TMI Blog2012 (6) TMI 442X X X X Extracts X X X X X X X X Extracts X X X X ..... ukhopadhaya, K.M. Thaker, JJ. Manish R. Bhatt, Sr. Adv. with Mauna M. Bhatt, Gaurang H. Bhatt for the Petitioner S.N. Soparkar and Mihir Thakore, Sr. Advs. with Maulik G. Nanavati, Manav A. Mehta for the Respondent JUDGMENT S.J. Mukhopadhaya, J 1. The first writ petition - Special Civil Application No. 3786 of 2010 has been preferred by the Tax Recovery Officer, Income-tax Commissioner's Office, Gandhinagar against the action taken by the 1st respondent - M/s Industrial Finance Corporation of India (hereinafter referred to as the 1st respondent - financial institution ) under Section 13(4) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the SARFAESI Act ). A prayer has been made to restrain the 1st respondent - financial institution from parting with possession, transferring or otherwise dealing with the properties of the 2nd respondent - Parekh Platinum Ltd. (hereinafter referred to as the 2nd respondent - borrower Company ). 2. The question involved in the first writ petition is whether, in view of sub-section (1) of Section 281 of the Income-tax Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner - revenue had no knowledge that the measures have been taken by the 1st respondent - financial institution, the secured creditor, for recovery of their dues by taking recourse under Section 13(4) of the SARFAESI Act and, therefore, the petitioner - revenue could not approach the Debts Recovery Tribunal at the appropriate time. Further case of the petitioner - revenue is that the 2nd respondent, who is an assessee, being defaulter, has not paid huge outstanding income-tax demand with interest and penalty till date for the Assessment Years 1996-97, 1998-99, 1999-2000, 2000-01, 2001-02 and for the block assessment period; the secured assets have already been attached by the petitioner - revenue on 20.12.2004. Therefore, such property of the 2nd respondent - assessee could not have been attached nor possession of the same could have been taken by the 1st respondent - financial institution claiming it to be the secured creditor, the charge created by mortgage on the same property by the 2nd respondent - borrower assessee in favour of the 1st respondent being void in view of sub-section (1) of Section 281 of the Income-tax Act, 1961. It is stated that an equitable mortgag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. Therein, as the action of 2002 and 2009 is challenged, the petition for condonation of delay has been filed and the matter is pending. The 2nd respondent, the assessee of the petitioner - revenue as also borrower of the 1st respondent - financial institution, has also challenged the measures taken by the 1st respondent under Section 13(4) of the SARFAESI Act by filing another appeal under Section 17 of the SARFAESI Act, being Securitization Appeal No. 35 of 2009 pending in the Court of the Debts Recovery Tribunal, Ahmedabad. Therein also, similar plea has been taken by the 2nd respondent against the measures taken by the 1st respondent apart from the other pleas relating to pendency of the appeal before the Appellate Authority constituted under the Sick Industrial Companies (Special Provisions) Act, 1985; the steps taken for One Time Settlement between the 2nd respondent - borrower and the 1st respondent - financial institution and also alleged violation of certain provisions of the SARFAESI Act and the Rules framed thereunder. Before this Court also, similar plea has been taken by the 2nd respondent, as taken by the petitioner - revenue. 6. In the second writ petitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Section 142(1)(ii)(C) of the Customs Act, 1962 and under the Customs (Attachment of Property of Defaulters for Recovery of Government Dues) Rules, 1995 and forwarded the same to its Ahmedabad office and Gandhinagar office. The Customs department has also submitted an application dated 8.10.2009 before the Debts Recovery Tribunal - I, Ahmedabad in the pending Securitization Application No. 35 of 2009 filed by the 2nd respondent under Section 17 of the SARFAESI Act and lodged its claim of recovery of the amount from the 2nd respondent. 11. The Customs department had appeared and attended the hearing of the said Securitization Application No. 35 of 2009 before the Debts Recovery Tribunal -I, Ahmedabad and on 1.4.2010 the Tribunal recorded the statement of the 1st respondent - financial institution regarding disclosure of the events of the sale process in respect of the properties of the 2nd respondent. The Customs department has submitted its application dated 5.4.2010 for intervening as a party respondent in the Securitization Application No. 35 of 2009. The matter was adjourned and having realized that earlier the Tribunal passed an order on 7.10.2009 (impugned order) allowin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovable properties and by mortgage of immovable properties by executing the loan agreement/security documents in the year 1997 as per the details given hereunder:- (i) Joint Mortgage created on 21.1.1999, by deposit of title deeds with IFCI on pari pasu