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TMI Blog2011 (9) TMI 1087X X X X Extracts X X X X X X X X Extracts X X X X ..... 1, MR RM DESAI for Respondent(s) : 2, DS AFF.NOT FILED (N) for Respondent(s) : 3, CAV JUDGMENT (Per : HONOURABLE MR. JUSTICE J.B.PARDIWALA) In this writ petition under Article 226 of the Constitution, the petitioner, a company incorporated under the Companies Act, 1956 and registered as reconstruction and securitization company with Reserve Bank of India under Section 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ( SARFAESI Act for short), has prayed for the following reliefs:- A. Be pleased to issue a writ of declaration that impugned claim, by the first respondent Income-tax Department, by way of attachment of assets covered by Section 13(2) notice, for priority over the petitioner for realization of income-tax dues, is contrary to law and thus illegal; B. Be pleased to issue a writ of mandamus or any other appropriate writ, order or declaration directing the first respondent, income-tax department to allow the petitioner to exercise its rights under the SARFAESI Act and the rules made thereunder unhampered without any regard for the attachment orders passed by it for realization o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s dated 31.3.2008, 11.7.2008 and 27.9.2008 respectively and in terms of Section 5 of the SARFAESI Act. 2.4 Second respondent and/or guarantors defaulted in payment of interest and principal instalments of the loans, and thereby have failed and neglected to clear the said over-dues. As a result, the loan amounts have been classified as Non Performing Assets in the Books of Account in accordance with the directives pertaining to asset classification issued by the Reserve Bank of India. 2.5 Second respondent is in liquidation. The second respondent having failed to repay the amount, was served with a notice dated 24.12.2009 under Section 13(2) of the SARFAESI Act. Thereafter, petitioner, in exercise of powers under Section 13(4) of the SARFAESI Act, read with Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002, took possession of the secured assets of the borrower company and advertised the possession notice in Economic Times (English edition) and Financial Express (Gujarati edition) on April 10, 2010, thereby informing second respondent and the public in general that the petitioner ARCIL has taken over the possession of the properties described in the notice. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yield because the provisions of the SARFAESI Ac are to have effect notwithstanding anything inconsistent therewith contained in the Income Tax Act or any instrument having effect by virtue of the Income Tax Act. 4.3 He would further submit that the Income Tax Act has no provision creating first charge or giving priority to the Income Tax dues over the dues of the secured creditor, the secured dues would get priority over crown debt (dues of the Income Tax Department) at common law. He referred to Chapter XVII-D of the Income Tax Act, 1961, which provides for collection and recovery of tax. Section 222 of the Act, which provides for Certificate to Tax Recovery Officer, reads as under:- 222. (1) When an assessee is in default or is deemed to be in default in making a payment of tax, the Tax Recovery Officer may draw up under his signature a statement in the prescribed form specifying the amount of arrears due from the assessee (such statement being hereafter in this Chapter and in the Second Schedule referred to as certificate ) and shall proceed to recover from such assessee the amount specified in the certificate by one or more of the modes mentioned below, in accorda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r this Schedule, the attachment shall relate back to, and take effect from, the date on which the notice to pay the arrears, issued under this Schedule, was served upon the defaulter. 4.5 He would submit that reading of the aforesaid provisions of law makes it clear that the Income Tax Act provides for how the tax arrears due may be recovered. The Act nowhere provides for priority of the State right over the rights of the secured creditor. He would submit that neither Section 222, nor the provisions in Schedule II to the Act provides for any charge much less first charge. They provide only for the machinery for realization of income-tax dues. 4.6 He submitted that the position of law has been made very clear by catena of Supreme Court judgments as well as this High Court judgments holding that it is only when there is a specific provision in the statute conferring first charge over the property, crown debt is entitled to have priority over the claim of secured creditors. In absence of any such provision, secured debt would prevail over the crown debt. He placed reliance on the following case laws:- 1. (2009) 4 SCC 94 - Bank of India Vs. State of Kerala and ors. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income Tax (OSD)-I, Circle4, Ahmedabad. 5.3 Though respondent No.1 Department has not specifically pleaded in its affidavit-in-reply about Section 281 of the Income Tax Act, learned counsel for the Income Tax Department during the course of his arguments, raised this point very vociferously and submitted that in view of sub-section (1) of Section 281 of the Income Tax Act, 1961, the charge created against the properties in question by mortgaging the property by respondent No.2 - assessee borrower in favour of the financial institutions, who in-turn assigned their debts in favour of the petitioner ARCIL during pendency of the proceedings under the Income Tax Act, 1961, is void as against any claim in respect of income-tax and other sum payable by respondent No.2 company in favour of respondent No.1 Department. This contention has been the main trump card for respondent No.1 Income Tax Department. 6. In rejoinder, learned counsel for the petitioner submitted that the equitable mortgage dated 17.9.1997 created by the borrower in favour of the lender financial institutions like ICICI, Central Bank of India, UTI Bank and Bank of India is not a void transfer in terms of Sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, the first notice of demand was sent to the assessee on 28.12.2005. The claim of the Income Tax Department was lodged with the Official Liquidator on 17.9.2008. Contrast this with the execution of the equitable mortgage by the borrower in favour of the financial institutions as back as 17.9.1997. Obviously, the financial institutions cannot be said to have had constructive notice of the pendency of the Income Tax proceedings against the assessee. 