Income Tax Case

IN THE HIGH COURT OF JUDICATURE AT MADRAS CORAM THE HON'BLE MR.JUSTICE T.S.SIVAGNANAM W.P.No.25867 of 2017 Canara BankTeppakulam Branch26 Nandhikoil StreetTeppakulam, Trichy 620 002. Represented by its Chief Manager & authorized Officer ... Petitioner Vs. 1.The Recovery Officer, Office of the Tax Recovery Officer I Income-Tax Department – Range II 44 Williams Road, Cantonment, Trichy 620 001. 2.S.Ravi Shankar ... Respondents Prayer: Writ Petition filed under Article 226 of theConstitution of India, praying to issue a Writ of Mandamus,directing the 1st respondent to lift the order of attachment TRNo.966/TRO-1/2015-16 dated 20.11.2015 and attachment TRNo.965/2015-16 & 973-2016-17 dated 02.12.2016 pursuant to therepresentation of the petitioner dated 06.02.2017. For Petitioner : Mr.P.Raghunathanfor T.S.Gopalan & Co. For 1[st] Respondents : Mr.A.N.Jeya Pradhap Standing Counsel O R D E R The petitioner is Canara Bank a Nationalised Bankrepresented by its Chief Manager and Authorised Officer,Teppakulam Branch, Trichy, and in this writ petition they seekfor a direction upon the first respondent, the Recovery Officer,Income-Tax Department-Range–II, Trichy, to lift the order ofattachment dated 20.11.2015 and the attachment order dated02.12.2016. 2. The facts which are necessary for the disposal ofthe writ petition are as hereunder: The petitioner had advanced certain credit facilities toM/s.Rathna Stores Private Limited upto an aggregate limit ofRs.21,50,00,000/- which credit was secured by way of a guaranteeby the second respondent. The second respondent created amortgage by deposit of title deeds over his property at No.19,Madley Road, & Door No.8, New No.19, Thukkaram 3[rd] Street, T.Nagar, Chennai 600 017, in favour of the petitioner bank. Themortgage by deposit of title deeds was recorded by a memorandumand registered as Document No.2015 of 2010 dated 21.09.2010 inthe office of the Sub-Registrar, T.Nagar. It is stated thatsubsequentlythecreditfacilitywasenhancedtoRs.30,50,00,000/- and further mortgage by way of deposit oftitle deeds was recorded by way of a memorandum dated 06.01.2014registered as Document No.27 of 2014. 3. The borrower M/s.Rathna Stores Private Limiteddefaulted in repayment of the loan and the account of theCompany was classified as non-performing on 05.11.2014. On25.02.2015, the Authorized Officer of the petitioner bank issueda demand notice to the Company and two others including thesecond respondent/guarantor calling upon them to pay a totalamount of Rs.28,96,34,614.30/- due as on 25.02.2015 togetherwith interest within a period of ninety days. The Company aswell as the second respondent were informed that if theycommitted default in payment, the property which has beenmortgaged would be brought for sale in accordance with theprovisions of the Securitisation and Reconstruction of FinancialAssets and Enforcement of Security Interest Act (SARFAESI Act).The borrower as well as the second respondent guarantordefaulted to comply with the notice and therefore, theAuthorized Officer of the petitioner’s bank took symbolicpossession of the property and also caused publication of thepossession notice in English and Tamil News Papers having widecirculation in the area. Even thereafter, the borrower nor theguarantor complied with the directions and did not effect anypayment. The property was brought for sale on various dates,but, there were no bidders and the petitioner bank came to knowthat there were no bidders because M/s. Pothys Private Limitedwere in possession of the property and they secured an interimorder in W.P.No.15785 of 2016. According to the said order, thebank was directed to hand over physical possession of theproperty to the said Company and further directed the Company toredeliver physical possession to the bank upon sale of theproperty. Subsequently it appears that the petitioner bank cameto know that there were attachments made by the Income TaxDepartment over the said property. On verification, it was foundthat by order dated 20.11.2015, the first respondent attachedthe property and also registered the same on the file of theSub-Registrar, T.Nagar, as document No.42 of 2015. Similarly on 02.12.2016, the first respondent attached the property andattachment was registered as document No.18 of 2016. Thepetitioner would submit that they being secured creditors andthe mortgage having been created in their favour by registeredinstrument was of the year 2014 and the attachment of the IncomeTax Department all being subsequent to their mortgage, they havethe first charge of the property and they are entitled to bringthe property for sale. With these facts, the petitioners praysfor the aforementioned relief. 4. The revenue on the other hand would contend thatthe notice under Section 148 of the Income Tax Act was issuedbefore the date of mortgage and during the pendency of theassessment proceedings, the lending bank could have takenpossession only after the approval from the Income TaxDepartment as per proviso 2 of Section 281 (1) of the Income-TaxAct. Therefore the first respondent would term the mortgage asillegitimate and the action of the first respondent to proceedto collect the statutory dues through attachment and sale of theproperty is in order. 