Madras High Court
State Bank Of India vs The Tax Recovery Officer on 27 April, 2021
W.P.No.5857 of 2018
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 27.04.2021
CORAM
THE HONOURABLE MR.JUSTICE S.M. SUBRAMANIAM
W.P.No.5857 of 2018
and W.M.P.Nos.7195 to 7197 of 2018
State Bank of India,
Rep., by its Chief Manager
RACPC, 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
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W.P.No.5857 of 2018
Petition filed under Article 226 of the Constitution of India praying
for issuance of Writ of Mandamus directing the first respondent to remove
the attachment registered as Doc Nos.8 & 9/2017 on the file of the second
respondent and document No.13/2017 on the file of the third respondent in
respect of the property situate at Plot No.A1, Peurmal Koil Street,
Arasangkazhanai Village, Sholinganallur Taluk, Kancheepuram District
comprised in Survey No.25, measuring an extent of 1263.28 sq.ft belonging
to the 5th respondent and Plot No.3B, Phase-I, Nagalakshmi Nagar, Endee
Villa, Ottiyambakkam Main Road, Sithalapakkam, Chennai-126, forming
Sithalapakkam Village, Sholinganallur Taluk, Kancheepuram District
comprised in O.S.No.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.ft and
building measuring an extent of 2300 sq.ft belonging to the 5th respondent
with the office of second respondent and Plot No.H 49 B, Kalashetra
Colony, Besant Nagar, Chennai-90, comprised in Survey No.171, forming
part of Thiruvanmiyur Village, Velachery Taluk, Chennai District,
measuring an extent of 1593 sq.ft belonging to the fourth respondent with
the office of third respondent so as to enable the petitioner bank to register
the sale certificate issued under SARFAESI Act in favour of successful
bidder.
For Petitioner : Mr.M.L.Ganesh
For R1 : Mr.A.P.Srinivas,
Senior Standing Counsel
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W.P.No.5857 of 2018
For RR2 to 5 : No appearance
******
ORDER
The relief sought for in the present writ petition is to direct the first
respondent-Tax Recovery Officer, Income Tax Department to remove the
attachment registered as Document Nos.8/2017 and 9/2017 on the file of the
second respondent and Document No.13/2017 on the file of the third
respondent in respect of the property situated at Plot No.A1, Peurmal Koil
Street, Arasangkazhanai Village, Sholinganallur Taluk, Kancheepuram
District comprised in Survey No.25, measuring an extent of 1263.28 sq.ft
belonging to the 5th respondent and Plot No.3B, Phase-I, Nagalakshmi
Nagar, Endee Villa, Ottiyambakkam Main Road, Sithalapakkam, Chennai-
126, forming Sithalapakkam Village, Sholinganallur Taluk, Kancheepuram
District comprised in 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.ft and
building measuring an extent of 2300 sq.ft belonging to the 5th respondent
with the office of second respondent and Plot No.H 49 B, Kalashetra
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Colony, Besant Nagar, Chennai-90, comprised in Survey No.171, forming
part of Thiruvanmiyur Village, Velachery Taluk, Chennai District,
measuring an extent of 1593 sq.ft belonging to the fourth respondent with
the office of third respondent so as to enable the petitioner bank to register
the sale certificate issued under SARFAESI Act in favour of successful
bidder.
2.The petitioner is State Bank of India. The petitioner states that the
subject properties, which were mortgaged with the petitioner-Bank by way
of raising loan by the fourth and fifth respondents, were attached in an
illegal manner by the first respondent. In view of the said attachment, the
petitioner-Bank is unable to deal with the said properties with reference to
the terms and conditions stipulated in the Deed of Mortgage. Thus, they are
constrained to move the present writ petition.
3.The facts regarding the mortgage of the properties in favour of the
Bank and their capacity as a secured creditor are not disputed by the first
respondent.
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W.P.No.5857 of 2018
4.The learned counsel for the petitioner reiterated that the petitioner-
Bank holds the first charge over the properties in view of Section 26E of the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 (hereinafter referred to as “the SARFAESI
Act” ) and Section 31B of the Recovery of Debts and Bankruptcy Act, 1993
(hereinafter referred to as “the 1993 Act”). Thus, the first respondent has no
authority to attach the subject properties, which is violation of the
provisions of SARFAESI Act and therefore, the direction as such sought for
is to be granted.