basis with SBI, on the Company's immovable properties situated at GIDC Gem and Jewellery Park, Village Bhat, District Gandhinagar in the State of Gujarat. (ii) Deed of Hypothecation dated 15.1.1997, executed by the Company in favour of IFCI Limited creating a first charge on the Company's movables at Bhat including movable machinery, machinery spares, tools and accessories, present and future. (iii) Personal Guarantee furnished by Shri Jaisukhlal J. Parekh, Shri Rajesh J. Parekh and Shri Rajnikant J. Parekh on 16.1.1997. (iv) Corporate Guarantee of Arraycom (India) Ltd. (Formerly Parekh Micro Electronics (India) Ltd. furnished on 15.1.1997. (v) Pledge Agreement, executed on 27.1.1999 for pledge of 1,00,00,000 equity shares of face value of ₹ 10/- each in favour of IFCI Ltd. Details of Secured Assets Movable properties: The whole of the movable properties of the Borrower (Respondent No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... representing more than 75% of the value of the amount outstanding as required under Section 13(9) of the SARFAESI Act, as detailed below:- S. No. Date Consent of Secured Creditors 1 18.02.2003 Dena Bank 2 19.02.2003 Corporation Bank 3 20.02.2003 State Bank of India 4 20.02.2003 Gujarat State Financial Corporation 5 22.02.2003 Indian Bank 6 26.02.2003 Allahabad Bank 7 28.02.2003 Bank of India 8 28.02.2003 State Bank of Saurashtra 9 10.03.2003 Industrial Investment Bank of India Ltd. 15. ARCIL, assignee of debts of Dena Bank, appointed Resolution Commercial Management Company as a facilitator for resolving the loan account of the 2nd respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue before the Debts Recovery Tribunal, Ahmedabad against the measures taken by the 1st respondent - financial institution under Section 13(4) of the SARFAESI Act. The auction of the immovable property is under challenge. The 2nd respondent has also filed Securitization Appeal No. 35 of 2009 against such measures taken by the 1st respondent under Section 13(4) of the SARFAESI Act and the said matter is also pending before the Debts Recovery Tribunal, Ahmedabad. In this background, it is not desirable to decide the question whether the measures taken by the 1st respondent under Section 13(4) of the SARFAESI Act are against any of the provisions of the SARFAESI Act or the Rules framed thereunder and thereby illegal or not. The secured assets having already been sold, the auction purchaser having not been impleaded as a party respondent to the present writ petition, the other financial institutions and banks with whom the auction amount has already been distributed being not parties to the present petition, it is not desirable to decide the question of validity of the measures taken by the 1st respondent under Section 13(4) of the SARFAESI Act. 17. The only question which is r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces (statutory or otherwise), claims and demands, and that no proceedings are pending or initiated against the borrower under the Income Tax Act, 1961, Public Demands Recovery Act or under other law in force in India for the time being and that no notice has been received or served on the Company under Rules 2, 16, 21 and 51 of the Second Schedule of the Income Tax Act, 1961 and/or any other law that there is no pending attachments whatsoever issued or initiated against the said immovable properties or any of them or any part thereof . It was further declared that the Company has paid all rents, royalties and all public demands including provided fund dues, gratuity dues, Employees' State Insurance Dues, Income Tax, Sales Tax, Corporation Tax and all other taxes and revenues payable to the Government of India or to the Government of any State or to any Local Authority and that at present there are no arrears of such dues, rents, royalties, taxes and revenues due and outstanding and that no attachments or warrants have been served on the Company in respect of Sales Tax, Income Tax, Government Revenues and other Taxes. The aforesaid facts have not been disputed by the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h any of the assets aforesaid does not form part of the stock-in-trade of the business of the assessee. 25. The petitioner - revenue, the Tax Recovery Officer, has not disputed the fact that no notice of pendency of any income-tax proceeding was served on the 1st respondent - financial institution on or before the equitable mortgage made by the 2nd respondent - borrower Company in favour of the 1st respondent - financial institution. It is not the case of the petitioner - revenue that no adequate consideration was made before creating the charge by equitable mortgage by the 2nd respondent in favour of the 1st respondent - financial institution. 