TMI Blog2022 (12) TMI 557X X X X Extracts X X X X X X X X Extracts X X X X ..... r the rights of the secured creditors - What is the nature of taxes and the right of the State to recover the same? - HELD THAT:- The power to tax is an inherent part and an attribute of sovereignty and is meant for being used for public welfare. Without taxes, the Government cannot run nor discharge its constitutional obligations set out in the form of Directive Principles of State Policy under Article 39 of the Constitution. In other words, taxes are collected in public interest and the taxes so collected cannot be used for any purpose other than common public good. Having dealt with the status and purpose of tax under the Constitution, it may be relevant to examine the priority of collection of taxes. Doctrine of priority of Crown Debts - The principle of priority of Government debts is founded on the rule of necessity and public policy. If the legislation provides for a charge or a priority, then, if the crown debt and the private secured creditor concurs in point of time, the crown debt would prevail. If the private secured creditor is prior in time that would prevail. If the State s charge is prior in time, then the State s charge would prevail. If a first charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ives a right to payment out of a particular fund or particular property without transferring that fund or property, whereas a mortgage is in essence a transfer of an interest in specific immovable property. A mortgage is a jus in rem, a charge is a jus ad rem and the practical distinction is that mortgage is good against subsequent transferees and a charge is only good against subsequent transferees with notice. A charge does not amount to a mortgage. In every mortgage, there is a charge, but every charge is not a mortgage. Having examined the scope of charge , it may be relevant to note that the second view holding that an attachment creates a charge is unsustainable as attachment and charge are distinct and attachment does not by itself create a charge as stated supra. In any view, we find that the Income Tax Act does not create a charge towards recovery of dues. Section 281 only declares certain transactions to be void and cannot be understood as creating a charge in favour of the Income Tax Department in respect of dues arising under the same. Certain transfers to be void - Whether Section 281 of the Income Tax Act only contains declaration of voidity in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... protect and safeguard the interest of the secured creditors, intended in larger public interest and as a matter of policy. One more rule of construction is that when two competing Acts construed to further the purposes behind them produce a conflict; the court may resolve the conflict by taking into consideration as to which Act represents the superior purpose , as held in the case of Allahabad Bank v. Canara Bank[ 2000 (4) TMI 757 - SUPREME COURT] Thus in view of the fact that the Parliament must be understood to have given priority to the secured creditors under Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, fully aware and conscious of the status and importance that taxes enjoy under the Constitution. Therefore, with regard to operation of section 281 of the Income Tax Act vis-a-vis the operation of sections 26E and 31B of the SARFAESI Act and Recovery of Debts and Bankruptcy Act, sections 26E and 31B according priority to secured creditors shall prevail and thus, the attachment by the Tax Recovery Officer is impermissible in the facts and circumstances of the case. We arrive at the following conclusion: (i)Appellant i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t arises for consideration in the batch of writ appeals, relates to the scope and ambit of Section 281 of the Income Tax Act, 1961 (hereinafter shortly referred to as the Income Tax Act ) vis-a-vis, Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (in short, the SARFAESI Act ) and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993. 2. There are four writ appeals viz., W.A.Nos.1512 of 2021, 60 of 2022, 1249 of 2022 and 1385 of 2022, out of which, W.A.Nos. 60 of 2022, 1249 of 2022 and 1512 of 2021 are filed by the Bankers/Financial institutions challenging the orders of a learned Judge in W.P.Nos.25325 of 2017, 15437 of 2014 and 5857 of 2018, wherein it was held that the dues of the Income Tax Department would take precedence over the dues of the secured creditor, though Section 26 E of the SARFAESI Act and Section 31 B of the Recovery of Debts and Bankruptcy Act, expressly provides/grants priority in payment of debts due to a secured creditor over all other debts including revenues, taxes, cesses, etc. The learned Judge proceeded on the basis that tax being an attribute of sovereignty and a necess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd Bankruptcy Act and Section 26 E of the SARFAESI Act. 5. Before proceeding further, we may narrate the facts and