2022 (7) TMI 798 - HC - Income Tax

Recovery proceedings - attachment order - petitioner brought the properties of the borrower to public auction. The third respondent was the highest bidder - The petitioner presented the Sale Certificate before the second respondent for registration. Citing the attachment made by the Income Tax Department, the second respondent refused to register the same. Questioning the stand of the second respondent, this writ petition came to be filed. HELD THAT - It is well settled that the rights of the secured creditor will prevail over crown debt. The legal position has been clarified in more than one decision. In this case, the mortgage was created in favour of the Bank on 07.12.2015. Attachment by Income Tax Department was on 14.12.2018. Since the mortgage was created earlier, the attachment made by the Income Tax Department subsequently will have to give way. The impugned proceeding is quashed. The writ petition is allowed. The second respondent is directed to register the petition mentioned Sale Certificate subject to fulfilment of the usual formalities. Consequently, connected miscellaneous petition is closed.

Summary

Issues:
1. Dispute over registration of Sale Certificate due to attachment by Income Tax Department.
2. Priority of rights between secured creditor and crown debt.
3. Interpretation of Section 281 and Section 26E of SARFAESI Act.

Analysis:
1. The petitioner conducted a public auction of properties, with the third respondent being the highest bidder, and obtained a Sale Certificate. However, the second respondent, upon presentation for registration, refused citing an attachment by the Income Tax Department. This led to the filing of a writ petition challenging the refusal to register the Sale Certificate.

2. The Court reiterated the legal principle that the rights of a secured creditor take precedence over crown debt, clarifying that this principle has been established in multiple decisions. The Court emphasized that in cases of conflicting claims, the rights of the secured creditor prevail over crown debts.

3. The judgment referred to a previous decision involving Corporation Bank, highlighting the interpretation of Section 281. It was noted that Section 281 does not create a positive charge of property but rather aims to protect bonafide purchasers from errant debtors attempting to circumvent recovery. Additionally, the judgment discussed Section 26E of the SARFAESI Act, which prioritizes debts to secured creditors over other laws, including the Income Tax Act, with exceptions for cases under the Insolvency and Bankruptcy Code.

4. In the present case, the Court found that the mortgage in favor of the Bank was created before the attachment by the Income Tax Department. As per the legal precedence discussed, the attachment made subsequently by the Income Tax Department had to yield to the prior valid charge of the secured creditor. Consequently, the impugned proceeding was quashed, and the writ petition was allowed. The second respondent was directed to register the Sale Certificate, subject to fulfilling formalities, and no costs were awarded.

This detailed analysis of the judgment provides insights into the legal issues involved, the relevant legal principles applied, and the Court's decision based on precedence and statutory interpretation.