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TMI Blog2021 (8) TMI 1233X X X X Extracts X X X X X X X X Extracts X X X X ..... s Ltd., and its Directors Shri.Raj Kumar Khemka, Shri.Ravi Prakash Khemka and Shri.Thirupathy Kumar Khemka. 3. The impugned order further proceeds that the above defaulters M/s.NEPC Agro Foods Ltd. and its Directors Shri.Raj Kumar Khemka, Shri.Ravi Prakash Khemka and Shri.Thirupathy Kumar Khemka are in tax arrears to the Income Tax Department as below: 1. M/s.NEPC Agro Foods Ltd. Rs. 20,37,11,265 2. Shri.Raj Kumar Khemka Rs. 51,08,289 3. Shri.Ravi Prakash Khemka Rs. 2,11,52,008 4. Shri.Thirupathy Kumar Khemka Rs. 59,35,011 4. In this connection, the respondent informed that the property mentioned in the newspaper, i.e. Plot No.83, Ambattur Industrial Estate, Chennai-53 was already attached in Form ITCP 16 by the Income Tax Department on 18.06.2003 and the same was served to the defaulter assessee company on 18.06.2003. A copy of the Form ITCP 16 also enclosed along with the impugned order which was communicated to Shri. A.S. Bapalt, the Authorised Officer, Janatha Sahakari Bank Ltd., Pune [the petitioner herein]. 5. The petitioner Janata Sahakari Bank Ltd., made a submission that the attachment was made against M/s.NEPC Agro Foods Ltd. and they are neither a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llenged before the DRT-I, Chennai but the original stay was vacated by the High Court. On remand, DRT dismissed S.A. No. 68 of 2008. An Appeal was made before the Debts Recovery Appellate Tribunal, which was also dismissed. At the time of filing of the writ petition, no proceedings were pending relating to the loan agreement entered into between the petitioner bank and the NEPC Agro Foods Ltd. It is contended that the petitioner bank initiated winding up proceedings before the Madras Court against M/s.NEPC Agro Foods Ltd. in C.P.No.247 of 2008. Meanwhile, the petitioner bank reeived the notice dated 27.12.2007 consequent to the advertisement dated 20.12.2007 in the Dinamalar newspaper from the respondent informing the petitioner of an Income Tax attachment by the respondent on the same schedule property vide Form ITCP6 dated 18.06.2003. 11. The petitioner states that the encumbrance certificate issued by the Inspector General of Registration reflects the charge created by the respondent vide Form ITCP 16 bearing reference No.T.R.No.130/CEN.I(1)/2003-04 dated 18.06.2003. The attachment was registered and started reflecting on the encumbrance certificate from 31.12.2007 as other cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rights of secured creditors to realise secured debts due and payable to them by 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. Explanation:-for the purposes of this Section, it is hereby clarified that on or after the commencement of the insolvency and bankruptcy Code, 2016, in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that code." 3.There is, thus, no doubt that the rights of a secured creditor to realise secured debts due and payable by sale of assets over which security interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority. This Section introduced in the Central Act is with "notwithstanding" clause and has come into force from 01.09.2016. 4. The law having now come into force, naturally i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly be satisfied. The fact that a statute provides for such a declaration being made, if the conditions mentioned in the statute are satisfied, does not imply that an officer exercising powers under the provisions of the statute can assume to himself the power and jurisdiction to declare what is otherwise a legally valid transaction as void. Adjudication is the function of the courts. Any declaration of a transaction being void must be sought in the civil court. The Income-tax Officer moreover in this case is an interested party as it is in the interests of the Revenue to make such a declaration and proceed to recover the vendor's arrears of tax from such person. 8. The Supreme Court of India in its recent decision rendered in the case of TRO v. Gangadhar Viswanath Ranade (Decd.) [1998] 234 ITR 188 has held that if the Department finds that the assessee has transferred a property to a third party with the intention to defraud the Revenue, the Revenue will have to file a suit under Rule 11(6) of Schedule II to the Income-tax Act to have the transfer declared void under Section 281 of the Income-tax Act." 16.Relying the said judgment, the learned senior counsel is of an opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d this Court is bound to consider the facts circumstances independently and the scope of the relevant provisions with reference to the provisions of the Income Tax Act. 20.In this regard, it is relevant to rely on the judgment of the Hon'ble Three Judges Bench of the Supreme Court of India in the case of Official Liquidator vs. Dayanand and others, reported in 2008 (10) SCC 1, wherein the Apex Court in an unambiguous terms held that "there have been several instances of different Benches of High Court not following the judgments/orders of co-ordinate and even larger Benches". In some cases, High Courts were gone to the extent of ignoring the law laid down by this Court without any tangible reason. Therefore, if there are factual differences or the reasons or conflicting decisions, then the reasons must be considered in clear terms for the purpose of distinguishing the judgment or otherwise. Thus, it is not as if every judgment produced by the respective learned counsels appearing on behalf of the parties to the lis is to be followed as it is. The Courts are bound to apply the facts and circumstances of each case and distinguish the principles if necessary with reference to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed during the financial year 1999-2000. Moreover, the Bank had sanctioned the loan without verifying the tax arrears and it is the bank's obligation to verify the same. Considering the above facts, it is submitted that the department has the first charge with respect to the tax dues which were created prior to 31.03.1999 and it is clear that the liability of the said bank that costs the encumbrance in the property located at Plot No. 83, Ambattur Industrial