9911796707
TMI Blog2022 (12) TMI 557X X X X Extracts X X X X X X X X Extracts X X X X ..... take precedence over the rights of the secured creditors - What is the nature of taxes and the right of the State to recover the same? - HELD THAT:- The power to tax is an inherent part and an attribute of sovereignty and is meant for being used for public welfare. Without taxes, the Government cannot run nor discharge its constitutional obligations set out in the form of Directive Principles of State Policy under Article 39 of the Constitution. In other words, taxes are collected in public interest and the taxes so collected cannot be used for any purpose other than common public good. Having dealt with the status and purpose of tax under the Constitution, it may be relevant to examine the priority of collection of taxes. Doctrine of priority of Crown Debts - The principle of priority of Government debts is founded on the rule of necessity and public policy. If the legislation provides for a charge or a priority, then, if the crown debt and the private secured creditor concurs in point of time, the crown debt would prevail. If the private secured creditor is prior in time that would prevail. If the State s charge is prior in time, then the State s charge would prevail. If a first ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent out of a particular fund or particular property without transferring that fund or property, whereas a mortgage is in essence a transfer of an interest in specific immovable property. A mortgage is a jus in rem, a charge is a jus ad rem and the practical distinction is that mortgage is good against subsequent transferees and a charge is only good against subsequent transferees with notice. A charge does not amount to a mortgage. In every mortgage, there is a charge, but every charge is not a mortgage. Having examined the scope of charge , it may be relevant to note that the second view holding that an attachment creates a charge is unsustainable as attachment and charge are distinct and attachment does not by itself create a charge as stated supra. In any view, we find that the Income Tax Act does not create a charge towards recovery of dues. Section 281 only declares certain transactions to be void and cannot be understood as creating a charge in favour of the Income Tax Department in respect of dues arising under the same. Certain transfers to be void - Whether Section 281 of the Income Tax Act only contains declaration of voidity in respect of transactions falling within its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cured creditors, intended in larger public interest and as a matter of policy. One more rule of construction is that when two competing Acts construed to further the purposes behind them produce a conflict; the court may resolve the conflict by taking into consideration as to which Act represents the superior purpose , as held in the case of Allahabad Bank v. Canara Bank[ 2000 (4) TMI 757 - SUPREME COURT] Thus in view of the fact that the Parliament must be understood to have given priority to the secured creditors under Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, fully aware and conscious of the status and importance that taxes enjoy under the Constitution. Therefore, with regard to operation of section 281 of the Income Tax Act vis-a-vis the operation of sections 26E and 31B of the SARFAESI Act and Recovery of Debts and Bankruptcy Act, sections 26E and 31B according priority to secured creditors shall prevail and thus, the attachment by the Tax Recovery Officer is impermissible in the facts and circumstances of the case. We arrive at the following conclusion: (i)Appellant is a secured creditor, who offered credit facilities to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Income Tax Act, 1961 (hereinafter shortly referred to as the Income Tax Act ) vis-a-vis, Section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (in short, the SARFAESI Act ) and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993. 2. There are four writ appeals viz., W.A.Nos.1512 of 2021, 60 of 2022, 1249 of 2022 and 1385 of 2022, out of which, W.A.Nos. 60 of 2022, 1249 of 2022 and 1512 of 2021 are filed by the Bankers/Financial institutions challenging the orders of a learned Judge in W.P.Nos.25325 of 2017, 15437 of 2014 and 5857 of 2018, wherein it was held that the dues of the Income Tax Department would take precedence over the dues of the secured creditor, though Section 26 E of the SARFAESI Act and Section 31 B of the Recovery of Debts and Bankruptcy Act, expressly provides/grants priority in payment of debts due to a secured creditor over all other debts including revenues, taxes, cesses, etc. The learned Judge proceeded on the basis that tax being an attribute of sovereignty and a necessity for attaining the constitutional goals and objectives, tax dues would prevail and take precedence over t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missions made by the learned counsel appearing for all the parties, which run thus: 5.1.1. Mr.Vijay Narayan, learned Senior counsel for the appellant in WA.No.60 of 2022 contended that the appellant, which is a