2018 (2) TMI 878 - HC - Income Tax

Recovery of income tax dues - Priority of Charge - mortgage of property - Secured creditor priority over the dues payable to the Income Tax Department - attachments made by the Income Tax Department over the said property - Held that - The issue is no longer res integra and has been considered in The Assistant Commissioner (CT) Versus The Indian Overseas Bank, M/s. Super Recording Co. Ltd. 2016 (12) TMI 373 - MADRAS HIGH COURT . Question No.(i) was answered in favour of the financial institution which is a secured creditor having the benefit of the mortgaged property. Accordingly the question framed above has to be answered in favour of the petitioner Bank and against the 1st respondent and accordingly it is held that the petitioner Bank is entitled to priority of charge over the mortgaged property in question. Applicability of Section 281 (1) - void transfers - whether the mortgage created in favour of the petitioner s Bank could have been done only after obtaining approval from the Income Tax Department in terms of Section 281 (1)? - Held that - This question was considered by the Division Bench of the High Court of Gujarat in the case of Tax Recovery Officer Vs. Industrial Finance Corporation of India 2012 (8) TMI 541 - Gujarat High Court as held that transfer of property which was for a valuable consideration and which was without notice of the pendency of the proceedings under the Sales-tax Act and therefore, the transfer falls under the exception created by the proviso to Section 33-A of the Madhyapradesh General Sales Tax Act, 1958. Thus, by applying the law laid down in the above mentioned documents question No.(ii) has to be answered in favour of the petitioner bank and against the respondents. Writ Petition is allowed and the attachment shall stand lifted and the 1st respondent shall intimate the Sub-Registrar, T. Nagar to delete the entries in the books maintained by him within a period of three weeks from the date of receipt of a copy of this order.

Summary

Issues:
1. Priority of charge between a secured creditor and the Income Tax Department.
2. Applicability of Section 281(1) of the Income Tax Act regarding mortgage creation.

Priority of Charge:
The petitioner, a nationalized bank, sought to lift attachment orders by the Income Tax Department over a property mortgaged to them by a borrower who defaulted on loan repayment. The key issue was whether the bank, as a secured creditor, had priority over the Income Tax Department's dues. The court referred to a full bench decision and the Enforcement of Security Interest and Recovery of Debts Laws Amendment Act, 2016. The court held that the rights of secured creditors to realize debts by selling assets take priority over all other debts and government dues, including taxes. Thus, the bank was entitled to priority of charge over the mortgaged property.

Applicability of Section 281(1) of the Income Tax Act:
The second issue revolved around whether the mortgage creation by the bank was legitimate under Section 281(1) of the Income Tax Act, considering a notice issued under Section 148 of the Act. The court analyzed a Gujarat High Court decision and held that the charge created by the borrower in favor of the bank was not void as it was made for adequate consideration and without notice of any pending income tax proceedings. The court emphasized that the bank did not have knowledge of the tax liability of the borrower and, therefore, the charge was valid. Referring to precedents under the General Sales Tax Act of Madhya Pradesh, the court concluded that the bank was entitled to have the attachment lifted, and the Sub-Registrar was directed to delete the entries related to the attachment.

In conclusion, the judgment clarified the priority of a secured creditor over government dues and affirmed the validity of the mortgage created by the bank. The court's decision favored the petitioner bank, allowing for the lifting of the attachment orders by the Income Tax Department and directing the removal of related entries.