Karnataka High Court Upholds Canara Bank's Priority Over GST Authorities in Charge Dispute
Court Directs Removal of GST Encumbrance on Property, Affirms Bank's Right to Auction for Debt Recovery
In a significant ruling, the Karnataka High Court, Dharwad Bench, has upheld the priority of a secured creditor's charge under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) over claims by the Goods and Services Tax (GST) authorities under the Goods and Services Tax Act, 2017. The judgment, delivered by Justice Suraj Govindaraj on September 23, 2025, comes in response to a writ petition filed by Canara Bank against the State of Karnataka and others, concerning a disputed residential flat in Belagavi.
The case, Writ Petition No. 103730 of 2025, revolved around the precedence of charges created under the SARFAESI Act and the GST Act. The crux of the matter was whether the charge created by Canara Bank in 2017 would prevail over a subsequent charge by the GST authorities in 2019 for unpaid taxes by respondents who had availed a mortgage loan from the bank.
The High Court meticulously analyzed the statutory provisions of both the SARFAESI Act and the GST Act. Under Section 26-E of the SARFAESI Act, the court noted that a secured creditor's charge takes precedence over other debts, including government dues. The GST Act's Section 82, however, states that tax dues shall be the first charge on the property, except in cases covered by the Insolvency and Bankruptcy Code, 2016.
Justice Govindaraj observed that the GST authorities' claim became enforceable only after an assessment order and subsequent entry in the public record, which occurred in 2019. In contrast, Canara Bank's charge was created and recorded in 2017, giving it precedence. The court emphasized that the timing of charge creation is crucial in determining priority.
The court referenced several judgments, including those from the Madras and Telangana High Courts, which supported the precedence of secured creditors under the SARFAESI Act over other statutory claims, including taxes, unless governed by specific provisions of the Insolvency and Bankruptcy Code, 2016.
In conclusion, the Karnataka High Court ruled in favor of Canara Bank, issuing a writ of mandamus to direct the removal of the GST authorities' charge on the disputed property. The decision underscores the legal precedent that secured creditors under the SARFAESI Act have priority over subsequent government tax claims unless otherwise specified by the IBC.
This decision reaffirms the legal standing of secured creditors, particularly banks, in recovering dues, thereby providing clarity amidst conflicting claims from governmental tax authorities.
Bottom Line:
SARFAESI Act - Priority of secured creditor's charge over claims of GST authorities under Section 82 of the GST Act depends on the timeline of creation of charges. Earlier charge in time prevails.
Statutory provision(s): Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 Section 26-E, Goods and Services Tax Act, 2017 Section 82.
Canara Bank v. State of Karnataka, (Karnataka)(Dharwad Bench) : Law Finder Doc Id # 2789124
