Income-tax recovery attachment prevails over a later mortgage when the security interest is void against the revenue.

Where an Income-tax recovery attachment preceded the bank's mortgage, the mortgage was void against the revenue under Section 281 of the Income-tax Act, 1961 because it was created during pending recovery proceedings. The secured creditor priority scheme under Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act applies only to a valid, subsisting security interest. Since the mortgage was hit by Section 281, the bank could not claim priority or seek removal of the tax attachment, and the tax authorities were entitled to proceed against the properties.

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Issues: Whether the bank, as a secured creditor, could claim priority and seek removal of the Income Tax Department's attachment over the mortgaged properties, or whether the mortgage created after initiation of tax recovery proceedings was void under the Income-tax Act.

Analysis: The attachment under the tax recovery proceedings preceded the mortgage in favour of the bank. Section 281 of the Income-tax Act, 1961 renders transfers, including mortgage, void as against the revenue when created during the pendency of proceedings under the Act. The principle of priority under Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 applies only where the competing claim rests on a valid transfer or subsisting right. Once the mortgage itself is hit by Section 281 and becomes void, the question of priority does not arise. The tax authorities were therefore entitled to proceed against the properties.

Conclusion: The bank could not claim priority over the tax department's attachment, and the mortgage was held invalid against the revenue.

Final Conclusion: The writ petition was rejected because the later mortgage could not defeat the earlier pending tax recovery proceedings, and the statutory priority for secured creditors was inapplicable on the facts.

Ratio Decidendi: A mortgage or transfer made during the pendency of income-tax recovery proceedings is void against the revenue under Section 281 of the Income-tax Act, 1961, and a secured creditor's priority under Section 26E of the SARFAESI Act arises only where the competing claim is based on a valid subsisting right.

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