2021 (4) TMI 1368 - HC - Indian Laws

Removal of attachment - certain transfers to be void or not - first charge over the properties in view of Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - HELD THAT - When it is established that the earliest demand notice under the IT Act with reference to the assessment years 2012-13 and 2013-14 was issued by the Income Tax Authorities on 31.03.2015 prior to the mortgage executed in favour of the petitioner-Bank on 27.01.2016 and 06.02.2016, the provisions of Section 281 of the IT Act would be applicable and the question of priority would not arise, in view of the fact that once the provision of Section 281 of the IT Act is applied, then the said transfer become void ab initio and the mortgage or transfer made thereafter is consequently void. Such transfers are to be construed as fraudulent transfers or mortgage and therefore, the mortgage in favour of the petitioner-Bank cannot be held as valid in the eye of law and since it is held as invalid, the question of invoking Section 26E of the SARFAESI Act would not arise at all. In view of the facts and circumstances that the earliest demand notice at the first instance issued by the Income tax Department on 31.03.2015 is not disputed, it is to be construed that the proceedings under the IT Act for recovery of tax dues were pending on the date, i.e., 31.03.2015 and therefore, any transfer made thereafter is hit by the provision of Section 281 of the IT Act and all such transfers are void and therefore, the subsequent mortgage became consequently invalid in the eye of law and therefore, the application of SARFAESI Act would not arise at all. Further, the scope of Section 26E of the SARFAESI Act is relatabe to the priority and the priority would arise only if more than one person could able to establish the right over the property and in the present case, when there is no right to mortgage was vested with the assessees, the question of priority would not arise at all. When the assessee has no right to mortgage the property purchased, then the Bank cannot accrue any right to deal with the mortgaged property or to claim priority based on the provision of Section 26E of the SARFAESI Act. The petitioner could not establish any right to deal with the property and even in such cases where such right are claimed, the persons aggrieved has to approach the Income Tax Authorities under Schedule 2 Rule 11 of the IT Act and in the present case, the question does not arise as the transfer itself became void. Petition dismissed.

Summary

Issues Involved:
1. Legality of the attachment of properties by the Income Tax Department.
2. Priority of claims between the Income Tax Department and the petitioner-Bank.
3. Applicability of Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993.
4. Interpretation and application of Section 281 of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Legality of the attachment of properties by the Income Tax Department:
The petitioner, a bank, sought to direct the Tax Recovery Officer to remove the attachment on certain properties to enable the registration of a sale certificate under the SARFAESI Act. The properties were mortgaged to the bank by the fourth and fifth respondents. The bank claimed that the attachment by the Income Tax Department was illegal and hindered its ability to deal with the properties per the mortgage terms.

2. Priority of claims between the Income Tax Department and the petitioner-Bank:
The petitioner argued that as a secured creditor, it held the first charge over the properties under Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993. The bank contended that these provisions granted it priority over all other debts, including taxes and cesses payable to the government.

3. Applicability of Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993:
The court acknowledged that the petitioner-Bank was a secured creditor and had mortgaged properties with the original title deeds deposited by the borrowers. The bank relied on the Supreme Court judgment in Bombay Stock Exchange vs. Kandalgaonkar & Ors., which stated that government dues only have priority over unsecured debts. The bank also referred to a Madras High Court judgment in M/s. Well Stores (Madras) Private Limited & Ors. Vs. Tax Recovery Officer, Chennai & Ors., which held that the rights of a secured creditor should prevail over government dues.

4. Interpretation and application of Section 281 of the Income Tax Act:
The Income Tax Department argued that the demands against the assessees (partners of M/s. Beetle Experts and M/s. Ultimate Solutions) were raised before the mortgage was created. The earliest demand notice was issued on 31.03.2015, while the mortgage was executed on 27.01.2016 and 06.02.2016. As per Section 281 of the IT Act, any transfer or mortgage made during the pendency of tax proceedings is void against any tax claims. The court held that Section 281 of the IT Act applied, making the mortgage void ab initio, as the tax proceedings were pending before the mortgage was created.

The court emphasized that Section 281 of the IT Act is declaratory, rendering transfers or mortgages void if made during tax proceedings to defraud the revenue. The court concluded that since the Income Tax Department's demand notice preceded the mortgage, the mortgage was invalid, and the bank could not claim priority under Section 26E of the SARFAESI Act.

Conclusion:
The court dismissed the writ petition, holding that the mortgage was void under Section 281 of the IT Act, and the bank could not claim priority over the Income Tax Department's attachment. The petitioner was advised to approach the Income Tax Authorities under Schedule 2 Rule 11 of the IT Act if they sought to contest the attachment. The court reiterated that the partners and the company were jointly and individually liable for the tax dues.