2016 (12) TMI 410 - HC - Income Tax

Recovery proceedings - attachment orders - Priority of Charge - false claim on property in question - petitioner submitted a representation stating that they have purchased the property through a public auction conducted by the Recovery Officer, DRT, Chennai and as on date of sale, there was no attachment over the property - Held that - Admittedly, the property was brought for public auction by the Dena Bank, which was a secured creditor. The question would be as to whether crown debts would have precedence over the debts payable to a secured creditor? This issue is no longer resintegra and has been answered by the Full Bench of this Court in the case of The Assistant Commissioner (CT) Vs. The Indian Overseas Bank and another 2016 (12) TMI 373 - MADRAS HIGH COURT . Thus, by applying the decision of the Full Bench referred above, the law having come into force, governs the parties even in respect of litigations which are pending. Therefore, the Income Tax Department cannot claim any precedence over the secured creditor in proceeding against the subject property for the recovery of the income tax arrears in the light of the law laid down by the Full Bench, which was rendered taking note of the recent enactment viz., the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016. Writ Petition is allowed and the impugned order is quashed. The sixth respondent, viz., the Sub Registrar, Keelur, Tuticorin District is directed to delete the encumbrance which has been entered based upon the request made by the Tax Recovery Officer and the said direction be complied with, within a period of three weeks from the date of receipt of a copy of this order

Summary

Issues:
1. Validity of the order passed by the Tax Recovery Officer attaching the property.
2. Priority of crown debts over debts payable to a secured creditor.
3. Rights of a third-party purchaser of a mortgaged property.

Analysis:
1. The petitioner sought a Writ of Certiorarified Mandamus to quash the order of attachment by the Tax Recovery Officer on the property owned by A.S.T.Winston. The property was collateral for a loan transaction with Dena Bank, and the petitioner had purchased it in a public auction. The petitioner argued that the attachment was made for income tax arrears of A.S.T.Winston, not considered the purchase through auction, and sought to lift the attachment.

2. The Court deliberated on whether crown debts would have precedence over debts payable to a secured creditor. Referring to a Full Bench decision, it was established that the rights of secured creditors to realize debts due to them by selling assets take priority over all other debts and government dues, including taxes. The Court cited the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, to support this position. The judgment clarified that even pending litigations would be governed by this law.

3. Applying the Full Bench decision, the Court held that the Income Tax Department cannot claim precedence over the secured creditor in recovering income tax arrears from the subject property. The impugned order was quashed, directing the Sub Registrar to delete the encumbrance entered based on the Tax Recovery Officer's request. The Court emphasized that this decision does not prevent the Income Tax Department from pursuing the defaulter. No costs were awarded in this matter.