State Bank Of India,Rep., By Its Chief Managerracpc, Omr,New v. The Tax Recovery Officer, Income Tax Department, Tro-1, Coimbatore

THE HONOURABLE MR.JUSTICE S.M. SUBRAMANIAM State Bank of India,Rep., by its Chief ManagerRACPC, OMR,New No.4/952, 4/952A, III Floor,Rajiv Gandhi Salai, Perungudi,Chennai-96... Petitioner -vs- 1.The Tax Recovery Officer, Income Tax Department, TRO-1, Coimbatore. 2.The Sub Registrar, Selaiyur, Kanchipuram District. 3.The Sub Registrar, Joint-I, South Chennai, Saidapet, Chennai-15. 4.Mr.V.Balasubramaniam, 5.Mrs.J.Swetha.. Respondents Petition filed under Article 226 of the Constitution ofIndia praying for issuance of Writ of Mandamus directing thefirst respondent to remove the attachment registered as DocNos.8 & 9/2017 on the file of the second respondent and documentNo.13/2017 on the file of the third respondent in respect of theproperty situate at Plot No.A1, Peurmal Koil Street,Arasangkazhanai Village, Sholinganallur Taluk, KancheepuramDistrict comprised in Survey No.25, measuring an extent of1263.28 sq.ft belonging to the 5[th] respondent and Plot No.3B,Phase-I, Nagalakshmi Nagar, Endee Villa, Ottiyambakkam MainRoad, Sithalapakkam, Chennai-126, forming Sithalapakkam Village,Sholinganallur Taluk, Kancheepuram District comprised inO.S.No.39/1, R.S.Nos.39/3A, 39/C, 39/4A, 39/4D, 39/4J, presentSurvey No.39/4A2, land measuring an extent of 861 sq.ft and building measuring an extent of 2300 sq.ft belonging to the 5[th]respondent with the office of second respondent and Plot No.H 49B, Kalashetra Colony, Besant Nagar, Chennai-90, comprised inSurvey No.171, forming part of Thiruvanmiyur Village, VelacheryTaluk, Chennai District, measuring an extent of 1593 sq.ftbelonging to the fourth respondent with the office of thirdrespondent so as to enable the petitioner bank to register thesale certificate issued under SARFAESI Act in favour ofsuccessful bidder. The relief sought for in the present writ petition is todirect the first respondent-Tax Recovery Officer, Income TaxDepartment to remove the attachment registered as DocumentNos.8/2017 and 9/2017 on the file of the second respondent andDocument No.13/2017 on the file of the third respondent inrespect of the property situated at Plot No.A1, Peurmal KoilStreet,ArasangkazhanaiVillage,SholinganallurTaluk,Kancheepuram District comprised in Survey No.25, measuring anextent of 1263.28 sq.ft belonging to the 5[th] respondent and PlotNo.3B, Phase-I, Nagalakshmi Nagar, Endee Villa, OttiyambakkamMain Road, Sithalapakkam, Chennai-126, forming SithalapakkamVillage, Sholinganallur Taluk, Kancheepuram District comprisedin O.S.Nos.39/1, R.S.Nos.39/3A, 39/C, 39/4A, 39/4D, 39/4J,present Survey No.39/4A2, land measuring an extent of 861 sq.ftand building measuring an extent of 2300 sq.ft belonging to the5[th] respondent with the office of second respondent and Plot No.H49 B, Kalashetra Colony, Besant Nagar, Chennai-90, comprised inSurvey No.171, forming part of Thiruvanmiyur Village, VelacheryTaluk, Chennai District, measuring an extent of 1593 sq.ftbelonging to the fourth respondent with the office of thirdrespondent so as to enable the petitioner bank to register thesale certificate issued under SARFAESI Act in favour ofsuccessful bidder. 2.The petitioner is State Bank of India. The petitionerstates that the subject properties, which were mortgaged withthe petitioner-Bank by way of raising loan by the fourth andfifth respondents, were attached in an illegal manner by thefirst respondent. In view of the said attachment, thepetitioner-Bank is unable to deal with the said properties with reference to the terms and conditions stipulated in the Deed ofMortgage. Thus, they are constrained to move the present writpetition. 3.The facts regarding the mortgage of the properties infavour of the Bank and their capacity as a secured creditor arenot disputed by the first respondent. 2.The petitioner is State Bank of India. The petitionerstates that the subject properties, which were mortgaged withthe petitioner-Bank by way of raising loan by the fourth andfifth respondents, were attached in an illegal manner by thefirst respondent. In view of the said attachment, thepetitioner-Bank is unable to deal with the said properties with reference to the terms and conditions stipulated in the Deed ofMortgage. Thus, they are constrained to move the present writpetition. 3.The facts regarding the mortgage of the properties infavour of the Bank and their capacity as a secured creditor arenot disputed by the first respondent. 