Secured creditor priority over income-tax recovery claims upheld absent a statutory first charge or proved Section 281 defect.
A secured creditor's enforcement rights under SARFAESI prevail over the Income-tax Department's attachment and recovery claim where no specific statutory first charge is created in favour of the Revenue. The Court held that income-tax recovery machinery does not by itself displace secured debt priority, so the Department could not obstruct enforcement on a claim of precedence. It also held that a transfer or charge cannot be invalidated under Section 281 of the Income-tax Act unless the statutory conditions are pleaded and proved; the Revenue could not raise that point for the first time in oral argument or collaterally impeach the transaction. The secured creditor was therefore allowed to enforce its rights.
Issues: (i) Whether the secured creditor under the SARFAESI Act could proceed against the secured assets notwithstanding the Income-tax Department's attachment and claim for priority; (ii) Whether the transfer or charge in favour of the secured creditors was void under Section 281 of the Income-tax Act, 1961, and could be relied upon by the Revenue in the absence of pleadings and proof.
Issue (i): Whether the secured creditor under the SARFAESI Act could proceed against the secured assets notwithstanding the Income-tax Department's attachment and claim for priority.
Analysis: The statutory scheme under the SARFAESI Act confers enforcement rights on a secured creditor, and the Income-tax Act provisions relied upon by the Revenue provide machinery for recovery but do not create a first charge over the secured assets. In the absence of any specific statutory provision giving the Revenue priority over secured debt, the general principle that crown debt does not prevail over secured debt applies. The Court also noted that the secured creditor's rights had to be considered in the context of liquidation and the relative priority of secured debts over unsecured claims.
Conclusion: The secured creditor was entitled to proceed under the SARFAESI Act, and the Income-tax Department could not obstruct those proceedings on the footing of priority.
Issue (ii): Whether the transfer or charge in favour of the secured creditors was void under Section 281 of the Income-tax Act, 1961, and could be relied upon by the Revenue in the absence of pleadings and proof.
Analysis: Section 281 operates only where the statutory conditions are shown to exist, and the proviso protects a transfer or charge made for adequate consideration and without notice of the pending proceedings or liability. The Revenue had not pleaded the factual foundation for invoking Section 281 in its counter, and the Court declined to permit the point to be raised for the first time in oral argument. The Court further held that, where the Department seeks to avoid a transfer as void under Section 281, it must take the appropriate legal course and cannot collaterally impeach the transfer in the present proceedings.
Conclusion: The Revenue could not successfully invoke Section 281 to invalidate the mortgage or assignment in favour of the secured creditors.
Final Conclusion: The petition succeeded, the Revenue's claim to priority over the secured assets was rejected, and the petitioner was permitted to enforce its rights under the SARFAESI Act without interference from the Income-tax Department.
Ratio Decidendi: In the absence of a specific statutory first charge in favour of the Revenue, a secured creditor's enforcement rights prevail over income-tax recovery claims, and a transfer cannot be treated as void under Section 281 of the Income-tax Act, 1961 unless the statutory conditions are pleaded and established.