TMI Blog2023 (12) TMI 351X X X X Extracts X X X X X X X X Extracts X X X X ..... o take action against Director of a company or invoke section 226 of Income Tax Act, but the respondents submitted that the owner of the property Mr.A.M.Arun is an assessee and a Tax Recovery Certificate under section 222 was drawn for a demand of Rs.565.34 crores plus interest for assessment years 2009-2010 to 2016-2017. HELD THAT:- For assessment year 2009-2010 the assessment was reopened in the year 2015, which means as on the date of mortgage there was no pending assessment proceedings for the assessment year 2009-2010. For the assessment year 2012-2013, the respondents had issued notice dated 16.08.2013 under section 143(2) for scrutiny assessment. According to the revenue the issuance of notice under section 143(2) would create an automatic charge over the property and any subsequent alienation would be liable to be set aside under section 281. But as per the Hon ble Supreme Court judgment in Gangadhar Vishwanath Ranade s case [ 1998 (9) TMI 1 - SUPREME COURT ] under Rule 11 of Second Schedule the Tax Recovery Officer had no power to declare a transfer void. When the Revenue has no power under Rule 11(6) to declare as void, likewise the Revenue has no authority to claim secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has held that there is no provision in the Income Tax Act by which 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. Section 281 of Income Tax Act and section 26E of SARFAESI Act and 31B of the Recovery of Debts and Bankruptcy Act cannot operate simultaneously and there arises conflict and hence the attachment ought to be lifted whenever the challenge is made and whenever the mortgage by bank is prior to the attachment under Income Tax Act. 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 duty to attach property by the Income Tax Department, as and when the bank claims and exercise its 1st charge over the property, the Income Tax Department is liable to issue no objection certificate and also lift the attachment. In the present case t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edings under SARFAESI Act, 2002 for recovering the outstanding loan amount. The petitioner had approached the 2nd respondent Registration Department to enquire about the registration of sale certificate and to the shock and surprise of the petitioner, there was an attachment by the Income Tax Department towards the mortgage property. Hence, the petitioner bank approached the 2nd respondent, the petitioner was made to run from pillar to post, finally the 2nd respondent issued a letter stating that the 1st respondent had attached the mortgage property. 3. The petitioner further submits the mortgage by the memorandum of deposit of title deeds was executed on 02.04.2009 and the same was further extended. The 4th respondent executed a registered mortgage deed in favour of the petitioner bank on 17.04.2014. Whereas the attachment of the 1st respondent as per the Encumbrance Certificate in 3616 of 2017 was on 03.11.2015. It is pertinent to point out the deposit title deed was on 02.04.2009 whereas the 1st respondent attached the property on 03.11.2015. Hence, the petitioner is entitled to have priority over the 1st respondent. The further contention of the petitioner is unless the order o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apter III. Further, the overriding provision of giving priority to the secured creditor can be given effect to only upon registration of the secured interest. When the security interest was registered only on 10.12.2014, the petitioner bank can claim priority only after 10.12.2014 and not prior to that. The Income Tax Act provides that any transfer by way of sale mortgage, gift, exchange or any other mode shall be void, if undertaken during the pendency of proceedings and section 281(1) declares the same as void. 5. The 1st respondent relied on the case of State Bank of India Vs. The Tax Recovery Officer, Coimbatore, in W.P.No.5857 of 2018, this Court vide order, dated 27.04.2021 has held that such transfers can be construed as fraudulent transfers. Therefore, mortgage in favour of the petitioner bank cannot be held valid in the eye of law. Applying the above principles to the present facts, it is evident that the proceedings under Income Tax Act was pending even before the creation of mortgage interest and the subsequent registration of security interest was on 10.12.2014, therefore, the said mortgage is void. Consequently, seeking the deletion of attachment or removing the name o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t from 24.01.2020, secured creditors shall be entitled to enforce securities under SARFAESI Act only if the security interest is filed with CERSAI. In the CERSAI report, there are no details found with regard to the attachment of the property. The petitioner claims that the Tax Recovery Officer had attached the property of the person who is not an assessee. Further the petitioner claims that the Tax Recovery Officer has to invoke section 179 to take action against Director of a company or invoke section 226 of Income Tax Act, but the respondents submitted that the owner of the property Mr.A.M.Arun is an assessee and a Tax Recovery Certificate under section 222 was drawn for a demand of Rs.565.34 crores plus interest for assessment years 2009-2010 to 2016-2017. The property was attached by Tax Recovery Officer on 04.01.2018, earlier during pending assessments, it was under provisional attachment under section 281B since 03.11.2015 with prior approval of the Principal Commissioner, Trichy and later Principal Commissioner, Chennai. Hence invoking section 179 or section 226 is not necessary in this case and it is not correct to state that the attachment by Tax Recovery Officer is ex-fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the respondent that the earlier mortgage is not registered cannot be accepted and the petitioner bank is in advantageous situation. Moreover, non-registration of the deposit of title deeds alone, would not determine the rights of the parties. As far as the allegation of not referring the deposit of title deeds dated 02.04.2009 in the demand notice dated 02.11.2017 is concerned, the petitioner bank had produced the copy of the deposit of title deeds and hence the doubt entertained by the Revenue is unnecessary. 