non-banking financial company, had extended financial assistance to the respondents 4 and 5 on the basis of the mortgage created over the properties in their favour by executing mortgage deeds dated 23.04.2013, 18.08.2014 and 22.10.2015, but the borrowers defaulted in payment of loan amount, as a result of which, arbitration proceedings were initiated and during the course of the said proceedings, the borrowers admitted their liability and expressed their willingness to sell the mortgaged properties for realisation of the dues to the appellant. At that time, the appellant came to know about the provisional order of attachment passed by the second respondent on 03.11.2015 over the mortgaged properties for the tax dues payable by the borrowers and their group entities/companies. Due to the attachment of the mortgaged properties, the appellant being unable to recover the dues payable by the borrowers, preferred WP.No.25325 of 2017, which was dismissed by the learned Judge. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cured creditors would prevail over the doctrine of priority of crown debts. 5.1.4. The learned Senior counsel for the appellant also contended that secured creditors always have priority over government debts. To lend support to this submission, he placed reliance on the decision of the Full Bench of this Court in Assistant Commissioner of Commercial Tax and others v. Indian Overseas Bank and others [2016 (6) CTC 769] wherein it was held that in view of Section 31 B of the Recovery of Debts and Bankruptcy Act, introduced by Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, the right of the secured creditors to realise the debts by way of sale of assets will have priority over all debts and government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority. The learned Senior counsel further referred to another order of the Full Bench of this Court in UTI Bank Limited v. Deputy Commissioner of Central Excise and another [(2007) 135 CC 329 (Mad)]. In the light of the said decisions, the order of attachment passed by the Tax Recovery Officer subsequent to the mortg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ederation Limited v. Bank of Baroda [2020 SCC ONLINE Chh 1271] and contended that the Central Government issued notification dated 26.12.2019 and Sections 17 to 19 of the SARFAESI Act came into effect. Therefore, there was no law before these amendments giving priority to the debts of the secured creditor. The learned counsel further submitted that the appellant's right to enforce the secured debt accrues only upon default by the borrowers and after realisation of the dues by the Income Tax Department. Thus, the appellant has no right to enforce the secured debt and that the Income Tax Department alone has a priority to do so. Therefore, the learned counsel prayed for dismissal of this appeal. 5.2.1. Mr.Satish Parasaran, learned senior counsel for the appellant in WA.No.1249 of 2022 submitted that the appellant had sanctioned loan to M/s.NEPC Agro Foods Ltd after executing a mortgage deed dated 11.12.1998 in respect of the property at Ambattur, in which, M/s.NEPC India Ltd (formerly known as NEPC Micon Ltd) stood as corporate guarantor. Both companies failed to repay the loan amount, which compelled the appellant to initiate the SARFAESI proceedings. After taking possession of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factual and hence, the appellant can go before the TRO under rule 11, Second Schedule, to decide the facts, as rightly held by the learned Judge. The learned counsel further submitted that Section 281 merely declares the mortgage to be invalid and reliance placed on the decision of the Andhra Pradesh High Court in ICICI Bank case may not be proper, as it never considered the judgment of the Madras High Court in Abdul Jamil Ors v. The Secretary, Income Tax [1998 (1) CTC 547] . Therefore, according to the learned counsel, the order of the learned Judge does not require any interference at the hands of this court. 5.3.1. Mr.A.P.Srinivas, the learned standing counsel for the appellant in WA.No.1385 of 2022 submitted that the assessment notice under section 143(2) was issued on 08.08.2013; demand was raised by the department through assessment order dated 31.03.2015; after issuance of several demand notices to the assessee / defaulters, the subject properties were attached by the Tax Recovery Officer on 27.03.2017; and section 281 of the Income Tax Act declares as void any transfer made by the assessee during the pendency of proceedings under the Act. Therefore, the attachment of the i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... secured property and accordingly created equitable mortgage in favour of the appellant Bank on 07.02.2016 and 28.01.2016. However, they failed to repay the loan, which compelled the appellant to issue demand notice under Section 13(2) of the SARFAESI Act and thereafter, possession notice under section 13(4), but the sale notice issued by the appellant bank to bring the secured property for auction, could not succeed, since the first respondent / ITO had attached the property with the office of the respondents 2 and 3 for income tax dues on 16.06.2017. Feeling aggrieved, the appellant preferred WP.No.5857 of 2018, which was dismissed by the learned Judge, by holding that the mortgage created in favour of the appellant by the respondents 4 and 5 was void in view of section 281 of the Income Tax Act. Therefore, this writ appeal. 