1986 (3) TMI 61 - HC - Income Tax

Summary

Issues Involved:
1. Maintainability of the application under Section 151 of the Code of Civil Procedure.
2. Priority of claims between secured creditors and income-tax authorities.
3. Applicability of Rule 16 of Schedule II of the Income-tax Act, 1961.
4. Jurisdiction of Civil Courts in matters involving tax recovery.

Issue-wise Detailed Analysis:

1. Maintainability of the application under Section 151 of the Code of Civil Procedure:

The plaintiff bank filed an application under Section 151 of the Code of Civil Procedure, seeking an injunction against the income-tax authorities from auctioning the mortgaged property. The income-tax authorities contested the application on the grounds that the Income-tax Act is a complete code providing adequate machinery for redressal of grievances, and thus, the application was not maintainable. The court, however, found the application maintainable, citing that Section 151 can be invoked to safeguard the rights of a secured creditor, even if the income-tax authorities are not parties to the suit.

2. Priority of claims between secured creditors and income-tax authorities:

The court addressed the issue of whether the income-tax dues have priority over the claims of a secured creditor. The plaintiff bank argued that their rights as a secured creditor could not be superseded by the income-tax authorities. The court agreed, stating that the priority of the Crown for the realization of its dues can only prevail among unsecured creditors of equal degree. The court referred to the judgment in Suraj Prasad Gupta v. Chartered Bank, which held that the Income-tax Act does not contain any substantive provision for overriding the claims of a secured creditor. The court concluded that the secured creditor's rights take precedence over the income-tax dues.

3. Applicability of Rule 16 of Schedule II of the Income-tax Act, 1961:

The income-tax authorities relied on Rule 16 of Schedule II, which restricts the defaulter from dealing with the property once a notice for recovery of dues has been served. The court distinguished the case from Sriniwas Pandit v. Jagjeet Singh Sawhney, noting that the rule applies to unsecured creditors and does not affect the rights of a secured creditor. The court emphasized that the secured creditor's interest in the mortgaged property cannot be denied unless a valid law explicitly provides for it, which is not the case under the Income-tax Act.

4. Jurisdiction of Civil Courts in matters involving tax recovery:

The income-tax authorities argued that the Civil Court is debarred from entertaining such applications, as the recovery of tax dues falls under the jurisdiction of the Tax Recovery Officer. The court, however, held that it has the jurisdiction to grant an injunction to protect the rights of a secured creditor. The court cited the Supreme Court's decision in Builders Supply Corporation v. Union of India, where it was held that the secured creditor has priority over the State's claim for tax dues. The court concluded that invoking Section 151 of the Code of Civil Procedure was necessary to prevent the secured creditor's rights from being jeopardized.

Conclusion:

The court confirmed the ad interim injunction restraining the income-tax authorities from selling the mortgaged property, emphasizing the precedence of the secured creditor's rights over the claims of the income-tax authorities. The judgment underscored the applicability of Section 151 of the Code of Civil Procedure to protect the interests of secured creditors, even against third parties not originally part of the suit. The appeal by the Tax Recovery Officer was dismissed, affirming the lower court's decision to grant the injunction.