Madras High Court
Janata Sahakari Bank Ltd vs Tax Recovery Officer Vii on 19 July, 2021
W.P.No.15437 of 2014
IN THE HIGH COURT OF JUDICATURE AT MADRAS
DATED : 19.07.2021
CORAM
THE HONOURABLE MR.JUSTICE S.M. SUBRAMANIAM
W.P.No.15437 of 2014
and
M.P.No.1 of 2014
Janata Sahakari Bank Ltd.,
Represented by its authorized signatory,
Umesh Khanderao Kokil,
1444, Shukrawar Peth,
Thorale Bajirao Road,
Pune – 411 002. .. Petitioner
-vs-
Tax Recovery Officer VII,
Income Tax Department,
Company Range IV,
121, M.G.Road,
Chennai – 600 034. .. Respondent
Petition filed under Article 226 of the Constitution of India praying
for issuance of Writ of Certiorari, calling for the records of letter of the
respondent bearing reference T.R.No.N.23/2007-08 dated 27.12.2007 and
quash the same.
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For Petitioner : Mr.Satish Parasaran
Senior Counsel
for Mr.B.N.Suchindran
For Respondent : Mr.A.P.Srinivas
Senior Standing Counsel
******
ORDER
The writ on hand is filed questioning the validity of the proceedings
dated 27.12.2007 passed by the respondent.
CONTENTION OF THE PETITIONER:
2.The impugned proceedings reveals that it was issued for recovery of
income tax arrears in the case of M/s.NEPC Agro Foods Limited and its
Directors Shri.Raj Kumar Khemka, Shri.Ravi Prakash Khemka and
Shri.Thirupathy Kumar Khemka. The respondent had noticed from the
advertisement published in the daily newspaper 'Dinamalar' on 20.12.2007
that the Bank has taken possession of the property at Plot No.83 at
Ambattur Industrial Estate, Chennai-53 for the loan amount of
Rs.28,89,35,552/- due from M/s.NEPC Agro Foods Ltd., and its Directors
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Shri.Raj Kumar Khemka, Shri.Ravi Prakash Khemka and Shri.Thirupathy
Kumar Khemka.
3.The impugned order further proceeds that the above defaulters
M/s.NEPC Agro Foods Ltd. and its Directors Shri.Raj Kumar Khemka,
Shri.Ravi Prakash Khemka and Shri.Thirupathy Kumar Khemka are in tax
arrears to the Income Tax Department as below:
1.M/s.NEPC Agro Foods Ltd. Rs.20,37,11,265
2.Shri.Raj Kumar Khemka Rs. 51,08,289
3.Shri.Ravi Prakash Khemka Rs. 2,11,52,008
4.Shri.Thirupathy Kumar Khemka Rs. 59,35,011
4.In this connection, the respondent informed that the property
mentioned in the newspaper, i.e. Plot No.83, Ambattur Industrial Estate,
Chennai-53 was already attached in Form ITCP 16 by the Income Tax
Department on 18.06.2003 and the same was served to the defaulter
assessee company on 18.06.2003. A copy of the Form ITCP 16 also
enclosed along with the impugned order which was communicated to
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Shri.A.S.Bapalt, the Authorised Officer, Janatha Sahakari Bank Ltd., Pune
[the petitioner herein].
5.The petitioner Janata Sahakari Bank Ltd., made a submission that
the attachment was made against M/s.NEPC Agro Foods Ltd. and they are
neither a proper nor necessary party since the petitioner Bank was under
lawful possession of the subject property since from 19.12.2007 which was
affirmed by the Debt Recovery Tribunal, Debt Recovery Appellate Tribunal
and the Madras High Court.
6.The petitioner states that M/s.NEPC Agro Foods Ltd. originally
entered into a loan agreement dated 31.03.1999 with the petitioner bank for
a sanctioned amount of Rs.12,80,00,000/- @ 18% interest per annum. As
security for the said loan, M/s.NEPC Agro Foods Ltd. mortgaged its
property at plot No.83, Ambattur Industrial Estate, Chennai – 53
admeasuring 02.00 acres together with all buildings and superstructures
thereon comprised in S.No.14, 15, 16(part), 18, 19, 20 bounded on the
North by land covering S.No.12, 13 South by New Avadi road, East by
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compound wall of Spheroidal Industries and West by Nallikanam Street,
within the sub registration of Ambattur, and the Registration district of
Chingelpet, Madras. NEPC India Ltd, the parent company, stood as
corporate guarantor of the loan.
