Wa/3015/2013 Of Commissioner Of Income Tax v. Karnataka State Industrial Investment Development

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURUDATED THIS THE 10[th]DAY OF JUNE, 2015. PRESENT THE HON’BLE MR. JUSTICE MOHAN M. SHANTANAGOUDAR. AND| THE HON’BLE MR. JUSTICE ARAVIND KUMAR ,Writ Appeal No.3015/2013 (1IT) BEIWEEN: 1)Commissioner of Income Tax.C.R. Building, |N.G.Road, AttavaraMangalore-575001C.R. Building, |N.G.Road, AttavaraMangalore-575001 2.Tax Recovery OfficerMangalore Range.C.R. Building.N.G. Road, Attavara Mangalore-575001Mangalore Range.C.R. Building.N.G. Road, Attavara Mangalore-575001 (By Sri Jeevan J. Neeralagi, Adv.,). AND * Karnataka State Industrial Investment | Development Corporation Ltd., .. Appellants| ? Regd. Office at No.49, ‘Khanija Bhavan’<[tn]Floor, East Wing, Race Course RoadBangalore-560001Represented by its Asst. General Manager|Sri B. Rajendra. ..Respondent (By Smt. Jinita Chaterjee, Adv., forSri S. Parthasarathi, Adv.,) This Writ Appeal is filed under Section 4 of theKarnataka High Court Act praying to set aside the order|passedIntheWrit PetitionNo.46/786/2012dated|13.03.7201 3 This Writ Appeal coming up for hearing, this day,MOHAN|SHANTANAGOUDARwaydelivered|thefollowing. — JUDGMENT The respondent is a State owned Corporation. It is a.financial institution governed by the State’ FinancialCorporations Act, 1951. The respondent sanctioned a. term loan to M/s Veekay Developers Private Limited|(Veekay Developers’ for snort) to establish a luxury hotel|at Sy.No.32-2A, Bangra Kulur village, Mangalore city on. 13.9.1995. However, the said term loan was transferredto V.K. Clubs and Homes Private Limited (‘V.K. Clubs’ for.short) on 26.3.1997. The borrower created an equitable|mortgage in favour of the respondent by deposit of title|deeds on 28.4.1998. The title deeds of the properties so.mortgaged are relating to portions of the land and buildings|measuring about 4,390 square feet on the ground floor,|2100 square feet on the first floor, 3,515 square feet and.1020 square feet on the third floor and about 18,435)Square feet on the 4[tn]5[tn]and 6[tn]floors of the commercial.building, together with common facilities thereof. By way|of furtner security, the said borrower created equitable.mortgage over free hold right in three shops measuring 325|Square feet, 115 square feet and 535 square feetrespectively in the building on the land mentioned supra. As aforementioned, the loan was sanctioned on13.9.1995. The notice came to be issued under Section) 143(2) of the Income Tax Act, 1961 (‘the Act’ for short) on12.9.1995 to M/s Veekay Developers in respect of|assessment year 1994-95 by the Assessing Officer.|Subsequently, the Tax Recovery Officer, Mangalore Range.passed an order dated 5.12.2000 attaching the immovable|properties including the properties mortgaged by Veekay|Developers and V.K. Clubs to the respondent invoking Rule|48 of Second Scnedule to tne Act to recover tax dues of.Rs.80,03,2/76/- from Sri Vivian Kamath D'Souza, M/sVeekay Developers, M/s Shalimar Constructions and M/s.Canara Buliders. Tne order of attacnment of immovable|properties was issued on 5.12.2000. #£=‘JThne said orderattachment of properties was called in question before this.Court in Writ Petition No.46786/2012 by the respondentnerein, whicn came to be allowed on 13.3.2013 andconsequently the order attaching the immovable properties was quashed. The Revenue nas questioned the order 5 of the learned Single Judge passed in Writ PetitionNo.46786/2012 by filing this intra Court writ appeal. 2. Heard Sri Jeevan J. Neeralagi, learned advocateappearing on behalf of the appellants and Smt. Jinita.Chaterjee, learned advocate appearing on benalf of the.respondent. was quashed. The Revenue nas questioned the order 5 of the learned Single Judge passed in Writ PetitionNo.46786/2012 by filing this intra Court writ appeal. 2. Heard Sri Jeevan J. Neeralagi, learned advocateappearing on behalf of the appellants and Smt. Jinita.Chaterjee, learned advocate appearing on benalf of the.respondent. 3. We do not find any ground to interfere in theimpugned order. Section 281 of the Act declares certain|transfers to be void. Section 281 of the Act states that§swhere, during the pendency of any proceeding under the.Act or after the completion thereof, but before the serviceof notice under rule 2 of Second Schedule, any assesseecreates 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 shall be void asagainst any claim in respect of any tax or any other sum. payable by the assessee as a result of the completion of the|Said proceeding. Based on the wordings of Section 281 ofthe Act, Sri Neeralagi, learned advocate appearing on.behalf of the appellant submits that the transfer by way of|mortgage in favour of the respondent - Corporation by|Veekay Developers is void|abInItIOand tnerefore tne.respondent - Corporation has no locus standi to question|the order of attachment. 