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TMI Blog2012 (8) TMI 541X X X X Extracts X X X X X X X X Extracts X X X X ..... section 281 of the Income-tax Act, 1961, the charge created against the property in question by mortgaging the property by the second respondent-assessee borrower in favour of the first respondent- financial institution during pendency of any of the proceedings under the Income-tax Act, 1961, is void as against any claim in respect of tax and other sum payable by the second respondent-assessee in favour of the petitioner-Revenue. The second writ petition-Special Civil Application No. 6961 of 2010- has been preferred by the Assistant Commissioner of Customs, against the same very measures taken by the first respondent-financial institution under section 13(4) of the SARFAESI Act. The order dated October 7, 2009, passed by the Debts Recovery Tribunal-I, Ahmedabad, in Securitization Application No. 35 of 2009 has been challenged, whereby the said Tribunal, on hearing the parties, observed that the public auction and the subsequent proceedings made by the first respondent-financial institution shall be subject to the final outcome of the securitization application pending before the Debts Recovery Tribunal. The question involved in the second writ petition is as to whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income-tax Act, 1961. It is stated that an equitable mortgage has been created by the second respondent on January 4, 1999, in respect of the immovable property as described in the case without obtaining any previous permission from the Assessing Officer at the time of creating the equitable mortgage. Therefore, such charge on mortgage created by the second respondent-assessee as borrower in favour of the first respondent-financial institution has to be declared as void as against all the claims in respect of outstanding tax demand with interest, penalty, charges, etc., totalling to Rs. 242 crores due and payable by the second respondent to the petitioner-Revenue and to that extent, the mortgage created by the second respondent in favour of the first respondent requires to be declared as void and not binding on the petitioner-Revenue, the Income-tax Department. The same is not legal, valid and enforceable by the first respondent against the petitioner-Revenue in the eye of law. Consequently, it be held and declared that the first respondent-financial institution is not entitled to exercise power under the SARFAESI Act in the capacity of a secured creditor on the basis of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plea has been taken by the second respondent, as taken by the petitioner-Revenue. In the second writ petition, the Assistant Commissioner of Customs while raising the question of charge over the property created in favour of the first respondent-financial institution, has made out a claim on the following facts. The Director General of Foreign Trade, New Delhi, had granted EPCG Licence No. 01500634 on July 16, 1997, to the second respondent. At that time, the second respondent had executed the requisite bond in favour of the Customs Department regarding due payment of the customs duty along with interest at the rate of 15 per cent. per annum on the said customs duty amount in case the export obligation is met with. The second respondent has failed to discharge the export obligation, as per Notification No. 29 of 1997, dated April 1, 1997, and the condition of the EPCG licence during 1997-98 itself. The petitioner of the second writ petition-Customs Department, therefore, issued a duty demand notice on December 30, 2004, directing the second respondent to pay a sum of Rs.65,30,96,269 along with interest at the rate of 15 per cent. per annum from July 16, 1998 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2010, for intervening as a party respondent in Securitization Application No. 35 of 2009. The matter was adjourned and having realized that earlier the Tribunal passed an order on October 7, 2009 (impugned order), allowing the first respondent-financial institution to sell the properties subject to the decision of the appeal, has preferred the writ petition, particularly when it also came to know that other writ petition, being SCA No. 3786 of 2010, has been filed by the Income-tax Department before this court. The first respondent-financial institution while opposed the prayer, has supported the action taken under section 13(4) of the SARFAESI Act. According to the learned counsel appearing on behalf the first respondent- financial institution, the charge created by the second respondent-borrower in favour of the first respondent-financial institution by mortgaging the property cannot be held to be void in view of clause (i) of the proviso to sub-section (1) of section 281 of the Income-tax Act, 1961. According to him, the charge having created for adequate consideration and no notice of pendency of the income-tax proceedings having issued or served on the first respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5, 1997. (v) Pledge agreement, executed on January 27, 1999, for pledge of 1,00,00,000 equity shares of the face value of Rs. 10 each in favour of IFCI Ltd. Details of secured assets Movable properties : The whole of the movable properties of the borrower (respondent No. 2-borrower company) including its movable plant and machinery, machinery spares, tools and accessories and other movables, both present and future (save and except book debts) whether installed or not and whether now lying loose or in cases or which are now lying or stored in or about or shall hereafter from time to during the continuance of the security of these presents by brought into or upon or be stored or be in or about all the borrower's factory premises and godowns situated at GIDC Gem and Jewellery Complex, Village Bhat, District Gandhinagar, in the State of Gujarat and/or be in or about all the borrower's factories, premises and godowns anywhere or wherever else the same may be or be held by any party to the order or disposition of the borrower or in the course of transit or on high seas or on order, delivery, howsoever and wheresoever in the possession of the borrower and either b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancial institution being the lead institution duly issued a notice under section 13(2) of the SARFAESI Act on April 29, 2003. The second respondent-borrower company approached the BIFR with a sole objective to avoid proceeding under the SARFAESI Act. Reference Case No. 240 of 2004 was registered before the BIFR, but the same was rejected by the BIFR on March 19, 2008, on the ground that the second respondent-borrower company has approached the BIFR with unclean hands by manipulating the company's accounts. The second respondent-borrower company has approached the first respondent-financial institution for one-time settlement and offered to pay the total sum of Rs. 29.96 crores towards the settlement of dues of the second respondent-borrower company. However, the proposal being on the lower side was not acceptable to the first respondent-financial institution. On July 25, 2007, the first respondent- financial institution has informed the second respondent-borrower company that the first respondent is only agreeable to consider the proposal of the second respondent-borrower company envisaging an aggregate payment of Rs. 36 crores immediately. Since the terms and conditions of the set ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by mortgaging the property by the second respondent-assessee borrower in favour of the first respondent-financial institution during pendency of any of the proceedings under the Income-tax Act, 1961, is void as against any claim in respect of income-tax and other sum payable by the second respondent-assessee in favour of the petitioner- Revenue. It is not in dispute that a proceeding under the Income-tax Act, 1961, is pending since the assessment year 1996ƒ_"97 (financial year 1995-96) as also the proceeding under the Income-tax Act, 1961, for the subsequent assessment year 1998-99 onwards against the second respondent-assessee, which is a borrower of the first respondent-financial institution. The charge has been created by the second respondent as borrower in favour of the first respondent-financial institution by way of equitable mortgage on January 21, 1999, in respect of the immovable property in dispute, during the pendency of the proceeding under the Income-tax Act. Therefore, the rigour of sub-section (1) of section 281 of the Income-tax Act, 1961, is attracted in respect of the mortgaged property in question. The stand of the first respondent is that the mort ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id provision does not prescribe any adjudicatory machinery for deciding any question which may arise under it. In order to declare a transfer fraudulent under section 281, appropriate proceeding will have to be taken out by the Department before the competent civil court. In the absence of such declaration, the creation of mortgage in favour of the first respondent cannot be declared to be bad. It is specifically pleaded by the first respondent that no notice of pendency of the income-tax proceeding was served on the first respondent on or before the execution of the equitable mortgage deed by the second respondent in favour of the first respondent. Therefore, according to the counsel for the first respondent, the mortgage created by the second respondent in favour of the first respondent is saved under clause (i) of the proviso to sub-section (1) of section 281 of the Income-tax Act, 1961. Section 281 of the Income-tax Act, 1961, reads as follows : "281. Certain transfers to be void.-(1) Where, during the pendency of any proceeding under this Act or after the completion thereof, but before the service of notice under rule 2 of the Second Schedule, any asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company to find out the liability of repayment and thereby it is to be accepted that they have knowledge of liability of payment of tax dues by the second respondent in favour of the petitioner-Revenue. However, such submission cannot be accepted as a fact cannot be presumed that the first respondent had the knowledge of income-tax liability of the second respondent-borrower company and/or pendency of any income-tax proceeding against the second respondent-borrower company, particularly while executing the agreement, the Director on behalf of the second respondent had specifically mentioned in the agreement that there was no income-tax dues and no such proceeding was pending. As the fact cannot be presumed, the aforesaid submission made on behalf of the petitioner- Revenue cannot be accepted. Under the proviso to sub-section (1) of section 281, the charge or transfer shall not be void if made-(i) for adequate consideration and without notice of the pendency of such proceedings, or (ii) without notice of tax or other sum payable by the assessee. There is nothing on record to suggest that any notice was given by the Revenue to the first respondent relating to pendency of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perty from a dealer bona fide for valuable consideration without notice of the proceedings for recovery of arrears of sales tax against that dealer, the transfer will be saved under the proviso even though it is hit by the main part of the section. The view that the expression "without notice of the proceedings" in the proviso refers to the dealer and not to be transferee is not correct. The case of the petitioner of the first writ petition, SCA No. 3786 of 2010 being also covered by the aforesaid decision, we hold that the first respondent-financial institution is entitled to the protection to the bona fide transfer of the property having made for valuable consideration from the second respondent-assessee and the same having made without notice of the proceedings for recovery of arrears of income-tax against the first respondent-transferee is saved under clause (i) of the proviso to sub-section (1) of section 281 of the Income-tax Act, 1961, though the transfer is hit by the main part of the section. In the absence of any merit, the first writ petition, SCA No. 3786 of 2010 is dismissed, but there shall be no order as to costs. In the second writ petition, SCA No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e costs including cost of sale remaining unpaid and shall render the surplus, if any, to such person : Provided that where the person (hereinafter referred to as predecessor), by whom any sum payable under this Act including the amount required to be paid to the credit of the Central Government under section 28B is not paid, transfers or otherwise disposes of his business or trade in whole or in part, or effects any change in the ownership thereof, in consequence of which he is succeeded in such business or trade by any other person, all goods, materials, preparations, plants, machineries, vessels, utensils, implements and articles in the custody or possession of the person so succeeding may also be attached and sold by the proper officer, after obtaining written approval from the Commissioner of Customs, for the purposes of recovering the amount so payable by such predecessor at the time of such transfer or otherwise disposal or change. (2) Where the terms of any bond or other instrument executed under this Act or any rules or regulations made thereunder provide that any amount due under such instrument may be recovered in the manner laid down in sub-section (1) th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the UTI Bank had taken possession of the property under section 13(4) of the SARFAESI Act and having noticed that there are no specific provisions under the Central Excise Act or the Customs Act to claim first charge, as provided under other enactments, the Full Bench held that generally the dues to the Government, i.e., tax, duties, etc. (Crown's debts), get priority over ordinary debts ; only when there is a specific provision in the statute claiming first charge over the property, the Crown's debt is entitled to have priority over the claim of others. In the absence of any such provision to claim first charge, the Government cannot claim precedence under the Central Excise Act over the claim of the secured creditor under the SARFAESI Act, 2002. Similar question fell for consideration before the Supreme Court in the case of Union of India v. Sicom Ltd. [2009] 147 Comp Cas 531 ; [2009] 2 SCC 121 ; [2010] 1 GSTR 346 (SC). Having noticed the provisions of the Central Excise Act, 1944, the Supreme Court has rejected the claim of the Government to have first charge over the secured debt. The same very issue also fell for consideration before a Division Bench of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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