The Calcutta High Court in the case of CFM ASSET RECONSTRUCTION PVT. LTD. & ORS. vs. ASSISTANT COMMISSIONER CGST AND C. EX. & ORS. Vide WPA 3564 of 2025 with WPA 26115 of 2024 dated 02.07.2025, upheld the overriding priority of secured creditors under SARFAESI over government claims under CGST. Despite CGST authorities attaching the property for tax dues, the secured asset must be returned to the ARC, enabling them to enforce their security under the SARFAESI framework. The Court held that although possession was not yet taken under SARFAESI, the secured creditor’s right under Section 26E of the SARFAESI Act—a non obstante provision granting priority of secured creditors over other dues, including statutory dues—must prevail.

Facts of the Case: In this case, the petitioner CFM Asset Reconstruction Pvt. Ltd. (CFM ARC), was an assignee of debts from Bank of India and Indian Bank. The principal borrower took loans from Bank of India and Indian Bank and mortgaged its immovable property as security. Due to default in repayment, the loan account was classified as a Non-Performing Asset (NPA). The secured creditor i.e. CFM ARC acquired the financial assets via assignment in 2021. Security interest was registered with CERSAI and action under Section 13(2) of SARFAESI Act was initiated.

The CGST department attached the mortgaged property under Section 79(1)(d) of the CGST Act, claiming it to be part of recovery proceedings for tax dues of the borrower. As a result, the secured creditor was prevented from taking possession of the property under the SARFAESI route.

Issue: Whether the CGST authorities were justified in attaching a secured asset under Section 79(1)(d) of the CGST Act, despite the existence of prior security interest under Section 26E of the SARFAESI Act, 2002?

Held that: The Court stated that secured creditor’s right under Section 26E of the SARFAESI Act prevails over the CGST authorities’ claim for statutory dues, even if the creditor had not taken possession of the asset before the CGST attachment.

The Court relied heavily on the Supreme Court’s ruling in Kotak Mahindra Bank Ltd. v. Girnar Corrugators Pvt. Ltd. reported in (2023) 3 SCC 2010, which upheld the overriding effect of Section 26E due to its non obstante clause.

Since the secured creditor had not taken possession, the Court found no procedural infirmity in CGST’s interim action of attaching the asset. However, such right is subordinate to the creditor’s rights under SARFAESI.

The CGST’s attachment was held not irregular, but considering the priority of rights of secured creditors, the CGST authorities were directed to hand over possession of the property to the secured creditor within a week. The secured creditor must prepare an inventory of the asset in the presence of the principal borrower and may enforce its rights under SARFAESI. The CGST Department’s right to recover tax dues remains, but is subject to the secured creditor’s priority rights.

To read the complete judgment 2025 Taxo.online 1500