Bank debt gets priority over state taxes in Sc ruling

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Bringing courage to the banks, the Supreme Court said on Thursday that lenders will take priority over the Center and the state on assessments, including excise duties and taxes.

Settling the law, a bench consisting of Justices L Nageswara Rao and Vineet Saran said the Sarfaesi Act 2020 will have an overriding effect on the provisions of the Central Excise Act.

A consortium of banks led by the Punjab National Bank had appealed to the highest court against a ruling by the Allahabad High Court in favor of the excise department.

In the case under investigation, the Central Customs and Excise Commissions in Ghaziabad had upheld an excise duty claim of Rs 15 crore from Rathi Ispat including interest and penalties. The department had confiscated land, buildings, plant and machinery from the company for evading excise duties.

Meanwhile, a consortium of banks led by PNB had issued a notice to Rathi Ispat for defaulting on the 2005 loans. Citing article 13(2) of the Sarfaesi law, the banks asked the company why its properties mortgaged or hypothecated should not be seized and auctioned off for duty recovery. The excise department, however, intervened and asked the assessee not to deal with the confiscated goods.

The consortium of banks challenged this decision in the High Court. However, the writ petition filed by the bank was rejected by the Allahabad High Court, following which the banks appealed to the Supreme Court.

The Supreme Court ruling upheld the banks’ assertion that the provisions of Section 35 of the Sarfaesi Act 2002 have overriding effect over all other laws, including Section 11E of the Central Excise Act of 1944. It stated that the secured creditor or bank will have the first charge on the secured assets, thus giving priority to the debts of the banks over the assessments of the central excise service.

The SC also said the Excise Department’s assertion that a forfeiture order cannot be reversed because a security interest is attached to the same property is “not worthy of acceptance”.

(Edited by : Thomas Abraham)

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