If the charge under the GST Act, 2017, was created prior to that under the SARFAESI Act, 2002, the GST Act will prevail

Where charge under SARFAESI Act is created prior in time to charge under GST Act, the secured creditor’s charge prevails

Facts of the Case

• The petitioner, Canara Bank, granted a mortgage loan to Respondents No. 4 and 5 for their partnership concern, secured by residential flat No. A-502, 5th floor, A-Wing, Sky Park Complex, Godsewadi, Belagavi.
• The loan became a non-performing asset on 1.12.2020.
• Notice under Section 13(2) of the SARFAESI Act was issued on 16.11.2022 for recovery of Rs. 42,09,855/- as of 31.10.2022.
• Subsequent notice under Section 13(4) of the SARFAESI Act was issued on 24.05.2024; further notice to guarantor on 3.08.2024; possession of property taken on 17.09.2024.
• It was discovered that Respondents No. 4 and 5 also owed Rs. 1,38,25,684/- as GST dues to the Commercial Taxes Department.
• Respondent No. 1 recovered Rs. 80,54,200/- by sale of other assets and created a charge/encumbrance on the subject apartment, entered in the property card.
• The Bank asserted its prior charge, with liability of Rs. 1,07,80,517/-, and requested removal of the GST encumbrance to enable auction of the property.
• Despite representations, no action was taken by the respondents, leading to the present writ petition seeking removal of the GST charge.

Contentions of the Parties

Petitioner (Canara Bank)

• Charge under SARFAESI Act has statutory precedence over all other charges, including those of taxing authorities, until the secured creditor’s dues are discharged.
• Security interest in favor of the Bank was created on 21.12.2017; GST charge was created later, on 6.11.2019.
• Relied on Division Bench decision in Sri Abdul Khader v. Sadath Ali Siddiqui (WA.No.1102 of 2021), Telangana High Court in State Bank of India v. Deputy Commercial Tax Officer (2023(6)ALT353), and Madras High Court in Indian Bank v. Commercial Tax Officer and Ors., (2025) taxcode.in 74 HC, all holding that secured creditor’s charge prevails over government dues if created earlier in time.
• Requested direction to GST authorities to remove the encumbrance to allow the Bank to auction the property.

Respondents (State of Karnataka and GST Authorities)

• GST Act is a subsequent central enactment and prevails over SARFAESI Act, except as provided under the Insolvency and Bankruptcy Code (IBC).
• Relied on Section 82 of the GST Act, which provides that tax is a first charge on property, save as otherwise provided in the IBC.
• Relied on Supreme Court decision in State Tax Officer v. Rainbow Papers Ltd., (2022) ibclaw.in 107 SC, holding that statutory dues cannot be subordinated to secured creditors’ claims.
• Submitted that Bank’s claim must yield to the government’s tax claim, as public money takes precedence.

Issues

1. Who would have preference or priority of charge/encumbrance by reading the SARFAESI Act and GST Act in conjunction?
2. In the facts of the present matter, whether this court is required to intercede?
3. What order?

Decision

A. Statutory Provisions and Priority of Charges (Issue No. i)

• The Court considered Section 26-E of the SARFAESI Act, which grants priority to secured creditors over all other debts, including government dues, subject to the IBC. (p8.1)
• Section 34 of the RDB Act was noted to provide overriding effect to its provisions over other laws. (p8.2)
• Section 53 of the IBC prescribes the order of distribution of liquidation assets, placing government dues and secured creditors on equal footing. (p8.3)
• Section 82 of the GST Act provides that tax is a first charge on property, except as otherwise provided in the IBC. (p8.4)
• All these provisions contain non-obstante clauses, indicating their overriding effect. (p8.9)
• When applied independently, each provision operates without conflict; conflict arises only when multiple enactments are invoked regarding the same property. (p8.10–8.11)
• State Tax Officer v. Rainbow Papers Ltd., (2022) ibclaw.in 107 SC held that statutory dues prevail over claims under the IBC. Indian Bank (Madras High Court) held that SARFAESI/RDB Act prevails over TNGST Act, but that case considered Section 24, not Section 82 of the GST Act. State Bank of India (Telangana High Court) held that secured creditor has precedence over state tax claims. (p8.12)
• Division Bench of this Court in Abdul Khader held that the non-obstante clause in Section 26-E of SARFAESI Act gives priority to the secured creditor’s charge, even over statutory charges under other laws. (p8.13)
• The only case directly addressing a similar conflict is Rainbow Papers (Supreme Court), which dealt with IBC and tax claims. The present case concerns conflict between Section 26-E of SARFAESI Act and Section 82 of the KGST Act. (p8.14)
• The argument that only IBC claims can override GST Act claims is rejected. The GST charge is not enforceable until assessment and entry in public records, whereas a SARFAESI charge is based on a registered security interest, usually available in the public domain. (p8.15–8.16)
• Rainbow Papers held that taxing authorities’ claims prevail over secured creditors under the IBC, but the date of creation of the charge is crucial. (p8.17)
• In this case, the GST order was passed on 16-04-2019 and entered on 06-11-2019, while the Bank’s charge was created and recorded on 15-07-2017. Thus, the Bank’s charge is prior in time. (p8.18)
• The principle is that the charge created earlier in time prevails. If the SARFAESI Act charge predates the GST Act charge, the former takes precedence. (p8.19)
• In case of conflict between GST Act and SARFAESI Act (or RDB Act), priority is determined by the order of creation of charges. (p8.20)

B. Application to Present Facts and Necessity of Court’s Intervention (Issue No. ii)

• The Bank’s charge was created and recorded on 15-07-2017; GST authorities’ charge was created by order dated 16-04-2019 and recorded on 06-11-2019. (p9.1)
• Regardless of the date of order or recordal, the Bank’s charge predates the GST charge by more than two years. (p9.2)
• Accordingly, the Bank’s charge takes precedence over the GST authorities’ charge in the present case. (p9.2)

C. Final Order (Issue No. iii)

• The writ petition is allowed. (p10.1)
• A writ of mandamus is issued directing Respondents No. 1 to 3 to remove the encumbrance/charge created over Apartment No. A-502 within 15 days from receipt of the certified copy of the order. (p10.1)
• Upon removal of the charge, the petitioner-Bank is entitled to proceed with auctioning the property in accordance with law. GST authorities may inform prospective purchasers or interested parties during the auction. (p10.1)
• If any surplus remains after full adjustment of the Bank’s dues, such surplus shall be deposited with Respondent No. 2 to be appropriated towards GST dues in accordance with law. (p10.1)

Conclusion

The Court held that, where a charge under the SARFAESI Act is created prior in time to a charge under the GST Act, the secured creditor’s charge prevails. The Bank’s charge, being earlier, takes precedence over the GST authorities’ charge, and the Bank is entitled to have the GST encumbrance removed to enable auction of the property, with any surplus to be appropriated towards GST dues.

Disposition

Writ petition allowed. Writ of mandamus issued directing Respondents No. 1 to 3 to remove the GST encumbrance/charge over Apartment No. A-502 within 15 days; Bank entitled to proceed with auction; surplus, if any, to be appropriated towards GST dues.

Source: Canara Bank v. State of Karnataka and Ors., (2025) taxcode.in 708 HC