4.The learned counsel for the petitioner reiterated thatthe petitioner-Bank holds the first charge over the propertiesin view of Section 26E of the Securitisation and Reconstructionof Financial Assets and Enforcement of Security Interest Act,2002 (hereinafter referred to as “the SARFAESI Act” ) andSection 31B of the Recovery of Debts and Bankruptcy Act, 1993(hereinafter referred to as “the 1993 Act”). Thus, the firstrespondent has no authority to attach the subject properties,which is violation of the provisions of SARFAESI Act andtherefore, the direction as such sought for is to be granted. 5.To substantiate the contentions, the learned counsel forthe petitioner relied on Section 26E of the SARFAESI Act, whichenumerates that “notwithstanding anything contained in any otherlaw for the time being in force, after the registration ofsecurity interest, the dates due to any security creditor shallbe paid in priority overall other debts and all revenues, taxesand cesses and other rates payable to the Central Government orState Government or local authority”. Section 31B of the 1993Act also provides “priority to secured creditors”. 6.In the present case, the petitioner-Bank is admittedlythe secured creditor and the subject properties are admittedlymortgaged and the original title deeds are deposited by theborrowers with the petitioner-Bank. Thus, the first respondenthas no authority to override the provisions of the SARFAESI Actand the 1993 Act and thus, the attachment made by the firstrespondent in respect of the subject properties is to be raised. 7.In reliance, the learned counsel referred to the judgmentof the Hon'ble Supreme Court of India in the case of BombayStock Exchange vs. Kandalgaonkar & Ors., reported in (2015) 2SCC 1 wherein, the following observations are made:- "39.The first thing to be noticed is thatthe Income Tax Act does not provide for anyparamountcy of dues by way of income tax. Thisis why the Court in Dena Bank vs. BhikhabhaiPrabhudas Parekh and Co., (2000) 5 SCC 694 heldthat Government dues only have priority overunsecured debts and in so holding the Courtreferred to a judgment in Giles vs. Grover(1832) 9 Bing 128 in which it has been held thatCrown has no precedence over a pledge of goods. .........." 8.Further, the learned counsel relied on the orders passedby this Court in M/s.Well Stores (Madras) Private Limited & Ors.Vs. Tax Recovery Officer, Chennai & Ors. [W.P.Nos.40656 of 2015etc., batch dated 18.07.2017] wherein, the followingobservations are made:-“6.Therefore the petitioner being thesuccessor would step into the shoes of thefinancing Bank, which admittedly, is a securedcreditor. Further more, the document has beenvalid by stamped for the purpose of stamp dutyas assignment deed as could be seen from theendorsement in the reverse of page No.1 of theAssignment agreement dated 07.02.2017. Thus, inthe light of the decision of the Full Bench,taking note of the Amendment Act, 2016, theorder of attachment made by the Income TaxDepartment should yield to rights of thepetitioner, secured creditor. Therefore, theyare required to be set aside.” 9.Relying on the judgments, the learned counsel for thepetitioner reiterated that the Bank holds the first charge overthe subject properties and when the properties in question weremortgaged as per the terms and conditions, the petitioner mustbe allowed to deal with the properties and the attachment madeillegally by the first respondent is to be raised. 10.The learned counsel for the petitioner has furtherstated that the order of attachment passed by the firstrespondent on 23.05.2017 is after the mortgage and the depositof title documents with the petitioner-Bank by the fourth andfifth respondents on 27.01.2016 and 06.02.2016 respectively.When the mortgage was executed prior to the passing of the orderof attachment by the first respondent on 23.05.2017, then thepetitioner-Bank holds the first charge over the properties.Thus, the subsequent order passed by the first respondent isinvalid in the eye of law. 11.The learned Senior Standing Counsel appearing on behalfof the first respondent-Income Tax Department strenuouslyobjected the contentions raised on behalf of the petitioner bystating that admittedly the subject properties were mortgaged infavour of the petitioner-Bank and the Bank is the securedcreditor. There is no much dispute with reference to the factspleaded by the petitioner-Bank. However, the legality of themortgage is to be gone into with reference to the provisions ofthe Income Tax Act, 1961 (hereinafter referred to as “the ITAct”) as well as the SARFAESI Act. https://hcservices.ecourts.gov.in/hcservices/ 12.It is contended that the demands of the assessees, i.e.,M/s.Beetle Experts and M/s.Ultimate Solutions, in