Estate. Chennai-600053 admeasuring two acres is void against the Income tax dues. 24.It is further contended that when the file was at Chennai, the property belonging to the assessee-defaulter, NEPC Agro Foods Limited, located at D.No.83, MTH Road, Ambattur Industrial Estate, Chennai-98 was attached by Tax Recovery Officer-I, Central, Chennai, vide ITCP 16 in T.R. Dated 18.06.2003. A copy of the above ITCP 16 was served on 18.06.2003 itself on the assessee-defaulter, NEPC Agro Foods Limited. Later on, on 20.12.2007, the petitioner bank M/s/.Janata Sahakari Bank issued an advertisement in the tamil daily newspaper Dina Malar informing that the aforesaid property had been taken possession by the petitioner-bank for default in pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on NEPC Agro Foods Limited on 18.06.2003, the petitioner- Janata Sahakari Bank cannot be said to be the lawful owner of the immovable property from the later period of 19.12.2007. While the petitioner-Janata Sahakari Bank is claiming to be in possession of the said immovable property from the year 2007, the Income Tax Department had attached the said immovable property much earlier on 18.06.2003. Consequent to the advertisement issued by the petitioner- Janata Sahakari Bank in the tamil daily newspaper DINA MALAR dated 20.12.2007, the then TRO-VI, Company Range-IV, Chennai, vide letter in T.R. No.23/2007-08, dated 27/12/2007, brought to the notice Of the petitioner- Janata Sahakari Bank that the aforesaid immovable property had already been attached by the Income Tax Department on 18.06.2003 and the attachment notice in ITCP 16 was served on the NEPC Agro Foods Limited on 18.06.2003. Whereas, as already mentioned in the comments for para 2, once the ITCP 16 is issued, an assessee-defaulter is prohibited and restrained from the date of the aforesaid notice until further order from the Income Tax Department, from transferring or charging the under mentioned properties which are in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that it is an acceptable principle in the matter of construction of an Indian statute as far as possible that there must be uniformity of construction and if the provision of law which falls for consideration before the Court has already been construed by another High Court, normally that construction should be accepted. But then the Honourable Division Bench also added a caveat that if there are compelling reasons to depart from the view taken by the other High Court, the said construction need not be accepted. This Court is of the considered opinion that there are compelling reasons to depart from the view taken by the Division Bench of the Gujarat High Court. Again as already pointed out, this Court treading the path taken by the Hon'ble Division Bench of the Punjab and Haryana High Court. 20.Yet the orders impugned in these writ petitions cannot sustained as such. The Hon'ble Supreme Court in (1998)6 SCC 658 has held that it is the function of the civil court to declare a transactions to be null and void and that the Tax Recovery Officer cannot exercise the said function. Therefore, the respondent clearly erred in declaring the transactions to which the petitioners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tax Recovery Officer under Schedule II Rule 11 of the Income Tax Act would be an appropriate procedure for adjudication of these facts. Thus, the writ petition is to be rejected. ANALYSIS: 30.Let us now consider the scope of Section 281 of the Income Tax Act. Chapter XXIII Section 281 of the Income Tax Act contemplates certain transfers to be void. Sub-clause (1) enumerates that "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 assessee 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, 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 or otherwise". A close reading of the above provision would reveal that where during the pendency of any proceedings under this Act or after the completion thereof, but before service of notice under rule 2 of the Second Schedule, if any charge is created by an assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vour of the petitioner Bank is valid, then he can pass appropriate orders withdrawing the attachment made under the provisions of the Act. If the Tax Recovery Officer is of an opinion that the attachment made under the provisions of the Act was prior to the mortgage or otherwise, then he can pass appropriate orders confirming the attachment. However, the said Rule is not relatable to declaration or in the form of an appeal by any third person. It is only an enabling provision for effective adjudication of the actual facts and to find out the genuinity of certain transfers made during the pendency of the Income tax proceedings and with reference to the provision under Section 281 of the Income Tax Act. 34.Looking into the provisions of the SARFAESI Act, more specifically, Section 26E, which contemplates priority to secured creditors which reads that "notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any Secured Creditor 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". 35 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which contemplates that any such transaction made during the pendency of any proceedings under the Income Tax Act shall be void. Thus, the understanding would be that if the proceedings under the Income Tax Act are pending at the time of creating mortgage, sale, gift, etc., then Section 281 of the Income Tax Act would be pressed into operation. The next question is at the time of creation of mortgage, sale, gift etc., the Income Tax Proceedings are pending as contemplated under Section 281 of the Income Tax Act, such transactions became void. Thus, it is unambiguous that the transactions or transfers made during the pendency of the Income tax proceedings are void. This being the purposive interpretation to be adopted, all transfers, mortgages etc., made during the pendency of the Income tax proceedings shall became void under Section 281 of the Income Tax Act. Once Section 281 of the Income Tax Act was pressed into service and the transactions or transfers became void, any mortgage, transfer etc., thereafter would be of no validity. In other words, the transfer or transactions made against the void transactions under the Income Tax Act are invalid in the eye of law. Therefore, eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all other claim including the Government dues. Even in such circumstances, this Court has to consider the other principles which all are to be followed in such cases. Admittedly, the SARFAESI Act and Recovery of Debts and Bunkruptcy Act, 1993 provides priority to the secured creditors and the Income Tax Act provides priority to the tax arrears to be recovered. Under these circumstances, this Court is inclined to consider the common law Doctrine of priority of crown debts. 