2021 (8) TMI 1233 - HC - Companies Law

Court denies relief in writ petition, directs Tax Recovery Officer under Income Tax Act. Tax priority over SARFAESI Act.

The court rejected the relief sought in the writ petition and directed the petitioner to approach the Tax Recovery Officer for adjudication under Schedule ... Recovery of Income Tax Arrears - property mentioned was already attached in Form ITCP 16 by the Income Tax Department - mortgage in existence - priority over the charge - HELD THAT:- A perusal of the entire Rule would reveal that it is not an appeal or Revision. It is an investigation by the Tax Recovery Officer, which is contemplated. Therefore, any third person if involved in such transfer of property, which is declared as void under Section 281 of the Income Tax Act may submit an application for investigation by Tax Recovery Officer. Therefore, the statute does not assume that every third person is liable under the Income Tax Act. Schedule II Rule 11 of the Income Tax Act is a beneficial provision in respect of the person, who was otherwise cheated by any of the defaulter of tax arrears, who in turn can submit an application for further investigation in order to cull out the truth or genuinity with reference to the transactions or transfers. Therefore, the Tax Recovery Officer during the pendency found that the charge created in favour of the petitioner Bank is valid, then he can pass appropriate orders withdrawing the attachment made under the provisions of the Act. On the one hand, the Income Tax Act states that, where during the pendency of any proceedings under the Income Tax Act or after completion thereof, any assessee creates a charge on or parts with the possession by way of mortgage, sale, etc. Shall be void against any claim in respect of any tax. So also, the SARFAESI Act states that Section 26E contemplates that the secured creditors shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government of State Government or local authority. Therefore, equal weightage is given in respect of the secured creditors. So also Section 31B of Recovery of Debts and Bunkruptcy Act, 1993 states that sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority - conflicting provisions in these three independent statutes are creating heart burning issues between the secured creditors as well as the Tax Department. The “doctrine of constitutional priority” will have precedence over the other priorities. If the priority clause is provided under various enactments, the question arises as to which priority is to be held precedence over the other priorities. The test of traceability and recognition under the constitutional provisions would be the proper procedure to form an opinion - In the present scenario, the SARFAESI Act and the DRT Act provides priority to secured creditors, i.e. the banks hold priority. The Income Tax Act contemplates any such mortgage or sale during the pendency of any proceedings under the Income Tax Act shall be void. Thus, this Court has to test the supremacy on the basis of the constitutional recognition, which is supreme than the statutes enacted under the constitution. The taxation laws are constitutionally recognised with reference to the sovereignty and the policies of the Government. Thus the supremacy of the Constitution overtakes the statutes enacted and such enactments constitutionally recognised directly takes precedence over the other statutes. The mortgages, transactions or transfers are made during the pendency of the Income Tax proceedings, then all such transfers, mortgages, transactions are void under Section 281 of the Income Tax Act and any such mortgage or attachment made by the Bank during the pendency of the Income tax proceedings, cannot be a ground to claim priority based on the provisions of the SARFAESI Act or DRT Act - the disputed factors cannot be adjudicated by the High Court under Article 226 of the Constitution of India and it is for the petitioner to establish the details regarding the mortgage and the pendency of Income tax proceedings under the Income Tax Act. It is for the petitioners to produce the documents in original and adjudicate the same in the manner prescribed under Schedule II Rule 11 of the Income Tax Act. Thus, it would be improper to form an opinion regarding the disputed facts between the parties to the lis in the present case, which requires adjudication of facts based on the documents and evidences. The petitioner is at liberty to approach the Tax Recovery Officer by filing an appropriate application under Schedule II, Rule 11 of the Income Tax Act. In the event of filing any such application, the Tax Recovery Officer is directed to investigate the same with reference to the original documents and pass appropriate orders as expeditiously as possible - petition disposed off. Issues Involved:1. Validity of the income tax recovery proceedings dated 27.12.2007.2. Priority of mortgage versus tax arrears.3. Jurisdiction and authority of the Income Tax Department to declare transactions void.4. Applicability of Section 281 of the Income Tax Act and Section 26E of the SARFAESI Act.5. Adjudication of disputed facts in writ proceedings versus alternative remedies.Issue-wise Detailed Analysis:1. Validity of the income tax recovery proceedings dated 27.12.2007:The petitioner challenged the proceedings dated 27.12.2007, which aimed to recover income tax arrears from M/s. NEPC Agro Foods Ltd. and its directors. The property in question was already under the lawful possession of the petitioner bank since 19.12.2007, affirmed by various judicial bodies. The petitioner argued that the mortgage existed since 16.10.2002, predating the tax attachment by the Income Tax Department on 18.06.2003. The court concluded that the petitioner bank must approach the Tax Recovery Officer under Schedule II Rule 11 of the Income Tax Act for adjudication of these facts.2. Priority of mortgage versus tax arrears:The petitioner asserted that the mortgage predates the tax attachment and thus holds priority over the tax arrears. Citing Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, the petitioner argued that secured creditors have priority over government dues. The court acknowledged the conflicting provisions but emphasized the constitutional priority of tax dues, highlighting that tax arrears hold precedence due to their importance in enabling the State to function as a sovereign entity.3. Jurisdiction and authority of the Income Tax Department to declare transactions void:The petitioner argued that the Income Tax Department lacks the authority to declare civil transactions void, as this power is vested in the civil courts. The court agreed, referencing previous judgments that upheld this principle. However, the court also noted that the Tax Recovery Officer has the authority to investigate claims under Schedule II Rule 11 of the Income Tax Act.4. Applicability of Section 281 of the Income Tax Act and Section 26E of the SARFAESI Act:Section 281 of the Income Tax Act declares certain transactions void if made during the pendency of tax proceedings. The court emphasized that this provision takes precedence over Section 26E of the SARFAESI Act when tax proceedings are pending at the time of the transaction. The court concluded that any mortgage or transfer made during the pendency of tax proceedings is void, and thus the petitioner bank's claim of priority based on the SARFAESI Act cannot be upheld.5. Adjudication of disputed facts in writ proceedings versus alternative remedies:The court highlighted that disputed facts, such as the timing of the mortgage and the pendency of tax proceedings, cannot be adjudicated in writ proceedings. The appropriate forum for such adjudication is the Tax Recovery Officer under Schedule II Rule 11 of the Income Tax Act. The court directed the petitioner to approach the Tax Recovery Officer for a detailed investigation and resolution of these disputed facts.Conclusion:The court rejected the relief sought in the writ petition and directed the petitioner to approach the Tax Recovery Officer for adjudication under Schedule II Rule 11 of the Income Tax Act. The court emphasized the constitutional priority of tax dues over other claims, including secured creditors under the SARFAESI Act. The writ petition was disposed of, with no costs awarded.