Excise, Revenue And Other Departments Will Not Have Priority Over Secured Creditors: Himachal Pradesh High Court

The Himachal Pradesh High Court has held that departments of the state, including excise and revenue, will not have priority over the secured creditors' debt.

The bench of Justice Tarlok Singh Chauhan and Justice Satyen Vaidya has observed that the dues of the secured creditor, i.e., the appellant bank, will have priority over the dues of the Central Excise Department, as even after the insertion of Section 11E in the Central Excise Act, 1944, w.e.f. April 8, 2011, and the provisions contained in the SARFAESI Act, 2002, will have an overriding effect on the provisions of the Central Excise Act.

The issue raised was whether the different departments of the state, including excise and revenue, would have priority over the secured creditors' debt.

Arvind Casting Pvt. Ltd. had availed various financial assistance and loan facilities from the petitioner bank, SB. Thereafter, in February 2013, the unit mortgaged its property with the petitioner bank.

After the mortgage of the property, the lien of the petitioner-bank as per Section 26 D was entered in the Central Registry of Securitization Asset Reconstruction and Security Interest of India (CERSAI), dated March 6, 2013.

Shortly, in the year 2014, the loan account of the unit came to be classified as non-performing assets (NPA), and consequently, recovery proceedings under the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest 2002 (SARFAESI Act) came to be initiated against it.

The notices under Sections 13(2) and 13(4) of the SARFAESI Act were issued to the unit. The District Magistrate granted assistance to the bank under Section 14 of the SARFAESI Act, paving the way to take physical possession of the secured assets of the unit, which was then taken over on July 17, 2015.

Just about a week prior, the Excise and Taxation Department entered a Rapat No. 459, dated July 9, 2015, in the revenue documents over the secured assets of the petitioner bank. To a similar effect, Rapat No. 173, dated February 5, 2018, was entered by the Income Tax Department. The petitioner-bank requested the respondents remove a lien over the secured assets of the petitioner-bank, but despite repeated requests, the lien was not removed, constraining the petitioner to file the petition.

The department contended that it has first charge over the property by operation of law as provided under Section 26 of the HPVAT Act, whereas the petitioner-bank is denying the claim on the property by virtue of a mortgage. The charge is wider than a mortgage inasmuch as Section 100 of the Transfer of Property Act deals with charges on an immovable property, which can be created by either of the parties or by operation of law over the property. Therefore, when the first charge is created by operation of law over a property, the charge will have precedence over an existing mortgage as the charge operates on the entire property.

The court has held that once the petitioner is a secured creditor and has moreover created the first charge over the property, then obviously it has the first right to realize its dues.

The court, while allowing the petition, directed the respondents to remove the red entry for the property in question made in the revenue record, i.e., Rapat No. 459, dated July 9, 2015, and Rapat No. 173, dated February 5, 2018.

Counsel For Petitioner: Arvind Sharma

Counsel For Respondent: I. N. Mehta

Case Title: State Bank of India Versus State of H. P. & Ors.

Citation: 2024 LiveLaw (HP) 4

Case No.: CWP No. 8502 of 2023

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