5.4.2. According to the learned counsel for the appellant, though the demand notice was issued on 31.03.2015, the first respondent has chosen to attach the security asset only on 16.06.2017, i.e., subsequent to the purchase of the secured asset by the respondents 4 and 5 on 22.09.2015 and 23.10.2015 and hence, there is no intent on the part of the respondents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of any sum payable under the Income Tax Act in favour of the Revenue and what is the scope of operation of Section 281 of the Income Tax Act and its input vis-a-vis Section 26 E of the SARFAESI Act and Section 31 B of the Recovery of Debts and Bankruptcy Act and whether the priority of charge created in favour of the secured creditors under the SARFAESI Act and the Recovery of Debts and Bankruptcy Act would prevail over the declaration of voidity contained in Section 281 of the Income Tax Act or any other recovery proceedings including attachment under the Income Tax Act? 7. We shall now proceed to answer the above questions in seriatim . a)What is the nature of taxes and the right of the State to recover the same? 8.1. The above question has been the subject matter of consideration on numerous occasions including Constitution Benches of the Hon'ble Supreme Court. We do not intend to multiply case laws as the legal position insofar as the above question is well settled. It is axiomatic that power to collect tax is an inherent attribute and an incident of sovereignty. The legislature of every State will possess the power to tax under the general grant of legislative power. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essive and vexatious despotism, since the only alternative to taxation would be a forced extortion for the needs of Government from such persons or objects as the men in power might select as victims. 8.3. The above extract would clearly show that the power to tax is an inherent part and an attribute of sovereignty and is meant for being used for public welfare. Without taxes, the Government cannot run nor discharge its constitutional obligations set out in the form of Directive Principles of State Policy under Article 39 of the Constitution. In other words, taxes are collected in public interest and the taxes so collected cannot be used for any purpose other than common public good. 9.1. Having dealt with the status and purpose of tax under the Constitution, it may be relevant to examine the priority of collection of taxes. Doctrine of priority of Crown Debts Tax dues are normally referred to as Crown Debt . The position insofar as priority of Crown Debt could be summarised as under: a. The principle of priority of Government debts is founded on the rule of necessity and public policy. b. Between an unsecured creditor and crown debt, it is the crown debt which would prevail as hel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods cannot be extinguished even by lawful seizure of goods by making money available to other creditors of the pawnor without the claim of the pawnee being first fully satisfied. Rashbehary Ghose states in Law of Mortgage (TLL, 7th Edn., p. 386) - It seems a government debt in India is not entitled to precedence over a prior secured debt. '' (emphasis supplied) 9.3. The above position has been reiterated by the Hon ble Supreme Court time and again and we do not intend to burden the judgment by multiplying case laws except to state that the above view has not been doubted much less a contrary view having been expressed. b) Whether fiscal/tax legislations provide for a charge in respect of the taxes/revenues that are due and if so, what are the kind/nature of charges created in fiscal/tax legislations and its status? 10. Under common law, priority of crown debts would prevail only over unsecured creditors and would not have precedence over a secured debt. It appears that the legislature being conscious of the above limitation, while framing fiscal/taxing statutes, had incorporated provisions providing for a charge over the property of the defaulter, while also declaring tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under the Central Excise Act is identical. 142A. Liability under Act to be first charge.-Notwithstanding anything to the contrary contained in any Central Act or State Act, any amount of duty, penalty, interest or any other sum payable by an assessee or any other person under this Act, shall, save as otherwise provided in section 529A of the Companies Act, 1956 (1 of 1956), the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of 1993) and 2 [the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002 (54 of 2002) and the Insolvency and Bankruptcy Code, 2016 (31 of 2016).] 12.1. It may also be relevant to take note of some of the other tax legislations, wherein, a statutory charge has been created in respect of the tax dues under the respective enactment, which are as follows: Madhya Pradesh General Sales Tax Act, 1958: 33-C. Tax to be first charge.