Priority Is Not Purity: Madras High Court Holds a SARFAESI Auction Purchaser Must Clear a Known Excise Attachment Before the Encumbrance Entry Is Removed

Quick answer: In Indian Overseas Bank v. The Assistant Commissioner of Central Excise and Service Tax, Salem I Division (2026:MHC:4031), decided on 30 September 2026 (reserved on 25 September 2026), a Division Bench of the Madras High Court (Abdul Quddhose and R. Rajesh Vivekananthan, JJ.) dismissed a bank’s writ appeal. The bank had auctioned a mortgaged property under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (“SARFAESI Act”), disclosing a Central Excise attachment of 3 December 2014 as a known encumbrance, and then sought a mandamus to the Sub-Registrar to delete that entry from the encumbrance certificate. The Court held that Rule 9(6) to (10) of the Security Interest (Enforcement) Rules, 2002 is mandatory, that the auction purchaser must first deposit the dues of known encumbrances, and that the secured creditor’s undoubted priority over Central, State and local government dues does not displace those rules. It also held that a departmental attachment is an “encumbrance” and that the bank was not functus officio.

Key Takeaways

• Priority and clearance are different questions. The Court accepted that registered secured creditors rank ahead of government dues, but held that this does not authorise deletion of a disclosed encumbrance without compliance with Rule 9(7) (¶¶29, 32).
• A disclosed excise attachment binds the sale. Where the sale notice and the sale certificate list the departmental attachment as a known encumbrance, the purchaser who bid “with eyes wide open” cannot later seek its removal without paying the dues (¶¶22–24).
• An attachment is an encumbrance. Relying on Section 100 of the Transfer of Property Act, 1882, the Court rejected the argument that attachment and encumbrance are different things (¶37).
• The bank was not functus officio. Because its recovery proceedings before the Debts Recovery Tribunal were pending, the bank could still maintain the writ (¶¶35–36).
• The ancillary priority questions were left academic. The prospectivity of Section 26E of the SARFAESI Act, CERSAI registration and the first charge under Section 82 of the Central Goods and Services Tax Act, 2017 were argued but not decided (¶¶28, 32).
• The ruling concerns legacy excise dues. The attachment was under Section 11E of the Central Excise Act, 1944; the judgment does not decide how GST dues rank.

1. Introduction

Banks enforcing security under the SARFAESI Act routinely find that the property they are selling already carries a departmental attachment for unpaid indirect tax. The bank’s usual position is that its statutory priority wipes the slate clean, so the purchaser should receive the property free of the departmental claim and the Sub-Registrar should delete the entry. The department’s position is that an attachment disclosed in the sale papers is part of the bargain.

On 30 September 2026 the Madras High Court sided with the department on the narrow question before it. The Division Bench held that the bank could not compel the registration department to delete an excise attachment from the encumbrance certificate where the sale notice and sale certificate had themselves disclosed it, and where the purchaser had not deposited the amount needed to discharge it under Rule 9(7) of the Security Interest (Enforcement) Rules, 2002 (the “SARFAESI Rules”).

The judgment matters for three reasons. First, it addresses the mechanics of the sale rather than the abstract ranking of debts, and so affects how banks draft sale notices and how bidders price encumbered lots. Second, it confronts the argument that Section 26E of the SARFAESI Act, Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 (“RDB Act”), Section 142A of the Customs Act, 1962 and Section 11E of the Central Excise Act, 1944 together make the department’s attachment irrelevant at the point of sale. Third, it sits in the legacy indirect tax regimes, where recovery disputes with secured lenders continue to surface years after the underlying demands arose.

This article sets out the facts, analyses the questions the Court answered and the limits of its reasoning, and then considers what the decision means for lenders, bidders and tax authorities. It is a recovery and priority decision; it does not construe the charging provisions of any indirect tax statute.

2. Case Summary and Background

The parties. The appellant was Indian Overseas Bank, Asset Recovery Management Branch, acting through its Chief Manager. The first respondent was the Assistant Commissioner of Central Excise and Service Tax, Salem I Division. The second respondent, Hi-Tech Minerals Industries Covai Pvt. Ltd., was the borrower and was in liquidation, represented by its official liquidator. The third respondent was the Sub-Registrar, Omalur, Salem District. The fourth respondent, SKM Animal Feeds and Foods India Private Limited, was the auction purchaser; it was impleaded on 17 April 2024 and supported the bank.

