2011 (12) TMI 68 - HC - Income Tax

Priority in recovering dues - Secured Creditors or Crown debt - Held That - secured creditor has preference over the dues of the Income Tax Department in respect of the secured assets.

Summary

Issues:
Challenge to threat of selling secured assets, Preferential rights of secured creditor vs. crown debt under Income Tax Act, Priority of recovering income tax dues, Interpretation of Rule 93 of Schedule II of Income Tax Act, Precedence of claims in case of debts under different statutes.

Analysis:

The judgment of the High Court dealt with the challenge posed by a petitioner against the threat of respondents to sell secured assets, specifically land measuring 10 kanals of a company. The company had availed credit facilities and mortgaged the land to secure the loan. Due to default in payments, the petitioner initiated proceedings under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The petitioner took possession of the property and initiated sale proceedings during the pendency of the writ petition.

The respondents claimed a preferential right to realize income tax dues as crown debt under Section 281-B of the Income Tax Act, 1961. The assessment was completed for a total sum, and penalty proceedings were also initiated. The petitioner relied on judgments emphasizing the preferential rights of secured creditors over crown debts among unsecured creditors.

The respondents referred to Rule 93 of Schedule II of the Income Tax Act, 1961, arguing for income tax dues as the first charge on assets. However, the respondents failed to cite a specific provision supporting this claim. Reference was made to a Supreme Court judgment regarding priority of debts under different statutes for recovery.

The Court analyzed previous judgments, including one involving the priority of recovering excise dues and other similar dues under the Excise Act. The Court held that the petitioners did not have priority over debts of financial corporations based on the doctrine of priority of Crown debts or any provision under the Excise Act or Rules. A Single Bench and later a Division Bench affirmed the priority of a secured creditor over income tax department dues, directing the petitioner to remit any excess amount to the respondents as preferential creditor among unsecured creditors.

In conclusion, the judgment clarified the precedence of claims in cases of debts under different statutes, affirming the preferential rights of secured creditors over crown debts and income tax dues in the context of recovering secured assets.