5.To substantiate the contentions, the learned counsel for the
petitioner relied on Section 26E of the SARFAESI Act, which enumerates
that “notwithstanding anything contained in any other law for the time being
in force, after the registration of security interest, the dates due to any
security creditor shall be paid in priority overall other debts and all
revenues, taxes and cesses and other rates payable to the Central
Government or State Government or local authority”. Section 31B of the
1993 Act also provides “priority to secured creditors”.
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W.P.No.5857 of 2018
6.In the present case, the petitioner-Bank is admittedly the secured
creditor and the subject properties are admittedly mortgaged and the original
title deeds are deposited by the borrowers with the petitioner-Bank. Thus,
the first respondent has no authority to override the provisions of the
SARFAESI Act and the 1993 Act and thus, the attachment made by the first
respondent in respect of the subject properties is to be raised.
7.In reliance, the learned counsel referred to the judgment of the
Hon'ble Supreme Court of India in the case of Bombay Stock Exchange vs.
Kandalgaonkar & Ors., reported in (2015) 2 SCC 1 wherein, the following
observations are made:-
"39.The first thing to be noticed is that the
Income Tax Act does not provide for any paramountcy
of dues by way of income tax. This is why the Court in
Dena Bank vs. Bhikhabhai Prabhudas Parekh and Co.,
(2000) 5 SCC 694 held that Government dues only
have priority over unsecured debts and in so holding
the Court referred to a judgment in Giles vs. Grover
(1832) 9 Bing 128 in which it has been held that Crown
has no precedence over a pledge of goods. .........."
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W.P.No.5857 of 2018
8.Further, the learned counsel relied on the orders passed by this
Court in M/s.Well Stores (Madras) Private Limited & Ors. Vs. Tax
Recovery Officer, Chennai & Ors. [W.P.Nos.40656 of 2015 etc., batch
dated 18.07.2017] wherein, the following observations are made:-
“6.Therefore the petitioner being the successor
would step into the shoes of the financing Bank, which
admittedly, is a secured creditor. Further more, the
document has been valid by stamped for the purpose of
stamp duty as assignment deed as could be seen from
the endorsement in the reverse of page No.1 of the
Assignment agreement dated 07.02.2017. Thus, in the
light of the decision of the Full Bench, taking note of
the Amendment Act, 2016, the order of attachment
made by the Income Tax Department should yield to
rights of the petitioner, secured creditor. Therefore,
they are required to be set aside.”
9.Relying on the judgments, the learned counsel for the petitioner
reiterated that the Bank holds the first charge over the subject properties and
when the properties in question were mortgaged as per the terms and
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W.P.No.5857 of 2018
conditions, the petitioner must be allowed to deal with the properties and
the attachment made illegally by the first respondent is to be raised.
10.The learned counsel for the petitioner has further stated that the
order of attachment passed by the first respondent on 23.05.2017 is after the
mortgage and the deposit of title documents with the petitioner-Bank by the
fourth and fifth respondents on 27.01.2016 and 06.02.2016 respectively.
When the mortgage was executed prior to the passing of the order of
attachment by the first respondent on 23.05.2017, then the petitioner-Bank
holds the first charge over the properties. Thus, the subsequent order passed
by the first respondent is invalid in the eye of law.
11.The learned Senior Standing Counsel appearing on behalf of the
first respondent-Income Tax Department strenuously objected the
contentions raised on behalf of the petitioner by stating that admittedly the
subject properties were mortgaged in favour of the petitioner-Bank and the
Bank is the secured creditor. There is no much dispute with reference to the
facts pleaded by the petitioner-Bank. However, the legality of the mortgage
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is to be gone into with reference to the provisions of the Income Tax Act,
1961 (hereinafter referred to as “the IT Act”) as well as the SARFAESI Act.
12.It is contended that the demands of the assessees, i.e., M/s.Beetle
Experts and M/s.Ultimate Solutions, in which Shri.V.Balasubramaniam and
Smt.J.Swetha are the partners, were initially raised by the Income Tax
Department on 31.05.2015, that is, prior to the date of creation of mortgage
by the petitioner-Bank on 27.01.2016 and 06.02.2016 and therefore, the
mortgage is void as per Section 281 of the IT Act.
