9911796707
TMI Blog2021 (8) TMI 1077X X X X Extracts X X X X X X X X Extracts X X X X ..... the 2 nd respondent company. The Directors of the said company executed a deed of Guarantors for the payment of loan amount in the event of default by the company. Admittedly, the 2 nd respondent company defaulted in payment of loan to the petitioner bank. Thus, the petitioner filed an application before the Debts Recovery Tribunal (DRT) at Chennai in O.A.No.678 of 1999 for recovery of a sum of Rs. 4,56,17,807/-. An exparte order was passed as the respondents therein failed to appear before the Debts Recovery Tribunal. Consequently, the recovery officer attached the property and issued a recovery certificate by order dated 17.06.2003. However, the petitioner bank found that the 1 st respondent has also created a charge holding that under the provisions of the TNGST Act, the department of Commercial Taxes holds first charge and accordingly, an encumbrance was created. Thus, the petitioner was constrained to move the present writ petition. 3. The learned Government counsel appearing on behalf of the 1 st respondent opposed the contentions of the learned counsel for the petitioner by stating that the Commercial Tax department holds first charge as per the provisions of the TNGST Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laborately considered by this Court and judgment was delivered on 19.07.2021 in W.P.No.15437 of 2014. In the said writ petition, the priority over charge claimed by the Income Tax Department was considered. However, the provisions of TNVAT Act also contains a similar provision that of the Income Tax Act and the provisions in TNVAT Act, are in pari materia with the provisions in the Income Tax Act. However, this Court has to consider the provisions of the TNVAT Act, for the purpose of deciding the present writ petition. 7. Section 40 of the TNVAT Act, 2006 stipulates collection of tax. Section 41 deals with forfeiture of tax collected. Section 42 contemplates payment of recovery of tax, penalty, etc. and sub section 2 to Section 42 reads as under. (2) Any tax assessed on or has become payable by, or any other amount due under this Act from a dealer or person and any fee due from him under this Act, shall, subject to the claim of the Government in respect of land revenue and the claim of the Agriculture and Rural Development Bank in regard to the property mortgaged to it under sub-section (2) of section 28 of the Tamil Nadu Co-operative Societies Act, 1983 (Tamil Nadu Act 30 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceedings or otherwise. 11. The proviso clause states that such charge or transfer shall not be void, if it is made with the previous permission of the authority or for adequate consideration and without notice of the pendency of such proceedings under the Act or, as the case may be without notice of such tax or other sum payable by the dealer. 12. Perusal of the above provisions would reveal that the TNVAT Act also contemplates priority regarding recovery of tax arrears. SARFAESI Act as well as DRT Act also promises priority. This being the conflicting provisions under various enactments in respect of one claim, this Court has elaborately considered it in the judgment dated 19.07.2021 made in WP No.15437 of 2014, and the issues as well as the facts are similar. Thus, it is useful to extract the relevant paragraphs of the said judgment. "30.Let us now consider the scope of Section 281 of the Income Tax Act. Chapter XXIII Section 281 of the Income Tax Act contemplates certain transfers to be void. Sub-clause (1) enumerates that ?where, during the pendency of any proceeding under this Act or after the completion thereof, but before the service of notice under rule 2 of the Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involved in such transfer of property, which is declared as void under Section 281 of the Income Tax Act may submit an application for investigation by Tax Recovery Officer. Therefore, the statute does not assume that every third person is liable under the Income Tax Act. Schedule II Rule 11 of the Income Tax Act is a beneficial provision in respect of the person, who was otherwise cheated by any of the defaulter of tax arrears, who in turn can submit an application for further investigation in order to cull out the truth or genuinity with reference to the transactions or transfers. Therefore, the Tax Recovery Officer during the pendency found that the charge created in favour of the petitioner Bank is valid, then he can pass appropriate orders withdrawing the attachment made under the provisions of the Act. If the Tax Recovery Officer is of an opinion that the attachment made under the provisions of the Act was prior to the mortgage or otherwise, then he can pass appropriate orders confirming the attachment. However, the said Rule is not relatable to declaration or in the form of an appeal by any third person. It is only an enabling provision for effective adjudication of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nues, taxes, cesses and rates due to the Central Government, State Government or local authority. 38. Thus, conflicting provisions in these three independent statutes are creating heart burning issues between the secured creditors as well as the Tax Department. Some of the decisions are in favour of the Tax Department and some of the decisions are in favour of the Banks. With reference to Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993, judgments are given in favour of the Banks in view of the fact that the said provisions contemplates priority over the Government dues is to be given to the Banks. The tenor of Section 281 of the Income Tax Act which contemplates that any such transaction made during the pendency of any proceedings under the Income Tax Act shall be void. Thus, the understanding would be that if the proceedings under the Income Tax Act are pending at the time of creating mortgage, sale, gift, etc., then Section 281 of the Income Tax Act would be pressed into operation. The next question is at the time of creation of mortgage, sale, gift etc., the Income Tax Proceedings are pending as contemplated under Section 281 