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TMI Blog2023 (12) TMI 351X X X X Extracts X X X X X X X X Extracts X X X X ..... iples of natural justice and consequently, to direct the 2nd respondent to strike the name of the 1st respondent from the EC with respect to the property measuring about 33.43 cents vacant land at Chinthamani Village Salai limit T.S.No.21- part, New Ward B, Block 19, Trichy-2. 2. The petitioner is M/s. City Union Bank Limited. The contention of the petitioner is that the M/s. Vasan Medical Centre (India) Private Limited which is the 3rd respondent herein had availed various credit facilities from the petitioner bank during the year 2009 and the Director of the 3rd respondent had mortgaged various properties with the petitioner by way of memorandum of deposit of title deeds dated 02.04.2009 and extended equitable mortgage dated 17.04.2009. The said Director stood as a guarantor especially for the property admeasuring 33.43 cents vacant land at Chinthamani Village Salai limit T.S.No. 21-part, New Ward B, Block 19, Trichy-2. However, the said Director died on 16.11.2020, hence, the legal heirs are arrayed as respondents 4 to 7. The 3rd respondent failed to repay the loans, thereafter, the accounts were classified as non-performing assets on 24.10.2015. The petitioner being secured cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se was referred to the Tax Recovery Officer and the properties were attached by the Tax Recovery Officer on 04.01.2018 following the recovery proceedings under Second Schedule of Income Tax Act. Demand raised in the order passed under section 143(3) read with 148 for assessment year 2009-2010 and that in order under section 153A for assessment years 2010-2011 to 2016-2017 are pending in appeal before Commissioner of Income Tax (Appeals). The primary contention of the bank is that the property was already mortgaged with the bank and hence under section 26-E the bank had priority as a secured creditor. In the demand notice dated 02.11.2017 indicates the subject property owned by Mr.A.M.Arun is shown as item I of the schedule "C". In the demand notice reference had been made to various registered memorandum of deposit of title deeds of the year 2014 and subsequently, but does not contain any reference to the unregistered memorandum of deposit of title deeds dated 02.04.2009. The SARFEASI Act provides that only upon registration of security interest under chapter IV or under chapter IV-A, a secured creditor is entitled to exercise the rights of enforcement including the public auction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be noted that there is no encumbrance in the records of Registration Department with regard to mortgage on 02.04.2009, hence the alleged deed was not registered. Further on the claimed date of mortgage on 17.04.2014, there was pending assessment proceedings for the assessment year 2012-2013 in the name of Mr.A.M.Arun and notice under section 143(2) was issued on 16.08.2013 for scrutiny assessment and the assessment was pending during April 2014. Hence, the respondents submitted that the 1st charge is that of the respondent Income Tax Department. Hence, the mortgage ought to be declared as null and void. Though the petitioner claims that he is entitled as priority mortgager, the mortgage has been made at the time of pending assessments and hence, it is void as per Section 281. Further, Rule 15 of Income Tax Certificate Proceedings Rules, 1962, provides that Tax Recovery Officer can attach even property with encumbrance, hence, the petitioner's statement that Tax Recovery Officer has exceeded jurisdiction is not correct. Moreover, there is no provision in the Income Tax Act to lift the attachment without realization and reduction of the outstanding demand. As per the amendment in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... age of deposit of title deeds cannot be taken as 02.04.2009. The date of registered mortgage is on 17.04.2014 and as on 17.04.2014 the assessment proceedings were initiated / pending before the authorities, hence any mortgage executed during that period is void as per Section 281 of the Income Tax Act. After hearing the rival submissions this Court is of the considered opinion that the mortgage of deposit of title deeds may be liable for registration, but the instrument written subsequently evidencing the agreement of deposit of title deeds was not liable for registration. In other words, registration was not compulsory where the instrument evidencing the agreement relating to deposit of title deeds until 30.11.2012 under the Registration Act. And the present deposit of title deeds dated 02.04.2009 falls under the category of "not compulsory". Thereafter, under the Tamil Nadu Amendment Act 2012 with effect from 01.12.2012 the registration of instrument evidencing the agreement relating to the deposit of title deed was made compulsory under section 17(i) of the Registration Act. When subsequently the registration of mortgage of deposit of title deeds was made compulsory as stated su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eedings. Further the Hon'ble Supreme Court in Tax Recovery Officer Vs. Gangadhar Vishwanath Ranade reported in (1998) 6 SCC 658 had held that the Assessing Officer or Tax Recovery Officer has no power to declare the transactions as void. The provisions of section 281 do not confer the power of adjudication upon the authorities, but merely the power to state the law. And the reason stated in the judgment is that the respondent Department is an interested party and no party can act as judge for his own cause. 