The attachment and the sale. The Central Excise department attached the borrower’s property on 3 December 2014, and the attachment was reflected in the encumbrance certificate maintained by the Sub-Registrar. The department’s counsel placed the bank’s mortgage in 2007 and the attachment under Section 11E of the Central Excise Act, 1944; the bank’s counsel stated that the attachment came after the mortgage and after SARFAESI proceedings had begun (¶¶5, 7). The quantum of the excise dues is not stated in the judgment.

The bank brought the property to auction by a sale notice of 9 March 2022, according to the purchaser’s counsel; the same submissions place confirmation of sale on 4 April 2022 and the sale certificate on 23 June 2022 (¶6). It is undisputed that the sale notice and the sale certificate disclosed the known encumbrances, including the one in favour of the department. The conditions of sale provided for sale on an “as is where is”, “as is what is” and “whatever there is” basis, with the purchaser to clear statutory liabilities and make its own enquiries (¶8). Neither the bank nor the purchaser paid the departmental dues reflected in the encumbrance certificate (¶8).

The writ and the Single Judge. The bank filed W.P. No. 15014 of 2022 seeking a mandamus directing the department to remove the attachment so that the sale certificate could be registered in the purchaser’s favour. By order dated 5 September 2023 the Single Judge dismissed it. Its reasons included that a purchaser aware of an encumbrance must discharge it, that entries could be removed only after the attachment was lifted, and that the writ was premature (¶4). The bank appealed.

The issues. The Division Bench framed one primary and several ancillary questions (¶¶1–2):

1. Where the sale certificate discloses known encumbrances, can the bank require the registration department to remove them from the encumbrance certificate without settling the dues payable under them?
2. Is the bank functus officio after issuing and registering the sale certificate, so that the writ is not maintainable?
3. Do Section 26E of the SARFAESI Act, Section 31B of the RDB Act and Section 35 of the SARFAESI Act give secured creditors priority over government dues?
4. Is the first charge under Section 11E of the repealed Central Excise Act, said to be pari materia with Section 142A of the Customs Act, subject to the secured creditor’s priority?
5. Is the Single Judge’s order contrary to four decisions cited by the bank (listed under Authorities below)?

The holding. The appeal was dismissed. On the primary issue the Court held that the direction sought “would tantamount to violation of the mandatory statutory procedure” in Rule 9(6) to (10) of the SARFAESI Rules (¶28). It held that the department’s attachment was an encumbrance (¶37), that the bank was not functus officio (¶¶35–36), and that there was no estoppel against law operating against the department (¶27). The Court recorded that the ancillary priority questions had become “purely of academic interest” but gave its views on them for future use (¶28).

3. Legal Analysis

3.1 The sale scheme in Rule 9

The Court’s reasoning begins with the architecture of the sale rather than the ranking of debts. It describes the sale notice and sale certificate under Appendices IV-A and V of the SARFAESI Rules as resting on “the principle of caveat venditor (let the seller beware), which is opposite to caveat emptor (buyer beware)” (¶10). The bank must ascertain, disclose and, where the rules require, clear known encumbrances; the purchaser, for its part, must be vigilant about what it is buying (¶10).

Rule 9(7) provides that where the property sold is subject to encumbrances, the authorised officer “may, if he thinks fit, allow the purchaser to deposit with him the money required to discharge the encumbrances and any interest due thereon”, together with a sum for contingencies. Rule 9(8) deals with notices to persons entitled to the deposit. Rule 9(9) requires the authorised officer to deliver the property “free from encumbrances known to the secured creditor on deposit of money as specified in sub-rule (7)”. Rule 9(10) requires the sale certificate to state whether the purchaser bought the property free of known encumbrances (¶13).

From this the Court drew a sequence: the secured creditor must first satisfy Rule 9(6) to (10), and only then can it seek removal of the entries after the encumbrances are settled (¶22). Granting the mandamus without that deposit “will indirectly amount to setting aside the disclosures made in the sale notice as well as the sale certificate” (¶23). The Court’s most pointed sentence is that what the bank and purchaser “could not have legally achieved directly, namely to sell the property free of encumbrances, they are attempting to carefully achieve the said objective by filing the writ petition and this writ appeal which is not legally permissible” (¶23).

3.2 Priority is conceded, then set aside as irrelevant

The bank and the purchaser rested on priority: Section 26E and Section 35 of the SARFAESI Act, Section 31B of the RDB Act, Section 11E of the Central Excise Act and Section 142A of the Customs Act (¶20). The Court did not dispute the proposition. It accepted that “the registered secured creditors have priority over Central, State and local government dues, including taxes and revenues” (¶29), and that the four decisions relied on by the bank and the purchaser show that the bank’s dues rank ahead of the department’s (¶25).

