2023 (12) TMI 199 - HC - Customs

Recovery of customs duty / dues - Perior over secured creditors - Validity of order of attachment - Seeking removal of entry of attachment made by the 4th respondent on the property of the petitioner company - overriding effect of SARFAESI Act than any other Act including Customs Act under Section 26E under Chapter IV-A - HELD THAT - In the present case, if the plea of the respondents ought to be considered that deposit of title deeds is not registered, then at the same breath, it ought to be considered that the attachment is also not registered. Then the bank and the Customs Department are standing on the same footing. Moreover, there is no provisions in the Customs Act granting 1st charge to its dues under its Act. In such circumstances, when both the parties are standing on the same footing and when there are no provisions of 1st charge to Customs Department then it ought to be seen which proceedings is first. A similar issue was considered by the High Court of Andhra Pradesh and Telangana in the case of ICICI Bank Limited Vs. Tax Recovery Officer 2019 (3) TMI 701 - TELANGANA AND ANDHRA PRADESH HIGH COURT . The challenge in the said judgment is an attachment order 14.03.2018, issued by the Tax Recovery Officer under Rule 48 of second schedule. After considering section 281 and rule 48, the Court has elaborately dealt with the issue and has held that there is no provision in the Income Tax Act by which a first charge is created automatically on the properties of the assesses. And also held it is now well settled that wherever the statute does not create a first charge over the property, the crown's debt does not take precedents over the claim of the secured creditor - In the present case also, there is no provisions in the Customs Act creating 1st charge on the property of the defaulter and the above judgment is applicable to the present case. Admittedly the bank had executed mortgage of deposit of title deeds on 31.07.1997, which is prior to the attachment of the Customs Department which was passed on 01.11.2004. Therefore, financial institution is having 1st charge as secured creditor than the crown debt. Hence, the impugned attachment cannot sustain the scrutiny of law. Hence, the impugned attachment is liable to be quashed. Petition allowed.

Summary

Issues Involved:
1. Validity of attachment by the Customs Department.
2. Priority of claims under SARFAESI Act vs. Customs Act.
3. Status of the mortgage executed by the financial institution prior to the attachment.

Summary:

1. Validity of Attachment by the Customs Department:
The petitioner challenged the attachment made by the Customs Department on their property, which was previously owned by M/s. Pillaiyar Pattiyar Textiles and sold to the petitioner through SARFAESI proceedings. The Customs Department had issued an attachment order on 01.11.2004 for dues owed by M/s. Pillaiyar Pattiyar Textiles. The petitioner argued that the attachment was made without proper consideration and was not recorded in the encumbrance register, thus making it ineffective. The court held that "simply sending a letter to the Registration Department is not sufficient to state that the property is attached" and that the petitioner is protected as a "bonafide purchaser."

2. Priority of Claims under SARFAESI Act vs. Customs Act:
The petitioner contended that under Section 26E of the SARFAESI Act, the mortgage to the bank has the first charge over any other claims, including those under the Customs Act. Although the amendment to Section 26E came into effect on 24.01.2020, the court noted that it applies to pending cases. The court cited a Division Bench ruling, stating, "the rights of a secured creditor to realise secured debts due and payable by sale of assets over which security interest is created, would have priority over all debts and Government dues." Therefore, the SARFAESI Act has overriding effect, and the petitioner's claim takes precedence.

3. Status of the Mortgage Executed by the Financial Institution Prior to the Attachment:
The court examined whether the mortgage executed by M/s. Pillaiyar Pattiyar Textiles with the financial institution on 31.07.1997 was valid despite not being registered. The court concluded that "the mortgage of deposit of title deeds may be liable for registration, but the instrument written subsequently evidencing the agreement of deposit of title deeds was not liable for registration" until 30.11.2012. Thus, the mortgage was valid and had priority over the Customs Department's attachment. The court further noted that "there is no provision in the Customs Act granting 1st charge to its dues."

Conclusion:
The court quashed the impugned attachment order by the Customs Department, directing the Sub Registrar to lift the attachment and enter the scheme of arrangement between the petitioner and M/s. Parampara Spinning Mills. The writ petitions were allowed with no costs, and the connected miscellaneous petitions were closed.