7.The petitioner states that the borrower, NEPC Agro foods Ltd and
the corporate guarantor NEPC India Ltd both defaulted on the repayment of
loan as per the payment schedule given in the loan agreement. This default
constrained the petitioner to classify the loans as C-100 under the NPA
classification rules as mandated by the Reserve Bank of India.
8.Before the Cooperative Court, NEPC Agro foods Ltd and NEPC
India Ltd, admitted their joint liability and entered into duly recorded
consent award dated 15.2.2007, wherein they agreed to repay a sum of Rs.
15,51,00,000/- on or before 15.3.2007 as full and final settlement of dues. It
was an expressed term of the consent award that failing repayment the
petitioner could proceed with its remedies under the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest
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Act [SARFAESI Act], 2002. Both NEPC Agro foods Ltd and NEPC India
Ltd defaulted on the terms of the consent award and no payments were
made.
9.The said default by these two Companies forced the petitioner to
proceed and take possession of the property on 19.12.2007 in continuation
of the action already initiated under the SARFAESI Act, 2002. It is
contended that since 2007 the Petitioner is in possession of the schedule
mentioned property.
10.The SARFAESI action initiated by the Petitioner Bank was
challenged before the DRT-I, Chennai but the original stay was vacated by
the High Court. On remand, DRT dismissed S.A. No. 68 of 2008. An
Appeal was made before the Debts Recovery Appellate Tribunal, which was
also dismissed. At the time of filing of the writ petition, no proceedings
were pending relating to the loan agreement entered into between the
petitioner bank and the NEPC Agro Foods Ltd. It is contended that the
petitioner bank initiated winding up proceedings before the Madras High
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Court against M/s.NEPC Agro Foods Ltd. in C.P.No.247 of 2008.
Meanwhile, the petitioner bank reeived the notice dated 27.12.2007
consequent to the advertisement dated 20.12.2007 in the Dinamalar
newspaper from the respondent informing the petitioner of an Income Tax
attachment by the respondent on the same schedule property vide Form
ITCP6 dated 18.06.2003.
11.The petitioner states that the encumbrance certificate issued by the
Inspector General of Registration reflects the charge created by the
respondent vide Form ITCP 16 bearing reference
No.T.R.No.130/CEN.I(1)/2003-04 dated 18.06.2003. The attachment was
registered and started reflecting on the encumbrance certificate from
31.12.2007 as other charge after possession of the property was undertaken
under SARFAESI Act by the petitioner. The petitioner bank's charge has
been registered as a mortgage since 16.10.2002.
12.Based on the above facts as narrated, the learned senior counsel
appearing on behalf of the petitioner has stated that, even before attachment
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by the Income Tax Department, the mortgage was in existence from
16.10.2002 onwards. However, it is clarified that the mortgage was
registered between the petitioner and M/s.NEPC Agro Foods Ltd. on
11.12.1998 and the said mortgage was reflected in the encumbrance
certificate also. Thus the petitioner bank holds priority over the charge and
therefore the impugned order passed by the respondent is null and void.