- Notwithstanding anything to the contrary contained in any law for the time being in force, any amount of tax and/or penalty, if any, payable by a dealer or other person under this Act shall be a first charge on the property of the dealer or such person. Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than enactments, but not to the TNVAT Act as it merely creates a charge, which, as stated above, is subject to other claims mentioned therein. In this regard, it may be relevant to refer to the judgment of the Hon'ble Supreme Court in State Bank of Bikaner and Jaipur v National Iron and Steel Rolling Corporation , reported in (1995) 2 SCC 19 , wherein, the scope of 1st charge was explained as under: 10. The section creates first charge on the property, thus clearly a statutory charge mortgage. created by The giving priority to the property statutory including first a charge over all other charges submission, therefore, on that the section 11AAAA the Rajasthan of Sales Tax Act operate only over the equity of redemption, cannot can be accepted. The charge operates on the entire property of the dealer including the interest of the mortgage therein. 12.3. Thus, it is evident that the legislature has provided provisions for creating charge over the property of the defaulter in tax enactments, some of which has been extracted above, with a view to enable recovery of the tax dues. The above legislative device/practice also reflects legislative recognition of the fact that in the absen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to further orders as also provisions of other statute. 11 . The word `attachment' would only mean `taking into the custody of the law the person or property of one already before the court, or of one whom it is sought to bring before it. It is used for two purposes : (i) to compel the appearance of a defendant; and (ii) to seize and hold his property for the payment of the debt. It may also mean prohibition of transfer, conversion, disposition or movement of property by an order issued by the court. 16.1. While, on the correctness of the divergent views expressed by the learned judges, to appreciate as to what would constitute charge , we may have to look to the Transfer of Property Act, 1882, in particular, Section 100 of the same, which reads as under: 100. Charges.- Where immoveable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property; and all the provisions hereinbefore contained [which apply to a simple mortgage shall, so far as may be, apply to such charge]. Nothing in this section applies to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of transactions falling within its mischief or does it create a charge in respect of any sum payable under the Income Tax Act in favour of the Revenue and what is the scope of operation of Section 281 of the Income Tax Act vis-a-vis Section 26 E of the SARFAESI Act and Section 31 B of the Recovery of Debts and Bankruptcy Act and whether the priority of charge created in favour of the secured creditors under the SARFAESI Act and Recovery of Debts and Bankruptcy Act would prevail over the declaration of voidity contained in Section 281 of the Income Tax Act or any other recovery proceedings including attachment under the Income Tax Act? 18.1. To answer the above question, it may be relevant to extract Section 281 of the Income Tax Act, which reads as under: Certain transfers to be void. 281. (1) 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 Second Schedule, any assessee creates a charge on, or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever) of, any of his assets in favour of any other person, such charge or transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the declaration of voidity would relate back and cover any transfer made prior to the completion of any proceeding under the Act. e) Section 281 of the Income Tax Act does not create a charge. It is a negative declaration in the sense that certain transactions, viz., any charge or transfer made during the pendency of the proceeding and on completion thereof and before issuance of notice under Rule 2 of the Second Schedule are declared void to the extent of sums payable on completion of such proceeding. f) The declaration of voidity under Section 281 of the Income Tax Act, is not absolute, but comes with exceptions, viz., that the charge/transfer though made during the pendency of proceedings under this Act or after completion but before issuance of notice, the charge/transfer, may still not be void if the same is made for adequate consideration and without notice of pendency of such proceedings or notice of such tax or sum being payable by the assessee or if the transfer is made with the previous permission of the Assessing Officer. g) The declaration of voidity under Section 281 of the Income Tax Act, is not absolute but only in respect of any tax or sum payable by the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Second Schedule kicks in and governs the recovery mechanism. 