Secured Creditors Prevail Over Tax Dues Under Section 31B

Case Details: OXYZO Financial Services Ltd. vs. Assistant Commissioner of Goods and Services Tax -[2026] 185 taxmann.com 315 (Madras)

Judiciary and Counsel Details

D. Bharatha Chakravarthy, J.
S. Sakthi Siddharth for the Petitioner.
R. Suresh Kumar, Addl. Govt. Pleader for the Respondent.

Facts of the Case

In the instant case, the petitioner, a secured creditor, submitted that the borrower had created a mortgage over the subject property and that the account was being proceeded against under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). The particulars of the security interest were also duly registered with the Central Registry of Securitisation Asset Reconstruction and Security Interest (CERSAI) portal.

Subsequently, the first respondent, the Assistant Commissioner of Goods and Services Tax (GST), issued a communication creating a charge over the same property for recovery of tax dues amounting to about Rs. 136.06 crores, and the second respondent, the Sub-Registrar, recorded the said charge in the encumbrance register.

The petitioner contended that, by virtue of Section 31B of the SARFAESI Act, it had priority over the secured asset and, therefore, the charge created by the GST authorities ought not to affect its rights. The petitioner filed the present writ petition before the High Court challenging the said communication and consequential entry, and seeking removal of the charge.

High Court Held

The High Court observed that, by virtue of Section 31B, a secured creditor has priority over the secured asset, even over tax dues of Government authorities. A secured creditor can enforce the security and bring the property to sale notwithstanding the charge created by the tax authorities and the entry made by the Sub-Registrar. However, the tax authorities are not precluded from creating or recording a charge in the encumbrance register. Upon auction sale, any surplus amount is liable to be appropriated towards tax dues, and the auction purchaser acquires the property free from such charge.

The High Court held that the charge could not be quashed at the initial stage. The authorities may claim from the surplus, if any, and the secured creditor or auction purchaser may seek appropriate endorsement from the Sub-Registrar.