submissions made by the learned counsel appearing for all the parties, which run thus: 5.1.1. Mr.Vijay Narayan, learned Senior counsel for the appellant in WA.No.60 of 2022 contended that the appellant, which is a non-banking financial company, had extended financial assistance to the respondents 4 and 5 on the basis of the mortgage created over the properties in their favour by executing mortgage deeds dated 23.04.2013, 18.08.2014 and 22.10.2015, but the borrowers defaulted in payment of loan amount, as a result of which, arbitration proceedings were initiated and during the course of the said proceedings, the borrowers admitted their liability and expressed their willingness to sell the mortgaged properties for realisation of the dues to the appellant. At that time, the appellant came to know about the provisional order of attachment passed by the second respondent on 03.11.2015 over the mortgaged properties for the tax dues payable by the borrowers and their group entities/companies. Due to the attachment of the mortgaged properties, the appellant being unable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Co. and others [(2000) 5 Supreme Court Cases 694] in which the Hon'ble Supreme Court expressly provided that the interest / priority of secured creditors would prevail over the doctrine of priority of crown debts. 5.1.4. The learned Senior counsel for the appellant also contended that secured creditors always have priority over government debts. To lend support to this submission, he placed reliance on the decision of the Full Bench of this Court in Assistant Commissioner of Commercial Tax and others v. Indian Overseas Bank and others [2016 (6) CTC 769] wherein it was held that in view of Section 31 B of the Recovery of Debts and Bankruptcy Act, introduced by Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, the right of the secured creditors to realise the debts by way of sale of assets will have priority over all debts and government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority. The learned Senior counsel further referred to another order of the Full Bench of this Court in UTI Bank Limited v. Deputy Commissioner of Central Excise and an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... priority to the secured creditor over other debts. In this context, the learned counsel placed reliance on the decision of the Chattisgarh State Co-operative Marketing Federation Limited v. Bank of Baroda [2020 SCC ONLINE Chh 1271] and contended that the Central Government issued notification dated 26.12.2019 and Sections 17 to 19 of the SARFAESI Act came into effect. Therefore, there was no law before these amendments giving priority to the debts of the secured creditor. The learned counsel further submitted that the appellant's right to enforce the secured debt accrues only upon default by the borrowers and after realisation of the dues by the Income Tax Department. Thus, the appellant has no right to enforce the secured debt and that the Income Tax Department alone has a priority to do so. Therefore, the learned counsel prayed for dismissal of this appeal. 5.2.1. Mr.Satish Parasaran, learned senior counsel for the appellant in WA.No.1249 of 2022 submitted that the appellant had sanctioned loan to M/s.NEPC Agro Foods Ltd after executing a mortgage deed dated 11.12.1998 in respect of the property at Ambattur, in which, M/s.NEPC India Ltd (formerly known as NEPC Micon Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of the proceedings initiated against NEPC India Ltd, the properties of NEPC Agro, cannot be attached. It is also contended that the dates of mortgage and other things are factual and hence, the appellant can go before the TRO under rule 11, Second Schedule, to decide the facts, as rightly held by the learned Judge. The learned counsel further submitted that Section 281 merely declares the mortgage to be invalid and reliance placed on the decision of the Andhra Pradesh High Court in ICICI Bank case may not be proper, as it never considered the judgment of the Madras High Court in Abdul Jamil Ors v. The Secretary, Income Tax [1998 (1) CTC 547] . Therefore, according to the learned counsel, the order of the learned Judge does not require any interference at the hands of this court. 5.3.1. Mr.A.P.Srinivas, the learned standing counsel for the appellant in WA.No.1385 of 2022 submitted that the assessment notice under section 143(2) was issued on 08.08.2013; demand was raised by the department through assessment order dated 31.03.2015; after issuance of several demand notices to the assessee / defaulters, the subject properties were attached by the Tax Recovery Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... writ appeal. 