Secured creditor priority prevails over tax attachment where no statutory first charge exists.

Tax dues do not obtain priority over a secured creditor unless the statute expressly creates a first charge in favour of the revenue, and an Income Tax Department attachment does not by itself create a charge over property. Section 281 of the Income-tax Act merely renders certain transfers or charges void against tax claims; it does not create a revenue charge. By contrast, Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act confer overriding priority on secured creditors, so a valid pre-existing mortgage or security interest prevails over a later revenue attachment.

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Issues: (i) Whether tax dues enjoy priority over secured creditors in the absence of an express statutory charge in favour of the revenue. (ii) Whether attachment by the Income Tax Department creates a charge over the property. (iii) Whether Section 281 of the Income-tax Act, 1961 overrides the priority conferred on secured creditors by Section 26E of the SARFAESI Act, 2002 and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993.

Issue (i): Whether tax dues enjoy priority over secured creditors in the absence of an express statutory charge in favour of the revenue.

Analysis: Tax is an incident of sovereignty and the State ordinarily has a preferential right to recover crown debts over unsecured creditors. However, that priority does not extend over a secured creditor unless the statute expressly creates a first charge or grants priority in favour of the State. The Court noted that several fiscal enactments do contain such express provisions, but the Income-tax Act, 1961 does not contain any provision creating a charge over the defaulter's property for tax dues.

Conclusion: The revenue does not get priority over a secured creditor merely by reason of tax dues.

Issue (ii): Whether attachment by the Income Tax Department creates a charge over the property.

Analysis: Attachment is distinct from charge. A charge arises when property is made security for payment of money by act of parties or operation of law, whereas attachment is only a restraint or seizure in aid of recovery. An attachment order does not, by itself, create a charge in favour of the revenue. Section 281 of the Income-tax Act, 1961 is only a declaration that certain transfers or charges are void against revenue claims; it does not itself create a charge.

Conclusion: Attachment by the Income Tax Department does not create a charge over the property.

Issue (iii): Whether Section 281 of the Income-tax Act, 1961 overrides the priority conferred on secured creditors by Section 26E of the SARFAESI Act, 2002 and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993.

Analysis: Section 281 declares transfers or charges made during the pendency of proceedings, or after completion but before service of notice under Rule 2 of the Second Schedule, void against tax claims, subject to its proviso. Section 26E and Section 31B, however, contain wide non-obstante clauses and expressly grant priority to secured creditors over all other debts, including taxes, revenues and cesses. Applying purposive construction, the Court held that these later provisions were enacted to cure the mischief left by the earlier recovery regime and must prevail in case of conflict. Where the mortgage/security interest is created before the revenue attachment and is otherwise valid, the secured creditor's statutory priority cannot be defeated by Section 281.

Conclusion: Section 26E of the SARFAESI Act, 2002 and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993 prevail over Section 281 of the Income-tax Act, 1961 in the event of conflict, and the secured creditor's priority is upheld where the mortgage preceded the revenue attachment.

Final Conclusion: The orders protecting the revenue's claim over the secured creditors' mortgages were set aside in the bank appeals, while the revenue appeal was not interfered with; the secured creditors were held entitled to priority over the attached properties on the facts found.

Ratio Decidendi: In the absence of an express statutory first charge in favour of the revenue, a valid security interest created before attachment is protected by the overriding priority expressly conferred on secured creditors by Section 26E of the SARFAESI Act, 2002 and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993, and Section 281 of the Income-tax Act, 1961 does not create a charge in favour of the revenue.

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