The Karnataka High Court has delivered a significant judgment, establishing a clear principle for resolving conflicts between the Goods and Services Tax (GST) Act and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. The court ruled that the priority of a financial charge on a property will be determined by the chronological order in which that charge was originally established.
Specifically, the court clarified that if a charge under the GST Act was created before a charge under the SARFAESI Act, then the GST Act’s claim would take precedence. Conversely, if the SARFAESI Act charge was established first, it would hold priority. This ruling provides much-needed legal direction for situations where competing claims exist on the same asset under these two distinct legislative frameworks.
This crucial decision came as Justice Suraj Govindaraj presided over a petition brought forth by Canara Bank. The bank had contested an encumbrance placed on an immovable property by the State Commercial Tax Department, which had sought to recover outstanding GST dues. The property in question had already been mortgaged to Canara Bank prior to the department’s claim.
The court specifically rejected the Commercial Tax Department’s argument, which contended that only claims under the Insolvency and Bankruptcy Code (IBC) could supersede those under the GST Act. The department had also argued that, given the GST Act’s more recent enactment compared to the SARFAESI Act, GST claims should inherently take precedence in all charging scenarios. This interpretation was not accepted by the High Court.
Emphasizing the importance of documented legal processes, the court highlighted that a GST Act claim isn’t directly enforceable until tax authorities complete a formal assessment and record the charge on public documents, such as an encumbrance certificate or property card. Therefore, the critical element for determining priority remains the verifiable date of the charge’s creation, rather than the Act’s enactment date.
In line with this principle, the court reiterated that if a charge under the SARFAESI Act was established prior to a GST Act charge, the SARFAESI claim would undeniably take precedence. Citing the specific case, the court noted that Canara Bank’s charge was created in 2017, whereas the Commercial Tax Department’s charge on the same property was only established in 2019, clearly placing the bank’s claim earlier.
Consequently, the court ordered the Commercial Tax Department to remove the encumbrance it had placed on the property. The ruling further authorized Canara Bank to proceed with auctioning the property to recover its outstanding dues. Any remaining surplus funds from the auction, after the bank’s claims are satisfied, are to be deposited with the Commercial Tax Department for the settlement of the GST dues.