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2021 (4) TMI 1260 - HC - Income TaxRecovery proceedings - Petitioners are Banks and challenge orders encumbering properties that, according to them, have been offered to them as collateral by persons who have availed financial assistance - According to the revenue, the issuance of notice under Section 143(2) would create an automatic charge over the property by the petitioner and any subsequent alienation of the property by the petitioner would be liable to be set aside in light of the protection under Section 281 - Banks had initiated action under Section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (in short SARFAESI Act ) and taken possession of the property thereafter under Section 13(4) thereof - HELD THAT - . Section 281 states that any transaction of transfer engaged in after the commencement of proceedings, with the intention of defrauding the revenue and circumventing proceedings for recovery, would be construed as void as against any claim of tax or other sum payable by that assessee. However, bona fide transactions that have been entered into for adequate consideration, with the parties being unaware of the pendency of proceedings before the Income Tax authorities/without being put to notice, shall stand excluded from the rigour of the provision. Transactions engaged in with the sanction of the Assessing Officer would also be excluded from the application of the provision. No merit in the submissions of the respondent to the effect that Section 281 constitutes a declaration of charge much less, one which is preferential to the revenue. The thrust of Section 281 is only a protection to a bona fide purchaser in cases where an errant assessee may seek to alienate property to circumvent anticipated recovery of outstanding arrears payable by him to the Income Tax Department. Nothing in Section 281 would support the submission that it, by itself creates a positive charge of property. The charge in this case was created by the Income Tax Department only after 27.03.2017 when the property was attached in terms of Rule 48 of the 2nd Schedule and duly communicated to the SRO. A matter similar to the present one came up for consideration before the Andhra Pradesh and Telangana High Court (prior to bifurcation) in the case of ICICI Bank Ltd 2019 (3) TMI 701 - TELANGANA AND ANDHRA PRADESH HIGH COURT - Conflicting claims to the same property were set up by the ICICI Bank and the Tax Recovery Officer. After considering the interpretation of Section 281 and the power of recovery under the 2nd Schedule to the Income Tax Act, the Bench states that the attachment in that case was prior to the attachment by the Income Tax Department and thus, held priority over the subsequent attachment. Following the ratio of the judgment of the Supreme Court in the case of Gangadhar Vishwanath Ranade 1998 (9) TMI 1 - SUPREME COURT the claim of the Bank was allowed. In this case the mortgage by the Bank is on 10.02.2014 and that by the Income tax Department, is post attachment, on 27.03.2017 only. The subsequent attachment thus fails in the light of Section 26E. Incidentally, at the time when the above decision was rendered, Section 26E of the SARFAESI Act had not been notified, prompting the Bench to state at paragraph 6 of that decision (of the SCC online report) that the issue before them could have been resolved in a trice, had only the provisions of Section 26E been notified at the time when the decision was being rendered. The provisions of Section 26E have since been notified on 24.01.2020 and the benefit of the same is available for the present Writ Petitioners. WP allowed.
Issues Involved:
1. Priority of charge between banks and the Income Tax Department over properties used as collateral. 2. Applicability and interpretation of Section 281 of the Income Tax Act. 3. Applicability and interpretation of Section 26E of the SARFAESI Act. 4. Validity of attachment by the Income Tax Department. 5. Legal protection for bona fide purchasers under Section 281. Detailed Analysis: Issue 1: Priority of Charge Between Banks and the Income Tax Department The core issue revolves around whether banks hold a priority of charge over the Income Tax Department concerning properties offered as collateral. The petitioners, banks, initiated action under Section 13 of the SARFAESI Act due to defaults by loanees and took possession of the properties. The properties were auctioned, and sale certificates were issued. The Income Tax Department claimed that due to tax arrears, they had attached these properties, leading to conflicting claims. Issue 2: Applicability and Interpretation of Section 281 of the Income Tax Act Section 281 of the Income Tax Act declares certain transfers void if made during or after the pendency of proceedings without adequate consideration or without notice of such proceedings. The Income Tax Department argued that the issuance of a notice under Section 143(2) creates an automatic charge over the property, making any subsequent transfer void. However, the court noted that Section 281 is intended to protect bona fide purchasers unaware of pending recovery proceedings and does not automatically create a charge. The court emphasized that the power to declare a transfer void rests with civil courts, not the Tax Recovery Officer (TRO). Issue 3: Applicability and Interpretation of Section 26E of the SARFAESI Act Section 26E of the SARFAESI Act, introduced on 24.01.2020, grants priority to debts owed to secured creditors over all other debts, including taxes. The court highlighted that Section 26E contains a non-obstante clause, ensuring its precedence over other laws, including the Income Tax Act. The court ruled that the mortgage created by the bank on 10.02.2014 takes precedence over the Income Tax Department's attachment made on 27.03.2017. Issue 4: Validity of Attachment by the Income Tax Department The court examined whether the attachment by the Income Tax Department was valid. It noted that while the attachment is valid, the department's power extends only to effecting the attachment, not declaring the transfer void. The court referred to Rule 11(6) of the 2nd Schedule to the Income Tax Act, which allows the TRO to attach property but requires a civil court's declaration to void a transfer. Issue 5: Legal Protection for Bona Fide Purchasers Under Section 281 The court clarified that Section 281 protects bona fide purchasers who acquire property without knowledge of pending recovery proceedings. It does not automatically create a charge or give the Income Tax Department priority over secured creditors. The court cited several judgments, including Gangadhar Vishwanath Ranade and Sancheti Leasing Company Ltd, to support this interpretation. Conclusion: The court allowed the writ petitions, ruling that the banks' charge over the properties, created by the mortgage on 10.02.2014, takes precedence over the Income Tax Department's attachment made on 27.03.2017. The court emphasized that Section 26E of the SARFAESI Act grants priority to secured creditors, and Section 281 of the Income Tax Act does not automatically create a charge or give the Income Tax Department priority over secured creditors. The court closed the MPs and awarded no costs.
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