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TMI Blog2011 (9) TMI 1087X X X X Extracts X X X X X X X X Extracts X X X X ..... chment of assets covered by Section 13(2) notice, for priority over the petitioner for realization of income-tax dues, is contrary to law and thus illegal; B. Be pleased to issue a writ of mandamus or any other appropriate writ, order or declaration directing the first respondent, income-tax department to allow the petitioner to exercise its rights under the SARFAESI Act and the rules made thereunder unhampered without any regard for the attachment orders passed by it for realization of income-tax dues of the second respondent company; C. Pending admission and final hearing of the present petition, be pleased to stay the operation and implementation of the impugned attachment of the assets covered by Section 13(2) notice ordered by the first respondent, income-tax department; D. Be pleased to grant such other and further relief/s as may be deemed fit in the in the interest of justice;" 2. The facts giving rise to this petition can be summarized as under:- 2.1 Petitioner - Asset Reconstruction Company (India) Ltd. (hereinafter referred to as "ARCIL" for short) is a company incorporated under the Companies Act, 1956 and registered as reconstruction and securitization company wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioner, in exercise of powers under Section 13(4) of the SARFAESI Act, read with Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002, took possession of the secured assets of the borrower company and advertised the possession notice in Economic Times (English edition) and Financial Express (Gujarati edition) on April 10, 2010, thereby informing second respondent and the public in general that the petitioner ARCIL has taken over the possession of the properties described in the notice. 2.6 At that stage, a major development took place. 1st respondent i.e. Income Tax Department, vide letter dated 8.11.2010, informed the petitioner that the assets of the second respondent company is under attachment of the Income Tax Department. Further, the Department also informed that the outstanding in the case of the company as per the record is to the tune of Rs. 36.33 crores excluding interest, under Section 220, Clause 2 of the Income Tax Act, 1961 for the Assessment Years 1993-94 to 1996-97. It appears that Department also informed that they already filed an affidavit of proof of debt before the Official Liquidator on 16.9.2009, claiming the outstanding dues and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Recovery Officer, reads as under:- "222. (1) When an assessee is in default or is deemed to be in default in making a payment of tax, the Tax Recovery Officer may draw up under his signature a statement in the prescribed form specifying the amount of arrears due from the assessee (such statement being hereafter in this Chapter and in the Second Schedule referred to as "certificate") and shall proceed to recover from such assessee the amount specified in the certificate by one or more of the modes mentioned below, in accordance with the rules laid down in the Second Schedule - (a) Attachment and sale of the assessee's movable property; (b) Attachment and sale of the assessee's immovable property; (c) Arrest of the assessee and his detention in prison; (d) Appointing a receiver for the management of the assessee's movable and immovable properties. Explanation: For the purpose of this subsection, the assessee's movable or immovable property shall include any property which has been transferred, directly or indirectly on or after the 1st day of June, 1973, by the assessee to his spouse or minor child or son's wife or son's minor c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been made very clear by catena of Supreme Court judgments as well as this High Court judgments holding that it is only when there is a specific provision in the statute conferring first charge over the property, crown debt is entitled to have priority over the claim of secured creditors. In absence of any such provision, secured debt would prevail over the crown debt. He placed reliance on the following case laws:- 1. (2009) 4 SCC 94 - Bank of India Vs. State of Kerala and ors. 2. (2009) 2 SCC 121 - Union of India Vs. SICOM Ltd. and anr. 3. 2011 (2) GLR 18 - Kotak Mahindra Bank Ltd., Mumbai Vs. District Panchayat, Baroda and anr. 4. 2010 (2) GLH 525 - Baroda City Cooperative Bank Ltd. Vs. State of Gujarat and ors. 5. Recent decision of this Court in SCA No. 13196 of 2008 in the case of Recovery Officer Vs. Bank of India and ors. 4.7 He further submitted that being a secured creditor, ARCIL is also entitled to have priority over the dues of the Income Tax Department under the Companies Act, 1956 more particularly when the borrower, Mardia Steel Limited is in liquidation. He has drawn our attention to Section 529A of the Companies Act, which provides th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of income-tax and other sum payable by respondent No.2 company in favour of respondent No.1 Department. This contention has been the main trump card for respondent No.1 Income Tax Department. 6. In rejoinder, learned counsel for the petitioner submitted that the equitable mortgage dated 17.9.1997 created by the borrower in favour of the lender financial institutions like ICICI, Central Bank of India, UTI Bank and Bank of India is not a void transfer in terms of Section 281 of the Income Tax Act, 1981 for two reasons - namely that application of Section 281 is not at all pleaded by the Income Tax Department and an issue which is not pleaded cannot be allowed to be raised at the stage of oral argument, and secondly; Section 281 defence cannot be raised by the Income Tax Department as a collateral challenge in a petition filed by a third party (in this case ARCIL). To this effect, reliance was placed on the decision of the Supreme Court in the case of Tax Recovery Officer-II, Sadar, Nagpur Vs. Gangadhar Vishwanath Ranade, reported in AIR 1999 SC 427, which holds that the Income Tax Department being a creditor, is required to file a suit for declaration that the char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as prayed for in the petition or not. 10. Before we deal with the main contention as regards Section 281 of the Income Tax Act, which is the only contention probably needs to be dealt with, we may reiterate the position of law so far as priority of dues of the Government is concerned over the debts of the