5.4.1. Mr.M.L.Ganesh, learned counsel for the appellant in WA.No.1512 of 2021 submitted that the respondents 4 and 5 viz., Balasubramaniam and Swetha had availed housing loan facility to purchase the secured property and accordingly created equitable mortgage in favour of the appellant Bank on 07.02.2016 and 28.01.2016. However, they failed to repay the loan, which compelled the appellant to issue demand notice under Section 13(2) of the SARFAESI Act and thereafter, possession notice under section 13(4), but the sale notice issued by the appellant bank to bring the secured property for auction, could not succeed, since the first respondent / ITO had attached the property with the office of the respondents 2 and 3 for income tax dues on 16.06.2017. Feeling aggrieved, the appellant preferred WP.No.5857 of 2018, which was dismissed by the learned Judge, by holding that the mortgage created in favour of the appellant by the respondents 4 and 5 was void in view of section 281 of the Income Tax Act. Therefore, this writ appeal. 5.4.2. According to the learned counsel for the appellant, though the demand notice was issued on 31.03.2015, the first respondent has chosen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he kind/nature of charges created in fiscal/tax legislations and its status? c) Whether Section 281 of the Income Tax Act only contains a declaration of voidity in respect of transactions falling within its mischief or does it create a charge in respect of any sum payable under the Income Tax Act in favour of the Revenue and what is the scope of operation of Section 281 of the Income Tax Act and its input vis-a-vis Section 26 E of the SARFAESI Act and Section 31 B of the Recovery of Debts and Bankruptcy Act and whether the priority of charge created in favour of the secured creditors under the SARFAESI Act and the Recovery of Debts and Bankruptcy Act would prevail over the declaration of voidity contained in Section 281 of the Income Tax Act or any other recovery proceedings including attachment under the Income Tax Act? 7. We shall now proceed to answer the above questions in seriatim . a)What is the nature of taxes and the right of the State to recover the same? 8.1. The above question has been the subject matter of consideration on numerous occasions including Constitution Benches of the Hon'ble Supreme Court. We do not intend to multiply case laws as the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lature of every free State will possess it under the general grant of legislative power, whether particularly specified in the Constitution among the powers to be exercised by it or not. No constitutional government can exist without it, and no arbitrary Government without regular and steady taxation could be anything but an oppressive and vexatious despotism, since the only alternative to taxation would be a forced extortion for the needs of Government from such persons or objects as the men in power might select as victims. 8.3. The above extract would clearly show that the power to tax is an inherent part and an attribute of sovereignty and is meant for being used for public welfare. Without taxes, the Government cannot run nor discharge its constitutional obligations set out in the form of Directive Principles of State Policy under Article 39 of the Constitution. In other words, taxes are collected in public interest and the taxes so collected cannot be used for any purpose other than common public good. 9.1. Having dealt with the status and purpose of tax under the Constitution, it may be relevant to examine the priority of collection of taxes. Doctrine of priority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has prevailed already. In Giles v. Grover [(1832) 131 ER 563 : 9 Bing 128] it has been held that the Crown has no precedence over a pledgee of goods. In Bank of Bihar v. State of Bihar [(1972) 3 SCC 196 : AIR 1971 SC 1210] the principle has been recognised by this Court holding that the rights of the pawnee who has parted with money in favour of the pawnor on the security of the goods cannot be extinguished even by lawful seizure of goods by making money available to other creditors of the pawnor without the claim of the pawnee being first fully satisfied. Rashbehary Ghose states in Law of Mortgage (TLL, 7th Edn., p. 386) - It seems a government debt in India is not entitled to precedence over a prior secured debt. '' (emphasis supplied) 9.3. The above position has been reiterated by the Hon ble Supreme Court time and again and we do not intend to burden the judgment by multiplying case laws except to state that the above view has not been doubted much less a contrary view having been expressed. b) Whether fiscal/tax legislations provide for a charge in respect of the taxes/revenues that are due and if so, what are the kind/nature of charges created in fiscal/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent herein. 11. At this juncture, it may be relevant to note that a specific provision creating a first charge in respect of the dues under the Central Excise Act, 1944 and the Customs Act, 1962, was inserted after the above order of the Full Bench of this Court. The said provision under the Customs Act reads as under, similar provision introduced under the Central Excise Act is not extracted to avoid being repetitive as the provision under the Central Excise Act is identical. 