Court sets aside attachment order, directs Sub-Registrar to register sale certificate, validates bank's mortgage.

The court allowed the writ petition, setting aside the order of attachment. It directed the Sub-Registrar to register the sale certificate issued by the bank, as the mortgage created by the assessee during income tax proceedings was deemed valid. The court emphasized that the bank's claim as a secured creditor takes precedence over the Income Tax Department's claim, as the mortgage was created before the assessment order and demand notice, and voidity under Section 281(1) is not automatic.

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Issues Involved:
1. Validity of the mortgage created by the assessee during the pendency of income tax proceedings.
2. The impact of Section 281(1) of the Income Tax Act, 1961 on the mortgage.
3. Priority of claims between the secured creditor (bank) and the Income Tax Department.

Issue-wise Detailed Analysis:

1. Validity of the Mortgage Created by the Assessee During the Pendency of Income Tax Proceedings:

The petitioner, ICICI Bank, challenged an order of attachment dated 14-03-2018 issued by the Tax Recovery Officer under Rule 48 of the Second Schedule to the Income Tax Act, 1961. The bank argued that M/s. Sojiram Ispat Private Limited had availed financial assistance in June 2011, with the 3rd respondent guaranteeing the loan and mortgaging properties. After the borrower defaulted, the bank initiated proceedings under the Securitisation Act, 2002, sold the property, and obtained a sale certificate. However, the Sub-Registrar refused to register the sale certificate due to the attachment order by the Tax Recovery Officer.

2. The Impact of Section 281(1) of the Income Tax Act, 1961 on the Mortgage:

The Tax Recovery Officer contended that the attachment was pursuant to a Tax Recovery Certificate issued following an assessment order for the Assessment Year 2009-10. Since the assessment proceedings under Section 143(2) were pending when the mortgage was created, the mortgage was deemed null and void under Section 281(1) of the Income Tax Act, 1961. The court noted that Section 281(1) declares any transfer or charge on the assets of the assessee during the pendency of proceedings under the Act as void. However, it emphasized that this voidity is not automatic and requires further action by the authorities.

The court analyzed the sequence of events and relevant provisions, concluding that the mortgage created on 11-07-2011 was before the assessment order on 27-12-2011 and the demand notice on the same date. Thus, the assessee was not in default at the time of the mortgage creation, and the mortgage could not automatically become void under Section 281(1).

3. Priority of Claims Between the Secured Creditor (Bank) and the Income Tax Department:

The court highlighted that the Income Tax Act does not create an automatic first charge on the properties of the assessee. It referred to legal precedents, including the Supreme Court's decision in Central Bank of India v. State of Kerala, which held that the RDDB Act and Securitisation Act do not create a first charge in favor of the secured creditor, and the Sales Tax Laws' charge would prevail over the bank's charge. However, in The Stock Exchange v. V.S. Kandalgoankar, the Supreme Court held that the Income Tax Act does not provide for the paramountcy of income tax dues over secured creditors.

The court concluded that since the mortgage was created before the assessment order and demand notice, and the voidity under Section 281(1) is not automatic before the issuance of a recovery certificate, the bank's claim as a secured creditor takes precedence over the Income Tax Department's claim.

Judgment:

The writ petition was allowed, setting aside the impugned order of attachment. The Sub-Registrar was directed to register the sale certificate issued by the bank upon compliance with necessary formalities. There was no order as to costs, and any pending miscellaneous petitions were closed.

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