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2022 (3) TMI 157 - HC - Income TaxTax recovery proceedings - Right over property mortgaged - Whether subject property belongs to the third respondent was already attached by the Income Tax Authorities and therefore, any subsequent mortgagee with the Bank is void under the provisions of the Income Tax Act? - dispute arose between the State Bank of India and the first respondent-Tax Recovery Officer, when the second respondent refused to register the Sale Certificate issued under the SARFAESI Act, on the ground that the subject property being vacant plot , is attached by the first respondent-Tax Recovery Officer for the alleged tax dues of the third respondent and the said attachment is recorded in the Books of the second respondent - HELD THAT - In the event of establishing that the mortgage was prior to the initiation of action by the Income Tax Department, prior to the default of the Assessee under the Income Tax Department, then the Bank may claim right over such mortgages. However, in order to ascertain the clear facts and circumstances, an enquiry is to be conducted by the Tax Recovery Officer. Therefore under Rule 11 of Schedule II of the Income Tax Act, the petitioner-Bank has to approach the Tax Recovery Officer for adjudication of the facts, so as to form an opinion whether the petitioner-Bank is entitled to enforce their rights or not. It is not as if in every case, Bank can enforce their rights only under the SARFAESI Act, without reference to the provisions of the Income Tax Act. When such conflict arises, the priority to be considered has been elaborately considered by this Court and detailed findings are provided in the judgment dated 19.07.2021 in WP No.15437 of 2014. The right of priority and adjudication of facts, which all are required and the issues involved are elaborately discussed and the parties were given an opportunity to approach the Tax Recovery Officer by filing an appropriate application under Schedule II of Rule 11 of the Income Tax Act. Therefore, the said principle, which is being followed by this Court, is to be adopted in the present case, as the first respondent-Tax Recovery Officer made a finding in the impugned order itself that the attachment of immovable property made on 10.12.2015 would relate back to 01.03.2013. It has come to the knowledge of the Tax Recovery Officer that the defaulter has mortgaged the subject property with the petitioner-Bank and the same was registered on 04.04.2013. Thus, the first respondent-Tax Recovery Officer formed an opinion that the attachment date precedes the mortgage date and hence the mortgage of the subject property and transfer of the subject property is void under the provisions of the Income Tax Act. As relying on JANATA SAHAKARI BANK LTD. case 2021 (8) TMI 1233 - MADRAS HIGH COURT the petitioner-Bank in the present case, is at liberty to approach the first respondent-Tax Recovery Officer by filing an appropriate application under Schedule II, Rule 11 of the Income Tax Act. In the event of filing any such application, the Tax Recovery Officer is directed to investigate the same with reference to the original documents and evidences and pass appropriate orders as expeditiously as possible.
Issues Involved:
1. Validity of mortgage executed by the petitioner-State Bank of India. 2. Priority of claims between the Income Tax Department and the petitioner-State Bank of India. 3. Application of Section 281 of the Income Tax Act. 4. Application of Section 26E of the SARFAESI Act. 5. Adjudication process under Rule 11 of Schedule II of the Income Tax Act. Issue-wise Detailed Analysis: 1. Validity of Mortgage Executed by the Petitioner-State Bank of India: The petitioner, State Bank of India, challenged the order issued by the Tax Recovery Officer, which declared the mortgage with the Bank as void under the Income Tax Act. The petitioner argued that they held a priority charge as a valid mortgage was executed before the attachment by the Income Tax Department. The court noted that the third respondent had mortgaged various properties to secure credit facilities from the petitioner-Bank. The petitioner issued a Sale Certificate dated 12.01.2016 following an auction sale held on 18.12.2015 under the SARFAESI Act. 2. Priority of Claims Between the Income Tax Department and the Petitioner-State Bank of India: The petitioner contended that their rights as a secured creditor under the SARFAESI Act should take precedence over the claims of the Income Tax Department. They cited previous court decisions supporting the priority of secured creditors over government dues. However, the court highlighted the conflicting provisions between the SARFAESI Act, the Recovery of Debts and Bankruptcy Act, and the Income Tax Act, emphasizing the need to consider the constitutional importance of tax collection. 3. Application of Section 281 of the Income Tax Act: Section 281 of the Income Tax Act declares transfers made during the pendency of income tax proceedings as void. The court noted that any mortgage entered into after the initiation of recovery action by the Income Tax Department is void. The Tax Recovery Officer found that the attachment of the property dated back to 01.03.2013, preceding the mortgage date of 04.04.2013, rendering the mortgage void under the Income Tax Act. 4. Application of Section 26E of the SARFAESI Act: Section 26E of the SARFAESI Act, notified on 24.01.2020, provides priority to secured creditors over government dues. The petitioner argued that this provision should apply to their case. However, the court noted that the conflicting statutory provisions and the constitutional priority of tax dues must be considered. The court emphasized that the doctrine of constitutional priority, which gives precedence to tax collection for the functioning of the sovereign state, overrides other statutory priorities. 5. Adjudication Process Under Rule 11 of Schedule II of the Income Tax Act: The court directed the petitioner to approach the Tax Recovery Officer under Rule 11 of Schedule II of the Income Tax Act for adjudication of the facts. This rule allows for investigation by the Tax Recovery Officer to determine the validity of claims and objections related to the attachment or sale of property. The court emphasized that the High Court cannot adjudicate disputed facts based on affidavits and counter-affidavits in writ proceedings and that the petitioner must establish the details regarding the mortgage and the pendency of income tax proceedings through proper investigation by the Tax Recovery Officer. Conclusion: The court rejected the relief sought by the petitioner and directed them to approach the Tax Recovery Officer for adjudication under Rule 11 of Schedule II of the Income Tax Act. The Tax Recovery Officer was instructed to investigate the claims with reference to original documents and pass appropriate orders expeditiously. The writ petition was disposed of with no order as to costs.
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