Secured creditor priority upheld: mortgage protected under tax law proviso, while customs dues did not outrank secured debt.

A mortgage created in favour of a secured creditor during pending income-tax proceedings was protected under the proviso to section 281 because it was supported by adequate consideration and the creditor had no notice of the tax proceedings or liability before the charge was created. The Court also held that section 142 of the Customs Act is only a recovery mechanism and does not create a first charge or statutory priority in favour of Customs. In the absence of express legislative priority, customs dues cannot override secured debt. The mortgage was therefore upheld against the Revenue, and the secured creditor's priority was preserved.

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Issues: (i) Whether a mortgage created in favour of a secured creditor during pendency of income-tax proceedings is void against the Revenue under section 281 of the Income-tax Act, 1961, or is protected by the statutory proviso; (ii) Whether the Customs Department has priority over the secured debt of the financial institution under section 142 of the Customs Act, 1962.

Issue (i): Whether a mortgage created in favour of a secured creditor during pendency of income-tax proceedings is void against the Revenue under section 281 of the Income-tax Act, 1961, or is protected by the statutory proviso.

Analysis: The charge was created by equitable mortgage while income-tax proceedings were pending, which attracted the main part of section 281. However, the mortgage was supported by loan consideration, and there was no notice served on the secured creditor regarding the pendency of the income-tax proceedings or the tax liability before creation of the charge. The statutory proviso protects a transfer made for adequate consideration and without notice of such proceedings. The Court treated the secured creditor as a bona fide transferee for value and held that the absence of notice brought the mortgage within the exception.

Conclusion: The mortgage was not void as against the Revenue and was protected by clause (i) of the proviso to section 281.

Issue (ii): Whether the Customs Department has priority over the secured debt of the financial institution under section 142 of the Customs Act, 1962.

Analysis: Section 142 provides the machinery for recovery of sums due to Government but does not create a first charge or statutory priority over secured creditors. In the absence of a specific statutory first charge, government dues do not prevail over secured debt. The Court relied on prior authority holding that Customs and Excise dues cannot claim precedence over a secured creditor under the SARFAESI regime unless the statute expressly creates such priority.

Conclusion: The Customs Department had no priority over the secured creditor's debt.

Final Conclusion: Both writ petitions failed. The secured creditor's mortgage was upheld against the income-tax claim under the statutory proviso, and the Customs Department was held not entitled to priority over the secured debt.

Ratio Decidendi: A transfer or mortgage created for adequate consideration without notice of pending tax proceedings is protected by the proviso to section 281 of the Income-tax Act, 1961, and government dues do not outrank secured debt unless the governing statute expressly creates a first charge.

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