Secured creditor priority prevails where a bank mortgage predates revenue attachment and no automatic tax first charge exists

A mortgage by deposit of title deeds created before the Revenue's attachment was treated as giving the bank priority over the Income Tax Department's recovery claim. Non-registration of the earlier mortgage did not defeat the bank's secured rights, and the Income-tax Act was held not to create an automatic first charge in favour of the Revenue. The proviso to section 281 was applied to protect bona fide transactions, with secured creditor priority prevailing on the facts. As a result, the attachment of the mortgaged property and the consequential encumbrance entry were held unsustainable and liable to be removed.

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Issues: (i) Whether the bank's mortgage created before the Revenue's attachment entitled the bank to priority over the Income Tax Department's recovery claim. (ii) Whether the impugned attachment of the mortgaged property and the consequential encumbrance entry were liable to be lifted.

Issue (i): Whether the bank's mortgage created before the Revenue's attachment entitled the bank to priority over the Income Tax Department's recovery claim.

Analysis: The mortgage by deposit of title deeds was treated as having been created prior to the Revenue's attachment, and the Court held that non-registration of the earlier deposit of title deeds did not defeat the bank's rights. The Court further held that the Income-tax Act does not create an automatic first charge in favour of the Revenue, and that a transfer or charge does not become void automatically merely because proceedings were pending. The proviso to section 281 was held to protect bona fide transactions, and the priority conferred on secured creditors was applied to the facts.

Conclusion: The bank's secured interest was held to have priority over the Revenue's claim.

Issue (ii): Whether the impugned attachment of the mortgaged property and the consequential encumbrance entry were liable to be lifted.

Analysis: Since the secured debt was found to rank prior to the tax attachment, the attachment could not be sustained against the bank's enforcement rights. The Court relied on the statutory priority accorded to secured creditors and the absence of any automatic paramount charge in favour of the Revenue to hold that the Department had to give effect to the bank's priority by removing the attachment and the corresponding encumbrance entry.

Conclusion: The attachment and the consequential encumbrance entry were held to be unsustainable and were quashed.

Final Conclusion: The writ petition succeeded, and the bank was held entitled to enforce its security free from the Revenue's attachment.

Ratio Decidendi: Where a secured creditor's mortgage predates the Revenue's attachment and the tax statute does not create an automatic first charge, the secured creditor's priority prevails and the attachment cannot stand against the secured interest.

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