2025 (3) TMI 98 - HC - Income Tax

Priority of Secured Creditor s Rights over Tax Dues - sequence of events - auction the two helicopters on account of it being classified as NPA and also stating that its charge over the assets had priority over the income tax dues - petitioner submits that the continued existence of the prohibitory order has prevented the DGCA M/s Yathi Air Services and SAR Aviation Services from releasing the helicopters to the petitioner - petitioner submits that that the hypothecation of the helicopters by respondent no. 3 and the default by M/s Summit Aviation Pvt. Ltd. were established and well-documented before the issuance of the prohibitory order HELD THAT - This Court finds no merit in the objections raised by respondent no. 2. It is a well-settled principle of law that unless specifically stipulated by statute the dues of a secured creditor take precedence over government debts. In this regard the respondent no. 3 as a secured creditor had priority over the revenue s claims and accordingly was entitled to exercise its rights over the secured assets and subsequently sell the concerned helicopters. In the present case the hypothecation agreement was executed well before the issuance of the prohibitory order. This establishes the legal foundation for the respondent no. 3 s rights over the helicopters which predate any action taken by the Income Tax Authorities. Objection raised by the Income Tax Department regarding inadequate prior notice of the auction is without merit. It is well-documented that on 06.09.2023 the respondent no. 3 formally communicated its intention to auction the helicopters to the Income Tax Department. However despite receiving this communication respondent no. 2 failed to respond. Section 222(1)(a) explicitly states attachment and sale signifying a sequential process where the property once attached must subsequently be sold to recover the arrears. Despite this respondent no. 2 failed to take any action beyond the issuance of the prohibitory order. This Court finds merit in the petitioner s contention that the absence of any objection or legal challenge from the tax authorities regarding the auction conducted by respondent no. 3 despite their prior knowledge of it signifies their acquiescence to the sale. In this regard reliance has been rightly placed on the judgments of N Murugesan 2021 (10) TMI 1375 - SUPREME COURT and State Bank of India v. M J James 2021 (11) TMI 1078 - SUPREME COURT Respondent no. 2 was clearly informed about respondent no. 3 s intention to auction the petitioner s two helicopters through a communication dated 06.09.2023. However respondent no. 2 did not raise any objection at that time. It was only after duly informing respondent no. 2 the intention of the respondent no. 3 a notice regarding the auction of the two helicopters was published in the Financial Express and Jansatta newspapers on 20.09.2023.Further on 22.09.2023 respondent no. 3 issued a corrigendum to furnish additional information to bidders regarding applicable hangar charges on the helicopters and the existence of a prohibitory order. Even after the successful auction and the subsequent sale of the two helicopters respondent no. 2 was informed about the same. Despite being duly informed at every step respondent No. 2 failed to raise any objection/s to the auction. In any event in view of the legal position that the dues of Respondent no. 3/ secured creditor takes precedence over the dues of respondent no. 2 the attachment order issued by respondent no. 2 cannot be construed to be an impediment to the auction sale in favour of the petitioner. Accordingly the present petitions are allowed.

Summary

ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment are:

1. Whether the prohibitory order issued by the Income Tax Department, restraining the release of helicopters, should be quashed in favor of the secured creditor's rights.

2. Whether the rights of a secured creditor, under a hypothecation agreement, take precedence over the claims of the Income Tax Department for outstanding tax dues.

3. Whether the auction conducted by the secured creditor, despite the prohibitory order, was valid and legally enforceable.

4. Whether the Income Tax Department's failure to object to the auction proceedings constitutes acquiescence to the sale.

ISSUE-WISE DETAILED ANALYSIS

1. Priority of Secured Creditor's Rights over Tax Dues

Relevant Legal Framework and Precedents: The legal framework hinges on the principles established in cases such as Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. and Bombay Stock Exchange v. V.S. Kandalgaokar, which affirm that secured creditors' rights take precedence over government tax dues unless explicitly stated otherwise by statute.

Court's Interpretation and Reasoning: The Court emphasized that the hypothecation agreement between Summit Aviation Pvt. Ltd. and the secured creditor was executed before the issuance of the prohibitory order. This established the secured creditor's rights over the helicopters, predating any actions by the Income Tax Authorities.

Key Evidence and Findings: The hypothecation agreement dated 12.05.2008, and the subsequent actions taken by the secured creditor to enforce its rights, were pivotal. The Court noted that the Income Tax Act does not provide for the paramountcy of tax dues over secured creditors.

Application of Law to Facts: The Court applied the legal principles from the cited precedents to conclude that the secured creditor's rights were superior to the tax claims, given the absence of statutory provisions to the contrary.

Treatment of Competing Arguments: The Income Tax Department's argument that the prohibitory order should take precedence was dismissed, as the Court found no statutory basis for such a claim.

Conclusions: The Court concluded that the secured creditor's rights were valid and enforceable, taking precedence over the tax dues.

2. Validity of the Auction Conducted by the Secured Creditor

Relevant Legal Framework and Precedents: The Court referred to the rights of secured creditors to enforce their security interests, as established in the hypothecation agreement and supported by relevant case law.

Court's Interpretation and Reasoning: The Court found that the auction was conducted in accordance with the legal rights of the secured creditor under the hypothecation agreement, and the Income Tax Department's failure to object constituted tacit approval.

Key Evidence and Findings: The communications between the secured creditor and the Income Tax Department, along with the public notices of the auction, demonstrated the transparency and legality of the auction process.

Application of Law to Facts: The Court applied the principle that the secured creditor's rights, once established, allow for the sale of hypothecated assets to recover dues, irrespective of subsequent prohibitory orders.

Treatment of Competing Arguments: The Income Tax Department's claim of illegality due to the prohibitory order was dismissed, as the Court found that their lack of timely objection indicated acquiescence.

Conclusions: The auction was deemed valid and enforceable, with the secured creditor's actions upheld.

3. Acquiescence by the Income Tax Department

Relevant Legal Framework and Precedents: The Court relied on the principles of estoppel and acquiescence, as established in precedents like Union of India v. N Murugesan and State Bank of India v. M J James.

Court's Interpretation and Reasoning: The Court interpreted the Income Tax Department's failure to object to the auction, despite being informed, as acquiescence to the sale process.

Key Evidence and Findings: The documented communications and public notices served as evidence that the Income Tax Department was aware of the auction and chose not to intervene.

Application of Law to Facts: The Court applied the principles of estoppel to conclude that the Income Tax Department could not contest the auction after failing to act upon receiving notice.

Treatment of Competing Arguments: The Income Tax Department's argument that they were not adequately informed was rejected, given the evidence of multiple communications.

Conclusions: The Court concluded that the Income Tax Department's inaction constituted acquiescence, validating the auction.

SIGNIFICANT HOLDINGS

The Court held that the rights of the secured creditor, as established by the hypothecation agreement, took precedence over the Income Tax Department's claims. The Court reiterated the principle that secured creditors have priority over government dues unless explicitly stated otherwise by statute.

Core Principles Established:

"The Crown's preferential right to recovery of debts over other creditors is confined to ordinary or unsecured creditors. The common law of England or the principles of equity and good conscience (as applicable to India) do not accord the Crown a preferential right for recovery of its debts over a mortgagee or pledgee of goods or a secured creditor."

"The Income Tax Act does not provide for any paramountcy of dues by way of income tax. This is why the Court in Dena Bank case held that Government dues only have priority over unsecured debts."

Final Determinations on Each Issue:

The Court quashed the prohibitory order, allowing the secured creditor to enforce its rights and confirming the validity of the auction sale. All pending applications were disposed of in favor of the petitioner, affirming the precedence of secured creditors over tax claims.