But the Court treated priority as answering a different question. Those provisions, it said, “grant priority to the secured creditors over government dues, taxes, cesses and other statutory claims”, yet “they do not stipulate that the registration department will have to remove the known encumbrances” reflected in the sale papers (¶21). Section 26E says the secured creditor’s debt must be paid in priority; it does not say that “the mandatory rules namely, Rules 9(6) to 9(10)” need not be followed (¶29). The Court concluded that these provisions “have no bearing for the facts of the instant case” because the Rule 9(7) deposit had not been made (¶32), and that they cannot be read “in isolation” from Rule 9 (¶33).

Paragraph 25 acknowledges the four decisions as establishing the ranking, but the judgment does not analyse them; they are accepted background.

3.3 Is an attachment an encumbrance?

The purchaser argued that an attachment under Section 11E is not an encumbrance in the SARFAESI sense, so that Rule 9 was never engaged and the department’s only recourse was the sale proceeds. The department answered that the two are the same, citing Section 100 of the Transfer of Property Act, 1882.

The Court agreed with the department. An encumbrance, it said, places a burden on the property “by operation of law or a court order” that prevents the owner from selling, transferring or creating further charges, and it appears on the encumbrance certificate to give public notice that title is restricted. The attachment did exactly that, and by Section 100 of the Transfer of Property Act the right of alienation was restricted. It therefore satisfied “the ingredients required for treating the said attachment as an encumbrance” (¶37). The purchaser, having bought knowing of the attachment, could not escape liability for the department’s dues under Rule 9(7) (¶37).

3.4 Functus officio, estoppel and maintainability

The department argued that after the sale certificate was issued and registered the bank had no further role, so the writ was incompetent. The Court rejected this. A bank becomes functus officio “only after the debt payable to the appellant/bank is fully recovered and the appellant’s/bank’s statutory right to hold or further enforce security against the remaining properties/assets of the borrower completely ceases” (¶35). Here the bank had not recovered its dues and its proceedings before the Debts Recovery Tribunal were pending (¶36).

The Court also rejected the plea of estoppel against law: the purchaser had not paid the dues, and only after discharging them could it take the property free of the department’s entry under Rule 9 (¶27).

3.5 What was argued but not decided

Several points were argued at length and then bypassed. The department contended that Section 26E of the SARFAESI Act is prospective, relying on Punjab & Sind Bank v. State of Punjab (2023) 15 SCR 903, that the mortgage dated from 2007 and the attachment from 2014, and that there was no proof of CERSAI registration (¶7). The purchaser relied on a decision of the Andhra Pradesh and Telangana High Court, reported as 2023 SCC OnLine TS 2302, for the proposition that Section 82 of the Central Goods and Services Tax Act, 2017 does not yield to Section 26E (¶6). The Court decided none of these. Because the primary issue went against the bank, it described the ancillary questions as academic (¶¶3, 28).

Two consequences follow. The general statements about priority in paragraphs 29 to 33 are not essential to the result and should not be quoted as a holding on the reach of Section 26E. And nothing here speaks to GST dues; the only tax regime in issue is Central Excise, with Section 142A of the Customs Act mentioned for comparison.

3.6 Critique

The decision’s strength is its fidelity to the text of Rule 9. Sub-rules (9) and (10) do tie delivery of the property free of encumbrances to the deposit under sub-rule (7), and the sale papers here disclosed the attachment. A court cannot readily order the Sub-Registrar to erase an entry that the seller itself told the buyer about.

Three points deserve scrutiny, however.

First, the Court describes Rule 9(6) to (10) as mandatory without engaging with the wording of Rule 9(7), under which the authorised officer “may, if he thinks fit” allow the deposit. That is language of discretion. The better reading may be that the mandatory element is disclosure and the correct certification under Rule 9(10), while the deposit mechanism is a facility. The result survives on the facts, because the purchaser knowingly bought subject to the attachment, but the broader statement that a deposit is required before any removal is wider than the text of sub-rule (7).

Second, there is a tension at the centre of the reasoning. If the bank’s dues rank ahead of the department’s, the department’s charge is, on the Court’s own account, subordinate. Requiring the purchaser to pay that subordinate claim as a condition of clean title can leave the department collecting from a purchaser what it could not have claimed from the sale proceeds ahead of the bank. The Court treats this as the result of disclosure and the purchaser’s informed choice, a coherent answer for an “as is where is” sale that leaves open what happens without such disclosure.

