2019 (3) TMI 701 - HC - Income Tax

Attachment orders - Mortgagee right of recovery vs Income tax dept right of recovery - legality of property mortgaged made before a demand was made under Rule 2 - whether all transfers made by the assessee during the pendency of the proceedings would automatically become null and void, without anything being done by any statutory authority or court? - whether the Tax Recovery Officer or the Civil Court, which is competent to issue a declaration of nullity and voidity of transfers under Section 281 (1) of the Income Tax Act? - mortgage was created by the assessee much before a demand was made under Rule 2 - whether all transfers made by the assessee during the pendency of the proceedings under the Act become automatically null and void, we must search for an answer from the Second Schedule to the Income Tax Act, 1961? - HELD THAT - The proviso (i) to sub-section (1) of Section 281 provides an escape route for innocent third parties, to whom the property of the assessee is transferred during the pendency of the proceedings, but before an attachment is ordered. This compartmentalization is very important to be noted, in view of the fact that during the pendency of the proceedings for assessment, an assessee does not become an assessee in default. Section 281 (1) cannot be interpreted to mean that every assessee is likely to become an assessee in default and therefore, all transfers effected by him even before he becomes a defaulter are null and void. Keeping in mind the fundamental premise on which the scheme of Section 281 read with Section 222 and the Second Schedule to the Act operates, let us now come back to the facts of the case. The timeline of events Part-II, which we have furnished elsewhere, shows that the 3rd respondent herein filed a return of income on 31-07-2009. His case was selected for scrutiny through CASS. Notices under Section 143 (2) were issued in September 2010 and February 2011. A notice under Section 142 (1) was issued on 23- 02-2011. The order of assessment itself was passed only on 27-12- 2011 under Section 143 (3). Consequently, the demand notice under Section 156 was issued only on 27-12-2011, giving the Managing Partner of the 3rd respondent thirty days time. Even if the period of thirty days is counted from the date of the notice namely 27-12-2011, the notice period would expire on 26-01-2012. Therefore, the Managing Partner of the 3rd respondent became an assessee in default in terms of Section 220 (4), only on 26-01-2012. It is only thereafter that a notice ought to have been issued under Rule 2. We do not know the date on which the notice under Rule 2 was issued. However, it is an admitted fact that the Tax Recovery Certificate was issued on 09-01-2014. The order of attachment was issued on 14-03-2018. But the mortgage was created by the 3rd respondent in favour of the petitioner-bank on 11-07-2011, much before the order of assessment was passed under Section 143 (3) on 27-12-2011. In other words, the assessee was nowhere near the point of being declared as an assessee in default on the date of creation of the mortgage. Hence, the creation of the mortgage cannot be said to have automatically become void in terms of Section 281 (1) merely because of the pendency of the proceedings under Sections 143 and 142. It required something more to be done, but the same was not done in this case. Even an investigation under Rule 11 was not carried out in this case. Therefore, the order of attachment is clearly illegal. On the date on which the order of attachment was passed, the property had already been sold by the petitioner-bank, in exercise of the power conferred upon the bank under the Securitisation Act, 2002. There appears to be no provision in the Income Tax Act, by which a first charge is created automatically on the properties of the assessees. There is no provision in the Income Tax Act similar to Section 16C of the Andhra Pradesh General Sales Tax Act, 1957. It is by now well settled that wherever the statute does not create a first charge over the property, the crown s debt does not take precedence over the claim of the secured creditor. In the light of the fact that the mortgage was created by the assessee much before a demand was made under Rule 2 and even before an order of assessment was passed and in the light of the fact that before the stage of issue of a certificate of recovery, the voidity under Section 281 (1) is not automatic, the petitioner-bank deserves to succeed. Accordingly, the writ petition is allowed and the impugned order of attachment is set aside. The Sub-Registrar may proceed to register the sale certificate issued by the Bank upon compliance with the necessary formalities.

Issues Involved:
1. Validity of the mortgage created by the assessee during the pendency of income tax proceedings.
2. The impact of Section 281(1) of the Income Tax Act, 1961 on the mortgage.
3. Priority of claims between the secured creditor (bank) and the Income Tax Department.

Issue-wise Detailed Analysis:

1. Validity of the Mortgage Created by the Assessee During the Pendency of Income Tax Proceedings:

The petitioner, ICICI Bank, challenged an order of attachment dated 14-03-2018 issued by the Tax Recovery Officer under Rule 48 of the Second Schedule to the Income Tax Act, 1961. The bank argued that M/s. Sojiram Ispat Private Limited had availed financial assistance in June 2011, with the 3rd respondent guaranteeing the loan and mortgaging properties. After the borrower defaulted, the bank initiated proceedings under the Securitisation Act, 2002, sold the property, and obtained a sale certificate. However, the Sub-Registrar refused to register the sale certificate due to the attachment order by the Tax Recovery Officer.

2. The Impact of Section 281(1) of the Income Tax Act, 1961 on the Mortgage:

The Tax Recovery Officer contended that the attachment was pursuant to a Tax Recovery Certificate issued following an assessment order for the Assessment Year 2009-10. Since the assessment proceedings under Section 143(2) were pending when the mortgage was created, the mortgage was deemed null and void under Section 281(1) of the Income Tax Act, 1961. The court noted that Section 281(1) declares any transfer or charge on the assets of the assessee during the pendency of proceedings under the Act as void. However, it emphasized that this voidity is not automatic and requires further action by the authorities.

The court analyzed the sequence of events and relevant provisions, concluding that the mortgage created on 11-07-2011 was before the assessment order on 27-12-2011 and the demand notice on the same date. Thus, the assessee was not in default at the time of the mortgage creation, and the mortgage could not automatically become void under Section 281(1).

3. Priority of Claims Between the Secured Creditor (Bank) and the Income Tax Department:

The court highlighted that the Income Tax Act does not create an automatic first charge on the properties of the assessee. It referred to legal precedents, including the Supreme Court's decision in Central Bank of India v. State of Kerala, which held that the RDDB Act and Securitisation Act do not create a first charge in favor of the secured creditor, and the Sales Tax Laws' charge would prevail over the bank's charge. However, in The Stock Exchange v. V.S. Kandalgoankar, the Supreme Court held that the Income Tax Act does not provide for the paramountcy of income tax dues over secured creditors.

The court concluded that since the mortgage was created before the assessment order and demand notice, and the voidity under Section 281(1) is not automatic before the issuance of a recovery certificate, the bank's claim as a secured creditor takes precedence over the Income Tax Department's claim.

Judgment:

The writ petition was allowed, setting aside the impugned order of attachment. The Sub-Registrar was directed to register the sale certificate issued by the bank upon compliance with necessary formalities. There was no order as to costs, and any pending miscellaneous petitions were closed.

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