41.The "doctrine of constitutional priority" will have precedence over the other priorities. If the priority clause is provided under various enactments, the question arises as to which priority is to be held precedence over the other priorities. The test of traceability and recognition under the constitutional provisions would be the proper procedure to form an opinion. 42.In the present scenario, the SARFAESI Act and the DRT Act provides priority to secured creditors, i.e. the banks hold priority. The Income Tax Act contemplates any such mortgage or sale during the pendency of any proceedings under the Income Tax Act shall be void. Thus, this Court has to test the supremacy on the basis of the constitutional ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts tax dues. 46.In this context, Part XII of the Constitution of India, more specifically, Article 265 which states that tax not to be imposed save by authority of law; Article 266 speaks about Consolidated funds and public accounts of India and the States; Article 267 states Contingency fund; Article 268 states Duties levied by the Union but collected and appropriated by the States; Article 268A denotes service tax levied by Union and collected and appropriated by the Union and the States; Article 269 states taxes levied and collected by the Union but assigned to the States; Article 269A denotes levy and collection of goods and service tax in course of inter-state trade or commerce and Article 270 states that taxes levied and distributed between the Union and the States. The chapter deals with the taxes and its constitutional importance are to be considered by this Court. Undoubtedly, tax is the backbone of our Nation's economy and it holds top priority. In this context, the tax collected goes to the welfare of the people in general, however the mortgage or sale transaction between the bank and the tax defaulter can be at no circumstances be compared with the constitutional i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter making a reference to the judgments of the Bombay High Court in Bank of India v. John Bowman and Ors., [AIR 1955 Bom. 305], Madras High Court in Kaka Mohammad Ghouse Sahib & Co. v. United Commercial Syndicate and others [(1963) 49 I.T.R. 25] and Manickam Chettiar v. Income-tax Officer, Madura, [(1938) 6 ITR 180], the Court held : (i) "The Common Law doctrine of the priority of Crown debts had a wide sweep but the question in the present appeal was the narrow one whether the Union of India was entitled to claim that the recovery of the amount of tax due to it from a citizen must take precedence and priority over unsecured debts due from the said citizen to his other private creditors. The weight of authority in India was strongly in support of the priority of tax dues. (ii) The Common Law doctrine on which the Union of India based its claim in the present proceedings had been applied and upheld in that part of India which was known as `British India' prior to the Constitution. The rules of Common Law relating to substantive rights which had been adopted by this country and enforced by judicial decisions, amount to `law in force' in the territory of India at the releva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o such debts as are incurred by the subjects of the Crown by reference to the State's sovereign power of compulsory exaction and would not extend to charges for commercial services or obligation incurred by the subjects to the State pursuant to commercial transactions. Having reviewed the available judicial pronouncements their Lordships have summed up the law as under: 1. There is a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts. 2. The common law doctrine about priority of Crown debts which was recognised by Indian High Courts prior to 1950 constitutes "law in force" within the meaning of Article 372(1) and continues to be in force. 3. The basic justification for the claim for priority of State debts is the rule of necessity and the wisdom of conceding to the State the right to claim priority in respect of its tax dues. 4. The doctrine may not apply in respect of debts due to the State if they are contracted by citizens in relation to commercial activities which may be undertaken by the State for achieving socio-economic good. In other words, where the welfare State enters into commercial fields which cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocuments in original and adjudicate the same in the manner prescribed under Schedule II Rule 11 of the Income Tax Act. Thus, it would be improper to form an opinion regarding the disputed facts between the parties to the lis in the present case, which requires adjudication of facts based on the documents and evidences. High Court cannot conclude the disputed facts merely based on the affidavits and counter affidavits filed by the parties in a writ proceedings. However, this Court cannot conclude that the petitioner Bank holds priority over the Income tax arrears due to the Income Tax Department. The principles elaborately considered and discussed in the aforementioned paragraph would highlight the constitutional importance, which all are to be considered to grant priority to the institutions. Thus, this Court is inclined to pass the following orders: (1) The relief as such sought for in the present writ petition stands rejected. (2) The petitioner is at liberty to approach the Tax Recovery Officer by filing an appropriate application under Schedule II, Rule 11 of the Income Tax Act. In the event of filing any such application, the Tax Recovery Officer is directed to investigate t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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