13.Elaborating the said contentions, the learned Senior Standing
Counsel for the first respondent states that the demands outstanding were
relating to the income tax assessment years 2012-13 and 2013-14 and the
earliest demand notice was issued on 31.03.2015. In spite of the repeated
reminders, the assessees failed to remit the dues and subsequently, the
subject properties were attached on 23.05.2017. Therefore, the Department
has first charge over the properties of the assessees and its partners with
effect from 31.03.2015 onwards. Consequently, the properties were
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W.P.No.5857 of 2018
attached by the first respondent on 23.05.2017 and even at that point of
time, the Income Tax Office was not aware of the fact that the scheduled
properties are under mortgage with the petitioner-Bank. It is stated that
there had been no board displayed by the Bank at the subject properties
stating that the same are under attachment. The fact regarding mortgage
came to the notice of the Income Tax Department only through the present
writ petition filed by the petitioner-Bank. The Income Tax Department is
empowered to attach the properties in the interest of revenue, even though
the properties are attached by the other agencies.
14.The learned Senior Standing Counsel mainly contended that
Section 281 of the Act provides about "certain transfers to be void".
However, the charge of the Income Tax Department, over the immovable
properties attached, precedes the charge of the Bank and the claim of
precedent by the Bank is no basis. Overriding powers in terms of Section
35 of the SARFAESI Act applies to the Bank only, if it has precedent of the
charge on the properties of its clients. In the case on hand, it is the Income
Tax Department, which holds the first charge, as the initial demand was
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W.P.No.5857 of 2018
made prior to the subject properties were mortgaged and the mortgage to the
Bank is void as per the IT Act.
15.At the outset, it is contended that the initial demand was raised by
the Department on 31.03.2015, whereas the properties are mortgaged with
the Bank only on 27.01.2016 and 06.02.2016 and hence, the Income Tax
Department do not have charge much less first charge over the assets of its
partners.
16.Lets us now consider the provisions of Section 281(1) of the IT
Act, which contemplates that where, during the pendency of any proceeding
under the IT 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
an other mode of transfer whatsoever) of, any of his assets in favour of any
other person, such charge or transfer shall be void as against 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 or otherwise.
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17.The question arises whether the present facts pleaded in the writ
petition would fall under the definition of “certain transfers to be void” or
not. In this contest, it is relevant to consider Rule 2 of II Schedule of the IT
Act. The said Rule reads as “when a certificate has been drawn up by the
Tax Recovery Officer for the recovery of arrears under the Second
Schedule, the Tax Recovery Officer shall cause to be served upon the
defaulter a notice requiring the defaulter to pay the amount specified in the
certificate within fifteen days from the date of service of the notice and
intimating that in default steps would be taken to realise the amount under
the Second Schedule”. Therefore, even before the service of notice under
Rule 2, which contemplates that when a certificate has been drawn up by the
Tax Recovery Officer for the recovery of arrears and during the pendency of
any proceedings under the IT Act, if certain transfers as denoted in Section
281 are executed, then all such transfers are declared as void under the said
provision. The provision contemplates that the transfers by way of sale,
mortgage, gift, exchange or any other mode of transfer whatsoever shall be
void as against any claim in respect of any tax or any other sum payable by
the assessee.
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18.Section 26E of the SARFAESI Act contemplates priority to
secured creditors. Section 31B of the 1993 Act reads pari materia with
Section 26E of the SARFAESI Act. Admittedly, the petitioner-Bank is the
secured creditor in the present case. Thus, under the SARFAESI Act, the
petitioner-Bank gains priority over the revenue tax payable to the Central
Government or the State Government. As per the above provision, the
petitioner-Bank holds the first charge in respect of the properties
mortgaged. What is relevant in the present case is that the question of
understanding the priority to secured creditor under Section 26E of the
SARFAESI Act would arise only if the mortgage is in existence or valid in
the eye of law.