whichShri.V.Balasubramaniam and Smt.J.Swetha are the partners, wereinitially raised by the Income Tax Department on 31.05.2015,that is, prior to the date of creation of mortgage by thepetitioner-Bank on 27.01.2016 and 06.02.2016 and therefore, themortgage is void as per Section 281 of the IT Act. 13.Elaborating the said contentions, the learned SeniorStanding Counsel for the first respondent states that thedemands outstanding were relating to the income tax assessmentyears 2012-13 and 2013-14 and the earliest demand notice wasissued on 31.03.2015. In spite of the repeated reminders, theassessees failed to remit the dues and subsequently, the subjectproperties were attached on 23.05.2017. Therefore, theDepartment has first charge over the properties of the assesseesand its partners with effect from 31.03.2015 onwards.Consequently, the properties were attached by the firstrespondent on 23.05.2017 and even at that point of time, theIncome Tax Office was not aware of the fact that the scheduledproperties are under mortgage with the petitioner-Bank. It isstated that there had been no board displayed by the Bank at thesubject properties stating that the same are under attachment.The fact regarding mortgage came to the notice of the Income TaxDepartment only through the present writ petition filed by thepetitioner-Bank. The Income Tax Department is empowered toattach the properties in the interest of revenue, even thoughthe properties are attached by the other agencies. 14.The learned Senior Standing Counsel mainly contendedthat Section 281 of the Act provides about "certain transfers tobe void". However, the charge of the Income Tax Department,over the immovable properties attached, precedes the charge ofthe Bank and the claim of precedent by the Bank is no basis.Overriding powers in terms of Section 35 of the SARFAESI Actapplies to the Bank only, if it has precedent of the charge onthe properties of its clients. In the case on hand, it is theIncome Tax Department, which holds the first charge, as theinitial demand was made prior to the subject properties weremortgaged and the mortgage to the Bank is void as per the IT Act. 14.The learned Senior Standing Counsel mainly contendedthat Section 281 of the Act provides about "certain transfers tobe void". However, the charge of the Income Tax Department,over the immovable properties attached, precedes the charge ofthe Bank and the claim of precedent by the Bank is no basis.Overriding powers in terms of Section 35 of the SARFAESI Actapplies to the Bank only, if it has precedent of the charge onthe properties of its clients. In the case on hand, it is theIncome Tax Department, which holds the first charge, as theinitial demand was made prior to the subject properties weremortgaged and the mortgage to the Bank is void as per the IT Act. 15.At the outset, it is contended that the initial demandwas raised by the Department on 31.03.2015, whereas theproperties are mortgaged with the Bank only on 27.01.2016 and06.02.2016 and hence, the Income Tax Department do not havecharge much less first charge over the assets of its partners. 16.Lets us now consider the provisions of Section 281(1) ofthe IT Act, which contemplates that where, during the pendencyof any proceeding under the IT Act or after the completion https://hcservices.ecourts.gov.in/hcservices/ thereof, but before the service of notice under Rule 2 of theSecond Schedule, any assessee creates a charge on, or parts withthe possession (by way of sale, mortgage, gift, exchange or another mode of transfer whatsoever) of, any of his assets infavour of any other person, such charge or transfer shall bevoid as against any claim in respect of any tax or any other sumpayable by the assessee as a result of the completion of thesaid proceeding or otherwise. 17.The question arises whether the present facts pleaded inthe writ petition would fall under the definition of “certaintransfers to be void” or not. In this contest, it is relevantto consider Rule 2 of II Schedule of the IT Act. The said Rulereads as “when a certificate has been drawn up by the TaxRecovery Officer for the recovery of arrears under the SecondSchedule, the Tax Recovery Officer shall cause to be served uponthe defaulter a notice requiring the defaulter to pay the amountspecified in the certificate within fifteen days from the dateof service of the notice and intimating that in default stepswould be taken to realise the amount under the Second Schedule”.Therefore, even before the service of notice under Rule 2, whichcontemplates that when a certificate has been drawn up by theTax Recovery Officer for the recovery of arrears and during thependency of any proceedings under the IT Act, if certaintransfers as denoted in Section 281 are executed, then all suchtransfers are declared as void under the said provision. Theprovision contemplates that the transfers by way of sale,mortgage, gift, exchange or any other mode of transferwhatsoever shall be void as against any claim in respect of anytax or any other sum payable by the assessee. 