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Sarfaesi overrides all laws: Banks’ dues priority over state taxes, says Supreme Court

Setting aside the Allahabad High Court judgment in favour of the department, the SC said that the contention of the department that a confiscation order cannot be quashed merely because a security interest is created in respect of the very same property is “not worthy of acceptance”.

While settling the law, a Bench comprising Justices L Nageshwara Rao and Vineet Saran accepted the stand of the consortium of banks led by Punjab National Bank that Section 35 of the Sarfaesi Act, 2002, provides that its provisions will have overriding effect on all other laws.
While settling the law, a Bench comprising Justices L Nageshwara Rao and Vineet Saran accepted the stand of the consortium of banks led by Punjab National Bank that Section 35 of the Sarfaesi Act, 2002, provides that its provisions will have overriding effect on all other laws.

In a judgment that will cheer lenders, the Supreme Court on Thursday held that the dues to secured creditors (banks) will have priority over the central or state dues like excise and tax dues. While settling the law, a Bench comprising Justices L Nageshwara Rao and Vineet Saran accepted the stand of the consortium of banks led by Punjab National Bank that Section 35 of the Sarfaesi Act, 2002, provides that its provisions will have overriding effect on all other laws.

While noting that even the provisions in Section 11E of the Central Excise Act, 1944, are subject to the provisions contained in the 2002 Act, the apex court said that the dues of the secured creditor, i.e. the banks, will have priority over the dues of the central excise department, as even after insertion of Section 11E in the Central Excise Act, the provisions contained in the Sarfaesi Act will have an overriding effect on the provisions of the excise law.

“Evidently, prior to insertion of Section 11E in the 1944 Act w.e.f. April 8, 2011, there was no provision providing for first charge on the property of the assessee or any person under the Act of 1944. Therefore,… where the land, building, plant machinery, etc. have been mortgaged/hypothecated to a secured creditor, having regard to the provisions contained in section 2(zc) to (zf) of Sarfaesi Act, 2002, read with provisions contained in Section 13 of the 2002 Act, the secured creditor will have a first charge on the secured assets,” the apex court said.

Setting aside the Allahabad High Court judgment in favour of the department, the SC said that the contention of the department that a confiscation order cannot be quashed merely because a security interest is created in respect of the very same property is “not worthy of acceptance”.

In this case, the commissioner, Customs and Central Excise, Ghaziabad, had confirmed an excise duty demand of around Rs 15 crore, including interest and penalty, against Rathi Ispat and also confiscated its land, building, plant and machinery for evasion of excise duty. As Rathi Ispat had defaulted in clearing its 2005 loan dues, the consortium of banks led by PNB had issued notice to the company under section 13(2) of the Sarfaesi Act as to why its all mortgaged/hypothecated movable and immovable properties should not to attached and auctioned for recovery of their dues. However, the excise department had asked the asseee not to deal with the confiscated properties, this was challenged by the bank in the HC.

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