142A. Liability under Act to be first charge.-Notwithstanding anything to the contrary contained in any Central Act or State Act, any amount of duty, penalty, interest or any other sum payable by an assessee or any other person under this Act, shall, save as otherwise provided in section 529A of the Companies Act, 1956 (1 of 1956), the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of 1993) and 2 [the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002 (54 of 2002) and the Insolvency and Bankruptcy Code, 2016 (31 of 2016).] 12.1. It may also be relevant to take note of some of the other tax legislations, wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) as land revenue, or (b) on application to any Magistrate, by such Magistrate as if it were a fine imposed by him: 12.2. We may note that while the Madhya Pradesh and Rajasthan Sales Tax Acts provide for first charge in favour of the tax dues, the TNVAT Act, while providing for a charge , does not create a first charge rather makes it subject to certain claims. Now, a first charge has been held to prevail even over existing charges/mortgages, which would apply to the Madhya Pradesh and Rajasthan enactments, but not to the TNVAT Act as it merely creates a charge, which, as stated above, is subject to other claims mentioned therein. In this regard, it may be relevant to refer to the judgment of the Hon'ble Supreme Court in State Bank of Bikaner and Jaipur v National Iron and Steel Rolling Corporation , reported in (1995) 2 SCC 19 , wherein, the scope of 1st charge was explained as under: 10. The section creates first charge on the property, thus clearly a statutory charge mortgage. created by The giving priority to the property statutory including first a charge over all other charges submission, therefore, on that the section 11AAAA the Rajasthan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a charge gets created only when the attachment is made. This view is again unsustainable since attachment would not constitute a charge. In this regard, it may be relevant to refer to the decision of the Hon'ble Supreme Court in Kerala State Financial Enterprises Ltd. v. Official Liquidator [(2006) 10 SCC 709] , which reads as under: 9.... An attachment itself does not create any charge in the property. 10 . The expression `attachment' has no definite connotation. An order of attachment is passed for achieving a limited purpose. It is subject to further orders as also provisions of other statute. 11 . The word `attachment' would only mean `taking into the custody of the law the person or property of one already before the court, or of one whom it is sought to bring before it. It is used for two purposes : (i) to compel the appearance of a defendant; and (ii) to seize and hold his property for the payment of the debt. It may also mean prohibition of transfer, conversion, disposition or movement of property by an order issued by the court. 16.1. While, on the correctness of the divergent views expressed by the learned judges, to appreciate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 17. Having examined the scope of charge , it may be relevant to note that the second view holding that an attachment creates a charge is unsustainable as attachment and charge are distinct and attachment does not by itself create a charge as stated supra. In any view, we find that the Income Tax Act does not create a charge towards recovery of dues. Section 281 only declares certain transactions to be void and cannot be understood as creating a charge in favour of the Income Tax Department in respect of dues arising under the same. c)Whether Section 281 of the Income Tax Act only contains declaration of voidity in respect of transactions falling within its mischief or does it create a charge in respect of any sum payable under the Income Tax Act in favour of the Revenue and what is the scope of operation of Section 281 of the Income Tax Act vis-a-vis Section 26 E of the SARFAESI Act and Section 31 B of the Recovery of Debts and Bankruptcy Act and whether the priority of charge created in favour of the secured creditors under the SARFAESI Act and Recovery of Debts and Bankruptcy Act would prevail over the declaration of voidity contained in Section 281 of the Income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule 2 of the Second Schedule, being void in respect of the tax or any sum payable as a result of completion of the said proceeding or otherwise. d) The voidity though is with reference to and governs transfers during the pendency of any proceeding or after its completion under the Act and before service of notice under Rule 2 of the Second Schedule, but appears to become operational only on completion of the proceeding consequent to which sums become payable under the Act. This is apparently for the reason that there could be instances where on completion of the proceeding, there may be no liability for the voidity to operate. However, once