26. The learned counsel for the petitioner referred to the Annual Reports of 1993-94 onwards of the 2nd respondent - borrower Company to show that in the report dated 30.9.1997 i.e. much prior to the creation of the equitable mortgage, the 2nd respondent has shown under the heading Contingent Liabilities Not Provided For , including the taxation matter under appeal ₹ 815.98 lacs (Previous Year ₹ 54.01 lacs). It was contended on behalf of the petitioner - revenue that the 1st respondent - financial institution before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the State revenue referring to the provisions of Section 33-A of the Madhya Pradesh General Sales Tax Act, 1958 contended that the transfer as against the revenue was void. The Indore Bench of the Madhya Pradesh High Court having noticed the provision of Section 33-A of the Madhya Pradesh General Sales Tax Act, 1958, which was almost similar to the present sub-section (1) of Section 281 of the Income-tax Act, 1961, held that the transfer was for a valuable consideration and it was without notice of the pendency of the proceeding under the Sales-tax Act and, therefore, the transfer falls under the exception created by the proviso to Section 33-A of the said Act. The finding of the lower Court was upheld and the second appeal preferred by the State of Maharashtra was dismissed. Similar finding was also given by a Division Bench of the Madhya Pradesh High Court (Gwalior Bench) in the case of Pooranchand Ved Prakash vs. The State of Madhya Pradesh, reported in (1973) XXXI Sales Tax Cases 170. Therein, the Division Bench of the Madhya Pradesh High Court, taking into consideration the object of the proviso to Section 33-A of the Madhya Pradesh General Sales Tax, 1958, held that suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner of Customs of Deputy Commissioner of Customs or such other officer of customs; or (c) if the amount cannot be recovered from such person in the manner provided in clause (a) or clause (b) - (i) the Assistant Commissioner of Customs or Deputy Commissioner of Customs may prepare a certificate signed by him specifying the amount due from such person and send it to the Collector of the district in which such person owns any property or resides or carries on his business and the said Collector on receipt of such certificate shall proceed to recover from such person the amount specified thereunder as if it were an arrears of land revenue; or (ii) the proper officer may, on an authorization by a Commissioner of Customs and in accordance with the rules made in this behalf, distrain any movable or immovable property belonging to or under the control of such person, and detain the same until the amount payable is paid; and in case, any party of the said amount payable or of the cost of the distress or keeping of the property, remains unpaid for a period of thirty days next after any such distress, may cause the said property to be sold and with the proceeds of such s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of State will prevail over the private debt which is an unsecured debt. (d) In normal course, the doctrine of first charge/priority cannot prevail over secured debts, but if first charge of the State is over the secured debts, both debts being equal, the State can claim priority even over the secured debts, and (e) The secured debts under the Securitization Act or debt under the RDDB Act has no first charge and thereby cannot compete with first charge/priority claim of the State if made under the statute. 33. A specific question whether the Central Excise Department can claim priority over the secured debt of a secured creditor under the Central Excise Act, 1944 also fell for consideration before different High Courts and the Supreme Court. A Full Bench of the Madras High Court in the case of UTI Bank Ltd. vs. The Dy. Commissioner of Central Excise, Chennai II Division, reported in 2007 (1) Law Weekly, 50 while dealing with the Central Excise Act, 1944, the Customs Act, 1962 and the SARFAESI Act, 2002, considered whether the Crown's debts, for which there is no priority or charge is created under the statute, should have precedence over the secured creditors or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ition, the Assistant Commissioner of Customs in SCA No. 6961 of 2010 being covered by the decision of the Madras High Court in the case of UTI Bank Ltd. vs. The Dy. Commissioner of Central Excise, Chennai II Division, reported in 2007 (1) Law Weekly, 50, the decision of the Supreme Court in the case of Union of India vs. Sicom Ltd., reported in (2009) 2 SCC 121 and the decision of a Division Bench of this Court in the case of Kotak Mahindra Bank vs. District Magistrate, reported in 2011 (1) GLR 18, we hold that the Customs Department cannot claim any priority of claim over the claim of the secured creditor, the 1st respondent - financial institution. No relief can be granted in the second writ petition - SCA No. 6961 of 2010, which is accordingly rejected. 37. So far as the question of taking over possession of the property under Section 13(4) of the SARFAESI Act or auction of sale of the said property under said Section 13(4) or distribution of the assets between the different secured creditors are concerned, they being the matters pending consideration before the Debts Recovery Tribunal, Ahmedabad in Securitization Appeal No. 35 of 2009 filed by the 2nd respondent and the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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