2011 (9) TMI 1087 - HC - Income Tax

Court Prioritizes SARFAESI Act Over Income Tax Claims, Declares Attachment Order Illegal

Asset Reconstruction Company (India) Limited Versus Commissioner Of Income Tax - Range - 4 & 2 -

The court ruled in favor of the petitioner, a company registered under the SARFAESI Act, stating that its secured dues have priority over the Income Tax ... Attachment order - Held that:- The petition is allowed. It is declared that the claim put-forward by respondent No.1 Income Tax Department by way of attachment of assets covered by Section 13(2) notice for priority over the petitioner for realization of the income-tax dues is contrary to the settled position of law and illegal. It will be open for the petitioner to exercise his right under the SARFAESI Act and the Rules made thereunder and the Income Tax Department shall not in any manner hamper or restrain the petitioner in proceeding further under the SARFAESI Act, regardless of the attachment orders passed by the Income Tax Department for realization of income-tax dues of respondent No.2 company. Rule is made absolute. Issues Involved:1. Priority of secured dues under the SARFAESI Act vs. Income Tax Department's claim.2. Application of Section 281 of the Income Tax Act.3. Validity of the mortgage created by the borrower in favor of financial institutions.4. Legal standing of the attachment order by the Income Tax Department.Issue-wise Detailed Analysis:1. Priority of Secured Dues under the SARFAESI Act vs. Income Tax Department's Claim:The petitioner, a company registered under the SARFAESI Act, argued that its secured dues have priority over the Income Tax Department's claims. The petitioner relied on Section 35 of the SARFAESI Act, which states, 'The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.' The court acknowledged that the SARFAESI Act provisions override other laws, including the Income Tax Act, in case of inconsistencies. The court cited various judgments, including the Supreme Court's rulings, which established that secured dues take precedence over crown debts unless a specific statute provides otherwise.2. Application of Section 281 of the Income Tax Act:The Income Tax Department contended that the mortgage created by the borrower in favor of financial institutions is void under Section 281 of the Income Tax Act. This section declares any transfer made during the pendency of proceedings under the Act as void against tax claims unless it is for adequate consideration and without notice of such proceedings. The court noted that the Income Tax Department did not plead this point in its affidavit-in-reply, making it impermissible to raise it during oral arguments. The court referenced the Supreme Court's decision in Tax Recovery Officer-II, Sadar, Nagpur vs. Gangadhar Vishwanath Ranade, which held that the Income Tax Department must file a suit to declare a transfer void under Section 281.3. Validity of the Mortgage Created by the Borrower in Favor of Financial Institutions:The court examined whether the mortgage created by the borrower was valid under the proviso to Section 281(1) of the Income Tax Act. The petitioner argued that the mortgage was for adequate consideration and without notice of pending income tax proceedings. The court found that the mortgage dated 17.9.1997 was indeed for adequate consideration and there was no evidence that the financial institutions had notice of any pending proceedings. The court concluded that the mortgage was valid and protected under the proviso to Section 281(1).4. Legal Standing of the Attachment Order by the Income Tax Department:The court evaluated the legality of the attachment order issued by the Income Tax Department. The petitioner argued that the attachment order was contrary to the settled position of law, which prioritizes secured creditors over crown debts. The court reiterated that the Income Tax Act does not provide for a first charge over the property, unlike other statutes that explicitly create such a charge. The court held that the attachment order by the Income Tax Department could not supersede the rights of the secured creditor under the SARFAESI Act.Conclusion:The court allowed the petition, declaring that the Income Tax Department's claim by way of attachment of assets covered by Section 13(2) notice for priority over the petitioner for realization of income-tax dues is contrary to law and illegal. The petitioner was granted the right to exercise its rights under the SARFAESI Act without interference from the Income Tax Department. The rule was made absolute.