Third, the bank’s counsel and the purchaser’s counsel relied on Division Bench decisions of the same Court, among them Indian Bank v. CTO (W.P. No. 31572 of 2022), Kotak Mahindra Bank v. Sub Registrar (W.P. No. 30293 of 2023) and HDFC Bank Limited v. The Sub Registrar (W.P. (MD) No. 1855 of 2024), for the proposition that encumbrances can be removed by mandamus and that the purchaser is not liable for the dues (¶6). The judgment lists them but does not discuss or distinguish them. We have only counsel’s account of what those decisions hold, but the omission leaves no stated reason why they did not apply.

4. Practical Significance

For secured creditors. The decision is a warning about the sale notice. A bank that lists a departmental attachment among the known encumbrances, and sells on an “as is where is” basis, will find it hard to obtain deletion afterwards. If the bank’s strategy depends on delivering clear title on the strength of its statutory priority, it should seek release of, or a ruling on, the attachment before the auction, and should not rely on the priority provisions to secure deletion after the sale. The sale certificate must also say accurately, as Rule 9(10) requires, whether the property is sold free of known encumbrances.

For auction purchasers. Bidders should treat every disclosed encumbrance as a potential cost to them. The Court was explicit that ignorance of the Rule 9 requirements “will not excuse the auction purchaser from depositing the amount payable towards the dues of the known encumbrances” (¶10). Due diligence should include the encumbrance certificate, the sale notice and the Appendix V certificate, and the bid should reflect the cost of discharging any departmental claim. A purchaser cannot count on writ relief to shed the burden after the fact.

For tax authorities and recovery officers. An attachment recorded in the encumbrance certificate retains practical force at a SARFAESI sale where it is disclosed, even though the department ranks behind a registered secured creditor. The decision does not displace Section 26E, and the attachment’s usefulness depends on its being recorded and disclosed in the sale papers.

For indirect tax litigators. Three cautions apply. First, the attachment in issue was under Section 11E of the Central Excise Act, 1944, now repealed; the judgment does not address Section 82 of the Central Goods and Services Tax Act, 2017, which counsel invoked but the Court left aside. Positions on GST dues against secured lenders cannot be taken from this ruling. Second, the judgment is a Division Bench decision of one High Court and binds Single Judges of that Court; elsewhere it is persuasive. Third, the copy of the judgment available to us leaves the “Index” and “Neutral Citation” entries in the endorsement at the foot of the judgment unmarked, so practitioners citing it should check how the Court’s own record treats it.

Choice of remedy. The writ was held maintainable but failed on the merits. Where the real question is discharge of a departmental claim, the more orthodox routes are release of the attachment by the department, settlement through the Rule 9(7) to (9) deposit mechanism, or adjudication of priority against the sale proceeds; a writ against the registration authority is an uncertain substitute.

Drafting. Sale notices should state precisely what is and is not an encumbrance and track Rule 9(10). Purchasers should ask in writing whether the departmental claim must be deposited and how it is quantified; here, the dues reflected in the encumbrance certificate were not deposited.

5. Conclusion

The Madras High Court’s decision is narrower than its language on priority suggests. The result turns on a simple point: where a secured creditor sells property with a disclosed excise attachment and the purchaser bids knowing of it, the purchaser cannot obtain deletion of the entry without complying with Rule 9(7). The Court conceded that registered secured creditors rank ahead of government dues, and held that ranking does not answer how the property is delivered.

The distinction separates two things often run together. Priority determines who is paid first out of the sale proceeds. Rule 9 determines what the purchaser takes and on what terms. A bank that wants clear title must settle the encumbrance, or obtain its release, through the machinery the Rules provide; it cannot reach the same end by invoking priority in a writ afterwards.

The decision leaves real questions open. It does not decide whether Section 26E applies to a mortgage created before its commencement, whether CERSAI registration is a precondition, how Section 82 of the Central Goods and Services Tax Act, 2017 interacts with the SARFAESI regime, or whether the discretionary wording of Rule 9(7) permits a sale subject to an encumbrance that the secured creditor later asks to have cleared at the purchaser’s expense. It also does not reconcile itself with the other Division Bench decisions of the same Court that the appellant and purchaser cited. Those matters will be litigated again; anyone relying on this decision should remember that its core reasoning rests on disclosure in the sale papers and the purchaser’s knowledge.

FAQ

Does this judgment say that government tax dues rank ahead of a secured creditor’s dues? No. The Court accepted the opposite proposition, that registered secured creditors have priority over Central, State and local government dues, but held that priority does not relieve the secured creditor and the purchaser of the duty to comply with Rule 9(6) to (10) of the Security Interest (Enforcement) Rules, 2002.