sum becomes payable on completion of proceeding, the declaration of voidity would relate back and cover any transfer made prior to the completion of any proceeding under the Act. e) Section 281 of the Income Tax Act does not create a charge. It is a negative declaration in the sense that certain transactions, viz., any charge or transfer made during the pendency of the proceeding and on completion thereof and before issuance of notice under Rule 2 of the Second Schedule are declared void to the extent of sums payable on completion of such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Schedule shall be void against any claim in respect of any tax or any other sum payable by the assessee as a result of completion of the said proceeding. In other words, the need to examine/enquire the intent of such transfer, viz., whether the charge/transfer is to defraud revenue is done away with. 19.1. There is yet another aspect which may have to be borne in mind. As stated above, the operation of Section 281 of the Income Tax Act is during the pendency of the proceeding and on completion thereof and before issuance of notice under Rule 2 of the Second Schedule, if any sum becomes payable as a result of completion of the said proceeding. This is in view of the fact that once a notice is issued under Rule 2, the Rules of the Second Schedule kicks in and governs the recovery mechanism. 19.2. To appreciate the compartmentalization of the recovery mechanism between Section 281 and the Rules of the Second Schedule of the Income Tax Act, it may be useful to refer to the decision of the High Court of Andhra Pradesh, in ICICI Bank Limited v. Tax Recovery Officer and others [ (2019) 411 ITR 518] , wherein, while dealing with the scope of Section 281 and the Rules under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r person in trust for the defaulter or that the property was in occupation of a tenant paying rent to the defaulter. If an order rejecting the claim or objection is passed by the Tax Recovery Officer under Rule 11(6), the party against whom such an order is made, may move the Civil Court to establish his right, in terms of Rule 11(6). 28. The procedure prescribed in Rule 11 for the investigation of claims and objections to the attachment or sale of a property, is relatable to the proviso to sub-section (1) of Section 281. It may be seen from the main part of sub-section (1) of Section 281 that the same declares all transfers and creation of charges to be void. But the proviso to sub-section (1) carves out an exception, in cases where the creation of the charge or the transfer was for adequate consideration and without notice of the pendency of any proceeding under the Act. What is important to note from the proviso (i) is that the exception carved out therein may be available only up to the stage of issue of an order of attachment. The proviso (i) to subsection (1) of Section 281 uses the words without notice of the pendency of such proceeding . Therefore, an assessee or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 143(2) were issued on September 2010 and February 2011, the order of assessment was passed on 27.12.2011 and the demand notice under Section 156 was also issued on 27.12.2011. The assessee therein would have become an assessee in default on 26.01.2012. It was only thereafter that notice could have been issued under Rule 2. The Tax Recovery Certificate was issued on 09.01.2014 and the order of attachment was on 14.03.2018. Importantly, the mortgage has been created on 11.07.2011 much before the order of assessment. It was thus held that the rights of the mortgagee would prevail. The relevant portion of the judgment reads as under: 31.But the mortgage was created by the third respondent in favour of the petitioner-bank on July 11, 2011, much before the order af assessment was passed under section 143(3) on December 27, 2011. In other words, the assessee was nowhere near the point of being declared as an assessee-in default on the date of creation of the mortgage. Hence, the creation of the mortgage cannot be said to have automatically become void in terms of section 281(1) merely because of the pendency of the proceedings under Sections 143 and 142, It required something mor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be taken to realise them. The crucial provision for adjudication of the dispute in this case is Rule 16. According to Rule 16(1), a defaulter or his representative cannot mortgage, charge, lease or otherwise deal with any property which is subject-matter of a notice under Rule 2. Rule 16(1) also stipulates that no civil court can issue any process against such property in execution of a decree for the payment of money. However, the property can be transferred with the permission of the Tax Recovery Officer. According to Rule 16(2), if an attachment has been made under Schedule II to the Act, any private transfer or delivery of the property shall be void as against all claims enforceable under the attachment. 