13.The learned senior counsel for the petitioner strenuously
contended that the actions of the Income Tax Department is absolutely
untenable and not in consonance with the terms of priority as contemplated
under the SARFAESI Act and Debt Recovery Tribunal Act. The learned
senior counsel made a submission that M/s.NEPC Agro Foods Limited is an
independent entity and absolutely unconnected with M/s.NEPC India
Limited, who was the income tax defaulter as per the respondent. Thus the
mortgage between the petitioner and the M/s.NEPC Agro Foods Limited is
no way responsible for the income tax arrears due to the Department. The
subject property mortgaged belongs to the M/s.NEPC Agro Foods Limited
which is a separate entity and a company registered and therefore, the very
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initiation of proceedings under the Income Tax Act is untenable. The
learned senior counsel in support of the said contention cited the judgments
wherein the priority of the mortgage was upheld. The learned senior
counsel cited the judgment of the Hon'ble Full Bench of this Court dated
10.11.2016 in W.P.No.2675 of 2011 [Assistant Commissioner (CT), Anna
Salai-III Assessment Circle vs. The Indian Overseas Bank], wherein the
Hon'ble Full Bench made an observation as under:
“2.We are of the view that if there was at all any
doubt, the same stands resolved by view of the
Enforcement of Security Interest and Recovery of Debts
Laws and Miscellaneous Provisions (Amendment) Act,
2016, Section 41 of the same seeking to introduce Section
31B in the Principal Act, Which reads as under:-
“31B. Notwithstanding anything contained in any
other law for the time being in force, the rights of secured
creditors to realise secured debts due and payable to them
by sale of assets over which security interest is created,
shall have priority and shall be paid in priority over all
other debts and Government dues including revenues,
taxes, cesses and rates due to the Central Government,
State Government or local authority. Explanation:-for the
purposes of this Section, it is hereby clarified that on or
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after the commencement of the insolvency and bankruptcy
Code, 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.”
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.
4.The law having now come into force, naturally it
would govern the rights of the parties in respect of even a
lis pending.
5.The aforesaid would, thus, answer question (a) in
favour of the financial institution, which is a secured
creditor having the benefit of the mortgaged property.
6.In so far as question (b) is concerned, the same is
stated to relate only to auction sales, which may be
carried out in pursuance to the rights exercised by the
secured creditor having a mortgage of the property. This
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aspect is also covered by the introduction of Section 31B,
as it includes “secured debts due and payable to them by
sale of assets over which security interest is created.
7.we, thus, answer the aforesaid reference
accordingly.”
14. On behalf of the petitioners, the judgments delivered by the
Hon'ble Single Judges of the Madras High Court with reference to the
priority issue are relied upon. In this regard, the Courts have formed an
opinion that the Bank gets priority over the other charges. Relying on the
said judgments, it is contended that in the present case, both the SARFAESI
Act and DRT Act contemplates priority in favour of the petitioner and
therefore, the first charge is for the petitioner's Bank and therefore, the
action of the respondents are in violation of the provisions of the Statutes.
15.The learned senior counsel appearing for the petitioner relied on
the recent judgment of this Court dated 21.04.2021 in W.P.No.27409 of
2019, wherein the similar issue was considered by this Court and this
Hon'ble Court considered Section 281 of the Income Tax Act as well as
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Section 26E of the SARFAESI Act. Considering the provisions, this Court
held that the mortgage by the bank holds priority over the claim of the
Income Tax Department and accordingly, attachment proceedings of the
Income Tax Department was set aside. The judgment relied was delivered
by the Hon'ble Single Judge in the case of Sancheti Leasing Company Ltd.
vs. Income Tax Officer [2018 SCC Online Hyd 441], wherein Justice
R.Jayasimha Babu made an observation as follows:
“6.Section 281(1) of the Act had been relied upon
by the Income-tax Officer. That section declares certain
transactions as void. The section, however, does not vest
the authority in the Income-tax Officer to make such a
declaration.
7.Before a transaction involving immovable
property can be declared as void, all the requirements of
law must necessarily be satisfied. The fact that a statute
provides for such a declaration being made, if the
conditions mentioned in the statute are satisfied, does
not imply that an officer exercising powers under the
provisions of the statute can assume to himself the power
and jurisdiction to declare what is otherwise a legally
valid transaction as void. Adjudication is the function of
the courts. Any declaration of a transaction being void
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must be sought in the civil court. The Income-tax Officer
moreover in this case is an interested party as it is in the
interests of the Revenue to make such a declaration and
proceed to recover the vendor's arrears of tax from such
person.
8.The Supreme Court of India in its recent
decision rendered in the case of TRO v. Gangadhar
Viswanath Ranade (Decd.) [1998] 234 ITR 188 has held
that if the Department finds that the assessee has
transferred a property to a third party with the intention
to defraud the Revenue, the Revenue will have to file a
suit under Rule 11(6) of Schedule II to the Income-tax
Act to have the transfer declared void under Section
281 of the Income-tax Act.”
