TaxTMI 
TaxTMI 
2021 (8) TMI 1125
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....he SARFAESI Act. 3. The learned counsel for the petitioner made a submission that the petitioner Bank being a secured creditor is having first charge over the property belongs to the second respondent and by invoking the provisions of the SARFAESI Act, they have initiated appropriate auction on the properties. Thus, the subsequent action taken by the Commercial Tax Department cannot be construed as 'proper', nor the authorities have any priority over the properties which were already mortgaged. 4. The learned Government Advocate appearing on behalf of the first respondent disputed the said contention by stating that the Commercial Tax Department holds first charge over the property under the provisions of the TNGST Act. Therefore, even in case an auction was taken by the Bank, they are liable to deposit the said money to the first respondent Commercial Tax Department. Thus, the first respondent passed an order of demand directing the petitioner to deposit the amount realised for the purpose adjusting the said amount towards the tax arrears. 5. The issue of priority over the charge with reference to various enactments are elaborately considered by this Court and judgment ....
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....r of any other person, with the intention to defraud the revenue, such charge or transfer shall be void as against any claim in respect of any tax, or any other sum payable by the dealer as a result of the completion of the said proceeding or otherwise: Provided that, such charge or transfer shall not be void if it is made - (a) for adequate consideration and without notice of the pendency of such proceeding under this Act or, as the case may be, without notice of such tax or other sum payable by the dealer; or (b) with the previous permission of the assessing authority." 9. The above section 43 clearly stipulates that if during the pendency of any proceedings under the TNVAT Act or after the completion thereof, any dealer creates a charge on, or parts with the possession by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever of any of his assets in favour of any other person with the intention to defraud the revenue, such charge or transfer shall be void as against any claim in respect of any tax, or any other sum payable by the dealer, as a result of the completion of the said proceedings or otherwise. 10. The proviso clause states that such cha....
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....certificate, on the ground that such property is not liable to such attachment or sale, the Tax Recovery Officer shall proceed to investigate the claim or objection". 32.Sub~clauses (5) and (6) to Rule 11 of the Income Tax Act reads as under: (5) Where the Tax Recovery Officer is satisfied that the property was, at the said date, in the possession of the defaulter as his own property and not on account of any other person, or was in the possession of some other person in trust for him, or in the occupancy of a tenant or other person paying rent to him, the Tax Recovery Officer shall disallow the claim. (6) Where a claim or an objection is preferred, the party against whom an order is made may institute a suit in a civil court to establish the right which he claims to the property in dispute; but, subject, to the result of such suit (if any), the order of the Tax Recovery Officer shall be conclusive. 33.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 ....
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.... and rates due to the Central Government, State Government or local authority". 36.It is necessary to consider the conflicting provisions of the Income Tax Act, SARFAESI Act and Recovery of Debts and Bankruptcy Act, 1993. 37.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. 38.T....
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....rances or the statutory implications or the genuinity of the title etc., Thus, the principles of caveat emptor would be applicable in such circumstances, where a transactions or transfers are made during the pendency of the Income tax proceedings. In such cases, the Income tax proceedings are known only to the tax defaulter and not to the third party purchaser or the mortgagee Bank or otherwise. Thus, the void transfers or transactions made during the pendency of the Income tax proceedings cannot be the subject matter for any mortgage or further transfers or transactions etc., This being the possible perceptions, the Courts are bound to consider, which transaction will prevail over and which Act would be applicable with reference to the facts and circumstances. 39.More elaborately the facts at the first instance to be considered and then the application of law which is to be applied at the first instance also to be considered. For instance in the case where the income tax proceedings are pending under the Income Tax Act and if a mortgage is entered into by the tax defaulter with any Bank, then it is the duty of the Bank to ensure that no other proceedings are pending and it is th....
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....the purpose of upholding the sovereignty and integrity of the Nation is to be considered as holding precedence over the other statutes providing priority. 44.The Constitutional Bench of the Hon-ble Supreme Court of India in the case of Builders Supply Corporation vs. Union of India [1965 AIR 1061] considered the principles laid down in the case of Kaka Mohamed Ghouse Sahib and Co. vs. United Commercial Syndicate and others [(1886) ILR 7 Mad. 434], wherein the Madras High Court has held that it is a settled principle of constitutional law that as between creditors of the same rank the Government is entitled to priority and the republican character of the Constitution of India has not abrogated this general doctrine of priority of State debts. In dealing with this question, Justice Ramamurti has referred to the relevant decisions in relation to the arrears of income tax due to the Government and has pointed out there is a consensus of judicial opinion on the question that the arrears of tax due to the State can claim priority over private debts. This position has not been seriously disputed. 45.Similarly, the basic justification for the claim of priority made by the Income Tax De....
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.... various statutes enacted by the Parliament gives priority to such institutions irrespective of the fact that the other Acts are also providing similar priority to other institutions. 47.In support of the said observation, this Court would like to draw the attention with reference to the judgment of the Three Judges Bench of the Hon-ble Supreme Court of India in the case of Central Bank of India vs. State of Kerala and others [Civil Appeal No.95 of 2005 dated 27.02.2009], wherein the Apex Court considered the provisions of the DRT Act and SARFAESI Act and the following observations are made: "33.The non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act give overriding effect to the provisions of those Acts only if there is anything inconsistent contained in any other law or instrument having effect by virtue of any other law. In other words, if there is no provision in the other enactments which are inconsistent with the DRT Act or Securitisation Act, the provisions contained in those Acts cannot override other legislations. Section 38C of the Bombay Act and Section 26B of the Kerala Act also contain non obstante clauses and giv....
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....claim priority in respect of its tax dues." 34. In State Bank of Bikaner and Jaipur v. National Iron and Steel Rolling Corporation and others [(1995) 2 SCC 19], the Court again recognized the priority of the State-s statutory first charge under Section 11~AAAA of the Rajasthan Sales Tax Act, 1954 vis~`~vis claim of the bank to recover its dues from the borrower. 35. In Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. and others [(2000) 5 SCC 694], the Court reviewed case law on the subject and observed: "The principle of priority of government debts is founded on the rule of necessity and of public policy. The basic justification for the claim for priority of State debts rests on the well~recognised principle that the State is entitled to raise money by taxation because unless adequate revenue is received by the State, it would not be able to function as a sovereign Government at all. It is essential that as a sovereign, the State should be able to discharge its primary governmental functions and in order to be able to discharge such functions efficiently, it must be in possession of necessary funds and this consideration emphasises the necessity and the wisdom of conceding to ....
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....and wisdom of conceding to the State, the right to claim priority in respect of its tax dues. The importance of the above reading is to be considered regarding the present facts and circumstances." 12. As far as the dispute raised in the present writ petition is concerned, the petitioner in fact claims that they hold priority over the charge as they are secured creditors. The 1st respondent/revenue equally claims the priority over all other charges as it is arrears of tax and State revenue. Further, the 1st respondent-Commercial Tax department claims that actions for recovery of arrears of tax was initiated long back and during the pendency of the proceedings under the taxation law, the bank has dealt with the property and therefore, they cannot claim any priority over the property, as far as the tax arrears are concerned. 13. However, such disputed fact cannot be adjudicated by the High Court in a writ petition under Article 226 of the Constitution of India. Which are all the proceedings initiated at the first instance and which proceedings has to be construed as an initial proceedings, are the disputed facts which are all to be adjudicated by scrutinising the original documents....