18.Section 26E of the SARFAESI Act contemplates priority tosecured creditors. Section 31B of the 1993 Act reads parimateria with Section 26E of the SARFAESI Act. Admittedly, thepetitioner-Bank is the secured creditor in the present case.Thus, under the SARFAESI Act, the petitioner-Bank gains priorityover the revenue tax payable to the Central Government or theState Government. As per the above provision, the petitioner-Bank holds the first charge in respect of the propertiesmortgaged. What is relevant in the present case is that thequestion of understanding the priority to secured creditor underSection 26E of the SARFAESI Act would arise only if the mortgageis in existence or valid in the eye of law. 18.Section 26E of the SARFAESI Act contemplates priority tosecured creditors. Section 31B of the 1993 Act reads parimateria with Section 26E of the SARFAESI Act. Admittedly, thepetitioner-Bank is the secured creditor in the present case.Thus, under the SARFAESI Act, the petitioner-Bank gains priorityover the revenue tax payable to the Central Government or theState Government. As per the above provision, the petitioner-Bank holds the first charge in respect of the propertiesmortgaged. What is relevant in the present case is that thequestion of understanding the priority to secured creditor underSection 26E of the SARFAESI Act would arise only if the mortgageis in existence or valid in the eye of law. 19.Contrarily, Section 281 of the IT Act unambiguouslystipulates that during the pendency of any proceedings under theIT Act, if certain transfers are made, such transfers are voidas against any claim in respect of any tax or other sum payableby the assessee. In this context, it is made clear that as faras the demands outstanding in respect of respondents 4 and 5 areconcerned, they are relating to the income tax assessment years https://hcservices.ecourts.gov.in/hcservices/ 2012-13 and 2013-14 and the earliest demand notice was issued bythe Income Tax Department on 31.03.2015. Thereafter, repeatedreminders were sent to the assessees and the assessees failed toremit dues and thereafter, the subject properties were attachedon 23.05.2017. Thus, the Income Tax Department claims firstcharge over the properties of the assessees and its partnerswith effect from 31.03.2015, the date on which the earliestdemand notice was issued. https://hcservices.ecourts.gov.in/hcservices/ 2012-13 and 2013-14 and the earliest demand notice was issued bythe Income Tax Department on 31.03.2015. Thereafter, repeatedreminders were sent to the assessees and the assessees failed toremit dues and thereafter, the subject properties were attachedon 23.05.2017. Thus, the Income Tax Department claims firstcharge over the properties of the assessees and its partnerswith effect from 31.03.2015, the date on which the earliestdemand notice was issued. 20.However, the learned counsel appearing on behalf of thepetitioner contended that the properties were purchased from andout of the housing loan sanctioned in favour of theassessees/fourth and fifth respondents in the present case andtherefore, subject properties itself were purchased from and outof the loan raised from the petitioner-Bank. In this regard, itis relevant to consider the factual details provided in thenotices under Section 13(2) of the SARFAESI Act issued torespondents 4 and 5 dated 11.11.2016 and 08.12.2016 respectivelyand the notice dated 11.11.2016 contains the details of securitydocuments including all supplementary documents and documentsevidencing creation of mortgage. The notice dated 08.12.2006would reveal the facts regarding the second property. Schedule-B provides details of application and regulation. Perusal of theabove details would reveal that housing loan application formsfor individuals were issued on 09.10.2015 and 14.09.2015;however, Deeds of Undertaking of Mortgage were made on26.10.2015 and 21.09.2015; minimum deposit was executed on27.01.2016 and 06.02.2016; and the confirmation letters wereissued on 28.01.2016 and 07.02.2016. Thus, it is clearthat all the dates relatable to the mortgage fall after theissuance of the earliest demand notice by the Income TaxDepartment on 31.03.2015. Undoubtedly, the properties