16.Relying the said judgment, the learned senior counsel is of an
opinion that Section 26E commences with a non-obstante clause and states
that priority shall be accorded to the debts payable to secured creditors
notwithstanding anything in any other law for the time being in force
including the Income Tax Act. The only exception is that as per explanation
to section 26E, cases pending under the Insolvency and Bankruptcy Code,
2016 in the case of secured creditors where a prior valid charge exist as in
the present case where the mortgage has been created on 10.02.2014, the
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provisions of section 281 of the Income Tax Act would not serve to disturb
the same.
17.In the case cited supra, the facts considered by this Court was that
the mortgage was well prior to the attachment made by the Income Tax
Department. In such circumstances, the Court formed an opinion that as per
Section 26E of the SARFAESI Act the Bank holds priority over the charge
and therefore, the subsequent attachment made by the Income Tax
Department is not valid. Even the judgment in the case of Sancheti
Leasing Company Limited, this Court held that “the fact that a statute
provides for such a declaration being made, if the conditions mentioned in
the statute are satisfied, does not imply that an officer exercising powers
under the provisions of the statute can assume to himself the power and
jurisdiction to declare what is otherwise a legally valid transaction as void”.
The consideration was whether the Income Tax Authority has got power
under the Income Tax Act to issue a declaration declaring certain civil
transactions as void, more specifically, the mortgage or otherwise. The
Court held that any declaration of transaction being void must be sought in
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the Civil Court.
18.This Court has no quarrel or any contra opinion with reference to
the principles settled in the said case. The Income Tax authorities have no
powers under the Act to issue any such declaration, declaring the civil
transactions as null and void and such a power is vested with the competent
Civil Court of Law.
19.Under these circumstances, this Court is bound to examine the
scope of Section 281 of the Income Tax Act as well as the priority conferred
in favour of the Bank under the provisions of the SARFAESI Act and Debt
Recovery Tribunal Act. The principles settled in the case of Corporation
Bank vs. The Commissioner, Income Tax Department and others in
W.P.No.27409 of 2019 dated 21.04.2012 is not in dispute and this Court is
bound to consider the facts circumstances independently and the scope of
the relevant provisions with reference to the provisions of the Income Tax
Act.
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20.In this regard, it is relevant to rely on the judgment of the Hon'ble
Three Judges Bench of the Supreme Court of India in the case of Official
Liquidator vs. Dayanand and others, reported in 2008 (10) SCC 1,
wherein the Apex Court in an unambiguous terms held that “there have been
several instances of different Benches of High Court not following the
judgments/orders of co-ordinate and even larger Benches”. In some cases,
High Courts were gone to the extent of ignoring the law laid down by this
Court without any tangible reason. Therefore, if there are factual
differences or the reasons or conflicting decisions, then the reasons must be
considered in clear terms for the purpose of distinguishing the judgment or
otherwise. Thus, it is not as if every judgment produced by the respective
learned counsels appearing on behalf of the parties to the lis is to be
followed as it is. The Courts are bound to apply the facts and circumstances
of each case and distinguish the principles if necessary with reference to the
provisions of the statute as well as the Rules. Conflicting decisions are
common in our Country. The duty of the Courts are to ensure that such
conflicting judgments are taken into consideration for the purpose of
dealing with the facts, which all are placed before the Courts. Even in some
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circumstances, certain interpretation of the provisions, which all are not
considered or not interpreted in its letter and spirit, then also the Courts are
bound to look into those aspects. Ultimately, while following the principles
laid down, independent application of mind by the Courts are of paramount
importance and it is not as if every judgment is to be followed in a routine
and mechanical manner. This exactly is the principle reiterated by the Apex
Court on several occasions. Thus, this Court has to consider the provisions
as well as the judgments.