Is an excise attachment an “encumbrance” for the purposes of a SARFAESI sale? The Court held that it is. Relying on Section 100 of the Transfer of Property Act, 1882, it reasoned that an attachment restricts the owner’s right to sell or create further charges and is recorded on the encumbrance certificate, so it satisfies the ingredients of an encumbrance.

Does the decision apply to GST dues? Not directly. The attachment was under Section 11E of the Central Excise Act, 1944. A submission on Section 82 of the Central Goods and Services Tax Act, 2017 was recorded but the Court did not decide it.

Can a bank argue it is functus officio once a sale certificate is registered? The Court rejected that argument for the department. The bank continues to have locus until its debt is fully recovered and its right to enforce security against the borrower’s remaining assets has ceased, and its recovery proceedings before the Debts Recovery Tribunal were still pending.

Authorities and Legislation

Applied by the Court:

• Rule 9(6) to (10), Security Interest (Enforcement) Rules, 2002, and Appendices IV-A and V — applied as mandatory (¶¶13–24, 28–33).
• Section 100, Transfer of Property Act, 1882 — applied to hold that an attachment is an encumbrance (¶37).

Acknowledged by the Court as establishing that secured debts rank ahead of government dues (¶25), but not analysed or applied to decide the appeal:

• UTI Bank Limited v. Deputy Commissioner of Central Excise, AIR 2007 Mad 118 (Full Bench).
• Punjab National Bank v. Union of India, (2022) 7 SCC 260.
• Dena Bank v. Bhikhabhai Prabhudas Parekh, 2000 (5) SCC 694.
• Assistant Commissioner of Customs (Bonds) v. Annam Steels Pvt. Ltd., W.A. No. 3249 of 2019, Division Bench of the Madras High Court, 27 June 2022 (reported at 2022 (5) MLJ 337, as cited by counsel).

Cited by counsel only (the judgment records them as submissions and does not discuss them):

• By the appellant bank and the purchaser: Kalupur Commercial Co-operative Bank v. State of Gujarat, 2019 SCC OnLine Guj 1892; Assistant Commissioner (CT) v. Indian Overseas Bank, AIR 2017 Mad 67 (Full Bench); Indian Overseas Bank v. Sub Registrar, Tuticorin Keelur, W.P. No. 14618 of 2018, 18 December 2018; Kotak Mahindra Bank v. Sub Registrar, W.P. No. 30293 of 2023; Indian Bank v. CTO, W.P. No. 31572 of 2022; HDFC Bank Limited v. The Sub Registrar, W.P. (MD) No. 1855 of 2024, 24 June 2025; Aachi Masala Foods Pvt. Ltd. v. Edelweiss Assets Reconstruction Co. Ltd., 2020 SCC OnLine Mad 2017; Tamil Nadu Co-operative Marketing Federation Ltd. v. Asset Reconstruction Co. (India) Ltd., 2020 (3) CTC 141; State Bank of India v. Deputy Commercial Tax Officer, 2023 SCC OnLine TS 2302; Bhushan Ramesh Bramgankar v. State of Maharashtra, 2024 SCC OnLine Bom 1215.
• By the department: Punjab & Sind Bank v. State of Punjab, (2023) 15 SCR 903; National Textile Corporation v. State of Maharashtra, (1977) 3 SCC 4; A.I. Champdany Industries Limited v. Official Liquidator, (2009) 4 SCC 486.

Legislation considered:

• Sections 13(7), 26E and 35, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 — https://www.indiacode.nic.in/
• Section 31B, Recovery of Debts and Bankruptcy Act, 1993 — https://www.indiacode.nic.in/
• Section 11E, Central Excise Act, 1944 (repealed) — https://www.indiacode.nic.in/
• Section 142A, Customs Act, 1962 — https://www.indiacode.nic.in/
• Section 82, Central Goods and Services Tax Act, 2017 (invoked by counsel; not decided) — https://www.indiacode.nic.in/

Case record:

• Indian Overseas Bank v. The Assistant Commissioner of Central Excise and Service Tax, Salem I Division and Ors., W.A. No. 3585 of 2023, Madras High Court, reserved on 25 September 2026 and pronounced on 30 September 2026 — https://indiankanoon.org/doc/34967379/

This article is not legal advice and does not create an attorney–client relationship. Readers should verify the certified copy of the judgment and any subsequent clarificatory orders before relying on it, and consult a qualified advocate on the facts of their matter.