2022 (9) TMI 251 - HC - Income Tax

Recovery proceedings of tax dues - preferential right - secured creditors - Income Tax Department s preferential right to recovery of debts over other creditors - whether the plaintiff or the defendant no.3 has a preferred lien in respect of the amount deposited in the said FDR lying with the defendant no.1 Bank? - HELD THAT - Income Tax Department s preferential right to recovery of debts over other creditors is confined only to ordinary or unsecured creditors. It would not extend to secured creditors. The ratio of the aforesaid judgment is fully applicable to the facts and circumstances of the present case. In the present case, the FDR in question was created on 27th March, 2012 payable to the plaintiff and the lien was confirmed by the defendant no. 1 bank in favour of the plaintiff on the said date. This was much before the notice dated 5th February, 2013 issued on behalf of the Income Tax Department to the defendant no.1 Bank. The lien in favour of the plaintiff makes the plaintiff a secured creditor and therefore, the right of the plaintiff would prevail over that of the Income Tax Department. Consequently, the plaintiff company would be entitled to the amounts under the said FDR. The only surviving issue as noted in the order dated 6th May, 2019, is decided in favour of the plaintiff and against the defendants. The suit is decreed in the aforesaid terms. Defendant no.1 Bank states that the original amount has throughout been kept in an interest bearing fixed deposit. The defendant no.1 Bank is directed to release the aforesaid amount along with accrued interest in favour of the plaintiff company within six weeks from today. If the aforesaid amount is not released within six weeks, the defendant no.1 bank would be liable to pay interest @ 8% per annum on the said amount after the expiry of the aforesaid period of six weeks.

Summary

Issues:
1. Recovery of a sum of Rs.1,15,36,076/- along with interest.
2. Validity of lien on a Fixed Deposit Receipt (FDR) between plaintiff and defendant no.2.
3. Preferential lien rights between plaintiff and Income Tax Department on the FDR amount.
4. Entitlement of plaintiff to the FDR amount over Income Tax Department.

Analysis:
1. The plaintiff filed a suit seeking recovery of Rs.1,15,36,076/- with interest. The plaintiff provided financial facilities to defendant no.2, who placed an FDR with defendant no.1 bank to secure the debt. However, the bank refused payment due to an Income Tax Department notice. The plaintiff contended its secured creditor status gives priority over the Income Tax Department, seeking recovery.

2. The key issue was the validity of the lien on the FDR. The plaintiff argued the FDR was to ensure repayment of defendant no.2's debt to them, making them a secured creditor with priority. The court analyzed legal precedents emphasizing secured creditors' precedence over government dues, ruling in favor of the plaintiff's lien on the FDR.

3. The court examined the preferential lien rights between the plaintiff and the Income Tax Department. Referring to legal principles, the court held that government debts have precedence over unsecured creditors only, not secured creditors like the plaintiff. The court found the plaintiff's lien on the FDR established them as a secured creditor, entitling them to the FDR amount.

4. Ultimately, the judgment favored the plaintiff, decreeing recovery of the FDR amount of Rs. 70,00,000/- along with accrued interest. The court directed defendant no.1 bank to release the amount within six weeks, imposing interest at 8% per annum for delays. The judgment clarified the plaintiff's entitlement as a secured creditor, emphasizing their priority over government dues in this specific case.

This comprehensive analysis outlines the legal proceedings, arguments presented by both parties, and the court's decision, emphasizing the significance of secured creditor status in determining priority over government dues in financial disputes.