2024 (3) TMI 210 - HC - Income Tax

Valuable right of recovery of petitioner as secured creditor - Tax recovery proceedings - priority to secured creditors - equitable mortgage created by the bank - dues of a secured creditor preference over Crown debts or not? - overriding effect and priority as given to secured creditors over claims, inter alia, of revenue, tax, cess etc with effect from 1st September, 2016 as per section 26-E of SARFAESI Act, 2002 - HELD THAT - Section 281 on amendment with effect from 1st October, 1975 provides for certain transfers to be void. The voidable transfer is to be shown as made during pendency of any proceeding under the Act of 1961 or after the completion thereof but before service of notice under rule 2 of the Second Schedule, resulting in a claim in respect of any tax or any other sum payable by the assessee on completion of the proceeding. Clause (i) in the proviso excepts the transfer from being void if made for adequate consideration and without notice of pendency of such proceeding or, as the case may be, without notice of such tax or other sum payable by the assessee. Impugned order does not give illumination regarding the assessment proceeding pursuant to notices issued under provisions of assessment procedure, referred therein, as had resulted, on completion of the proceeding, in a claim of tax requiring the TRO to certify the claim and thereafter declare the mortgage void. There is also no finding in impugned order that the mortgage was created after notice of the tax or other sum payable by the mortgagor assessee as a result of completion of the assessment proceeding in respect of one or more of the assessment years referred to in the mentioned notices. By impugned order valuable right of recovery of petitioner as secured creditor was sought to be interfered with. We notice that impugned order was made after 2023 (1) TMI 226 - ORISSA HIGH COURT giving liberty to both, borrower and revenue, there being connection between said and present borrowers to be essentially the same person, to approach the DRT or any other forum for ventilating their grievance. We are told, instead of so doing, in this case revenue has issued impugned order. As aforesaid, from it we have been unable to locate finding on date of initiation of proceeding as prior to date of creation of the mortgage. Neither of the two dates have been mentioned in impugned order. In the circumstances, impugned order is bad for being vague. We are fortified in taking such view, without going into enquiry on documents referred to in impugned order, by judgment of the Supreme Court in Mohinder Singh Gill v. Chief Election Commissioner 1977 (12) TMI 138 - SUPREME COURT Omission to mention finding on dates of initiation of proceeding and creation of the mortgage, to demonstrate that the mortgage was created subsequent to initiation of the proceeding cannot be supplied on contention that the Tax Recovery Officer has power under rule 83 in the Second Schedule empowering him to take evidence exercising power of civil Court. The power is undoubtedly there and the officer has and had the power but in exercise of the power there must be laid evidence to substantiate declaration of the mortgage being void. So far as rule 86 is concerned, revenue was not heard to argue that impugned order is not one, which is conclusive in declaring the mortgage void. Impugned order is set aside and quashed.

Summary

Issues Involved:
1. Validity of the mortgage created by the borrower.
2. Priority of secured creditors over tax claims.
3. Adequacy of findings in the impugned order regarding the date of mortgage creation.

Summary:

1. Validity of the mortgage created by the borrower:
The petitioner, a finance company, challenged an order by the Tax Recovery Officer (TRO) declaring the mortgage void and attaching the property. The petitioner argued that the mortgage was created on 29th March 2016 and duly registered. The respondent contended that proceedings under the Income Tax Act were initiated before the mortgage creation, rendering the mortgage void under section 281 of the Act. The court found that the impugned order lacked a clear finding on the date of mortgage creation, which is crucial to determine the validity of the mortgage.

2. Priority of secured creditors over tax claims:
The petitioner relied on section 26-E of the SARFAESI Act, 2002, and section 31-B of the Recovery of Debts and Bankruptcy Act, 1993, which prioritize secured creditors over tax claims. The court referred to the Supreme Court's judgment in Connectwell Industries (P) Ltd. v. Union of India, which affirmed that secured creditors have preference over Crown debts unless a statute provides otherwise. The court noted that the impugned order did not adequately address the priority of claims.

3. Adequacy of findings in the impugned order regarding the date of mortgage creation:
The court emphasized the necessity of a clear finding on the date of mortgage creation. The impugned order mentioned that proceedings under the Income Tax Act were initiated before the mortgage creation but failed to specify the dates. The court found this omission significant and ruled that the impugned order was vague and lacked necessary findings. The court set aside and quashed the impugned order, noting that the TRO must provide evidence to substantiate the declaration of the mortgage being void.

Conclusion:
The court allowed the writ petition, vacated the interim order, and quashed the impugned order due to its vagueness and lack of clear findings on the dates of initiation of proceedings and mortgage creation.