9. An identical case was considered by another Learned Single Judge of this Court in W.P.Nos.27409 & 27411 of 2019 vide order dated 21.04.2021, wherein it held as under: "15. Let us first analyze the provisions of Section 281 read with the proviso thereunder, and the umbrella of protection it offers, as well as the case law on point. Section 281 has been enacted to protect the interests of a bonafide purchaser lured into the purchase of the property in question without the knowledge of recovery of 2019 proceedings pending as against the vendor. Thus, Section 281 may be invoked only in cases where the transfer was a devise or an arrangement to circumvent a subsisting or antici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable by that assessee. However, bona fide transactions that have been entered into for adequate consideration, with the parties being unaware of the pendency of proceedings before the Income Tax authorities/without being put to notice, shall stand excluded from the rigour of the provision. Transactions engaged in with the sanction of the Assessing Officer would also be excluded from the application of the provision. 21. The Supreme Court thus held that the TRO shall have the power to examine the alternate charge created by the assessee and attach the property if he came to the conclusion that the charge had been created only to circumvent the attachment by the income tax department. However, the power of the TRO shall not extend to declaration of title that may be made only by the Civil Courts in a Suit for declaration declaring the transaction void under Section 281 of the Act. This was for the reason that the TRO is himself an interested party and hence cannot sit himself in judgment in such a case. 22. Thus, while the attachment of the Income Tax Department over the subject property would be held to be valid, the power vested in the income tax authorities can extend no f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... payable by him to the Income Tax Department. Nothing in Section 281 would support the submission that it, by itself creates a positive charge of property. The charge in this case was created by the Income Tax Department only after 27.03.2017 when the property was attached in terms of Rule 48 of the 2nd Schedule and duly communicated to the SRO. 25. Moreover, the aforesaid cases however do not take note of Section 26E of the SARFAESI that has been notified on 24.01.2020. Section 26E commences with a non-obstante clause and states that priority shall be accorded to the debts payable to secured creditors, notwithstanding anything in any other law for the time being in force, including the Income tax Act. The only exception, is as per the Explanation to Section 26E, cases pending under the Insolvency and Bankruptcy Code 2016. In the case of a secured creditor where a prior valid charge exists, as in the present case where the mortgage has been created on 10.02.2014, the provisions of Section 281 would not serve to disturb the same. 26. A matter similar to the present one came up for consideration before the Andhra Pradesh and Telangana High Court (prior to bifurcation) in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claim section 281 as automatic. Following the aforesaid judgment, this Court is of the considered opinion that when the Tax Recovery Officer has no power to declare as void, likewise the Revenue has no authority to claim the charge or attachment over the property as automatic. 11. The above position would further be substantiated by section 281B, wherein the authority has to obtain prior permission from the Principal Commissioner for passing temporary attachment that too for six months and may be extended for another period of six months with prior approval of the Principal Commissioner of Income Tax. When the temporary attachment is restricted with time limit, then the power is not absolute. In the present case the Revenue had passed an order of provisional attachment on 03.11.2015 after approval of Principal Commissioner of Income Tax. Moreover, there was a search under section 132 of the Income tax Act in the case of M/s.Vasan Health Care Private Limited group of cases on 01.12.2015. And all other subsequent proceedings are on later dates, especially the approval of Principal CIT, Central-2, Chennai, was granted on 22.07.2016, for a list of 46 properties including the subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a first charge is created automatically on the properties of the assesses. And also held it is now well settled that wherever the statute does not create a first charge over the property, the crown's debt does not take precedents over the claim of the secured creditor. The relevant portion of the judgment is extracted hereunder: "31. But the mortgage was created by the 3rd respondent in favour of the petitioner-bank on 11-07-2011, much before the order of assessment was passed under Section143(3) on 27-12-2011. 