werepurchased after receipt of demand notice dated 31.03.2015 by theIncome Tax Department. However, Section 281 of the IT Act is tobe interpreted that where during the pendency of any proceedingsunder the IT Act, if at all the properties purchased or ownedeven prior to the proceedings, the properties are subject to bedealt with in accordance with Section 281 of the IT Act and ifany of such properties were transferred, then the Income TaxAuthorities are competent to invoke Section 281 of the IT Act,holding that such transfers are void. However, in the presentcase, the housing loan applications itself were issued on09.10.2015 and on 14.09.2015 after the issuance of the earliestdemand notice by the Income Tax Department on 31.03.2015. Thus,respondents 4 and 5, the partners of M/s.Beetle Experts andM/s.Ultimate Solutions were aware of the fact that they have toclear the dues to the Income Tax Department. In spite of thefact that they are aware of the dues, they have mortgaged theproperties in favour of the petitioner-Bank. 21.The learned counsel for the petitioner made a submissionthat the registration was done before the Sub Registrar on22.09.2015 and the attachment of immovable properties was doneby the Income Tax Department on 23.05.2017. Thus, even beforeissuing the attachment order by the Income Tax Department, themortgage was in existence and therefore, the petitioner-Bankholds the first charge over the subject properties.Undoubtedly, the deposit of title deeds was made on 22.09.2015.However, before such date, the income tax proceedings werepending under the provisions of the IT Act against the assesseesconcerned. 22.Section 281 of the IT Act stipulates that if anymortgage or transfer is made in any manner, then all suchtransfers, mortgage, gift, etc., became void and therefore, suchmortgage, gift or transfer is non-existence in law. In suchcircumstances, the question of priority would not arise at all. 22.Section 281 of the IT Act stipulates that if anymortgage or transfer is made in any manner, then all suchtransfers, mortgage, gift, etc., became void and therefore, suchmortgage, gift or transfer is non-existence in law. In suchcircumstances, the question of priority would not arise at all. 23.The concept of priority would arise, if there are morethan one claim between two or more transfers, who all areholding valid right in respect of the subject property. If morethan two persons are having right over the property and suchmore than two or more persons are claiming the benefits from andout of the subject property, then only the question of prioritywould arise. If the priority question arises, then as perSection 26E of the SARFAESI Act, the first charge must be to thesecured creditor/Bank. Thus, the priority to secured creditorsis not disputed and such priority would arise only if rightsregarding the subject property are established by more than twopersons. 24.Section 26E of the SARFAESI Act is not connected withthe declaration contemplated under Section 281 of the IT Act.Therefore, the said provisions cannot be construed as repugnantand in fact, the scope of Section 281 of the IT Act isabsolutely unconnected with the priority contemplated underSection 26E of the SARFAESI Act. However, Section 26E of theSARFAESI Act provides that when the rights are claimed by morethan two persons in respect of any property, then the prioritywould lie on the secured creditor, in the present case, thepetitioner/Bank. Thus, the provisions are independent anddifferent. The scope of these two provisions are to bedistinguished, more specifically, with reference to the factsand circumstances of each case. It is not as if the SARFAESIAct will prevail over the IT Act or the IT Act will prevail overthe SARFAESI Act, it is a question with reference to the factualmatrix established before the Court of law, which would throwlight in respect of the decision to be taken. 25.When it is established that the earliest demand notice under the IT Act with reference to the assessment years 2012-13and 2013-14 was issued by the Income Tax Authorities on31.03.2015 prior to the mortgage executed in favour of thepetitioner-Bank on 27.01.2016 and 06.02.2016, the provisions ofSection 281 of the IT Act would be applicable and the questionof priority would not arise, in view of the fact that once theprovision of Section 281 of the IT Act is applied, then the saidtransfer become void ab initio and the mortgage or transfer madethereafter is consequently void. Such transfers are to beconstrued as fraudulent transfers or mortgage and therefore, themortgage in favour of the petitioner-Bank cannot be held asvalid