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lter with any Bank, then it is the duty of the Bank to ensure that no other proceedings are pending and it is the duty of the person who is borrowing loan to inform the same to the Bankers. Under these circumstances, the Income Tax Department is alien to the transaction of mortgage between the bank and the tax defaulter and therefore, the Act will automatically come to the rescue of the Income Tax Department declaring such transfers as void under Section 281 of the Income Tax Act. 40.Where the Bank entered into a mortgage well before the pendency of proceedings under the Income Tax Act, then Section 26E of the SARFAESI Act would be applicable and in such circumstances, the Bank will hold priority over all other claim including the Government dues. Even in such circumstances, this Court has to consider the other principles which all are to be followed in such cases. Admittedly, the SARFAESI Act and Recovery of Debts and Bunkruptcy Act, 1993 provides priority to the secured creditors and the Income Tax Act provides priority to the tax arrears to be recovered. Under these circumstances, this Court is inclined to consider the common law Doctrine of priority of crown debts. 41. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has not been seriously disputed. 45. Similarly, the basic justification for the claim of priority made by the Income Tax Department in the present case rests on the well recognised principle that the State is entitled to raise money by taxation, because unless adequate revenue is received by the State, it would not be able to function as sovereign Government at all. It is essential that as a sovereign the Sate should be able to discharge its primary governmental functions and in order to able to discharge such functions efficiently, it must be in possession of necessary funds and this consideration emphasises the necessity and the wisdom of conceding to the State, the right to claim priority in respect of its tax dues. 46. In this context, Part XII of the Constitution of India, more specifically, Article 265 which states that tax not to be imposed save by authority of law; Article 266 speaks about Consolidated funds and public accounts of India and the States; Article 267 states Contingency fund; Article 268 states Duties levied by the Union but collected and appropriated by the States; Article 268A denotes service tax levied by Union and collected and appropriated by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cannot override other legislations. Section 38C of the Bombay Act and Section 26B of the Kerala Act also contain non obstante clauses and give statutory recognition to the priority of State-s charge over other debts, which was recognized by Indian High Courts even before 1950. In other words, these sections and similar provisions contained in other State legislations not only create first charge on the property of the dealer or any other person liable to pay sales tax, etc. but also give them overriding effect over other laws. In Builders Supply Corporation v. Union of India [(1965) 2 SCR 289], the Constitution Bench considered the question whether tax payable to the Union of India has priority over other debts. After making a reference to the judgments of the Bombay High Court in Bank of India v. John Bowman and Ors., [AIR 1955 Bom. 305], Madras High Court in Kaka Mohammad Ghouse Sahib & Co. v. United Commercial Syndicate and others [(1963) 49 I.T.R. 25] and Manickam Chettiar v. Income~tax Officer, Madura, [(1938) 6 ITR 180], the Court held : (i) "The Common Law doctrine of the priority of Crown debts had a wide sweep but the question in the present appeal was the narrow on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e such functions efficiently, it must be in possession of necessary funds and this consideration emphasises the necessity and the wisdom of conceding to the State, the right to claim priority in respect of its tax dues (see Builders Supply Corpn.). In the same case the Constitution Bench has noticed a consensus of judicial opinion that the arrears of tax due to the State can claim priority over private debts and that this rule of common law amounts to law in force in the territory of British India at the relevant time within the meaning of Article 372(1) of the Constitution of India and therefore continues to be in force thereafter. On the very principle on which the rule is founded, the priority would be available only to such debts as are incurred by the subjects of the Crown by reference to the State-s sovereign power of compulsory exaction and would not extend to charges for commercial services or obligation incurred by the subjects to the State pursuant to commercial transactions. Having reviewed the available judicial pronouncements their Lordships have summed up the law as under: 1. There is a consensus of judicial opinion that the arrears of tax due to the State can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st instance and which proceedings has to be construed as an initial proceedings, are the disputed facts which are all to be adjudicated by scrutinising the original documents and evidences made available. An enquiry has to be conducted in this regard. 15. This being the factum and considering the judgment of the Hon'ble three Judges bench of Hon'ble Supreme Court of India, in the case of Central Bank of India (cited supra), this Court is of the opinion that such disputes are to be adjudicated before the competent appellate authority under the tax laws. 16. The TNVAT Act contemplates appeals to the authority. The appellate authority under the said Act are exercising the power of the Quasi judicial authorities. Therefore, they have to adjudicate the issue, by affording opportunity to all the parties concerned and take a decision in respect of such claims. As far as the tax laws are concerned, both the assessee and the revenue are preferring appeal before the appellate authorities and before the tribunal. 17. Similarly, the bank being aggrieved from and out of the action initiated by the 1 st respondent, Commercial Tax department, is entitled to file an appeal before the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
