TaxTMI 
TaxTMI 
2022 (3) TMI 157
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....old the priority charge as the valid mortgage was executed by the petitioner-State Bank of India and under the provisions of the Debt Recovery Act and SARFAESI Act, the Bank holds the priority and therefore, the Income Tax Department has no authority to pass such an order affecting the rights of the Bank in respect of the subject property under mortgage. 4. The dispute arose between the State Bank of India and the first respondent-Tax Recovery Officer, when the second respondent refused to register the Sale Certificate dated 12.01.2016 issued under the SARFAESI Act, on the ground that the subject property being vacant plot bearing Plot No.39, "FLOS CARMELI", Layout, Carmel Convent, Muthiyalpet, Village No.40, Pondicherry Revenue Village, comprised in R.S.No.4/1, measuring an extent 6055 sq. ft., covered by Doc. No.7359/2011, among other properties, is attached by the first respondent-Tax Recovery Officer for the alleged tax dues of the third respondent and the said attachment is recorded in the Books of the second respondent. 5. The petitioner had issued the Sale Certificate dated 12.01.2016 in terms of the auction sale held on 18.12.2015 and pursuant to the E-Auction Sale No....
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....on the assets of the defaulter by a statutory recognition and therefore, cannot defeat the rights of the secured creditor in whose favour the interest has been created over the said properties, even prior to the attachment of the properties. It is contended by the petitioner that the attachment said to have been made in ITCP-16 is only on 10.12.2015, whereas even earlier to the same, the third respondent had created mortgages over her various immovable properties in favour of the State Bank of India, SME Branch, Puducherry and therefore, the petitioner-Bank is entitled to enforce the said mortgage for the recovery of huge outstanding dues. 11. The petitioner-Bank, in exercise of their right under the SARFAESI Act and, after compliance with all the statutory provisions had in fact issued an E-Auction Sale Notice dated 07.11.2015, bringing the properties of the third respondent as well as the other family members for auction sale, scheduled on 18.12.2015. 12. Relying on these facts and circumstances, the learned Senior Counsel for the petitioner reiterated that this Court in the case of State Bank of India, Stressed Assets Management Branch, represented by its Assistant General....
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.... provisions of the Income Tax Act. When such conflict arises, the priority to be considered has been elaborately considered by this Court and detailed findings are provided in the judgment dated 19.07.2021 in WP No.15437 of 2014. The right of priority and adjudication of facts, which all are required and the issues involved are elaborately discussed and the parties were given an opportunity to approach the Tax Recovery Officer by filing an appropriate application under Schedule II of Rule 11 of the Income Tax Act. 18. Therefore, the said principle, which is being followed by this Court, is to be adopted in the present case, as the first respondent-Tax Recovery Officer made a finding in the impugned order itself that the attachment of immovable property made on 10.12.2015 would relate back to 01.03.2013. It has come to the knowledge of the Tax Recovery Officer that the defaulter has mortgaged the subject property with the petitioner-Bank and the same was registered on 04.04.2013. Thus, the first respondent-Tax Recovery Officer formed an opinion that the attachment date precedes the mortgage date and hence the mortgage of the subject property and transfer of the subject property i....
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.... 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 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 transf....
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.... 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.Thus, conflicting provisions in these three independent statutes are creating heart burning issues between the secured creditors as well as the Tax Department. Some of the decisions are in favour of the Tax Department and some of the decisions are in favour of the Banks. With reference to Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993, judgments are given in favour of the Banks in view of the fact that the sa....
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....cy 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 the duty of the person who is borrowing loan to inform the same to the Bankers. Under these circumstances, the Income Tax Department is alien to the transaction of mortgage between the bank and the tax defaulter and therefore, the Act will automatically come to the rescue of the Income Tax Department declaring such transfers as void under Section 281 of the Income Tax Act. 40.Where the Bank entered into a mortgage well before the pendency of pr....
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....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 Department in the present case 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 sovereign Government at all. It is essential that as a sovereign the Sate should be able to discharge its primary governmental functions and in order to able to discharge such function....
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....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 give statutory recognition to the priority of State's charge over other debts, which was recognized by Indian High Courts even before 1950. In other words, these sections and similar provisions contained in other State legislations not only create first charge on the property of the dealer or any other person liable to pay sales tax, etc. but also give them overriding ....
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.... 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 the State, the right to claim priority in respect of its tax dues (see Builders Supply Corpn.). In the same case the Constitution Bench has noticed a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts and that this rule of common law amounts to law in force ....
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....Tax Department in their counter affidavit had stated that the assessee defaulter is in arrears to the tune of Rs. 34,52,12,985/-. The demands were raised by the Income Tax Department prior to 31.03.1999, the date of mortgage to the petitioner bank. The Income Tax Department in other words claims that the proceedings under the Income Tax Act was pending even before the date of mortgage. The petitioner relying on the encumbrance certificate issued by the Registration Department of the State contends that the attachment is made after the mortgage by the petitioner bank. However, Section 281 of the Income Tax Act unambiguously states that during the pendency of any proceedings under the Income Tax Act. Thus, pendency of any proceedings is sufficient to treat any other transfer/mortgage as void. 50. Thus, 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....