2017 (8) TMI 487 - HC - Income Tax

Tax Recovery proceedings - priority over other dues / secured creditors - attaching a particular immovable property for the pending dues of the Income Tax department - Held that - The facts are not seriously in dispute. The borrower had created security interest in an immovable property by executing an equitable mortgage for availing cash credit facility from the petitioner bank. This was done on 24.11.2010. At that time, neither the assessment nor the income tax dues of the borrower were in picture. The dues which the Revenue now seeks to recover through the property in question, we are informed, pertain to assessment year 2012-13. In that view of the matter and in view of section 31B of the Recovery of Debts and Bankruptcy Act 1993, the Revenue cannot prevent the petitioner-bank as a secured creditor from realizing its unpaid dues through sale of secured asset.

Summary

Issues:
Challenge to order of attachment by Tax Recovery Officer for pending Income Tax dues against a property already under security interest for bank loan.

Analysis:
The petitioner, a nationalized bank, challenged an order of attachment passed by the Tax Recovery Officer against an immovable property for pending Income Tax dues of a borrower who had obtained a credit facility from the bank. The borrower had created security interest in the property through an equitable mortgage in 2010. Subsequently, the bank issued a notice under the SARFAESI Act in 2015 and took possession of the property after default by the borrower. The property was sold through public auction, and a sale certificate was issued in 2017.

The Tax Recovery Officer issued an order of attachment in 2015 against the borrower for unpaid Income Tax dues, which the bank argued should not affect its right to recover dues through the sale of the secured asset. The bank contended that the Income Tax dues arose after the creation of security interest and that its right to recover dues as a secured creditor should take priority over other dues, including those of the Revenue Department.

The court noted that the borrower had created security interest in the property before the Income Tax dues arose, which were for assessment year 2012-13. Referring to section 31B of the Recovery of Debts and Bankruptcy Act 1993, the court held that the Revenue Department could not prevent the bank from realizing its unpaid dues through the sale of the secured asset. Consequently, the court set aside the order of attachment by the Tax Recovery Officer and allowed the petition in favor of the bank.

In conclusion, the court's judgment favored the bank's right as a secured creditor to recover its dues through the sale of the property, holding that the subsequent Income Tax dues could not take precedence over the bank's security interest created prior to the tax liabilities.