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TMI Blog2022 (3) TMI 157X X X X Extracts X X X X X X X X Extracts X X X X ..... e clear facts and circumstances, an enquiry is to be conducted by the Tax Recovery Officer. Therefore under Rule 11 of Schedule II of the Income Tax Act, the petitioner-Bank has to approach the Tax Recovery Officer for adjudication of the facts, so as to form an opinion whether the petitioner-Bank is entitled to enforce their rights or not. It is not as if in every case, Bank can enforce their rights only under the SARFAESI Act, without reference to the provisions of the Income Tax Act. When such conflict arises, the priority to be considered has been elaborately considered by this Court and detailed findings are provided in the judgment dated 19.07.2021 in WP No.15437 of 2014. The right of priority and adjudication of facts, which all are required and the issues involved are elaborately discussed and the parties were given an opportunity to approach the Tax Recovery Officer by filing an appropriate application under Schedule II of Rule 11 of the Income Tax Act. Therefore, the said principle, which is being followed by this Court, is to be adopted in the present case, as the first respondent-Tax Recovery Officer made a finding in the impugned order itself that the attachment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... second respondent refused to register the Sale Certificate dated 12.01.2016 issued under the SARFAESI Act, on the ground that the subject property being vacant plot bearing Plot No.39, FLOS CARMELI , Layout, Carmel Convent, Muthiyalpet, Village No.40, Pondicherry Revenue Village, comprised in R.S.No.4/1, measuring an extent 6055 sq. ft., covered by Doc. No.7359/2011, among other properties, is attached by the first respondent-Tax Recovery Officer for the alleged tax dues of the third respondent and the said attachment is recorded in the Books of the second respondent. 5. The petitioner had issued the Sale Certificate dated 12.01.2016 in terms of the auction sale held on 18.12.2015 and pursuant to the E-Auction Sale Notice dated 07.11.2015 issued under the provisions of the SARFAESI Act. The petitioner therefore seeks to quash the communication of the first respondent dated 29.01.2016. 6. The third respondent is the Sole Proprietrix of M/s.Devaki Agencies had availed the credit facilities from the State Bank of India, SME Branch, Puducherry for the business development. The said facilities were availed against specific securities created including mortgage of various immovab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of the State Bank of India, SME Branch, Puducherry and therefore, the petitioner-Bank is entitled to enforce the said mortgage for the recovery of huge outstanding dues. 11. The petitioner-Bank, in exercise of their right under the SARFAESI Act and, after compliance with all the statutory provisions had in fact issued an E-Auction Sale Notice dated 07.11.2015, bringing the properties of the third respondent as well as the other family members for auction sale, scheduled on 18.12.2015. 12. Relying on these facts and circumstances, the learned Senior Counsel for the petitioner reiterated that this Court in the case of State Bank of India, Stressed Assets Management Branch, represented by its Assistant General Manager vs. Assistant Commissioner of Income Tax And Another [MANU/TN/4044/2017], wherein this Court held that the impugned notice issued by the Income Tax Department cannot be enforced in that particular case. 13. In the case of Corporation Bank vs. Commissioner of Income Tax Department [MANU/TN/7177/2021], wherein this Court, in paragraph-28 of its judgment held as under:- 28. Incidentally, at the time when the above decision was rendered, Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion under Schedule II of Rule 11 of the Income Tax Act. 18. Therefore, the said principle, which is being followed by this Court, is to be adopted in the present case, as the first respondent-Tax Recovery Officer made a finding in the impugned order itself that the attachment of immovable property made on 10.12.2015 would relate back to 01.03.2013. It has come to the knowledge of the Tax Recovery Officer that the defaulter has mortgaged the subject property with the petitioner-Bank and the same was registered on 04.04.2013. Thus, the first respondent-Tax Recovery Officer formed an opinion that the attachment date precedes the mortgage date and hence the mortgage of the subject property and transfer of the subject property is void under the provisions of the Income Tax Act. 19. This Court in the case of Janata Sahakari Bank Ltd vs. Tax Recovery Officer VII, Income Tax Department, Chennai-34 {MANU/TN/5263/2021] elaborately considered the issues as follows:- ANALYSIS : 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 whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 relata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 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 qu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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. Ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioner 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 the pendency of the Income Tax proceedings, then all such transfers, mortgages, transactions are void under Section 281 of the Income Tax Act and any such mortgage or attachment made by the Bank during the pendency of the Income tax proceedings, cannot be a ground to claim priority based on the provisions of the SARFAESI Act or DRT Act. 51. The disputed factors cannot be adjudicated by the High Court under Article 226 of the Constitution of India and it is for the petitioner to establish the details regarding the mortgage and the pendency of Income tax proceedings under the Income Tax Act. It is for the petitioners to produce the documents in original and adjudicate the same in the manner prescribed under Schedule II Rule 11 of the Income Tax Act. Thus, it would be improper to form an opinion regarding the disputed facts between the parties to the lis in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X
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