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TMI Blog2021 (8) TMI 1233X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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. On the one hand, the Income Tax Act states that, where during the pendency of any proceedings under the Income Tax Act or after completion thereof, any assessee creates a charge on or parts with the possession by way of mortgage, sale, etc. Shall be void against any claim in respect of any tax. So also, the SARFAESI Act states that Section 26E contemplates that the secured creditors shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government of State Government or local authority. Therefore, equal weightage is given in respect of the secured creditors. So also Section 31B of Recovery of Debts and Bunkruptcy Act, 1993 states that sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority - conflicting provisions in these three inde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such application, the Tax Recovery Officer is directed to investigate the same with reference to the original documents and pass appropriate orders as expeditiously as possible - petition disposed off. - W.P.No.15437 of 2014 and M.P.No.1 of 2014 - - - Dated:- 19-7-2021 - THE HONOURABLE MR.JUSTICE S.M. SUBRAMANIAM For the Petitioner : Mr. Satish Parasaran Senior Counsel for Mr. B. N. Suchindran For Respondent : Mr. A. P. Srinivas Senior Standing Counsel ORDER The writ on hand is filed questioning the validity of the proceedings dated 27.12.2007 passed by the respondent. CONTENTION OF THE PETITIONER: 2.The impugned proceedings reveals that it was issued for recovery of income tax arrears in the case of M/s. NEPC Agro Foods Limited and its Directors Shri. Raj Kumar Khemka, Shri. Ravi Prakash Khemka and Shri. Thirupathy Kumar Khemka. The respondent had noticed from the advertisement published in the daily newspaper 'Dinamalar' on 20.12.2007 that the Bank has taken possession of the property at Plot No.83 at Ambattur Industrial Estate, Chennai-53 for the loan amount of ₹ 28,89,35,552/- due from M/s.NEPC Agro Foods Ltd., and its Directors Shr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tood as corporate guarantor of the loan. 7. The petitioner states that the borrower, NEPC Agro foods Ltd and the corporate guarantor NEPC India Ltd both defaulted on the repayment of loan as per the payment schedule given in the loan agreement. This default constrained the petitioner to classify the loans as C-100 under the NPA classification rules as mandated by the Reserve Bank of India. 8. Before the Cooperative Court, NEPC Agro foods Ltd and NEPC India Ltd, admitted their joint liability and entered into duly recorded consent award dated 15.2.2007, wherein they agreed to repay a sum of ₹ 15,51,00,000/- on or before 15.3.2007 as full and final settlement of dues. It was an expressed term of the consent award that failing repayment the petitioner could proceed with its remedies under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act [SARFAESI Act], 2002. Both NEPC Agro foods Ltd and NEPC India Ltd defaulted on the terms of the consent award and no payments were made. 9. The said default by these two Companies forced the petitioner to proceed and take possession of the property on 19.12.2007 in continuation of the act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Recovery Tribunal Act. The learned senior counsel made a submission that M/s.NEPC Agro Foods Limited is an independent entity and absolutely unconnected with M/s.NEPC India Limited, who was the income tax defaulter as per the respondent. Thus the mortgage between the petitioner and the M/s.NEPC Agro Foods Limited is no way responsible for the income tax arrears due to the Department. The subject property mortgaged belongs to the M/s.NEPC Agro Foods Limited which is a separate entity and a company registered and therefore, the very initiation of proceedings under the Income Tax Act is untenable. The learned senior counsel in support of the said contention cited the judgments wherein the priority of the mortgage was upheld. The learned senior counsel cited the judgment of the Hon'ble Full Bench of this Court dated 10.11.2016 in W.P.No.2675 of 2011 [Assistant Commissioner (CT), Anna Salai-III Assessment Circle vs. The Indian Overseas Bank], wherein the Hon'ble Full Bench made an observation as under: 2.We are of the view that if there was at all any doubt, the same stands resolved by view of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. Relying on the said judgments, it is contended that in the present case, both the SARFAESI Act and DRT Act contemplates priority in favour of the petitioner and therefore, the first charge is for the petitioner's Bank and therefore, the action of the respondents are in violation of the provisions of the Statutes. 