2011 (9) TMI 1092 - HC - Income Tax

Summary

Issues Involved:
1. Whether the charge created by the respective borrowers in favor of their respective secured creditor Banks is saved under the proviso to sub-sec.(1) of Sec.281 of the Income Tax Act, 1961, or is void against the claim of tax payable by the borrower-assessees in favor of the Revenue.

Summary:

Issue 1: Validity of Charge Created by Borrowers in Favor of Banks u/s 281 of the Income Tax Act, 1961

1. The common petitioner, the Tax Recovery Officer, Panchmahal Range, Godhra, raised the issue of whether the charge created by the borrowers in favor of their respective secured creditor Banks is saved under the proviso to sub-sec.(1) of Sec.281 of the Income Tax Act, 1961, or is void against the tax claims of the Revenue.

2. In S.C.A. No.13196 of 2008, the petitioner argued that the borrower, M/s. Somani Cement Company Limited, failed to pay outstanding tax dues, leading to the attachment of its properties by the petitioner Department. The Bank of India, however, initiated recovery proceedings and obtained an order of attachment from the Debt Recovery Tribunal, which prioritized the Bank's dues over the tax claims.

3. In S.C.A. No. 888 of 2009, the borrower, M/s. Kanugo Tubes (India) Limited, created an equitable mortgage in favor of Bank of Baroda before the initiation of income tax proceedings. The petitioner Department later attached the same property for tax arrears, but the Debt Recovery Tribunal prioritized the Bank's secured charge.

4. The petitioner contended that the Income Tax Department has priority over the property and that the mortgage made in favor of the Banks is void u/s 281(1) of the Income Tax Act, 1961. Conversely, the Banks argued that in the absence of any statutory provision granting priority to the Income Tax Department over secured creditors, the mortgages are valid and protected under the proviso to Sec.281(1).

5. The Court noted that the Income Tax Act does not contain any provision creating a first charge over the property in favor of the Income Tax Department. The Court also observed that the mortgages were created for adequate consideration and without notice of the pendency of income tax proceedings, thus falling under the exception provided in the proviso to Sec.281(1).

6. The Court referred to similar cases, including decisions by the Madhya Pradesh High Court and a previous judgment by the Gujarat High Court, which upheld that transfers made for valuable consideration without notice of pending tax proceedings are protected under the proviso to Sec.281(1).

7. In both cases, the Court found that the mortgages were created before the initiation of income tax proceedings and without notice of such proceedings. Therefore, the charges created in favor of the Banks are saved under clause (i) of sub-sec.(1) of Sec.281 of the Income Tax Act, 1961.

8. Consequently, the Court dismissed the writ petitions filed by the Income Tax Department, holding that the mortgages made by the borrowers in favor of the Banks are not void against the tax claims of the Department. The prayer for interim relief was also rejected.