2020 (3) TMI 362 - SC - Income Tax

Stay petition - recovery proceedings - seeking a restraint order against the Tax Recovery Officer, Range 1, Kalyan - Respondent No.4 for enforcing the attachment made under the Income Tax Act, 1961for recovery of the dues - HELD THAT - According to Rule 16(2), if an attachment has been made under Schedule II to the Act, any private transfer or delivery of the property shall be void as against all claims enforceable under the attachment. The property in dispute was mortgaged by BPIL to the Union Bank of India in 2000 and the DRT passed an order of recovery against the BPIL in 2002. The recovery certificate was issued immediately, pursuant to which an attachment order was passed prior to the date on which notice was issued by the Tax Recovery Officer- Respondent No.4 under Rule 2 of Schedule II to the Act. It is true that the sale was conducted after the issuance of the notice as well as the attachment order passed by Respondent No.4 in 2003, but the fact remains that a charge over the property was created much prior to the notice issued by Respondent No.4 on 16.11.2003. The High Court held that Rule 16(2) is applicable to this case on the ground that the actual sale took place after the order of attachment was passed by Respondent No.4. The High Court failed to take into account the fact that the sale of the property was pursuant to the order passed by the DRT with regard to the property over which a charge was already created prior to the issuance of notice on 11.02.2003. As the charge over the property was created much prior to the issuance of notice under Rule 2 of Schedule II to the Act by Respondent No.4, we find force in the submissions made on behalf of the Appellant. The judgment of the High Court is set aside and the Appeal is allowed. The MIDC is directed to issue a No Objection certificate to the Appellant. Respondent No.4 is restrained from enforcing the attachment order dated 17.06.2003.

Summary

Issues:
1. Transfer of property purchased in auction sale despite attachment by Income Tax Department.
2. Interpretation of Rule 16 of Schedule II to the Income Tax Act, 1961.
3. Priority of Crown debt over secured creditor's dues.

Issue 1: Transfer of Property Purchased in Auction Sale Despite Attachment

The Appellant filed a Writ Petition seeking to restrain the Tax Recovery Officer from enforcing an attachment made under the Income Tax Act for recovery of dues. The High Court dismissed the petition, stating that no transfer can occur once a property is attached. The Appellant purchased the property in an auction sale following a recovery certificate issued by the Debt Recovery Tribunal. The High Court held that the sale was void as it occurred after the attachment. The Appellant argued that the property was already charged to a secured creditor before the attachment notice, thus not subject to the attachment rules.

Issue 2: Interpretation of Rule 16 of Schedule II

Rule 16 of Schedule II to the Act prohibits dealing with attached property without permission. The High Court ruled that the sale to the Appellant post-attachment was void. The Appellant contended that the property was charged to a secured creditor before the attachment notice, making the transfer valid. The Court found merit in this argument, emphasizing that the charge existed before the attachment notice, rendering the sale valid despite occurring after the attachment.

Issue 3: Priority of Crown Debt over Secured Creditor's Dues

The Union of India argued for the priority of Crown debt over the Appellant's claim, citing the attachment made by the Tax Recovery Officer. However, the Court found that the property was already charged to a secured creditor before the attachment, giving precedence to the prior secured debt. Citing precedents, the Court emphasized that unless a statute provides otherwise, secured creditors' dues take precedence over Crown debts.

In conclusion, the Supreme Court set aside the High Court's judgment, directing the issuance of a 'No Objection' certificate to the Appellant and restraining the Tax Recovery Officer from enforcing the attachment order. The Court emphasized the validity of the property transfer to the Appellant due to the pre-existing charge on the property, overriding the attachment made by the Income Tax Department.