5. On the above facts, two questions arise forconsideration, namely, (i) whether the petitioner who is asecured creditor would have priority over the dues payable tothe Income Tax Department and (ii) whether on account of thenotice issued under Section 148 of the Income-Tax Act, whetherthe mortgage created in favour of the petitioner’s Bank couldhave been done only after obtaining approval from the Income TaxDepartment in terms of Section 281 (1) of Income Tax Act. 5. On the above facts, two questions arise forconsideration, namely, (i) whether the petitioner who is asecured creditor would have priority over the dues payable tothe Income Tax Department and (ii) whether on account of thenotice issued under Section 148 of the Income-Tax Act, whetherthe mortgage created in favour of the petitioner’s Bank couldhave been done only after obtaining approval from the Income TaxDepartment in terms of Section 281 (1) of Income Tax Act. 6. So far as the first question is concerned, theissue is no longer res integra and has been considered by thefull bench of this court in WP.Nos.6267 of 2006 and 253 of 2011dated 10.11.2016. Before the full bench, the question whicharose for consideration was whether the financial institution,which is a secured creditor or the Department of the Governmentconcerned, would have priority of charge over the mortgagedproperty in question with regard to the tax and other dues andas to the status and rights of a third party purchaser of themortgaged property in question. 7. The questions were answered by the full bench inthe following manner:- “The writ petitions have been listed before theFull Bench in pursuance to the reference order inW.P.No.6267 of 2006 and W.P.No.253 of 2011, in respectof the following issues:- https://hcservices.ecourts.gov.in/hcservices/ “a) AS to whether the FinancialInstitution, which is a secured creditor, orthe department of the government concerned,would have the 'Priority of Charge' over themortgaged property in question, with regardto the tax and other dues. b) AS to thestatus and the rights of a third partypurchaser of the mortgaged property inquestion.” 2. We are of the view that if there was at allany doubt, the same stands resolved by view of theEnforcement of Security Interest and Recovery ofDebts Laws and Miscellaneous Provisions (Amendment)Act, 2016, Section 41 of the same seeking tointroduce Section 31B in the Principal Act, whichreads as under:- “31B.Notwithstandinganythingcontained in any other law for the timebeing in force, the rights of securedcreditors to realise secured debts dueand payable to them by sale of assetsover which security interest is created,shall have priority and shall be paid inpriority over all other debts andGovernment dues including revenues,taxes, cesses and rates due to theCentral Government, State Government orlocal authority. Explanation:- For the purpose ofthis section, it is hereby clarified thaton or after the commencement of theInsolvency and Bankruptcy Code, 2016 incases where insolvency or bankruptcyproceedings are pending in respect ofsecured assets of the borrower, priorityto secured creditors in payment of debtshall be subject to the provisions ofthat Code.” 3. There is, thus, no doubt that the rights ofa secured creditor to realise secured debts due andpayable by sale of assets over which securityinterest is created, would have priority over alldebts and Government dues including revenues, taxes,cesses and rates due to the Central Government,State Government or Local Authority. This sectionintroduced in the Central Act is with“notwithstanding” clause and has come into forcefrom 01.09.2016. 4. The law having now come into force,naturally it would govern the rights of the partiesin respect of even a lis pending. 5. The aforesaid would, thus, answer question(a) in favour of the financial institution, which isa secured creditor having the benefit the mortgagedproperty. 6. In so far as question (b) is concerned, thesame is stated to relate only to auction sales,which may be carried out in pursuance to the rightsexercised by the secured creditor having a mortgageof the property. This aspect is also covered by theintroduction of Section 31B, as it includes “secureddebts due and payable to them by sale of assets overwhich security interest is created”. 4. The law having now come into force,naturally it would govern the rights of the partiesin respect of even a lis pending. 5. The aforesaid would, thus, answer question(a) in favour of the financial institution, which isa secured creditor having the benefit the mortgagedproperty. 6. In so far as question (b) is concerned, thesame is stated to relate only to auction sales,which may be carried out in pursuance to the rightsexercised by the secured creditor having a mortgageof the property. This aspect is also covered by theintroduction of Section 31B, as it includes “secureddebts due and payable to them by sale of assets overwhich security interest is created”. 7. We, thus, answer the aforesaid referenceaccordingly. 8. The matters be placed before the rosterDivision Bench for dealing with the individualcases.” 8. Thus, question No.(i) was answered in favour of thefinancial institution which is a secured creditor having thebenefit of the mortgaged property. Accordingly the questionframed above has to be answered in favour of the petitioner Bankand against the 1[st] respondent and accordingly it is held thatthe petitioner Bank is entitled to priority of charge over themortgaged property in question. 