2015 (7) TMI 365 - HC - Income Tax

Recovery of tax - Charge or transfer of property during the pendency of the Income Tax proceedings - Transfer by way of mortgage was without notice of pendency of the assessment proceedings - Held that - In the matter on hand, there cannot be any dispute that the transfer was for adequate consideration. The records reveal that the term loan obtained by Veekay Developers and subsequently transferred to V.K. Clubs is to the tune of ₹ 211.00 lakhs. Whereas the notice under Section 143(2) of the Act by the Income Tax Department is for recovery of ₹ 80,03,376/-. Hence it is clear that the transfer was for adequate consideration. It is also clear from the records that, while the transfer by way of mortgage is effected, there was no notice of pendency issued to transferee, of the proceedings initiated by the department. As aforementioned, the notice was issued to the assessee by the Assessing Officer one day prior to sanctioning of the loan. The notice was issued on 12.9.1995, whereas the loan was sanctioned by the respondent Corporation to V.K. Developers on 13.9.1995. Therefore it is clear that the transfer by way of mortgage was also without notice of pendency of the assessment proceedings. In view of the same, the transfer cannot be held to be void. Same views were rendered in the judgment of Gujarath High Court in the case of TAX RECOVERY OFFICER .vs. INDUSTRIAL FINANCE CORPORATION OF INDIA AND ANOTHER 2012 (8) TMI 541 - Gujarat High Court . Undisputedly, the respondent is a secured creditor. Hence it is needles to observe that even the Crown debt could be discharged only after the debt of secured creditors stand discharged. In that regard, consciously the concerned Tax Recovery Officer by his letter dated 27.1.2006 has clearly stated that the respondent Corporation can proceed for sale of the properties involved as the respondent - Corporation has first charge over the properties and to treat the Income Tax Department as second mortgagor. It is also clearly stated in the said letter that after appropriation of sale proceeds towards dues of the respondent Corporation, surplus, if any has to be handed over to Tax Recovery Officer, Range-2, Mangalore for appropriation of Income Tax dues. In view of the same, no interference is called for. - Decided against the revenue.

Summary

Issues:
1. Validity of the transfer of mortgage by the borrower to the respondent - Corporation.
2. Interpretation of Section 281 of the Income Tax Act, 1961 regarding the voidability of transfers during pendency of proceedings.
3. Dispute over the attachment of immovable properties by the Tax Recovery Officer for tax dues.

Issue 1: Validity of the transfer of mortgage
The respondent, a State-owned Corporation, sanctioned a term loan to a borrower for a luxury hotel project. The borrower later transferred the loan to another entity, creating an equitable mortgage in favor of the respondent. The borrower also created an equitable mortgage over additional properties. The Tax Recovery Officer attached the properties to recover tax dues, which was challenged in court. The appellant argued that the transfer of mortgage was void ab initio, making the respondent ineligible to challenge the attachment.

Issue 2: Interpretation of Section 281 of the Income Tax Act
Section 281 of the Income Tax Act declares transfers during pending proceedings void, unless made for adequate consideration and without notice of the proceedings. The appellant contended that the transfer of mortgage was void, citing Section 281. However, the court disagreed, citing the proviso to Section 281 which exempts transfers made for adequate consideration and without notice of pending tax dues. The court found that the transfer in this case met these criteria, making it valid and not void under Section 281.

Issue 3: Dispute over attachment of immovable properties
The Tax Recovery Officer had attached the properties to recover tax dues, but the court ruled in favor of the respondent. The court noted that the respondent was a secured creditor with a first charge over the properties. The Tax Recovery Officer acknowledged this priority in a letter, allowing the respondent to proceed with the sale of properties to recover dues. The court dismissed the appeal, upholding the respondent's right to sell the properties and prioritize the repayment of dues.

In conclusion, the court upheld the validity of the transfer of mortgage, interpreted Section 281 of the Income Tax Act to allow for the transfer in question, and affirmed the respondent's right to sell the properties to recover dues as a secured creditor.