19.2. To appreciate the compartmentalization of the recovery mechanism between Section 281 and the Rules of the Second Schedule of the Income Tax Act, it may be useful to refer to the decision of the High Court of Andhra Pradesh, in ICICI Bank Limited v. Tax Recovery Officer and others [ (2019) 411 ITR 518] , wherein, while dealing with the scope of Section 281 and the Rules under the Second Schedule of the Income Tax Act, it was held as under: 24. If we keep in mind the sequence of steps to be taken first by the Assessing Officer and then by the Tax Recovery Officer in terms of Section 222(1) read with Rules 2, 4, 16 and 48, it will be clear that they are compartmentalized into 3 sections, (i) the first, up to the issue of a certificate of recovery (ii) the second, from the issue of a certificate of recovery upto the attachment of the property for non compliance with the demand made under Rule 2 and (iii) the third, the voidity of all transfers from the date of the order of attachment. 25. Section 281(1) operates from the stage of commencement of proceedings under the Act upto the stage of service of a notice of demand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r was for adequate consideration and without notice of the pendency of any proceeding under the Act. What is important to note from the proviso (i) is that the exception carved out therein may be available only up to the stage of issue of an order of attachment. The proviso (i) to subsection (1) of Section 281 uses the words without notice of the pendency of such proceeding . Therefore, an assessee or a transferee or a mortgagee can claim the benefit of proviso (i) only if the transfer has been made or charge created before the issue of an order of attachment, but during the pendency of the proceedings under the Act. Once an order of attachment is to be issued, then Rule 16(2) will come into play and the benefit of the proviso to sub-section (1) of Section 281 may not be available. 29. Therefore, it is clear that the proviso (i) to sub-section (1) of Section 281 provides an escape route for innocent third parties, to whom the property of the assessee is transferred during the pendency of the proceedings, but before an attachment is ordered. This compartmentalization is very important to be noted, in view of the fact that during the pendency of the proceedings for assessment, an ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on December 27, 2011. In other words, the assessee was nowhere near the point of being declared as an assessee-in default on the date of creation of the mortgage. Hence, the creation of the mortgage cannot be said to have automatically become void in terms of section 281(1) merely because of the pendency of the proceedings under Sections 143 and 142, It required something more to be done, but the same was not done in this case. As a matter of fact even an investigation, under rule 11 was not carried out in this case. Therefore, the order of attachment is clearly illegal. On the date on which the order of attachment was passed, the property had already been sold by the petitioner-bank, in exercise of the power conferred upon the bank under the Securitisation Act, 2002. 32. It is important to note one more aspect. Section 281(1), by its very nature operates only up to the stage of service of notice under rule 2 of the Second Schedule. Therefore, section 281(1) obviously deals with a situation, which can be compared to fraudulent preferences dealt with by the insolvency laws. Therefore, what is applied to an assessee (or an insolvent under the Insolvency laws) cannot be applied to a s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssed an order of recovery against BPIL in 2002. The recovery certificate was issued immediately, pursuant to which an attachment order was passed prior to the date on which notice was issued by the Tax Recovery Officer, Respondent 4 under Rule 2 of Schedule II to the Act. It is true that the sale was conducted after the issuance of the notice as well as the attachment order passed by Respondent 4 in 2003, but the fact remains that a charge over the property was created much prior to the notice issued by Respondent 4 on 16-11-2003. The High Court held that Rule 16(2) is applicable to this case on the ground that the actual sale took place after the order of attachment was passed by Respondent 4. The High Court failed to take into account the fact that the sale of the property was pursuant to the order passed by DRT with regard to the property over which a charge was already created prior to the issuance of notice on 11-2-2003. As the charge over the property was created much prior to the issuance of notice under Rule 2 of Schedule II to the Act by Respondent 4, we find force in the submissions made on behalf of the appellant. 