Earlier SARFAESI Charge Created Before GST Charge Takes Precedence Over Subsequent Encumbrance: Karnataka High Court
Isabella Mariam
The High Court of Karnataka at Dharwad, Single Bench of Justice Suraj Govindaraj held that when both the SARFAESI Act and the GST Act are invoked over the same property, the priority of charge must depend on which was created first. The Court ruled that a SARFAESI charge established earlier in time will prevail over a subsequent GST charge, whereas a prior GST charge would take precedence if created earlier. Allowing a writ petition filed by a nationalised bank, the Court directed the State tax authorities to remove the GST encumbrance on the mortgaged property, recognising the bank’s earlier security interest as having superior priority under law.
The petitioner, a nationalised bank, approached the High Court seeking a writ of mandamus directing the State tax authorities to remove the encumbrance created over a residential flat mortgaged to it. The flat, located in Belagavi, had been offered as security by two borrowers for a loan advanced to their partnership firm. The account was later classified as a non-performing asset, and the bank initiated recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). A notice under Section 13(2) was issued in November 2022, followed by a possession notice under Section 13(4) in May 2024. Physical possession of the property was taken in September 2024.
Subsequently, the bank discovered that the borrowers had outstanding dues towards the Commercial Taxes Department under the Goods and Services Tax (GST) regime, amounting to over ₹1.38 crore. The Department had recovered part of this amount by selling certain assets and had created a charge on the mortgaged apartment, which was entered in the property records. The bank asserted that its security interest, registered in 2017, had priority over the GST encumbrance recorded in 2019. It relied on Section 26E of the SARFAESI Act, claiming a first and exclusive charge on the secured asset.
The State authorities contended that Section 82 of the GST Act granted precedence to tax dues over other claims, except those arising under the Insolvency and Bankruptcy Code, 2016. They argued that being a later Central enactment, the GST Act would override earlier laws, including the SARFAESI Act. Both sides referred to judicial precedents supporting their respective interpretations, including decisions of the Supreme Court and various High Courts. The statutory provisions examined by the Court included Section 26E of the SARFAESI Act, Section 34 of the Recovery of Debts and Bankruptcy Act, Section 53 of the Insolvency and Bankruptcy Code, and Section 82 of the GST Act.
The Court stated that “Section 26-E of the SARFAESI Act provides that, notwithstanding anything contained in any other law for the time being in force, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses, and other rates payable to the Central Government or State Government or local authority.”
It recorded: “The issue arises when two or more of these enactments are invoked concerning the same property or security. In such cases, it becomes necessary to determine the priority of charges and the order of recovery under the conflicting enactments.”
Addressing the State’s reliance on Section 82 of the GST Act, the Court observed that while the GST Act gives precedence to government claims, “the GST Act provides for an overriding effect only except as otherwise provided in the Insolvency and Bankruptcy Code, 2016, whereas the SARFAESI Act, by virtue of Section 26-E, gives precedence to the secured creditor over all other debts.” The Court found that the legislative intent of Section 26-E was to ensure that secured creditors have a first charge over secured assets, even against government dues.
Referring to previous judicial precedents, the Court relied on the Karnataka High Court Division Bench decision in Sri Abdul Khader v. Sadath Ali Siddiqui, observing that “the secured creditor has precedence over all other charges.” The judgment cited that under Section 26-E, priority in payment has been statutorily created in favour of the secured creditor, including over taxes payable to the government.
The Court also referred to the Telangana High Court’s decision in State Bank of India v. Deputy Commercial Tax Officer and the Madras High Court’s judgement in Indian Bank v. The Commercial Tax Officer, Ambattur Assessment Circle, both holding that a secured creditor’s claim under SARFAESI prevails over government tax claims when the security interest was created prior to the tax liability.
Justice Govindaraj observed: “The principle to be applied is that if the charge under the SARFAESI Act was created prior in time to the charge under the GST Act, the charge under the SARFAESI Act would prevail, and vice versa.”
Applying this principle, the Court noted that the bank’s mortgage and corresponding charge were created and recorded in 2017, while the GST authority’s charge arose from an order passed on April 16, 2019, and recorded on November 6, 2019. Thus, the Court held: “In the present case, the Bank’s charge takes precedence over that of the GST authorities.”
Justice Govindaraj stated: “Writ petition is allowed. A writ of mandamus is issued directing Respondent Nos. 1 to 3 to remove the encumbrance or charge created over Apartment No. A-502, situated on the 5th Floor, A-Wing, Sky Park Complex, Godsewadi, Belagavi, within a period of 15 days from the date of receipt of a certified copy of this order.”
“Upon removal of the said charge, the petitioner-Bank shall be entitled to proceed with bringing the said property to auction in accordance with law. Upon completion of the auction, if any surplus amount remains after full adjustment of the dues recoverable by the petitioner-Bank, such surplus shall be deposited with Respondent No. 2, to be appropriated towards the dues payable to the GST authorities in accordance with law.”
Advocates Representing the Parties
For the Petitioner: Sri. Santosh Kumar B. Malligwad and Sri. B. Dinkar Shetty, Advocates
For the Respondents: Sri. Sharad V. Magadum, Additional Government Advocate
Case Title: The Canara Bank v. The State of Karnataka & Ors.
Neutral Citation: 2025: KHC-D:12959
Case Number: Writ Petition No. 103730 of 2025 (GM-RES)
Bench: Justice Suraj Govindaraj
