Equitable mortgage and secured creditor priority upheld where tax and customs provisions did not defeat bona fide security interest.

An equitable mortgage created in favour of a financial institution during pending income-tax proceedings was protected by the proviso to section 281(1) because it was supported by loan consideration and the Revenue had given no notice of the proceedings or tax dues to the lender. The mortgage was therefore not void as against the Revenue. The Customs Department also could not claim priority over the secured debt, as section 142 of the Customs Act provides recovery machinery but does not create a first charge or statutory priority in favour of customs dues. In the absence of such a charging provision, the secured creditor's priority was upheld.

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Issues: (i) Whether an equitable mortgage created in favour of a financial institution during pendency of income-tax proceedings was void against the Revenue under section 281(1) of the Income-tax Act, 1961. (ii) Whether the Customs Department had priority over the secured debt of the financial institution in the absence of any statutory first charge under the Customs Act, 1962.

Issue (i): Whether an equitable mortgage created in favour of a financial institution during pendency of income-tax proceedings was void against the Revenue under section 281(1) of the Income-tax Act, 1961.

Analysis: Section 281(1) renders a transfer or charge void as against tax claims where it is created during the pendency of proceedings, but the proviso protects a charge made for adequate consideration and without notice of such pendency or tax liability. The mortgage was created for loan consideration, and there was no notice from the Revenue to the financial institution of the pending income-tax proceedings or tax dues. The Court treated the financial institution as a bona fide transferee for valuable consideration and held that the statutory exception in the proviso applied.

Conclusion: The mortgage was not void as against the Revenue and was protected by the proviso to section 281(1).

Issue (ii): Whether the Customs Department had priority over the secured debt of the financial institution in the absence of any statutory first charge under the Customs Act, 1962.

Analysis: Section 142 of the Customs Act, 1962 provides modes of recovery of government dues but does not create any charge, first charge, or statutory priority over secured creditors. In the absence of a specific statutory first charge, the claim of the Customs Department could not prevail over the secured debt, particularly in light of the settled principle that secured debts do not yield to mere recovery provisions without a charging statute.

Conclusion: The Customs Department could not claim priority over the secured creditor.

Final Conclusion: Both writ petitions failed on the substantive questions decided. The mortgage in favour of the financial institution survived the income-tax challenge, and the Customs Department was held to have no priority over the secured debt.

Ratio Decidendi: A transfer or mortgage for adequate consideration is protected from being void under section 281(1) of the Income-tax Act, 1961 if the transferee had no notice of the pending proceedings, and a government recovery provision that does not expressly create a first charge does not displace the priority of a secured creditor.

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