21. Thus, the judgment of the Andhra Pradesh High Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or after the commencement of the Insolvency and Bankruptcy Code, 2016 (31 of 2016), in cases where insolvency or bankruptcy proceedings are pending in respect of secured assets of the borrower, priority to secured creditors in payment of debt shall be subject to the provisions of that Code. 22.2. The most important aspect of the above provisions and one which would help to resolve the controversy, viz., the impact of Section 281 of the Income Tax Act vis-a-vis Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, is the effect and extent of the non-obstante clause contained in Section 26E and 31B of the SARFAESI Act and the Recovery of Debts and Bankruptcy Act, respectively. This is not the first time that the SARFAESI Act had employed non-obstante clause with a view to override other laws, even prior to Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, there were Sections 35 and section 34 of the SARFAESI Act and the Recovery of Debts and Bankruptcy Act which provided for provisions with non-obstante clauses intended to override other laws. 23.1. Before we proceed to examine the manner in which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on. As stated above, prior to introduction of Sections 26E and 31B of the SARFAESI Act and the Recovery of Debts and Bankruptcy Act, Section 35 of the SARFAESI Act and Section 34 of the Recovery of Debts and Bankruptcy Act provided that the provisions of these Acts would override other laws. For a better appreciation of the width of the non- obstante clause in Section 26E of the SARFAESI Act and section 31 B of the Recovery of Debts and Bankruptcy Act, it may be relevant to contrast the same with Section 35 of the SARFAESI Act and Section 34 of the Recovery of Debts and Bankruptcy Act. The following table is relevant: Section 26 E of SARFAESI Act and Section 31 B of Recovery of Debts and Bankruptcy Act Section 35 of SARFAESI Act and Section 34 of Recovery of Debts and Bankruptcy Act SARFAESI Act Section 26E: Priority to secured creditors. 26E . Notwithstanding anything contained in any other law for the time being in force, after the registration of security interest, the debts due to any secured creditor shall be paid in priority over all other debts and all revenues, taxes, cesses and other rates payable to the Central Government or State Government or local authority. Explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l be in addition to, and not in derogation of the Industrial Finance Corporation Act, 1948 (15 of 1948), the State Financial Corporations Act, 1951 (63 of 1951), the Unit Trust of India Act, 1963 (52 of 1963), the Industrial Reconstruction Bank of India Act, 1984 (62 of 1984), the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986) and the Small Industries Development Bank of India Act, 1989 (39 of 1989). 23.3. A question arose before the Hon ble Supreme Court in Central Bank of India v. State of Kerala and others [ (2009) 4 SCC 94] as to whether Sections 34 and 35 of the Recovery of Debts and Bankruptcy Act and SARFAESI Act which give overriding effect to the provisions of those Acts against other laws, would prevail over Section 38-C of the Bombay Act and Section 26-B of the Kerala Act, which provided for non obstante clause and created a first charge in favour of the State with regard to the dues arising under those enactments. The Hon ble Supreme Court held that the non obstante clause contained in Sections 34 and 35 would get attracted only in the event of conflict in the light of the language employed therein which provided that the provisions of the said ena ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the property of the dealer or any person liable to pay the dues of sales tax, etc. Sub-section (7) of Section 13 which envisages application of the money received by the secured creditor by adopting any of the measures specified under sub-section (4) merely regulates distribution of money received by the secured creditor. It does not create first charge in favour of the secured creditor. ....116. 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 the Securitisation Act, the provisions contained in those Acts cannot override other legislations. Section 38-C of the Bombay Act and Section 26-B of the Kerala Act also contain non obstante clauses and give statutory recognition to the priority of the State's charge over other debts which was recognised by Indian High Courts even before 1950. In other words, these sections and similar provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Sections 34 and 35, Sections 26E and 31B of the SARFAESI Act and Recovery of Debts and Bankruptcy Act has been introduced. If one contrasts the non-obstante clauses contained in Sections 26E and 31B of the SARFAESI Act and Recovery of Debts and Bankruptcy Act vis-a-vis Sections 34 and 35, it would be evident that the non-obstante clause in Section 26E and Section 31B of the SARFAESI Act and Recovery of Debts and Bankruptcy Act is not limited in its operation only in the event of inconsistency, but is intended to give primacy to the rights of secured creditors to recover over all other debts and expressly includes revenues, taxes, cesses or other rates payable to Central Government or State Government or local authority. Parliament intended to give primacy to Sections 26E and 31B of the SARFAESI Act and Recovery of Debts and Bankruptcy Act, as evident from the non-obstante clause contained therein which is couched in very wide terms as to its scope and operation. Section 281 of the Income Tax Act declares certain transactions to be void, now can it be understood that the declaration of voidity would prevail despite Sections 26E and 31B of the SARFAESI Act and Recovery of Debts and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to, cadit opus, meaning, if the foundation is removed, the superstructure falls [See: Kalabharati Advertising v. Hemant Vimalnath Narichania and others, (2010) 9 SCC 437 : 2010 SCC Online SC 970 at page 447] . 