2019 (8) TMI 356 - HC - Income Tax

Secured creditor prevails over tax dues in property attachment case. Priority ruling by Madras High Court.

State Bank of India Versus The Tax Recovery Officer (TDS), The Joint-I Sub Registrar Tiruppur, M/s. P.G.C. Corporation Ltd., M/s. P.G.C. Industries Pvt. Ltd.

The Madras High Court ruled in favor of the petitioner-Bank, a secured creditor, in a case involving priority of secured creditors over other dues. The ... Attachment orders - recovery proceedings - attachment made by the first respondent of the properties belonging to the fourth respondent for realizing the tax dues from the third respondent - HELD THAT:- In view of the above settled position of law, even assuming that the properties belonged to the third respondent, still the petitioner-Bank has priority over the said properties as secured creditor than the first respondent. Even, that question does not arise in this case, when admittedly, the properties so attached by the first respondent do not belong to the third respondent and on the other hand, they belong to the fourth respondent. Admittedly, the fourth respondent is not the defaulter before the first respondent. Therefore, the very attachment made by the first respondent of the properties belonging to the fourth respondent for realizing the tax dues from the third respondent, cannot be justified. In any event, in view of the fact that the petitioner being the secured creditor and their claim prevails over the other claims including Crown debts, this Court is of the view that the first respondent is not entitled to continue the attachment over the subject matter properties any further. Accordingly, this writ petition is allowed and the first respondent is directed to raise the attachment and communicate the same to the second respondent within a period of two weeks from the date of receipt of a copy of this order, so as to enable the petitioner to get the sale certificate registered before the second respondent. Issues:1. Priority of secured creditors over other dues.2. Validity of attachment by the first respondent.3. Rights of the petitioner-Bank in the case.Issue 1: Priority of secured creditors over other duesThe petitioner-Bank sought a mandamus to remove an attachment to register a sale certificate in favor of an auction purchaser. The petitioner was the secured creditor for loans taken by the third respondent. The properties were mortgaged by the corporate guarantor to secure the loan liability. The petitioner initiated SARFAESI action due to default, took possession of the property, and auctioned it. The successful bidder was issued a sale certificate, but registration was hindered due to the first respondent's attachment. The petitioner argued that as a secured creditor under Section 26E of the SARFAESI Act, they had priority over other dues. Legal precedents were cited to support this claim, emphasizing the precedence of secured creditors over crown debts.Issue 2: Validity of attachment by the first respondentThe first respondent, the Income Tax Department, attached the properties for tax dues of the third respondent. The first respondent claimed that the attachment was on properties belonging to the fourth respondent, the guarantor, not the defaulting third respondent. The petitioner contended that the first respondent had no right to attach the fourth respondent's properties for the third respondent's tax dues. Legal arguments were presented based on decisions highlighting the priority of secured creditors over government dues, including tax liabilities.Issue 3: Rights of the petitioner-BankThe court analyzed the legal position that secured creditors have precedence over other debts, including crown debts. Citing relevant judgments, the court affirmed that the petitioner-Bank, as a secured creditor, had priority over the attached properties. The court concluded that the first respondent's attachment of the fourth respondent's properties for the third respondent's tax dues was unjustified. The judgment directed the first respondent to lift the attachment within two weeks to enable the petitioner to register the sale certificate. The ruling emphasized the rights of secured creditors and the invalidity of the attachment in this case.This detailed judgment by the Madras High Court clarified the priority of secured creditors, the validity of attachments, and the rights of the petitioner-Bank in a case involving loan defaults, property auctions, and tax liabilities.