2017 (8) TMI 240 - HC - Income Tax

Right of secured creditors - Attachment orders - properties initially mortgaged with the Indian Bank by the borrower - rights of the a secured creditor to realise secured debts due and payable by sale of assets over which security interest - Held that - The petitioner being the successor would step into the shoes of the financing Bank, which admittedly, is a secured creditor. Further more, the document has been valid by stamped for the purpose of stamp duty as assignment deed as could be seen from the endorsement in the reverse of page No.1 of the Assignment agreement dated 07.02.2017. Thus, in the light of the decision of the Full Bench, taking note of the Amendment Act, 2016, the order of attachment made by the Income Tax Department should yield to rights of the petitioner, secured creditor. Therefore, they are required to be set aside. The petitioner would have priority over all other debts and Government dues including taxes, cesses, etc., due to the Income Tax Department, Central Government, State Government or Local Authority. Therefore, the impugned orders of attachment are liable to be set aside.

Summary

Issues:
1. Priority of charge between a financial institution as a secured creditor and the government department over mortgaged property for tax and other dues.
2. Status and rights of a third-party purchaser of the mortgaged property.

Analysis:

Issue 1: Priority of Charge
The case involved three writ petitions challenging the Income Tax Department's orders of attachment on properties initially mortgaged with the Indian Bank. The petitioners, including Asset Reconstruction Company (India) Limited, sought to raise the attachment based on the Full Bench decision regarding the priority of charge over mortgaged property. The Full Bench, considering the Enforcement of Security Interest and Recovery of Debts Laws (Amendment) Act, 2016, emphasized that a secured creditor's rights to realize secured debts have priority over all government dues, including taxes and revenues. The introduction of Section 31B confirmed the priority of secured creditors in realizing debts through the sale of assets. The judgment clarified that the rights of a secured creditor prevail over government dues, settling the issue in favor of the financial institution.

Issue 2: Rights of Third-Party Purchaser
The respondents argued that any property transfer during Income Tax Act proceedings or after completion but before notice under Rule 2 of the Second Schedule is void. They claimed that the document between the petitioner and the bank was a sale document, making the purchase after the attachment void. However, the court disagreed, interpreting the agreement as an assignment of security interest, making the petitioner a successor to the financing bank and a secured creditor. The stamped assignment deed validated the transaction, aligning with the Full Bench decision and the Amendment Act, 2016. Consequently, the court ruled that the Income Tax Department's attachment should yield to the rights of the secured creditor, setting aside the impugned orders.

In conclusion, the judgment clarified the priority of secured creditors over government dues and upheld the rights of the petitioners as successors to the financing bank. The court allowed the writ petitions, set aside the attachment orders, and directed the removal of encumbrance entries on the subject properties, dismissing one petition covered by the others.