4. The above submission cannot be accepted havingregard to the proviso to Section 281 of the Act. Section|281 of the Act will Nave to be read in its entirety andhomogeneously. On reading the said provision, it is clear|that Section 281 of the Act lays down that charge or.transfer of property during the pendency of the Income Taxproceedings shall be void. However under the proviso tosub-section (1) of Section 281 of the Act, charge or transferShall not be void if it is made - (a) for adequate consideration and without notice of the pendency of such.proceeding or (b) without notice of tax or other sum)payable by the assessee. | 5. In the matter on hand, there cannot be anydispute tnat the transfer was for adequate consideration.The records reveal that the term loan obtained by Veekay.Developers and subsequently transferred to V.K. Clubs is to the tune of Rs.211.00 lakns. Whereas tne notice under|Section 143(2) of the Act by the Income Tax Department is_for recovery of Rs.80,03,3/76/-. Hence it is clear that thetransfer was for adequate consideration. It is also clear.from the records that, while the transfer by way of.mortgage is effected, there was no notice of pendency|issued to transferee, of the proceedings initiated by the)department. As aforementioned, the notice was issued to.the assessee py the Assessing Officer one day prior to.sanctioning of the loan. The notice was issued on| 8 12.9.1995, whereas the loan was sanctioned by _ threspondent - Corporation to V.K. Developers on 13.9.1995.Therefore it is clear that the transfer by way of mortgagewas also without notice of pendency of the assessment.proceedings. In view of the same, the transfer cannot be)neid to be void. For the aforementioned finding, we are)Supported by the judgment of Gujarath High Court in the.case of TAX RECOVERY OFFICER .vs. INDUSTRIAL FINANCE|CORPORATION OF INDIA AND ANOTHER reported in.(2012)346 ITR 11 (Guj). | In yet another judgment in the case of TAX RECOVERYOFFICER .vs. GANGADHAR VISWANATH RANADE reportedin (1998) 234 ITR 188 (SC), the Apex Court has observed|that Section 281 will have to be read homogeneously with.the Rule 11(1) of Second Schedule to Act. The Apex Courtin the said judgment has observed thus: | In yet another judgment in the case of TAX RECOVERYOFFICER .vs. GANGADHAR VISWANATH RANADE reportedin (1998) 234 ITR 188 (SC), the Apex Court has observed|that Section 281 will have to be read homogeneously with.the Rule 11(1) of Second Schedule to Act. The Apex Courtin the said judgment has observed thus: | In the present case, the Tax RecoveryOfficer could not have examined whether the|transfer was void under section 281 of the!Income-tax Act. His adjudication of the transfer|as void under section 281 is without jurisdiction.The Tax Recovery Officer has relied upon theearlier order of the Income-tax Officer dated May9, 1974, declaring that the transaction is void|Under section 281 of the Income-tax Act. In the.earlier proceedings, however, although the High.Court has not set aside this order of the Income-tax Officer, the High Court has expressly held|that the order amounted only to an intention or.declaration on the part of the Department totreat the transaction as void under Section 281.Such a declaration cannot affect the legal rights|of the parties affected under rule 11. The High|Court expressly held that the rights of theparties under rule 11 were not affected in any)way by this. declaration. The Department,|therefore, cannot proceed on the assumption.that the transaction is void under section 281,NOT|Caf)theTaxRecovery.Officer,while|proceeding under rule 11, declare a transaction. 10| of transfer as void under section 281 by relyingon the order of May 9, 1974, or otherwise. His—jurisdiction relates to examining possession, and.only incidentally, any question of right to|possession as claimed by the objector. The High.Court has, therefore, rightly set aside the orderof the Tax Recovery Officer. However, the right of the Department tohave the transfer declared as void under section.281 of the Income-tax Act, as it stood at therelevant time, is not thereby taken away. We,are informed that the property continues to be.under attachment by virtue of interim orders|passed in this appeal. The Department may, if it)so desires, take appropriate proceedings in|accordance with law for having the _ transfedeclared as void under section 281 of the!Income-tax Act. Be that as it may, as aforementioned, on facts, it is.clear|that|thetransferby Way|ofmortgagebyV.K.Developers in favour of the respondent —- Corporation was for adequate consideration and was without notice ofpendency of the assessment proceedings. Hence the same.cannot be declared as void. In view of the same, the|learned Single Judge has rightly set aside the order passedby the Tax Recovery Officer attaching the immovable)properties for the purpose of sale. 6. Undisputedly, the respondent is a secured creditor. —Hence it is needles to observe that even the Crown dept|could be discharged only after the debt of secured creditors|stand discharged. In that regard, consciously the)concerned Tax Recovery Officer by his letter dated2/.1.2006 has clearly stated that the respondent —Corporation can proceed for sale of the properties involved.as the respondent - Corporation has first charge over the.properties and to treat the Income Tax Department as)second mortgagor. It is also clearly stated in the said letterthat after appropriation of sale proceeds towards dues of, the respondent - Corporation, surplus, if any has to be.handed over to Tax Recovery Officer, Range-2, Mangalore|for appropriation of Income Tax dues. In view of the same,no interference is called for. | Appeal fails and the same standsdismissed Sd/-JUDGE Sd/-.JUDGE Gss/-