15.The learned senior counsel appearing for the petitioner relied on the recent judgment of this Court dated 21.04.2021 in W.P.No.27409 of 2019, wherein the similar issue was considered by this Court and this Hon'ble Court considered Section 281 of the Income Tax Act as well as Section 26E of the SARFAESI Act. Considering the provisions, this Court held that the mortgage by the bank holds priority over the claim of the Income Tax Department and accordingly, attachment proceedings of the Income Tax Department was set aside. The judgment relied was delivered by the Hon'ble Single Judge in the case of Sancheti Leasing Company Ltd. vs. Income Tax Officer [2018 SCC Online Hyd 441], wherein Justice R.Jayasimha Babu made an observation as follows: 6.Section 281(1) of the Act had been relied upon by the Income-tax Officer. That section declares certain transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent is not valid. Even the judgment in the case of Sancheti Leasing Company Limited, this Court held that the fact that a statute provides for such a declaration being made, if the conditions mentioned in the statute are satisfied, does not imply that an officer exercising powers under the provisions of the statute can assume to himself the power and jurisdiction to declare what is otherwise a legally valid transaction as void . The consideration was whether the Income Tax Authority has got power under the Income Tax Act to issue a declaration declaring certain civil transactions as void, more specifically, the mortgage or otherwise. The Court held that any declaration of transaction being void must be sought in 18. This Court has no quarrel or any contra opinion with reference to the principles settled in the said case. The Income Tax authorities have no powers under the Act to issue any such declaration, declaring the civil transactions as null and void and such a power is vested with the competent Civil Court of Law. 19. Under these circumstances, this Court is bound to examine the scope of Section 281 of the Income Tax Act as well as the priority conferred in favour of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion that factually there are certain disputes which all are to be adjudicated, and High Court cannot venture into the adjudication of such disputed facts and in this regard, the Income Tax Act provides an avenue for the aggrieved person to prefer an appeal before the Tax Recovery Officer under Schedule II Rule 11, wherein the factual adjudications can be made. Thus the petitioner has to approach the Tax Recovery Officer under Schedule II Rule 11 of the Income Tax Act for clarifying certain aspects which all are made available. Contrarily, a writ proceedings need not be entertained as adjudication of facts in the present case is vital. 22.In order to substantiate the said contention, the learned senior standing counsel contended that the assessee defaulter is in arrears to the tune of ₹ 34,52,12,985/-. The following demands were raised prior to 31.03.1999, the alleged date of mortgage to the petitioner Bank. Asst. Year Date of Order Amount (in Rs.) 1993-94 143(3) dated 25.03.1996 3,84,14,746 1994-95 143(3) dated 27.03.1997 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee- defaulter, NEPC Agro Foods Limited, located at D.No.83, MTH Road, Ambattur Industrial Estate,Chennai-98 was attached by Tax Recovery Officer, Central, Chennai, vide ITCP 16 in T.R.No.130/Cen.I(1)/2003-04, dated 18.06.2003. A copy of the above ITCP 16 was served on 18.06.2003 itself on the assessee-defaulter, NEPC Agro Foods Limited. Once the ITCP 16 is issued, an assessee-defaulter is prohibited and restrained from the date of the aforesaid notice until further order from the Income Tax Department, from transferring or charging the subject mentioned properties, which are included in the property of the defaulter by virtue of the Explanation to sub- section (1) of the section 222 of the Income-tax Act 1961 in any way and that all persons be and they are prohibited from taking any benefit under such transfer or charge. Further, notices in ITCP 17 dated 12.01.2012 was issued by the TRO, Tirupur, requesting the assessee-defaulter and its directors, copy of the notices were sent to the Coimbatore and Chennai address of the assessee-defaulter and its directors, to bring to the notice of the department any encumbrances, charges, claims or liabilities attaching to the above s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lows:- In considering s. 281 of the said Act, the said provision is declaratory in nature. It declares that the transfers effected by any assessee with intent to defraud the Revenue during the pendency of any proceedings under the Act shall be void against any claim in respect of any tax or any sum payable by the assessee as a result of the completion of the said proceedings . Therefore, the three requirements under the section are : (i) that there must be a transfer of the property; (ii) that it should be during the pendency of a proceeding under the Act; and (iii) that the transfer must be with intent to defraud the Revenue and if these conditions