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2023 (12) TMI 351 - HC - Income TaxRecovery proceedings of tax dues - Attachment orders - priority of rights over property as secured creditor - charge over the property already mortgaged with the bank - as argued charge over the property was created much prior than the notice issued by Income Tax Department - whether 1st charge over the bank s debt under SARFAESI Act? - primary contention of the bank is that the property was already mortgaged with the bank and hence u/s 26-E the bank had priority as a secured creditor - properties in the name of the deceased Arun were attached under section 281B of Income Tax Act provisionally following the approval of Income Tax Department - petitioner claims that the Tax Recovery Officer has to invoke section 179 to take action against Director of a company or invoke section 226 of Income Tax Act, but the respondents submitted that the owner of the property Mr.A.M.Arun is an assessee and a Tax Recovery Certificate under section 222 was drawn for a demand of Rs.565.34 crores plus interest for assessment years 2009-2010 to 2016-2017. HELD THAT - For assessment year 2009-2010 the assessment was reopened in the year 2015, which means as on the date of mortgage there was no pending assessment proceedings for the assessment year 2009-2010. For the assessment year 2012-2013, the respondents had issued notice dated 16.08.2013 under section 143(2) for scrutiny assessment. According to the revenue the issuance of notice under section 143(2) would create an automatic charge over the property and any subsequent alienation would be liable to be set aside under section 281. But as per the Hon ble Supreme Court judgment in Gangadhar Vishwanath Ranade s case 1998 (9) TMI 1 - SUPREME COURT under Rule 11 of Second Schedule the Tax Recovery Officer had no power to declare a transfer void. When the Revenue has no power under Rule 11(6) to declare as void, likewise the Revenue has no authority to claim section 281 as automatic. Following the aforesaid judgment, this Court is of the considered opinion that when the Tax Recovery Officer has no power to declare as void, likewise the Revenue has no authority to claim the charge or attachment over the property as automatic. The above position would further be substantiated by section 281B, wherein the authority has to obtain prior permission from the Principal Commissioner for passing temporary attachment that too for six months and may be extended for another period of six months with prior approval of the Principal Commissioner of Income Tax. When the temporary attachment is restricted with time limit, then the power is not absolute. In the present case the Revenue had passed an order of provisional attachment on 03.11.2015 after approval of Principal Commissioner of Income Tax. Moreover, there was a search under section 132 of the Income tax Act in the case of M/s.Vasan Health Care Private Limited group of cases on 01.12.2015. And all other subsequent proceedings are on later dates, especially the approval of Principal CIT, Central-2, Chennai, was granted on 22.07.2016, for a list of 46 properties including the subject property and fresh approval was granted on 18.01.2017 for provisional attachment under section 281B and the same was extended for another 6 months vide proceedings dated 13.07.2017. Then Tax Recovery Certificate was issued on 14.09.2017 and the subject property was attached on 04.01.2018. The Revenue had created charge in this case on 04.01.2018. The respondents had reopened the assessment proceedings in the year 2015 for the assessment year 2009-2010 and the respondents had not stated the exact date of reopen in their counter. From the above narration of events, it is evident that the mortgage is on 17.04.2014 and the same is registered on 10.12.2014 which is prior to the reopen of assessment in the year 2015 and prior to attachment dated 04.01.2018, hence this Court is of the considered opinion that no assessment proceedings were pending when the petitioner bank has executed registered mortgage deed dated 10.12.2014, hence the petitioner bank s debt has priority over the respondent s crown debt. After considering section 281 and rule 48, the Court in ICICI Bank Limited Vs. Tax Recovery Officer 2019 (3) TMI 701 - TELANGANA AND ANDHRA PRADESH HIGH COURT has elaborately dealt with the issue and has held that there is no provision in the Income Tax Act by which a first charge is created automatically on the properties of the assesses. And also held it is now well settled that wherever the statute does not create a first charge over the property, the crown's debt does not take precedents over the claim of the secured creditor. Section 281 of Income Tax Act and section 26E of SARFAESI Act and 31B of the Recovery of Debts and Bankruptcy Act cannot operate simultaneously and there arises conflict and hence the attachment ought to be lifted whenever the challenge is made and whenever the mortgage by bank is prior to the attachment under Income Tax Act. Income Tax Act has not provided any 1st charge of its debts. But there is 1st charge over the bank s debt under SARFAESI Act. Moreover, the amendment of Section 26E is applicable to pending lis. Therefore, this Court is of the considered opinion that even though it is a statutory duty to attach property by the Income Tax Department, as and when the bank claims and exercise its 1st charge over the property, the Income Tax Department is liable to issue no objection certificate and also lift the attachment. In the present case this Court has already held that the mortgage by bank is prior to the attachment of the Revenue - Thus the impugned orders are liable to be quashed. 1st respondent is directed to lift the attachment. The 2nd respondent is directed to strike the name of the 1st respondent from the Encumbrance Certificate with respect to the property measuring about 33.43 cents vacant land at Chinthamani Village Salai limit T.S.No.21-part, New Ward B, Block 19, Trichy-2.