8. The petitioner bank and the borrower had executed memorandum of extension of equitable mortgage by way of deposit of title deeds on 17.04.2014 and the same was registered. But the contention of the Revenue is that at the time of registered mortgage the assessment proceedings were pending, hence the revenue is protected under section 281. But under proviso to section 281 any bonafide purchaser, who had purchased the property without the knowledge of recovery proceedings pending against the assessee/seller, is protected. It protects the interest of the purchaser who has paid valuable consideration for the purchase of the property. Hence the rigorous of section 281 may be in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tect the interests of an unsuspecting purchaser who has paid valuable consideration for the purchase of the property in question. 16. Since Section 281 would apply in cases where the transfer of the property has been made during the pendency of proceedings or after the completion thereof, one has to examine whether there were any proceedings pending in the case of the company for AY 2012-13 at the time when the MOD was registered, which is 10.02.2014. 17. The counter filed by the TRO refers to a notice issued in terms of Section 143(2) of the Act without setting out any details thereof. It is also silent as to when the returns of income were filed by the petitioners or when notices were issued thereafter to indicate commencement of proceedings. However, Mr.Srinivas states that he is in possession of the assessment files and produces a notice under Section 143(2) of the Act dated 08.08.2013 relating to AY 2012- 2013, that has been issued to the company in August 2013, prior to registration of mortgage. There is no reference to any notice issued as far as AY 2013-14 is concerned. 18. According to the revenue, the issuance of notice under Section 143(2) would create an automatic charg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the 2nd Schedule to the Act, reading thus: Investigation by Tax Recovery Officer..... 11... (6) Where a claim or an objection is preferred, the party against whom an order is made may institute a suit in a civil court to establish the right which he claims to the property in dispute; but, subject to the result of such suit (if any), the order of the Tax Recovery Officer shall be conclusive. 23. In Sancheti Leasing Company Ltd (supra), Justice R.Jayasimha Babu says: 6. Section 281(1) of the Act had been relied upon by the Income-tax Officer. That section declares certain transactions as void. The section, however, does not vest the authority in the Income-tax Officer to make such a declaration. 7. Before a transaction involving immovable property can be declared as void, all the requirements of law must necessarily 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ICICI Bank and the Tax Recovery Officer. After considering the interpretation of Section 281 and the power of recovery under the 2nd Schedule to the Income Tax Act, the Bench states that the attachment in that case was prior to the attachment by the Income Tax Department and thus, held priority over the subsequent attachment. Following the ratio of the judgment of the Supreme Court in the case of Gangadhar Vishwanath Ranade (supra), the claim of the Bank was allowed. 27. In this case the mortgage by the Bank is on 10.02.2014 and that by the Income tax Department, is post attachment, on 27.03.2017 only. The subsequent attachment thus fails in the light of Section 26E. 28. Incidentally, at the time when the above decision was rendered, Section 26E of the SARFAESI Act had not been notified, prompting the Bench to state at paragraph 6 of that decision (of the SCC online report) that the issue before them could have been resolved in a trice, had only the provisions of Section 26E been notified at the time when the decision was being rendered. The provisions of Section 26E have since been notified on 24.01.2020 and the benefit of the same is available for the present Writ Petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 281B and the same was extended for another 6 months vide proceedings dated 13.07.2017. Then Tax Recovery Certificate was issued on 14.09.2017 and the subject property was attached on 04.01.2018. The Revenue had created charge in this case on 04.01.2018. The respondents had reopened the assessment proceedings in the year 2015 for the assessment year 2009-2010 and the respondents had not stated the exact date of reopen in their counter. From the above narration of events, it is evident that the mortgage is on 17.04.2014 and the same is registered on 10.12.2014 which is prior to the reopen of assessment in the year 2015 and prior to attachment dated 04.01.2018, hence this Court is of the considered opinion that no assessment proceedings were pending when the petitioner bank has executed registered mortgage deed dated 10.12.2014, hence the petitioner bank s debt has priority over the respondent s crown debt. 12. The learned Senior Standing Counsel appearing for the Revenue submitted that the attachment is a statutory duty mandated on the Income Tax Department, therefore, there cannot be any positive direction for lifting the attachment. If the Hon ble Court comes to the conclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ant to note one more aspect. Section 281(1), by its very nature operates only up to the stage of service of notice under Rule 2 of the Second Schedule. Therefore, Section 281(1) obviously deals with a situation, which can be compared to fraudulent preferences dealt with by the Insolvency Laws. Therefore, what is applied to an assessee (or an insolvent under the Insolvency Laws) cannot be applied to a secured creditor like the bank. 33. There appears to be no provision in the Income Tax Act, by which a first charge is created automatically on the properties of the assessee. There is no provision in the Income Tax Act similar to Section 16C of the Andhra Pradesh General Sales Tax Act, 1957. 34. It is by now well settled that wherever the statute does not create a first charge over the property, the crown's debt does not take precedence over the claim of the secured creditor. A useful reference can be made in this regard to the decision of the Full Bench of the Madras High Court in U.T.I. Bank Ltd., V. Deputy Commissioner of Central Excise (2007) 75 SCL 20 (Mad.) (FB). 