11. There is no dispute regarding the facts of this case. The property in dispute was mortgaged by BPIL to Union Bank of India in 2000 and DRT passed an order of recovery against BPIL in 2002. The recovery certificate was issued immediately, pursuant to which an attachment order was passed prior to the date on which notice was issued by the Tax Recovery Officer, Respondent 4 under Rule 2 of Schedule II to the Act. It is true that the sale was conducted after the iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lanation.-For the purposes of this section, it is hereby clarified that on or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 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.] 31B. Priority to secured creditors.- Notwithstanding anything contained in any other law for the time being in force, the 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 (31 of 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 provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Industry Facilitation Council and another reported in AIR 2006 SC 3252: In ICICI Bank Ltd. v. Sidco Leathers Ltd. and Others (2006) Scw 2361) 5 SCALE 27] the law is stated in Para 38) the following terms: The non obstante nature of a provision although may be of wide amplitude, the interpretative process thereof must be kept confined to the legislative policy. Only because the dues of the workmen and the debt due to the secured creditors are treated pari passu with each other, the same by itself, in our considered view, would not lead to the conclusion that the concept of inter se priorities amongst the secured creditors had thereby been intended to be given a total go-by. A non obstante clause must be given effect to, to the extent the Parliament intended and not beyond the same. 23.2. It thus appears that non-obstante clause is a legislative device intended to give an overriding effect and ensure that the provisions have its full operation. As stated above, prior to introduction of Sections 26E and 31B of the SARFAESI Act and the Recovery of Debts and Bankruptcy Act, Section 35 of the SARFAESI Act and Section 34 of the Recovery of Debts and Bankruptcy A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n any other law for the time being in force, the 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 (31 of 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. Recovery of Debts and Bankruptcy Act: 34. Act to have overriding effect. (1) Save as provided under sub-section (2), the provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act. (2) The provisions of this Act or the rules made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Property Act. In terms of that sub-section, a secured creditor can enforce security interest without intervention of the court or tribunal and if the borrower has created any mortgage of the secured asset, the mortgagee or any person acting on his behalf cannot sell the mortgaged property or appoint a Receiver of the income of the mortgaged property or any part thereof in a manner which may defeat the right of the secured creditor to enforce security interest. This provision was enacted in the backdrop of Chapter VIII of the Narasimham Committee's Second Report in which specific reference was made to the provisions relating to mortgages under the Transfer of Property Act. 113. In an apparent bid to overcome the likely difficulty faced by the secured creditor which may include a bank or a financial institution, Parliament incorporated the non obstante clause in Section 13 and gave primacy to the right of secured creditor vis- -vis other mortgagees who could exercise rights under Sections 69 or 69-A of the Transfer of Property Act. However, this primacy has not been extended to other provisions like Section 38-C of the Bombay Act and Section 26-B of the Kerala Act by whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the intervention of the court or Tribunal. The reason for this omission appears to be that the new legal regime envisages transfer of secured assets to private companies. ...128. If the provisions of the DRT Act and the Securitisation Act are interpreted keeping in view the background and context in which these legislations were enacted and the purpose sought to be achieved by their enactment, it becomes clear that the two legislations, are intended to create a new dispensation for expeditious recovery of dues of banks, financial institutions and secured creditors and adjudication of the grievance made by any aggrieved person qua the procedure adopted by the banks, financial institutions and other secured creditors, but the provisions contained therein cannot be read as creating first charge in favour of banks, etc. 23.4. The above judgment proceeds on the basis that though there is a non-obstante clause, the same would become operational and get triggered only in the event of inconsistency with provisions of other enactment. In other words, the non-obstante clause was found to be inadequate and may not operate