CONTENTIONS OF THE RESPONDENTS:
21.The learned senior standing counsel made a submission that
factually there are certain disputes which all are to be adjudicated, and High
Court cannot venture into the adjudication of such disputed facts and in this
regard, the Income Tax Act provides an avenue for the aggrieved person to
prefer an appeal before the Tax Recovery Officer under Schedule II Rule
11, wherein the factual adjudications can be made. Thus the petitioner has
to approach the Tax Recovery Officer under Schedule II Rule 11 of the
Income Tax Act for clarifying certain aspects which all are made available.
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Contrarily, a writ proceedings need not be entertained as adjudication of
facts in the present case is vital.
22.In order to substantiate the said contention, the learned senior
standing counsel contended that the assessee defaulter is in arrears to the
tune of Rs.34,52,12,985/-. The following demands were raised prior to
31.03.1999, the alleged date of mortgage to the petitioner Bank.
Asst. Year Date of Order Amount (in Rs.)
1993-94 143(3) dated 25.03.1996 3,84,14,746
1994-95 143(3) dated 27.03.1997 6,17,58,825
1995-96 143(3) dated 19.11.1998 1,69,74,612
1996-97 143(3) dated 30.03.1999 1,59,54,741
23.It is contended on behalf of the respondent that the defaulter
company had failed to pay the above demands. The petitioner M/s.
JanataSahakari Bank Ltd, Pune claims that it had sanctioned the term loan
of Rs.12,80,00,000/- to the defaulter company only on 31.03.1999 and the
said loan were dispersed during the financial year 1999-2000. Moreover, the
Bank had sanctioned the loan without verifying the tax arrears and it is the
bank’s obligation to verify the same. Considering the above facts, it is
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submitted that the department has the first charge with respect to the tax
dues which were created prior to 31.03.1999 and it is clear that the liability
of the said bank that costs the encumbrance in the property located at Plot
No. 83, Ambattur Industrial Estate. Chennai-600053 admeasuring two acres
is void against the Income tax dues.
24.It is further contended that when the file was at Chennai, the
property belonging to the assessee-defaulter, NEPC Agro Foods Limited,
located at D.No.83, MTH Road, Ambattur Industrial Estate, Chennai-98
was attached by Tax Recovery Officer-I, Central, Chennai, vide ITCP 16 in
T.R. Dated 18.06.2003. A copy of the above ITCP 16 was served on
18.06.2003 itself on the assessee-defaulter, NEPC Agro Foods Limited.
Later on, on 20.12.2007, the petitioner bank M/s/.Janata Sahakari Bank
issued an advertisement in the tamil daily newspaper Dina Malar informing
that the aforesaid property had been taken possession by the petitioner-bank
for default in payment of the loan to the tune of Rs.28.89 crores by the
assessee-defaulter and its directors. After the advertisement, the then TRO
(TRO-VII, Company Range-IV, Chennai, issued a letter dated 27.12.2007
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intimating the petitioner-bank that the aforesaid immovable property was
already attached by the Income Tax Department on 18.06.2003. This
attachment is being questioned by the petitioner-bank by filing of writ
petition before the Hon'ble High Court of Madras W.P.No.15437 of 2014
and the petitioner - bank is praying before the Hon'ble High Court to quash
the above letter dated 27.12.2007.
25.It is submitted that the property belonging to the assessee-
defaulter, NEPC Agro Foods Limited, located at D.No.83, MTH Road,
Ambattur Industrial Estate,Chennai-98 was attached by Tax Recovery
Officer, Central, Chennai, vide ITCP 16 in T.R.No.130/Cen.I(1)/2003-04,
dated 18.06.2003. A copy of the above ITCP 16 was served on 18.06.2003
itself on the assessee-defaulter, NEPC Agro Foods Limited. Once the ITCP
16 is issued, an assessee-defaulter is prohibited and restrained from the date
of the aforesaid notice until further order from the Income Tax Department,
from transferring or charging the subject mentioned properties, which are
included in the property of the defaulter by virtue of the Explanation to sub-
section (1) of the section 222 of the Income-tax Act 1961 in any way and
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that all persons be and they are prohibited from taking any benefit under
such transfer or charge. Further, notices in ITCP 17 dated 12.01.2012 was
issued by the TRO, Tirupur, requesting the assessee-defaulter and its
directors, copy of the notices were sent to the Coimbatore and Chennai
address of the assessee-defaulter and its directors, to bring to the notice of
the department any encumbrances, charges, claims or liabilities attaching to
the above said Ambattur Industrial Estate property. Against the aforesaid
notice, the assessee-defaulter filed a writ petition before the Hon'ble High
Court of Madras which on 05.07.2012 stayed further proceedings pursuant
to the aforesaid notice (ITCP 17 dated 12.01.2012) pending disposal of the
WP No.2361 /2012. It is seen from the records,the aforesaid WP is yet to be
disposed of.