9. Having heard learned counsel for the parties and having considered various contentions raised by all the parties, we shall now proceed to examine the case on merits as to whether petitioner ARCIL is entitled to any relief as prayed for in the petition or not. 10. Before we deal with the main contention as regards Section 281 of the Income Tax Act, which is the only contention probably needs to be dealt with, we may reiterate the position of law so far as priority of dues of the Government is concerned over the debts of the Banks, which have been secured by the borrower by creating mortgage. The question relating to priority of dues of the Government fell for consideration before the Supreme Court and other High Courts from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim of others. In absence of any such provision to claim first charge, the Government cannot claim precedence under the Central Excise Act over the claim of the secured creditor under the SARFAESI Act, 2002. 34. Similar question fell for consideration before the Supreme Court in the case of Union of India vs. Sicom Ltd., reported in (2009) 2 SCC 121. Having noticed the provisions of the Central Excise Act, 1944, the Supreme Court has rejected the claim of the Government to have first charge over the secured debt. 35. The same very issue also fell for consideration before a Division Bench of this Court in the case of Kotak Mahindra Bank vs. District Magistrate, reported in 2011 (1) GLR 18. In the said case, the proceeding under the Central Excise Act, 1944 was initiated on 24.2.1987 and 26.2.1991 when Rule 173Q(2) and Rule 211 of the Central Excise Rules, 1944 were in vogue. At the time the first order of confiscation was passed, the authority had jurisdiction under Rule 173Q(2) to confiscate the land, building, plant, machinery, etc.. The said order was set aside and remitted for de nova decision. The final order was passed on 25.2.2006, by this time both Rule 173Q ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee ; or (ii) with the previous permission of the Assessing Officer. (2) This section applies to cases where the amount of tax or other sum payable or likely to be payable exceeds five thousand rupees and the assets charged or transferred exceed ten thousand rupees in value. Explanation .-In this section, assets means land, building, machinery, plant, shares, securities and fixed deposits in banks, to the extent to which any of the assets aforesaid does not form part of the stock-in-trade of the business of the assessee. 13. Similar issue fell for consideration before the Madhya Pradesh High Court in the case of State of Madhya Pradesh vs. Abhaykumar reported in (1992) 86 Sales Tax Cases 88 , wherein almost similar provision i.e. Sec.33-A of the Madhya Pradesh General Sales Tax Act, 1958 fell for consideration. The Indore Bench of the Madhya Pradesh High Court held that the transfer was for a valuable consideration and it was without notice of the pendency of the proceeding under the Sales-tax Act, and therefore, the transfer falls under the exception created by the proviso to Section 33-A of the said Act. Similar was the view expressed by a Division B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the learned counsel for the Department touched this issue and relying on Section 281 of the Income Tax Act, submitted that the transfer or charge can be said to be void and the situation would not be saved by the proviso to Section 281. The position of law is well settled. In our opinion, when a point which is ostensibly a point of law is required to be substantiated by facts, the party raising the point, if he is a respondent in a writ petition, must plea and prove such facts by evidence which must appear from the counter affidavit. If the facts are not pleaded or the evidence in support of such facts is not annexed to the counter, the Court will not entertain the point. In this context, it would be expedient to rely upon a judgment of the Hon'ble Supreme Court in the case of Bharat Singh Vs. State of Haryana, reported in AIR 1988 SC 2181, wherein the Hon'ble Supreme Court in paragraph 13 held as under:- In our opinion, when a point which is ostensibly a point of law is required to be substantiated by facts, the party raising the point, if he is the writ petitioner, must plead and prove such facts by evidence which must appear from the writ petition and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Similar view has been reiterated in Bachhaj Nahar Vs. Nilima Mandal ors. AIR 2009 SC 1103. 18. The second reason why we do not propose to touch this Section 281 is as to whether the Department in a writ petition by ARCIL can take up this plea of Section 281 and submit that the charge of transfer be declared as void? We have come across a ruling of the Supreme Court in the case of Tax Recovery Officer-II, Sadar, Nagpur Vs. Gangadhar Vishwanath Ranade, reported in AIR 1999 SC 427, where the Supreme Court considered Section 281 of the Income Tax Act and examined the issue as to whether a Tax Recovery Officer can declare any transfer made by the assessee in favour of a third party as void. The Supreme Court held in paragraphs 7, 8 and 9 as under:- 7. The question which is now required to be answered is whether in a proceeding under Rule 11 of the Second Schedule to the Income-tax Act, the Tax Recovery Officer can declare a transfer as void under Section 281. Section 281, as it stood at the relevant time provided as follows:-- Section 281: Where, during the pendency of any proceeding under this Act, any assessee creates a charge on or parts with the possession b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it in a Civil Court to establish the right which he claims to the property in dispute; but, subject to the result of such suit (if any), the order of the Tax Recovery Officer shall be conclusive. 9. The Tax Recovery Officer, therefore, has to examine who is in possession of the property and in what capacity. He can only attach property in possession of the assessee in his own right, or in possession of a tenant or a third party on behalf of for the benefit of the assessee. He cannot declare any transfer made by the assessee in favour of a third party as void. If the Department finds that a property of the assessee is transferred by him to a third party with the intention to defraud the Revenue, it will have to file a suit under Rule 11(6) to have the transfer declared void under Section 281. 19. Thus, what can be deduced from the judgment of the Supreme Court in the case of Tax Recovery OfficerII, Sadar, Nagpur Vs. Gangadhar Vishwanath Ranade (supra) is that if the Department finds that a property of the assessee is transferred by him to a third party with the intention to defraud the Revenue, it will have to file a Suit under Rule 11(6) of the Second Schedule t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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