Banks, which have been secured by the borrower by creating mortgage. The question relating to priority of dues of the Government fell for consideration before the Supreme Court and other High Courts from time to time. Taking into consideration the different decisions of the Supreme Court, a Division Bench of this Court in the case of Baroda City Co-operative Bank Limited Vs. State of Gujarat, reported in 2010 (3) GLR 2132 : 2010 (2) GLH 525, held as under:- "16. From the judgments referred to above, it will be evident that (a) The arrears of tax due to the State can claim priority over the unsecured debt. (b) If first charge by way of priority is not claimed under the statute, the said doctrine is not applicable. (c) Normally, the doctrine of first charge/priority of State will prevail over the private debt which is an unsecured debt. (d) In normal course, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LR 18. In the said case, the proceeding under the Central Excise Act, 1944 was initiated on 24.2.1987 and 26.2.1991 when Rule 173Q(2) and Rule 211 of the Central Excise Rules, 1944 were in vogue. At the time the first order of confiscation was passed, the authority had jurisdiction under Rule 173Q(2) to confiscate the land, building, plant, machinery, etc.. The said order was set aside and remitted for de nova decision. The final order was passed on 25.2.2006, by this time both Rule 173Q(2) and Rule 211 stood omitted. Having noticed the different provisions of the Central Excise Act, 1944, Central Excise Rules, 1944 and the Central Excise Rules, 2001 including Rule 28 of the Central Excise Rules, 2001 which related to the property to be vested in the Central Government on confiscation, and different decisions of the High Courts and Supreme Court, this Court held that Excise and Customs department of the Central Government cannot claim any priority over the secured debt of a secured creditor as created under the SARFAESI Act." 11. If under the law there is a first charge created with the State, even a secured creditor which has secured interest on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 92) 86 Sales Tax Cases 88, wherein almost similar provision i.e. Sec.33-A of the Madhya Pradesh General Sales Tax Act, 1958 fell for consideration. The Indore Bench of the Madhya Pradesh High Court 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. Similar was the view expressed by a Division Bench of the Madhya Pradesh High Court (Gwalior Bench) in the case of Pooranchand Ved Prakash v. The State of Madhya Pradesh reported in (1973) XXXI Sales Tax Cases 170. 14. Sec.281 of the Income Tax Act also fell for consideration before the Division Bench of this Court in the case of Tax Recovery Officer v. Industrial Financial Corporation of India in Special Civil Application No. 3786 of 2010 with another case wherein by judgment dated 22nd June 2011, this Court taking into consideration the facts that the transfer of property was made for valuable consideration without notice of proceeding of recovery of arrears of income tax held that the financial institution was entitled to protecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill not entertain the point. In this context, it would be expedient to rely upon a judgment of the Hon'ble Supreme Court in the case of Bharat Singh Vs. State of Haryana, reported in AIR 1988 SC 2181, wherein the Hon'ble Supreme Court in paragraph 13 held as under:- "In our opinion, when a point which is ostensibly a point of law is required to be substantiated by facts, the party raising the point, if he is the writ petitioner, must plead and prove such facts by evidence which must appear from the writ petition and if he is the respondent, from the counteraffidavit. If the facts are not pleaded or the evidence in support of such facts is not annexed to the writ petition or to the counter, affidavit, as the case may be, the court will not entertain the point. In this context, it will not be out of place to point out that in this regard there is a distinction between a pleading under the Code of Civil Procedure and a writ petition or a counteraffidavit. While in a pleading, that is, a plaint or a written statement, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R 1999 SC 427, where the Supreme Court considered Section 281 of the Income Tax Act and examined the issue as to whether a Tax Recovery Officer can declare any transfer made by the assessee in favour of a third party as void. The Supreme Court held in paragraphs 7, 8 and 9 as under:- "7. The question which is now required to be answered is whether in a proceeding under Rule 11 of the Second Schedule to the Income-tax Act, the Tax Recovery Officer can declare a transfer as void under Section 281. Section 281, as it stood at the relevant time provided as follows:-- "Section 281: Where, during the pendency of any proceeding under this Act, any assessee creates a charge on or parts with the possession by way of sale, mortgage, 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 assessee as a result of the completion of the said proceeding: Provided that such charge or transfer shall not be void if made for valuable consideration and without notice of the pendency ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the benefit of the assessee. He cannot declare any transfer made by the assessee in favour of a third party as void. If the Department finds that a property of the assessee is transferred by him to a third party with the intention to defraud the Revenue, it will have to file a suit under Rule 11(6) to have the transfer declared void under Section 281." 19. Thus, what can be deduced from the judgment of the Supreme Court in the case of Tax Recovery OfficerII, Sadar, Nagpur Vs. Gangadhar Vishwanath Ranade (supra) is that if the Department finds that a property of the assessee is transferred by him to a third party with the intention to defraud the Revenue, it will have to file a Suit under Rule 11(6) of the Second Schedule to the Income Tax Act to have the transfer declared void under Section 281 of the Act. 20. Therefore, it is difficult for us to accept this contention of the learned counsel for the Department that the charge or transfer by respondent No.2 in favour of the financial institutions can be said to be a void charge or transfer. 21. In the above view of the matter, the petition is allowed. It is declared that the claim put-forward by responde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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