35. In Central Bank of India V. State of Kerala, a Three Member Bench of the Supreme Court had an occasion to con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity under Section281(1) is not automatic, the petitioner-bank deserves to succeed. 38. Accordingly, the writ petition is allowed and the impugned order of attachment is set aside. The Sub-Registrar may proceed to register the sale certificate issued by the Bank upon compliance with the necessary formalities. There shall be no order as to costs. 13. The said judgment is followed by Hon ble Division Bench of Madras High Court in W.P.(MD)Nos.1251 of 2018 and batch. Vide judgment dated 01.09.2022, the Hon'ble Division Bench has held that the section 281 of Income Tax Act and section 26E of SARFAESI Act and 31B of the Recovery of Debts and Bankruptcy Act cannot operate simultaneously and there arises conflict and hence the attachment ought to be lifted whenever the challenge is made and whenever the mortgage by bank is prior to the attachment under Income Tax Act. The relevant portion of the judgment is extracted hereunder: 24. Keeping the above background in mind, it does not seem that section 281 of the Income Tax Act and sections 26E of the SARFAESI Act and 31B of the Recovery of Debts and Bankruptcy Act can operate simultaneously without conflict. In other words, the conflict is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by defeating the object of Sections 26E and 31B of the SARFAESI Act and Recovery of Debts and Bankruptcy Act. 26. While interpreting the scope of the non-obstante clause contained in Sections 26E and 31B of the SARFAESI Act and Recovery of Debts and Bankruptcy Act, we may take guidance from the Heydon's Rule, commonly known as Purposive Construction , which provides that when the material words are capable of bearing two or more constructions, the most firmly established rule for construction of such words of all statutes in general (be they penal or beneficial, restrictive or enlarging of the common law) is the rule laid down in Heydon's case which has now attained the status of a classic . The rule which is also known as purposive construction or mischief rule enables consideration of four matters in construing an Act: (i) What was the law before the making of the Act, (ii) What was the mischief or defect for which the law did not provide, (iii) What is the remedy that the Act has provided, and (iv) What is the reason of the remedy. The rule then directs that the courts must adopt that construction which shall suppress the mischief and advance the remedy . Four things are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposive interpretation has been applied by the Supreme Court in favour of jurisdiction and powers of the Company Court in Sudarsan Chits (1) Ltd. case [(1984) 4 SCC 657), and other cases, the said principle, in our view, cannot be invoked in the present case against the Debts Recovery Tribunal in view of the superior purpose of the RDB Act and the special provisions contained therein. In our opinion, the very same principle mentioned above equally applies to the Tribunal/Recovery Officer under the RDB Act, 1993 because the purpose of the said Act is something more important than the purpose of Sections 442, 446 and 537 of the Companies Act. It was intended that there should be a speedy and summary remedy for recovery of thousands of crores which were due to the banks and to financial institutions, so that the delays occurring in winding-up proceedings could be avoided. If the above rule is applied, then there is no room for doubt that Section 26 E of the SARFAESI Act and Section 31 B of the Recovery of Debts and 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, ces ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat even if the recovery proceeding is set-aside for any reason, the same may not serve any purpose. The claim of the Bankers/ Financial Institutions is admittedly still outstanding, hence it is open for the Bankers/ Financial Institutions on proceeding being set-aside to invoke Section 26 E of the SARFAESI Act and Section 31 B of the Recovery of Debts and Bankruptcy Act as it is applicable presently in any view. In similar circumstances, the Hon'ble Supreme Court in the case of Dena Bank v. Bhikhabhai Prabhudas Parekh and Co. [(2000) 5 SCC 694] while examining the question whether the State would have precedence to recover the tax dues over that of secured creditors after clarifying the position on the above issue, proceeded to examine the further contention that the petitioners therein who were partners of a firm that Section 15(2-A) of the Karnataka Sales Tax Act, which provided that where any firm is liable, the firm and each of the partners would be jointly and severally liable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certificate and also lift the attachment. In the present case this Court has already held that the mortgage by bank is prior to the attachment of the Revenue. In such circumstances by following the aforesaid judgments this Court is of the considered opinion that the impugned orders are liable to be quashed. 15. In the subsequent judgment rendered by Hon'ble Supreme Court in the case of M/s. Connectwell Industries Private Limited, Vs. Union of India in Civil Appeal No.1919 of 2010 vide judgment dated 06.03.2020, the Hon'ble Supreme Court has held that when the charge over the property was created much prior than the notice issued by Income Tax Department then the bank has first charge than the department. As and when the charge over the property was created much prior to the notice under rule 2 Second Schedule, the bank is entitled to seek no objection certificate. Hence, the Hon'ble Supreme Court directed the Income Tax Department to issue no objection certificate and also restrained the Income Tax Department from enforcing the attachment order. 16. The Hon'ble First Bench of High Court of Madras in W.P.No. 19742 of 2022 batch vide order date 27.09.2023 had held th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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