unless there is inconsistency with any other law. With a view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he conflict is inevitable. Application of section 281 could result in two possible outcome: (i)the transfer / charge can either be saved under the proviso (or) (ii)transfer / charge could come under the mischief of section 281 and its declaration of voidity. In the first case, if the transfer / charge falls under the proviso, Section 281 of the Income Tax Act would not get attracted and the secured creditor will be entitled to enforce in view of its priority. If the transfer / charge falls within the mischief of Section 281 of the Income Tax Act as discussed supra, it would suffer from the declaration of voidity. Void as explained by the Hon ble Supreme Court in Kalawati v. Bisheshwar [AIR 1968 SC 261] and State of Kerala v. M.K.Kunhikannan Nambiar Manjeri Manikoth [(1996) 1 SCC 435 : AIR 1996 SC 906], would mean non-existent from its very inception and nullity . Sections 26E and 31B presuppose an existence of a valid charge / mortgage and if the declaration of voidity in section 281 of the Income Tax Act destroys the very foundation on which sections 26E and 31B exists, it appears doubtful that a banker or a financial institution can take advantage of the priorit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the mischief and advance the remedy . Four things are to be discerned and considered: Firstly, what was the common law before the making of the Act, ( Principles of Statutory Interpretation, Justice GP Singh ) Secondly, what was the mischief and defect for which the common law did not provide, Thirdly, what remedy the Parliament hath resolved and appointed to cure the disease of the commonwealth, and Fourthly, the true reason of the remedy, Then to make such construction as shall suppress the mischief, and advance the remedy, and to suppress subtle inventions and evasions for continuance of the mischief, and pro priuate commodo, and to add force and life to the cure and remedy, according to the true intent of the makers of the Act, pro bone publico . 27. Applying the mischief or Heydons Rule to Sections 26E and 31B of the SARFAESI and Recovery of Debts and Bankruptcy Act, we can infer the following: The Mischief - Inadequacy of the non-obstante clause in Section 34 and 35 of the Recovery of Debts and Bankruptcy Act and SARFAESI Act, which was found to be limited in operation to grant to primacy only in case of inconsistency with other laws. The remed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bankruptcy Act which was introduced with a specific purpose to override and grant priority to recovery of debts due to secured creditors over all other debts, taxes, cesses etc., must be understood as prevailing over Section 281 of the Income Tax Act, in the event of conflict of priority. This is also in view of the fact that the Parliament must be understood to have given priority to the secured creditors under Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, fully aware and conscious of the status and importance that taxes enjoy under the Constitution. Therefore, with regard to operation of section 281 of the Income Tax Act vis-a-vis the operation of sections 26E and 31B of the SARFAESI Act and Recovery of Debts and Bankruptcy Act, sections 26E and 31B according priority to secured creditors shall prevail and thus, the attachment by the Tax Recovery Officer is impermissible in the facts and circumstances of the case. 29. Now coming to the question of whether the amendments by way of Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, would be applicable to the Bankers in the present case in vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le was introduced only with effect from 18.11.1983, however the taxes that were sought to be recovered related to periods prior to 1964-65 i.e., prior to the insertion of the above provision. The Apex Court after holding that it would be prospective, however proceeded to hold that even if the recovery proceedings were to be set aside, it may not serve any purpose since it was open for the State to resort to the amended Section 15(2-A) of the Karnataka Sales Tax Act which would prevail over the right of the appellant Bank. The following portion is relevant and thus extracted: 21.....Even if we were to set aside the sale held by the State, it will merely revive the arrears outstanding on account of sales tax to which further interest and penalty shall have to be added. The amended Section 15(2-A) of the Karnataka Sales Tax Act shall apply. The State shall have a preferential right to recover its dues over the rights of the appellant Bank and the property of the partners shall also be liable to be proceeded against. No useful purpose would, therefore, be served by allowing the appeal which will only further complicate the controversy. The position here is no different. Apar ..... X X X X Extracts X X X X X X X X Extracts X X X X
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