Issues Involved:
1. Legality of the attachment order by the Income Tax Department. 2. Priority of mortgage between the petitioner bank and the Income Tax Department. 3. Validity of the mortgage executed by the petitioner bank. 4. Applicability of Section 281 of the Income Tax Act versus Section 26E of the SARFAESI Act. Summary: 1. Legality of the attachment order by the Income Tax Department: The petitioner, a bank, challenged the attachment order dated 04.01.2018 issued by the Income Tax Department under Rule 48 of the Second Schedule of the Income Tax Act. The bank contended that the borrower had executed a mortgage by deposit of title deeds on 02.04.2009 and subsequently extended it on 17.04.2014, thus claiming priority over the IT department. The Income Tax Department argued that the alleged deposit of title deeds dated 02.04.2009 was not registered and the registered mortgage on 17.04.2014 was executed during pending assessment proceedings, making it void under Section 281 of the Income Tax Act. 2. Priority of mortgage between the petitioner bank and the Income Tax Department: The court noted that the mortgage by deposit of title deeds dated 02.04.2009 was not compulsory for registration under the Registration Act until 30.11.2012. The registered mortgage on 17.04.2014 was executed during pending assessment proceedings, but the court found that the petitioner bank's debt had priority over the respondent's crown debt. The court emphasized that non-registration of the deposit of title deeds alone would not determine the rights of the parties. 3. Validity of the mortgage executed by the petitioner bank: The court held that the mortgage executed on 17.04.2014 and registered on 10.12.2014 was prior to the reopening of assessment in 2015 and the attachment dated 04.01.2018. Therefore, the mortgage was valid, and the bank had priority over the Income Tax Department's claim. The court cited several judgments, including the Supreme Court's decision in Tax Recovery Officer Vs. Gangadhar Vishwanath Ranade, which held that the Tax Recovery Officer has no power to declare transactions void under Section 281 of the Income Tax Act. 4. Applicability of Section 281 of the Income Tax Act versus Section 26E of the SARFAESI Act: The court referred to the non-obstante clause in Section 26E of the SARFAESI Act, which grants priority to secured creditors over all other debts, taxes, and cesses. The court concluded that Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act would prevail over Section 281 of the Income Tax Act in case of conflict. The court also cited the Full Bench decision of the Madras High Court and the Supreme Court's judgment in M/s. Connectwell Industries Private Limited Vs. Union of India, which upheld the priority of secured creditors. Final Judgment: The court quashed the impugned order of attachment dated 04.01.2018 and directed the Income Tax Department to lift the attachment. The Sub-Registrar was instructed to strike the name of the Income Tax Department from the Encumbrance Certificate concerning the property in question. The writ petition was allowed with no costs, and the connected miscellaneous petition was closed.
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