Statutory First Charge for Tax Arrears Prevails Over Priority Payment Rights Under Section 26E of SARFAESI Act

The debtor company, M/s BPL Engineering Limited (BPL), mortgaged 42.99 acres of land in Telangana to an IDBI-led consortium in 1997-1998.

In 2001, the account became an NPA, and debt was assigned to SASF in 2004.

Meanwhile, the Commercial Tax Department (CTD) issued attachment orders in 2007 and 2011 for tax arrears arising from 1995-1996.

BPL was ordered to be wound up in 2012.

SASF registered its security interest with CERSAI only on 05.05.2021.

Omkara sought to recall the tax attachments, claiming priority under Section 26E of the SARFAESI Act, while the CTD sought to sell the property via its statutory first charge.

Section 26E and 26C of the SARFAESI Act regarding priority of secured creditors.

Sections 16(4) and 16C of the Andhra Pradesh General Sales Tax (APGST) Act, which create a statutory first charge on a dealer's property for tax arrears.

The Supreme Court precedent in Jalgaon District Central Co-operative Bank Ltd. v. State of Maharashtra, which established that a non-obstante clause conferring mere "priority" cannot override a "statutory first charge" created independently.

The precedent in Punjab and Sind Bank v. State of Punjab regarding the prospective nature of Section 26E.

Section 9(2) of the CST Act was applied to incorporate State recovery mechanisms into central tax collection.

The court reasoned that while Section 26E of the SARFAESI Act grants "priority" in payment to secured creditors, it does not statutorily create a "first charge".

Conversely, the APGST/APVAT Acts expressly create a first charge for tax dues.

Following the Jalgaon District precedent, the court held that a mere priority cannot eclipse a pre-existing statutory first charge created dehors a non-obstante clause.

Regarding retroactivity, the court noted that since the secured creditor registered the interest with CERSAI only in 2021—long after the State's 2007/2011 attachments—the prospective nature of Section 26E prevents it from overriding the State's vested recovery rights.

The court interpreted Section 9(2) of the CST Act as a provision of "incorporation by reference," meaning the statutory first charge powers found in State laws are fully available to the CTD for recovering Central Sales Tax dues.

The court confirmed that this first charge extends to CST Act dues.

The court dismissed Omkara’s application to recall the tax attachments, recalled its previous order allowing Omkara to sell the property, and permitted the CTD to sell the property, directing the proceeds to be deposited with the Official Liquidator.