19.Contrarily, Section 281 of the IT Act unambiguously stipulates
that during the pendency of any proceedings under the IT Act, if certain
transfers are made, such transfers are void as against any claim in respect of
any tax or other sum payable by the assessee. In this context, it is made
clear that as far as the demands outstanding in respect of respondents 4 and
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5 are concerned, they are relating to the income tax assessment years 2012-
13 and 2013-14 and the earliest demand notice was issued by the Income
Tax Department on 31.03.2015. Thereafter, repeated reminders were sent to
the assessees and the assessees failed to remit dues and thereafter, the
subject properties were attached on 23.05.2017. Thus, the Income Tax
Department claims first charge over the properties of the assessees and its
partners with effect from 31.03.2015, the date on which the earliest demand
notice was issued.
20.However, the learned counsel appearing on behalf of the petitioner
contended that the properties were purchased from and out of the housing
loan sanctioned in favour of the assessees/fourth and fifth respondents in the
present case and therefore, subject properties itself were purchased from and
out of the loan raised from the petitioner-Bank. In this regard, it is relevant
to consider the factual details provided in the notices under Section 13(2) of
the SARFAESI Act issued to respondents 4 and 5 dated 11.11.2016 and
08.12.2016 respectively and the notice dated 11.11.2016 contains the details
of security documents including all supplementary documents and
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documents evidencing creation of mortgage. The notice dated 08.12.2006
would reveal the facts regarding the second property. Schedule-B provides
details of application and regulation. Perusal of the above details would
reveal that housing loan application forms for individuals were issued on
09.10.2015 and 14.09.2015; however, Deeds of Undertaking of Mortgage
were made on 26.10.2015 and 21.09.2015; minimum deposit was executed
on 27.01.2016 and 06.02.2016; and the confirmation letters were issued
on 28.01.2016 and 07.02.2016. Thus, it is clear that all the dates relatable to
the mortgage fall after the issuance of the earliest demand notice by the
Income Tax Department on 31.03.2015. Undoubtedly, the properties were
purchased after receipt of demand notice dated 31.03.2015 by the Income
Tax Department. However, Section 281 of the IT Act is to be interpreted
that where during the pendency of any proceedings under the IT Act, if at
all the properties purchased or owned even prior to the proceedings, the
properties are subject to be dealt with in accordance with Section 281 of the
IT Act and if any of such properties were transferred, then the Income Tax
Authorities are competent to invoke Section 281 of the IT Act, holding that
such transfers are void. However, in the present case, the housing loan
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W.P.No.5857 of 2018
applications itself were issued on 09.10.2015 and on 14.09.2015 after the
issuance of the earliest demand notice by the Income Tax Department on
31.03.2015. Thus, respondents 4 and 5, the partners of M/s.Beetle Experts
and M/s.Ultimate Solutions were aware of the fact that they have to clear
the dues to the Income Tax Department. In spite of the fact that they are
aware of the dues, they have mortgaged the properties in favour of the
petitioner-Bank.
21.The learned counsel for the petitioner made a submission that the
registration was done before the Sub Registrar on 22.09.2015 and the
attachment of immovable properties was done by the Income Tax
Department on 23.05.2017. Thus, even before issuing the attachment order
by the Income Tax Department, the mortgage was in existence and
therefore, the petitioner-Bank holds 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 were
pending under the provisions of the IT Act against the assessees concerned.
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22.Section 281 of the IT Act stipulates that if any mortgage or
transfer is made in any manner, then all such transfers, mortgage, gift, etc.,
became void and therefore, such mortgage, gift or transfer is non-existence
in law. In such circumstances, the question of priority would not arise at all.
23.The concept of priority would arise, if there are more than one
claim between two or more transfers, who all are holding valid right in
respect of the subject property. If more than two persons are having right
over the property and such more than two or more persons are claiming the
benefits from and out of the subject property, then only the question of
priority would arise. If the priority question arises, then as per Section 26E
of the SARFAESI Act, the first charge must be to the secured creditor/Bank.
Thus, the priority to secured creditors is not disputed and such priority
would arise only if rights regarding the subject property are established by
more than two persons.
