2012 (6) TMI 442 - HC - Income Tax

Writ petition - whether the Excise and Customs Department of the Central Government have priority over the secured debt of the 1st respondent - financial institution Held that - are no specific provisions under the Central Excise Act or the Customs Act to claim first charge, as provided under other enactments, the Full Bench held that generally the dues to the Government i.e. tax, duties, etc. (Crown s debts) get priority over ordinary debts; only when there is a specific provision in the statute claiming first charge over the property, the Crown s debt is entitled to have priority over the claim of others. In absence of any such provision to claim first charge, the Government cannot claim precedence under the Central Excise Act over the claim of the secured creditor under the SARFAESI Act, 2002. Customs Department cannot claim any priority of claim over the claim of the secured creditor, the 1st respondent - financial institution.

Issues:
1. Validity of the charge created by the borrower in favor of the financial institution under Section 281(1) of the Income-tax Act, 1961.
2. Priority of the Customs Department's claim over the secured debt of the financial institution under Section 142 of the Customs Act, 1962.

Issue-wise Analysis:

1. Validity of the Charge under Section 281(1) of the Income-tax Act, 1961:

The first writ petition, Special Civil Application No. 3786 of 2010, was filed by the Tax Recovery Officer against the measures taken by the financial institution under Section 13(4) of the SARFAESI Act. The primary question was whether the charge created by the borrower in favor of the financial institution during the pendency of proceedings under the Income-tax Act, 1961, is void against any tax claims by the revenue.

The revenue argued that the borrower had significant outstanding income-tax liabilities and that the property had been attached by the Income-tax Department. They contended that the mortgage created by the borrower in favor of the financial institution without prior permission from the Assessing Officer was void under Section 281(1) of the Income-tax Act.

The financial institution, however, argued that the mortgage was created for adequate consideration and without notice of the pending income-tax proceedings, thus falling under the proviso to Section 281(1), which exempts such transactions from being void.

The court noted that no notice of the income-tax proceedings was served on the financial institution before the mortgage was created. The borrower had declared that there were no pending tax proceedings or liabilities at the time of the mortgage. The court held that the mortgage was protected under the proviso to Section 281(1) as it was made for adequate consideration and without notice of the tax proceedings. Consequently, the first writ petition was dismissed.

2. Priority of the Customs Department's Claim under Section 142 of the Customs Act, 1962:

The second writ petition, Special Civil Application No. 6961 of 2010, was filed by the Assistant Commissioner of Customs, challenging the measures taken by the financial institution under Section 13(4) of the SARFAESI Act. The Customs Department claimed priority over the secured debt of the financial institution based on Section 142 of the Customs Act, 1962.

The court examined Section 142 of the Customs Act, which outlines the methods for recovering sums due to the government but does not create a charge or priority over secured creditors. The court referred to various judgments, including the Supreme Court's decision in Union of India vs. Sicom Ltd., which held that government dues do not have priority over secured debts unless explicitly provided by statute.

The court concluded that the Customs Department could not claim priority over the secured debt of the financial institution under the SARFAESI Act. The second writ petition was therefore rejected.

Conclusion:

The court dismissed the first writ petition, holding that the mortgage created by the borrower in favor of the financial institution was valid under the proviso to Section 281(1) of the Income-tax Act. The second writ petition was also rejected, as the Customs Department could not claim priority over the secured debt of the financial institution under Section 142 of the Customs Act. The court did not express any opinion on the pending matters before the Debts Recovery Tribunal regarding the measures taken under Section 13(4) of the SARFAESI Act.

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