T.Selvaraj vs. The Sub Registrar

Facts

The petitioners purchased property through sale deeds dated 03.05.2010, registered with the first respondent. They discovered an encumbrance entry dated 07.03.2007, made at the instance of the second respondent (Commercial Tax Officer), due to alleged sales tax arrears of the previous owner (fifth respondent). The property was mortgaged to the third respondent Bank in 1994, and possession was taken under the SARFAESI Act on 09.02.2007, prior to the tax department's attachment. The petitioners sought a writ of mandamus to delete this encumbrance, arguing the Bank's prior security interest should prevail over the subsequent tax attachment. The property was subsequently auctioned by the Bank and purchased by the petitioners.

Held

The Court held that the third respondent Bank, as a secured creditor, had priority over the sales tax attachment order. The mortgage was created in 1994, and possession was taken under the SARFAESI Act on 09.02.2007. The sales tax attachment order was made on 07.03.2007, which is subsequent to both the mortgage and the taking of possession. The Court relied on Section 31-B of the SARFAESI Act, which clearly states that the rights of secured creditors shall have priority over all other debts and Government dues, including taxes. The Court also noted that the Full Bench judgment cited by the petitioner, though under challenge before the Supreme Court, had not resulted in any interim order, and that other Division Bench judgments supporting the petitioner's claim had not been reversed. Therefore, the Court found that the Bank's prior security interest prevailed, and the attachment order by the second respondent had no binding effect on the auction purchaser (the petitioner). The Court directed the first respondent to delete the encumbrance entry.

Key Issues

1. Whether the prior mortgage created in favour of the third respondent Bank in 1994, and possession taken under the SARFAESI Act on 09.02.2007, grants the Bank priority over the sales tax attachment order dated 07.03.2007, made by the second respondent. Petitioner's arguments: The petitioners contended that the Bank, as a secured creditor, has priority because its security interest was created much earlier than the tax department's attachment. They relied on Section 31-B of the SARFAESI Act, which grants priority to secured creditors over government dues, and cited High Court judgments in Assistant Commissioner (CT) vs. Indian Overseas Bank and M. Nagarajan vs. Deputy Commercial Tax Officer, which affirmed this principle. They argued that the tax department's claim should subserve the secured creditor's claim. Revenue's arguments: The second respondent argued that Section 24(2) of the Tamil Nadu General Sales Tax Act, 1959, gives statutory rules of the State Government priority over other private parties. They also contended that a Full Bench judgment relied upon by the petitioner was under challenge before the Supreme Court and had not attained finality. Furthermore, they pointed out that the sale certificate issued to the petitioner mentioned the attachment order, implying the petitioner was not a bonafide purchaser without knowledge.