24.Section 26E of the SARFAESI Act is not connected with the
declaration contemplated under Section 281 of the IT Act. Therefore, the
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said provisions cannot be construed as repugnant and in fact, the scope of
Section 281 of the IT Act is absolutely unconnected with the priority
contemplated under Section 26E of the SARFAESI Act. However, Section
26E of the SARFAESI Act provides that when the rights are claimed by
more than two persons in respect of any property, then the priority would lie
on the secured creditor, in the present case, the petitioner/Bank. Thus, the
provisions are independent and different. The scope of these two
provisions are to be distinguished, more specifically, with reference to the
facts and circumstances of each case. It is not as if the SARFAESI Act will
prevail over the IT Act or the IT Act will prevail over the SARFAESI Act, it
is a question with reference to the factual matrix established before the
Court of law, which would throw light 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 2012-13 and 2013-14 was issued
by the Income Tax Authorities on 31.03.2015 prior to the mortgage
executed in favour of the petitioner-Bank on 27.01.2016 and 06.02.2016,
the provisions of Section 281 of the IT Act would be applicable and the
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question of priority would not arise, in view of the fact that once the
provision of Section 281 of the IT Act is applied, then the said transfer
become void ab initio and the mortgage or transfer made thereafter is
consequently void. Such transfers are to be construed as fraudulent
transfers or mortgage and therefore, the mortgage in favour of the
petitioner-Bank cannot be held as valid in the eye of law and since it is held
as invalid, the question of invoking Section 26E of the SARFAESI Act
would not arise at all.
26.In the case of Abdul Jamil and Others vs. Secretary, Income Tax
Department and Others [Second Appeal No. 1294 of 1984, dated
26.03.1998], the scope of Section 281 of the IT Act was 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. It declares that the
transfers effected by any assessee with intent to
defraud the Revenue during the pendency of any
proceedings under the Act shall be void against any
claim in respect of any tax or any sum payable by the
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assessee as a result of the completion of the said
proceedings
". Therefore, the three requirements under the section
are :
(i) that there must be a transfer of the property;
(ii) that it should be during the pendency of a
proceeding under the Act; and
(iii) that the transfer must be with intent to defraud the
Revenue
and if these conditions are satisfied, then the transfer
shall be void in respect of any tax or sum payable by
the assessee as a result of the completion of the
proceedings during the pendency of which the transfer
was effected. The effect of the section is that, if such
transfer with intent to defraud the Revenue has been
made and any claim for tax arises after completion of
the proceedings during the pendency of which the
transfer took place, such tax or other sum can be
recovered by proceeding against the property
notwithstanding the said transfer.”
27.In view of the facts and circumstances that the earliest demand
notice at the first instance issued by the Income tax Department on
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31.03.2015 is not disputed, it is to be construed that the proceedings under
the IT Act for recovery of tax dues were pending on the date, i.e.,
31.03.2015 and therefore, any transfer made thereafter is hit by the
provision of Section 281 of the IT Act and all such transfers are void and
therefore, the subsequent mortgage became consequently invalid in the eye
of law and therefore, the application of SARFAESI Act would not arise at
all. Further, the scope of Section 26E of the SARFAESI Act is relatabe to
the priority and the priority would arise only if more than one person could
able to establish the right over the property and in the present case, when
there is no right to mortgage was vested with the assessees, the question of
priority would not arise at all. Once the proceedings are initiated, Section
281 of the IT Act provides power to the Income Tax Authorities to attach
the property and further, the assessee ceases to exercise the power of right
regarding transfer of such properties, once the notice is issued. When the
assessee has no right to mortgage the property purchased, then the Bank
cannot accrue any right to deal with the mortgaged property or to claim
priority based on the provision of Section 26E of the SARFAESI Act.
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28.These being the principles to be followed, the petitioner could not
able to establish any right to deal with the property and even in such cases
where such right are claimed, the persons aggrieved has to approach the
Income Tax Authorities under Schedule 2 Rule 11 of the IT Act and in the
present case, the question does not arise as the transfer itself became void.
29.Accordingly, the writ petition fails and stands dismissed. Though
the demand notice was issued to the partnership firm, subject properties
were purchased in the name of the partners, in respect of the tax dues, the
partners as well as the company are individually and jointly liable as per the
provisions of the Act. No costs. Consequently, connected miscellaneous
petitions are closed.
27.04.2021
Index : Yes
Speaking Order
abr
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To
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.
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S.M.Subramaniam, J.
(abr)
W.P.No.5857 of 2018
27.04.2021
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