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 Section 143 and 142. It required something more to be done, but the same was not done in this case. As a matter of fact even an investigation under Rule 11 was not carried out in this case. Therefore, the order of attachment is clearly illegal. On the date on which the order of attachment was passed, the property had already been sold by the petitioner-bank, in exer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... favour of the Bank. 36. But in a more recent decision in the Stock Exchange V. V.S. Kandalgoankar (2014) 187 Comp. Cas. 143 (SC), a question arose as to whether a lien created by the operation of the Rules of the Stock Exchange, on the security provided by a member, would have precedence over the dues to the Income Tax Department. After quoting with approval the decision of the Supreme Court in Dena Bank V. Bhikabhai Prabhudas Pareks Co. (2000 (5) SCC 694), the Supreme Court came to the conclusion that the Income Tax Act does not provide for any paramountcy of dues by way of income tax and that the Government dues have priority only over unsecured debts. In its decision in Stock Exchange, the Supreme Court went to the extent of holding that the lien possessed by the Stock Exchange made it a secured creditor and that irrespective of whether the lien was a statutory lien or a lien arising out of an agreement, the same made the holder of the lien a secured creditor, who would have priority over Government dues. 37. Therefore, in the light of the fact that the mortgage was created by the assessee much before a demand was made under Rule 2 and even before an order of assessment was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appears doubtful that a banker or a financial institution can take advantage of the priority provided therein. In this regard, it may be necessary to bear in mind the Maxim sublato fundamento, cadit opus, meaning, "if the foundation is removed, the superstructure falls" [See: Kalabharati Advertising v. Hemant Vimalnath Narichania and others, (2010) 9 SCC 437 : 2010 SCC Online SC 970 at page 447] "25. Thus, once the security interest is declared a nullity, it will be non-est and there is no question of applying SARFAESI or Recovery of Debts and Bankruptcy Act and consequentially, no question of priority. This would essentially lead to a conflict, as in the present case, primacy to section 281 will render the priority accorded to secured creditors nugatory. We must thus examine, whether section 281 of the Income Tax Act or sections 26E and 31B of the SARFAESI and Recovery of Debts and Bankruptcy Act would prevail. It appears that the non-obstante clause in Sections 26E and 31B of the SARFAESI Act and Recovery of Debts and Bankruptcy Act would prevail over the declaration of voidity contained in Section 281 of the Income Tax Act, for unless it is nullified, the primacy contained in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emedy - To get over the above mischief of Section 26E and 31B of the SARFAESI and Recovery of Debts and Bankruptcy Act, containing non- obstante clause was introduced. The said non-obstante clause is very wide in scope and operation and grants primacy against any other law, which is not confined to circumstances, wherein, there is inconsistency between the SARFAESI Act and Recovery of Debts and Bankruptcy Act. Thus, applying the Heydon's Rule or Purposive construction, the non-obstante clause contained in Sections 26E and 31B of the SARFAESI Act and Recovery of Debts and Bankruptcy Act, which was introduced to give primacy to the secured creditors and expressly provides that it would prevail over all taxes, cesses clc., ought to be construed/interpreted in a manner that would promote and not defeat the object of the Parliament to protect and safeguard the interest of the secured creditors, intended in larger public interest and as a matter of policy. 28. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he fact that Section 31B was inserted with effect from 01.09.2016, while Section 26 E was inserted and notified to come into force on 24.01.2020. The above question need not detain us long for the following reasons: a) Firstly, the Full Bench of this Court in W.P.No.2675 of 2011 etc. batch, dated 10.11.2016 has held that it would govern the rights of the parties even in respect of a pending lis. The relevant portion of the same reads as under: "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. The law having now come into force, naturally it would govern the rights of the parties in respect of even a lis pending." The Special Leave Petition is stated to be pending before the Apex Court and there is an order of "Status Quo" in SLP (Civil) No. 20471 of 2021 dated 16.03.2018. In view th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll Bench has while considering the applicability of Section 31 B of the Recovery of Debts and Bankruptcy Act has held that it would apply even to lis pending, which would be the position in respect of Section 26E of the SARFAESI Act as well. Even if this Court were to set aside the recovery proceedings for any reason, the Bankers/ Financial Institutions right to claim priority in terms of Section 31 B of the Recovery of Debts and Bankruptcy Act and Section 26 E of the SARFAESI Act would be available and the right to recover under the Income Tax Act, 1961 must yield to the provisions under the SARFAESI Act and the Recovery of Debts and Bankruptcy Act and thus, the above exercise may not serve any useful purpose. Therefore, the above issue appears to be a mere academic exercise and we do not intend to examine the question any further." 14. The two judgments cited supra had held in categorical terms that the Income Tax Act has not provided any 1st charge of its debts. But there is 1st charge over the bank's debt under SARFAESI Act. Moreover, the amendment of Section 26E is applicable to pending lis. Therefore, this Court is of the considered opinion that even though it is a statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X
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