are satisfied, then the transfer shall be void in respect of any tax or sum payable by the assessee as a result of the completion of the proceedings during the pendency of which the transfer was effected. The effect of the section is that, if such transfer with intent to defraud the Revenue has been made and any claim for tax arises after completion of the proceedings during the pendency of which the transfer took place, such tax or other sum can be recovered by proceeding against the property notwithstanding the said tran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned senior standing counsel reiterated that even as per the petitioner, the corporate guarantee was provided by the NEPC India Limited and the directors of these two Companies, NEPC India Limited and M/s.NEPC Agro Foods Ltd. are one and the same and even as per the impugned order, the tax arrears to the Income Tax Department was fixed not only on NEPC Agro Foods Limited but also to its Directors who is having interest over the NEPC India Limited also. If at all M/s.NEPC Agro Foods Limited is an independent entity and unconnected with NEPC India Limited, then it is for the petitioner to adjudicate the same before the Tax Recovery Officer by filing an application under Schedule II Rule 11 of the Income Tax Act. This apart, the defaulter has not been impleaded as party respondent in the writ petition. Therefore, those facts are to be adjudicated and if at all the judgment made by the Income Tax Department is not in consonance with the Income Tax Officer, then the petitioner may elaborate the same before the Tax Recovery Officer who in turn is competent to pass an order either way by considering the merits and demerits of the case. Instead the High Court cannot go into those facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground that such property is not liable to such attachment or sale, the Tax Recovery Officer shall proceed to investigate the claim or objection . 32. Sub-clauses (5) and (6) to Rule 11 of the Income Tax Act reads as under: (5) Where the Tax Recovery Officer is satisfied that the property was, at the said date, in the possession of the defaulter as his own property and not on account of any other person, or was in the possession of some other person in trust for him, or in the occupancy of a tenant or other person paying rent to him, the Tax Recovery Officer shall disallow the claim. (6) Where a claim or an objection is preferred, the party against whom an order is made may institute a suit 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. 33. A perusal of the entire Rule would reveal that it is not an appeal or Revision. It is an investigation by the Tax Recovery Officer, which is contemplated. Therefore, any third person if involved in such transfer of property, which is declared as void under Section 281 of the Income Tax Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the Central Government, State Government or local authority . 36.It is necessary to consider the conflicting provisions of the Income Tax Act, SARFAESI Act and Recovery of Debts and Bunkruptcy Act, 1993. 37.On the one hand, the Income Tax Act states that, where during the pendency of any proceedings under the Income Tax Act or after completion thereof, any assessee creates a charge on or parts with the possession by way of mortgage, sale, etc. Shall be void against any claim in respect of any tax. So also, the SARFAESI Act states that Section 26E contemplates that the secured creditors shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government of State Government or local authority. Therefore, equal weightage is given in respect of the secured creditors. So also Section 31B of Recovery of Debts and Bunkruptcy Act, 1993 states that sale of assets over which security interest is created, shall have priority and shall be paid in priority over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority. 38.Thus, confl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the statutory implications or the genuinity of the title etc., Thus, the principles of caveat emptor would be applicable in such circumstances, where a transactions or transfers are made during the pendency of the Income tax proceedings. In such cases, the Income tax proceedings are known only to the tax defaulter and not to the third party purchaser or the mortgagee Bank or otherwise. Thus, the void transfers or transactions made during the pendency of the Income tax proceedings cannot be the subject matter for any mortgage or further transfers or transactions etc., This being the possible perceptions, the Courts are bound to consider, which transaction will prevail over and which Act would be applicable with reference to the facts and circumstances. 