1986 (3) TMI 61 - HC - Income Tax

Injunction granted to bank under Sec 151 CCP over income-tax authorities, securing secured creditors' rights.

The court found the application maintainable under Section 151 of the Code of Civil Procedure, granting an injunction to the plaintiff bank against ... Priority of secured creditor over Crown for a prior-created mortgage - equitable mortgage confers an interest in the property - invocation of inherent powers under section 151 CPC against a non-party - procedural character of Schedule II (rule 16) of the Income-tax Act - injunctive relief to protect a mortgagee's securityPriority of secured creditor over Crown for a prior-created mortgage - equitable mortgage confers an interest in the property - Whether the income-tax authorities can proceed to sell immovable property mortgaged earlier to a bank so as to defeat the bank's security - HELD THAT: - The Court held that where a mortgage or deposit of title deeds in favour of a bank existed prior to the enforcement steps taken by the revenue, the mortgagee acquires an interest in the property which cannot be defeated by the Crown's claims as if the mortgagee were an unsecured creditor. The priority accorded to the Crown over unsecured creditors does not extend to impair rights of a secured creditor arising from a prior-created mortgage; the statutory recovery machinery in Schedule II is procedural and, absent a specific substantive provision to the contrary, cannot divest the mortgagee of its security. The single judge's reliance on the principle that a mortgagee's right is not overridden by rule 16(1) was approved by the Division Bench as applicable to the facts.The injunction restraining the Income-tax Department from selling the mortgaged property was confirmed and the bank's priority as a secured creditor recognised.Invocation of inherent powers under section 151 CPC against a non-party - injunctive relief to protect a mortgagee's security - Whether the Civil Court may invoke section 151 CPC to grant relief against persons who are not parties to the suit (here, the Tax Recovery Officer) to protect the plaintiff's security - HELD THAT: - The Division Bench held that section 151 CPC may be invoked to preserve the subject-matter of litigation and protect the rights of a party where those rights are in jeopardy, even if the person sought to be restrained is not a party to the suit. The court applied parity of reasoning with earlier authorities to conclude that inherent powers can be exercised to restrain third parties whose actions would defeat the mortgagor's and mortgagee's rights, so as to prevent denial of justice to the plaintiff and safeguard the mortgagee's security.Section 151 CPC could be invoked to grant injunctive relief against the Tax Recovery Officer despite his non-party status; the appeal by the Tax Recovery Officer was dismissed.Procedural character of Schedule II (rule 16) of the Income-tax Act - Whether rule 16 of Schedule II to the Income-tax Act operates so as to oust civil remedies or deny the mortgagee's rights in a prior-created security - HELD THAT: - The Court treated Schedule II, including rule 16, as procedural machinery for recovery of tax dues and not as a substantive provision capable of extinguishing thirdparty proprietary rights. Rule 16's restrictions on dealing with property and on civil process must be construed narrowly and cannot be read to defeat a legally created mortgage interest; therefore the existence of a notice or attachment under Schedule II does not automatically invalidate or displace a prior mortgage.Rule 16 of Schedule II is procedural and cannot be given an operation that would deny or override the mortgagee's prior-created proprietary rights.Final Conclusion: The court confirmed the injunction protecting the bank's mortgage and dismissed the Tax Recovery Officer's challenge, holding that a prior equitable mortgage confers a proprietary interest which takes priority over revenue recovery measures under Schedule II of the Income-tax Act and that section 151 CPC may be invoked to restrain non-parties whose actions would imperil that security. Issues Involved:1. Maintainability of the application under Section 151 of the Code of Civil Procedure.2. Priority of claims between secured creditors and income-tax authorities.3. Applicability of Rule 16 of Schedule II of the Income-tax Act, 1961.4. Jurisdiction of Civil Courts in matters involving tax recovery.Issue-wise Detailed Analysis:1. Maintainability of the application under Section 151 of the Code of Civil Procedure:The plaintiff bank filed an application under Section 151 of the Code of Civil Procedure, seeking an injunction against the income-tax authorities from auctioning the mortgaged property. The income-tax authorities contested the application on the grounds that the Income-tax Act is a complete code providing adequate machinery for redressal of grievances, and thus, the application was not maintainable. The court, however, found the application maintainable, citing that Section 151 can be invoked to safeguard the rights of a secured creditor, even if the income-tax authorities are not parties to the suit.2. Priority of claims between secured creditors and income-tax authorities:The court addressed the issue of whether the income-tax dues have priority over the claims of a secured creditor. The plaintiff bank argued that their rights as a secured creditor could not be superseded by the income-tax authorities. The court agreed, stating that the priority of the Crown for the realization of its dues can only prevail among unsecured creditors of equal degree. The court referred to the judgment in Suraj Prasad Gupta v. Chartered Bank, which held that the Income-tax Act does not contain any substantive provision for overriding the claims of a secured creditor. The court concluded that the secured creditor's rights take precedence over the income-tax dues.3. Applicability of Rule 16 of Schedule II of the Income-tax Act, 1961:The income-tax authorities relied on Rule 16 of Schedule II, which restricts the defaulter from dealing with the property once a notice for recovery of dues has been served. The court distinguished the case from Sriniwas Pandit v. Jagjeet Singh Sawhney, noting that the rule applies to unsecured creditors and does not affect the rights of a secured creditor. The court emphasized that the secured creditor's interest in the mortgaged property cannot be denied unless a valid law explicitly provides for it, which is not the case under the Income-tax Act.4. Jurisdiction of Civil Courts in matters involving tax recovery:The income-tax authorities argued that the Civil Court is debarred from entertaining such applications, as the recovery of tax dues falls under the jurisdiction of the Tax Recovery Officer. The court, however, held that it has the jurisdiction to grant an injunction to protect the rights of a secured creditor. The court cited the Supreme Court's decision in Builders Supply Corporation v. Union of India, where it was held that the secured creditor has priority over the State's claim for tax dues. The court concluded that invoking Section 151 of the Code of Civil Procedure was necessary to prevent the secured creditor's rights from being jeopardized.Conclusion:The court confirmed the ad interim injunction restraining the income-tax authorities from selling the mortgaged property, emphasizing the precedence of the secured creditor's rights over the claims of the income-tax authorities. The judgment underscored the applicability of Section 151 of the Code of Civil Procedure to protect the interests of secured creditors, even against third parties not originally part of the suit. The appeal by the Tax Recovery Officer was dismissed, affirming the lower court's decision to grant the injunction.