25. Thus, once the security interest is declared a nullity, it will be non-est and there is no question of applying SARFAESI or Recovery of Debts and Bankruptcy Act and consequentially, no question of priority. This would essentially lead to a conflict, as in the present case, primacy to section 281 will render the priority accorded to secured creditors nugatory. We must thus examine, whether section 281 of the Income Tax Act or sections 26E and 31B of the SARFAESI and Recovery of Debts and Bankruptcy Act would prevail. It appears that the non-obstante clause in Sections 26E and 31B of the SARFAESI Act and Recovery of Debts and Bankruptcy Act would prevail over the declaration of voidity contained in Section 281 of the Income Tax Act, for unless it is nullified, the primacy contained in the provisions of Sections 26E and 31B of the SARFAESI Act and Recovery of Debts and Bankruptcy Act would stand nullified, thereby defeating the object of Sections 26E and 31B of the SARFAESI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntroduced. The said non-obstante clause is very wide in scope and operation and grants primacy against any other law, which is not confined to circumstances, wherein, there is inconsistency between the SARFAESI Act and Recovery of Debts and Bankruptcy Act. Thus, applying the Heydon s Rule or Purposive construction, the non-obstante clause contained in Sections 26E and 31B of the SARFAESI Act and Recovery of Debts and Bankruptcy Act, which was introduced to give primacy to the secured creditors and expressly provides that it would prevail over all taxes, cesses etc., ought to be construed/interpreted in a manner that would promote and not defeat the object of the Parliament to protect and safeguard the interest of the secured creditors, intended in larger public interest and as a matter of policy. 28. One more rule of construction is that when two competing Acts construed to further the purposes behind them produce a conflict; the court may resolve the conflict by taking into consideration as to which Act represents the superior purpose , as held in the case of Allahabad Bank v. Canara Bank [(2000) 4 SCC 406], which reads as under: 34. While it is true that the principle of purposiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... detain us long for the following reasons: a) Firstly, the Full Bench of this Court in W.P.No.2675 of 2011 etc. batch, dated 10.11.2016 has held that it would govern the rights of the parties even in respect of a pending lis . The relevant portion of the same reads as under: 3. There is, thus, no doubt that the rights of a secured creditor to realise secured debts due and payable by sale of assets over which security interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority. This section introduced in the Central Act is with notwithstanding clause and has come into force from 01.09.2016. The law having now come into force, naturally it would govern the rights of the parties in respect of even a lis pending. The Special Leave Petition is stated to be pending before the Apex Court and there is an order of Status Quo in SLP (Civil) No.20471 of 2021 dated 16.03.2018. In view thereof, the Full Bench Order of this Court would continue to bind/govern. b) Secondly, we would think the examination of the above question may be academic, in view of the fact that even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of Section 26E of the SARFAESI Act as well. Even if this Court were to set aside the recovery proceedings for any reason, the Bankers/ Financial Institutions right to claim priority in terms of Section 31 B of the Recovery of Debts and Bankruptcy Act and Section 26 E of the SARFAESI Act would be available and the right to recover under the Income Tax Act, 1961 must yield to the provisions under the SARFAESI Act and the Recovery of Debts and Bankruptcy Act and thus, the above exercise may not serve any useful purpose. Therefore, the above issue appears to be a mere academic exercise and we do not intend to examine the question any further. 30.1. In view of the legal position explained above and applying the same to the facts of the present case, we arrive at the following conclusion: (i)In WA.No.60 of 2022, the appellant is a secured creditor, who offered credit facilities to the Respondents 4 and 5, for which, mortgages were created in favour of appellant on 23.04.2013 vide document No.453 of 2013, on 18.08.2014 vide document No.2467 of 2014 and on 22.10.2015 vide document No.3168 of 2015. However, the Income Tax Department passed the order of attachment on 03.11.2015, for recov ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