39.More elaborately the facts at the first instance to be considered and then the application of law which is to be applied at the first instance also to be considered. For instance in the case where the income tax proceedings are pending under the Income Tax Act and if a mortgage is entered into by the tax defaulter 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the purpose of upholding the sovereignty and integrity of the Nation is to be considered as holding precedence over the other statutes providing priority. 44.The Constitutional Bench of the Hon'ble Supreme Court of India in the case of Builders Supply Corporation vs. Union of India [1965 AIR 1061] considered the principles laid down in the case of Kaka Mohamed Ghouse Sahib and Co. vs. United Commercial Syndicate and others [(1886) ILR 7 Mad. 434], wherein the Madras High Court has held that it is a settled principle of constitutional law that as between creditors of the same rank the Government is entitled to priority and the republican character of the Constitution of India has not abrogated this general doctrine of priority of State debts. In dealing with this question, Justice Ramamurti has referred to the relevant decisions in relation to the arrears of income tax due to the Government and has pointed out there is a consensus of judicial opinion on the question that the arrears of tax due to the State can claim priority over private debts. This position has not been seriously disputed. 45.Similarly, the basic justification for the claim of priority made by the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther claims as various statutes enacted by the Parliament gives priority to such institutions irrespective of the fact that the other Acts are also providing similar priority to other institutions. 47.In support of the said observation, this Court would like to draw the attention with reference to the judgment of the Three Judges Bench of the Hon'ble Supreme Court of India in the case of Central Bank of India vs. State of Kerala and others [Civil Appeal No.95 of 2005 dated 27.02.2009], wherein the Apex Court considered the provisions of the DRT Act and SARFAESI Act and the following observations are made: 33.The non obstante clauses contained in Section 34(1) of the DRT Act and Section 35 of the Securitisation Act give overriding effect to the provisions of those Acts only if there is anything inconsistent contained in any other law or instrument having effect by virtue of any other law. In other words, if there is no provision in the other enactments which are inconsistent with the DRT Act or Securitisation Act, the provisions contained in those Acts cannot override other legislations. Section 38C of the Bombay Act and Section 26B of the Kerala Act also contain non obst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conceding to the State the right to claim priority in respect of its tax dues. 34. In State Bank of Bikaner and Jaipur v. National Iron and Steel Rolling Corporation and others [(1995) 2 SCC 19], the Court again recognized the priority of the State's statutory first charge under Section 11-AAAA of the Rajasthan Sales Tax Act, 1954 vis-`-vis claim of the bank to recover its dues from the borrower. 35. In Dena Bank v. Bhikhabhai Prabhudas Parekh Co. and others [(2000) 5 SCC 694], the Court reviewed case law on the subject and observed: The principle of priority of government debts is founded on the rule of necessity and of public policy. The basic justification for the claim for priority of State debts 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 a sovereign Government at all. It is essential that as a sovereign, the State should be able to discharge its primary governmental functions and in order to be able to discharge such functions efficiently, it must be in possession of necessary funds and this consideration emphasises th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at all. This consideration emphasises the necessity and wisdom of conceding to the State, the right to claim priority in respect of its tax dues. The importance of the above reading is to be considered regarding the present facts and circumstances. 49.Let us consider the dispute raised in the present case. The Income Tax Department in their counter affidavit had stated that the assessee defaulter is in arrears to the tune of ₹ 34,52,12,985/-. The demands were raised by the Income Tax Department prior to 31.03.1999, the date of mortgage to the petitioner bank. The Income Tax Department in other words claims that the proceedings under the Income Tax Act was pending even before the date of mortgage. The petitioner relying on the encumbrance certificate issued by the Registration Department of the State contends that the attachment is made after the mortgage by the petitioner bank. However, Section 281 of the Income Tax Act unambiguously states that during the pendency of any proceedings under the Income Tax Act. Thus, pendency of any proceedings is sufficient to treat any other transfer/mortgage as void. 50. Thus, the mortgages, transactions or transfers are made during t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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