2012 (8) TMI 541 - HC - Income Tax

Whether in view of sub-section (1) of section 281 of the Income-tax Act, 1961, the charge created against the property in question by mortgaging the property by the second respondent-assessee borrower in favour of the first respondent-financial institution during pendency of any of the proceedings under the Income-tax Act, 1961, is void as against any claim in respect of income-tax and other sum payable by the second respondent-assessee in favour of the petitioner- Revenue. As the proviso to sub-section (1) of section 281 stipulates a notice relating to such pendency of the income-tax proceeding or payment of tax payable by the assessee, the Revenue cannot take the plea that the first respondent had knowledge of the pendency of the proceeding and thereby it is open to the first respondent to derive advantage of clause (i) of the proviso to sub-section (1) of section 281 of the Income-tax Act, 1961, so far as it relates to charge created by the second respondent in favour of the first respondent-financial institution by equitable mortgage of the immovable property in question, as against any claim in respect of any tax or any other sum payable by the assessee as a result of completion of any proceeding or otherwise by the petitioner-Revenue.

Issues Involved:
1. Whether the charge created against the property by mortgaging it during the pendency of proceedings under the Income-tax Act, 1961, is void against any claim of tax payable by the assessee.
2. Whether the Excise and Customs Department has priority over the secured debt of the financial institution.

Issue-wise Detailed Analysis:

1. Validity of the Charge Created During Pendency of Income-tax Proceedings:
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 mortgaging the property by the borrower during the pendency of proceedings under the Income-tax Act, 1961, is void against any tax claims.

The petitioner-Revenue argued that the mortgage created by the borrower in favor of the financial institution during the pendency of Income-tax proceedings is void under section 281(1) of the Income-tax Act, 1961. The secured assets had already been attached by the petitioner-Revenue on December 20, 2004, and thus any subsequent mortgage should be declared void.

The financial institution contended that the mortgage was created for adequate consideration and without notice of the pendency of income-tax proceedings, thus falling under the protection of the proviso to section 281(1) of the Income-tax Act. The court noted that no notice of the pendency of income-tax proceedings was served on the financial institution before the creation of the equitable mortgage. Therefore, the mortgage is protected under clause (i) of the proviso to section 281(1) of the Income-tax Act, 1961.

The court referred to similar cases, including the Madhya Pradesh High Court's decision in State of Madhya Pradesh v. Abhaykumar and Pooranchand Ved Prakash v. State of Madhya Pradesh, which supported the financial institution's position. Consequently, the court held that the mortgage created by the borrower in favor of the financial institution is not void and is protected under the proviso to section 281(1) of the Income-tax Act. The first writ petition was dismissed.

2. Priority of Customs Department Over Secured Debt:
The second writ petition, Special Civil Application No. 6961 of 2010, was filed by the Assistant Commissioner of Customs, challenging the priority of the Customs Department over the secured debt of the financial institution. The Customs Department claimed priority based on section 142 of the Customs Act, 1962.

The court examined section 142 of the Customs Act, which pertains to the recovery of 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 v. Sicom Ltd. and the Madras High Court's decision in UTI Bank Ltd. v. Deputy Commissioner of Central Excise, which held that government dues do not have priority over secured creditors unless explicitly provided by statute.

The court concluded that the Customs Department cannot claim priority over the secured debt of the financial institution. The second writ petition was rejected.

Pending Matters Before the Debts Recovery Tribunal:
The court noted that appeals under section 17 of the SARFAESI Act, including Securitization Appeal No. 35 of 2009, were pending before the Debts Recovery Tribunal, Ahmedabad. These appeals challenged the measures taken by the financial institution under section 13(4) of the SARFAESI Act. The court refrained from expressing any opinion on these matters, leaving them to be determined independently by the Debts Recovery Tribunal.

Conclusion:
The court dismissed the first writ petition, holding that the mortgage created by the borrower in favor of the financial institution is protected under section 281(1) of the Income-tax Act. The second writ petition was also rejected, as the Customs Department cannot claim priority over the secured debt of the financial institution. The court left the pending matters before the Debts Recovery Tribunal to be decided independently.

← Previous Next →