.

Assistant Commissioner of Commercial Tax & Ors. (Special

Civil Application No. 21020 of 2023).

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8. Coming to the undisputed facts on record of the present case, it