Prior Charge Rule: Karnataka HC Resolves Conflict Between GST Act and SARFAESI Act

Prior Charge Rule: Karnataka HC Resolves Conflict Between GST Act and SARFAESI Act

• Date of Charge Creation is Decisive

  The Karnataka High Court ruled that in a conflict over priority of claims on a mortgaged property between the Goods and Services Tax (GST) Act and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, the priority must be determined by the order in which the charges were created. The charge created earlier in time will prevail.

• GST Act Does Not Always Supersede

  The court rejected the Commercial Tax Department’s argument that the GST Act, being a later enactment than the SARFAESI Act, should automatically prevail in all circumstances. It clarified that a GST claim is not directly enforceable until a proper assessment is made and an entry is made on public records (like an encumbrance certificate), making the date of entry the decisive factor for the tax charge.

• Ruling in Favor of the Bank

  In the specific case involving Canara Bank, the court noted that the bank’s charge (mortgage) was created in 2017, whereas the department’s charge for GST dues was created over the same property in 2019. The court directed the department to remove its encumbrance and permitted the bank to auction the property to recover its dues. Any surplus amount remaining after the bank’s recovery must be deposited with the department for adjustment towards the GST dues.