in the eye of law and since it is held as invalid, thequestion of invoking Section 26E of the SARFAESI Act would notarise at all. 26.In the case of Abdul Jamil and Others vs. Secretary,Income Tax Department and Others [Second Appeal No. 1294 of1984, dated 26.03.1998], the scope of Section 281 of the IT Actwas considered by this Court and it was held as follows:-“In considering s. 281 of the said Act, the said provision is declaratory in nature. Itdeclares that the transfers effected by anyassessee with intent to defraud the Revenueduring the pendency of any proceedings under theAct shall be void against any claim in respectof any tax or any sum payable by the assessee asa result of the completion of the saidproceedings ". Therefore, the three requirements under thesection are :(i) that there must be a transfer of theproperty;(ii) that it should be during the pendency of aproceeding under the Act; and (iii) that the transfer must be with intent todefraud the Revenue said provision is declaratory in nature. Itdeclares that the transfers effected by anyassessee with intent to defraud the Revenueduring the pendency of any proceedings under theAct shall be void against any claim in respectof any tax or any sum payable by the assessee asa result of the completion of the saidproceedings ". Therefore, the three requirements under thesection are :(i) that there must be a transfer of theproperty;(ii) that it should be during the pendency of aproceeding under the Act; and (iii) that the transfer must be with intent todefraud the Revenue and if these conditions are satisfied, then thetransfer shall be void in respect of any tax orsum payable by the assessee as a result of thecompletion of the proceedings during thependency of which the transfer was effected. Theeffect of the section is that, if such transferwith intent to defraud the Revenue has been madeand any claim for tax arises after completion ofthe proceedings during the pendency of which thetransfer took place, such tax or other sum canbe recovered by proceeding against the propertynotwithstanding the said transfer.” 27.In view of the facts and circumstances that the earliest demand notice at the first instance issued by the Income taxDepartment on 31.03.2015 is not disputed, it is to be construedthat the proceedings under the IT Act for recovery of tax dueswere pending on the date, i.e., 31.03.2015 and therefore, anytransfer made thereafter is hit by the provision of Section 281of the IT Act and all such transfers are void and therefore, thesubsequent mortgage became consequently invalid in the eye oflaw and therefore, the application of SARFAESI Act would notarise at all. Further, the scope of Section 26E of the SARFAESIAct is relatabe to the priority and the priority would ariseonly if more than one person could able to establish the rightover the property and in the present case, when there is noright to mortgage was vested with the assessees, the question ofpriority would not arise at all. Once the proceedings areinitiated, Section 281 of the IT Act provides power to theIncome Tax Authorities to attach the property and further, theassessee ceases to exercise the power of right regardingtransfer of such properties, once the notice is issued. Whenthe assessee has no right to mortgage the property purchased,then the Bank cannot accrue any right to deal with the mortgagedproperty or to claim priority based on the provision of Section26E of the SARFAESI Act. 28.These being the principles to be followed, thepetitioner could not able to establish any right to deal withthe property and even in such cases where such right areclaimed, the persons aggrieved has to approach the Income TaxAuthorities under Schedule 2 Rule 11 of the IT Act and in thepresent case, the question does not arise as the transfer itselfbecame void. 29.Accordingly, the writ petition fails and standsdismissed. Though the demand notice was issued to thepartnership firm, subject properties were purchased in the nameof the partners, in respect of the tax dues, the partners aswell as the company are individually and jointly liable as perthe provisions of the Act. No costs. Consequently, connectedmiscellaneous petitions are closed. Abr Sub Assistant Registrar https://hcservices.ecourts.gov.in/hcservices/ To 1.The Tax Recovery Officer, Income Tax Department, TRO-1, Coimbatore. Income Tax Department, TRO-1, Coimbatore. 2.The Sub Registrar, Selaiyur, Kanchipuram District. Selaiyur, Kanchipuram District. 3.The Sub Registrar, Joint-I, South Chennai, Saidapet, Chennai-15. +1cc to Mr.A.P.Srinivas, Advocate, S.R.No. 25639 W.P.No.5857 of 2018RP(CO)GN(06/07/2021)