9. With regard to the question No.(ii) regarding theapplicability of Section 281 (1) of the Income Tax Actadmittedly the counter affidavit does not state that notice wasgiven by the Income Tax Department to the 1[st] respondent relatingto pendency of income tax proceedings or liability of any taxpayable by the 2[nd] respondent to the Income Tax Department. Insuch circumstances, would the proviso to Sub-section (1) ofSection 281 (1) of the Income Tax Act stand attracted. Thisquestion was considered by the Division Bench of the High Courtof Gujarat in the case of Tax Recovery Officer Vs. IndustrialFinance Corporation of India reported in (2012) 346 ITR Page 11.The question involved in the said writ petition was whether, inview of sub-section (2) of Section (1) Section 281 (1) of theIncome-Tax Act, the charge created against the property inquestion by mortgaging the property by the borrower in favour ofthe financial institution during pendency of any proceedingsunder the Income Tax Act is void as against any claim in respectof the tax and other sum payable by the assessee in favour of the revenue. This question was answered in the following terms:- “ 25.The petitioner-revenue, theTax Recovery Officer, has not disputed thefact that no notice of pendency of anyincome-tax proceeding was served on the 1[st]respondent-financial institution on or beforethe equitable mortgage made by the 2[nd]respondent-borrower Company in favour of the1[st] respondent-financial institution. It isnot the case of the petitioner-revenue thatno adequate consideration was made beforecreating the charge by equitable mortgage bythe 2[nd] respondent in favour of the 1[st]respondent-financial institution. 26....It was contended on behalf of thepetitioner-revenue that the 1[st] respondent-financial institution before allowing theloan in favour of the 2[nd] respondent-borrowerCompany must have noticed the Annual Reportsof the Company to find out the liability ofrepayment and thereby it is to be acceptedthat they have knowledge of liability ofpayment of tax dues by the 2[nd] respondent infavourt of the petitioner-revenue. However,such submission cannot be accepted as a factcannot be presumed that the 1[st] respondenthad the knowledge of income-tax liability ofthe 2[nd] respondent-borrower Company and/orpendency of any income-tax proceeding againstthe2[nd]respondent-borrowerCompany,particularly while executing the agreement,the Director on behalf of the 2[nd] respondenthad specifically mentioned in the agreementthat there was no income-tax dues and no suchproceeding was pending. As the fact cannot bepresumed, the aforesaid submission made onbehalf of the petitioner-revenue cannot beaccepted. 27. Under the proviso to sub-section (1) of Section 281, the charge ortransfer shall not be void if made-(i) foradequate consideration and without notice ofthe pendency of such proceedings, or (ii)without notice of tax or other sum payable bythe assessee. Thereis nothing on record to suggest that any notice was given by therevenue to the 1[st] respondent relating topendency of such income-tax proceeding orliability of any tax payable by the 2[nd]respondent assessee in favour of thepetitioner –revenue cannot take the plea thatthe 1[st] respondent had knowledge of thependency of the proceeding and thereby it isopen to the 1[st]respondent to deriveadvantage of clause (i) of the proviso tosub-section (1) of Section 281 of the Income-tax Act, 1961, so far as it relates to chargecreated by the 2[nd] respondent in favour ofthe 1[st]respondent-financial institutionequitable mortgage of the immovable propertyin question, as against any claim in respectof any tax or any other sum payable by theassessee as a result of completion of anyproceeding or otherwise by the petitioner-revenue.”10. The Division Bench of the High Court of Gujarat alsoreferred to two other decisions of the High Court of MadhyaPradesh arising under the General Sales Tax Act of MadhyaPradesh in the case of State of Madhyapradesh Vs. Abhaykumar,reported in (1992) 86 STC 88 and Pooranchand Ved Prakash Vs. TheState of Maddhyapradesh, reported in (1973) 31 STC 170, wherein,it was held that transfer of property which was for a valuableconsideration and which was without notice of the pendency ofthe proceedings under the Sales-tax Act and therefore, thetransfer falls under the exception created by the proviso toSection 33-A of the Madhyapradesh General Sales Tax Act, 1958.Thus, by applying the law laid down in the above mentioneddocuments question No.(ii) has to be answered in favour of thepetitioner bank and against the respondents. 11. Thus for all the above reasons, the Writ Petitionis allowed and the attachment shall stand lifted and the 1[st]respondent shall intimate the Sub-Registrar, T. Nagar to deletethe entries in the books maintained by him within a period ofthree weeks from the date of receipt of a copy of this order. Nocosts. Sd/-Assistant Registrar(CS III) //True copy// sji/cse Sub Assistant Registrar https://hcservices.ecourts.gov.in/hcservices/ To The Recovery Officer,Office of the Tax Recovery Officer I Income-Tax Department – Range II44 Williams Road,Cantonment, Trichy 620 001. +1cc to Mr.A.P.Srinivas, Advocate SR.No.6392+1cc to Mr.T.S.Gopalan @ Co, Advocate SR.No.6041 W.P.No.25867 of 2017GP(CO)GN(21/02/2018)