2013 (8) TMI 195 - HC - Income Tax

Secured debts - Whether realization of income-tax dues from the assesses under the Income Tax Act, 1961 will have priority over the secured debt in terms of the State Financial Corporations Act, 1951 - overriding charge - Held that - Regard being had to the provisions of the State Financial Corporations Act, it is clear that a first charge on the property is created clearly giving priority to the dues of the said statutory authority over all other charges on the property, on the basis of the mortgage, since the Income Tax Act, 1961 does not provide for a priority to the statutory charge over all other charges including mortgage under the SFC Act - Following decision of State Bank of Bikaner and Jaipur Vs. National Iron and Steel Rolling Corpn. 1994 (12) TMI 72 - SUPREME Court - Decided in favour of petitioner.

Summary

Issues Involved:
1. Priority of debt recovery between the State Financial Corporation and the Income Tax Department.
2. Validity of the attachment order by the Income Tax Department.
3. Entitlement to the sale proceeds of the mortgaged properties.

Detailed Analysis:

1. Priority of Debt Recovery:
The primary issue for consideration was whether the realization of income-tax dues from the assessees under the Income Tax Act, 1961, would have priority over the secured debt in terms of the State Financial Corporations Act, 1951. The court referenced the authoritative pronouncement in Union of India and others vs. Sicom Limited and another (2009) 2 SCC 121, which established that statutory provisions prevail over Crown debt. The non-obstante clause in Section 46-B of the SFC Act gives the Financial Corporation the right to appropriate sale proceeds towards the discharge of its debt before any other debts.

2. Validity of the Attachment Order:
The Tax Recovery Officer attached the immovable properties mortgaged to the petitioner to recover income tax dues. The petitioner argued that their secured debt had priority over the income tax dues. The court found that the Income Tax Act, 1961, does not provide for a priority to the statutory charge over all other charges, including those under the SFC Act. The court noted that Rule 93 of the Second Schedule of the Income Tax Act, 1961, and Section 281 of the Act do not establish a prior charge in favor of the Income Tax department over the assets of the assessee.

3. Entitlement to Sale Proceeds:
The petitioner sought relief to lift the attachment and restrain the Income Tax Department from interfering with the sale of the mortgaged properties. The court referenced the decision in Axis Bank Ltd. vs. Commissioner of Income-tax, Ludhiana [2012] 17 taxmann.com 139 (Punj. & Har.), which declined to accept the plea that Rule 93 creates a prior charge over the assets of the assessee. The court also noted that the Tax Recovery Officer had conceded that the petitioner had a prior charge over the immovable properties, which the court upheld over the Commissioner of Income Tax's contrary opinion.

Conclusion:
The court allowed the petition in part, quashing the Tax Recovery Officer's attachment order and restraining the Income Tax authorities from interfering with the sale process. The petitioner was entitled to recover its dues first from the sale proceeds, with any remainder directed to the Income Tax Department for appropriation against its dues from the assessees.