26.It is further submitted that since the notice of attachment [ITCP 16
in T.R. No.130/Cen.I(1)/2003—04,dated 18.06.2003] of the aforesaid
immovable property was served on NEPC Agro Foods Limited on
18.06.2003, the petitioner- Janata Sahakari Bank cannot be said to be the
lawful owner of the immovable property from the later period of
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19.12.2007. While the petitioner-Janata Sahakari Bank is claiming to be in
possession of the said immovable property from the year 2007, the Income
Tax Department had attached the said immovable property much earlier on
18.06.2003. Consequent to the advertisement issued by the petitioner-
Janata Sahakari Bank in the tamil daily newspaper DINA MALAR dated
20.12.2007, the then TRO-VI, Company Range-IV, Chennai, vide letter in
T.R. No.23/2007-08, dated 27/12/2007, brought to the notice Of the
petitioner- Janata Sahakari Bank that the aforesaid immovable property had
already been attached by the Income Tax Department on 18.06.2003 and the
attachment notice in ITCP 16 was served on the NEPC Agro Foods Limited
on 18.06.2003. Whereas, as already mentioned in the comments for para 2,
once the ITCP 16 is issued, an assessee-defaulter is prohibited and
restrained from the date of the aforesaid notice until further order from the
Income Tax Department, from transferring or charging the under mentioned
properties which are included in the property of the defaulter by virtue of
the Explanation to sub-section (1) of the section 222 of the Income- tax Act
1961 in any way and that all persons be and they are prohibited from taking
any benefit under such transfer or charge.
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27.The learned senior standing counsel to rebut the contentions with
reference to the judgments relied on by the petitioner drawn the attention of
this Court regarding the judgment in the case of Abdul Jamil and others vs.
Secretary, Income Tax Department and others [(1998) 101 Taxman 332
(Madras)], wherein 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 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
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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.”
28.The learned senior standing counsel further relied on the judgment
in the case of D.S.Senthilvel vs. Tax Recovery Officer [(2018) 405 ITR 202
(Madras)], wherein this Court made an observation as under:
“19.The learned counsel appearing for the
petitioners also emphasised that this Court should defer
to the decision rendered by the Division Bench of the
Gujarat High Court. But this Court is unable to agree
with the said submission. It is true that the Division
Bench of this Court in the decision reported in [1986]159
ITR 646 (Mad) observed that it is an acceptable principle
in the matter of construction of an Indian statute as far as
possible that there must be uniformity of construction and
if the provision of law which falls for consideration
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before the Court has already been construed by another
High Court, normally that construction should be
accepted. But then the Honourable Division Bench also
added a caveat that if there are compelling reasons to
depart from the view taken by the other High Court, the
said construction need not be accepted. This Court is of
the considered opinion that there are compelling reasons
to depart from the view taken by the Division Bench of
the Gujarat High Court. Again as already pointed out,
this Court treading the path taken by the Hon'ble
Division Bench of the Punjab and Haryana High Court.
20.Yet the orders impugned in these writ petitions
cannot sustained as such. The Hon'ble Supreme Court in
(1998)6 SCC 658 has held that it is the function of the
civil court to declare a transactions to be null and void
and that the Tax Recovery Officer cannot exercise the
said function. Therefore, the respondent clearly erred in
declaring the transactions to which the petitioners are
parties as null and void. Therefore, the orders impugned
in these writ petitions stand quashed to that extent. It
would certainly be open to the petitioners herein to avail
the remedy set out in Rule 11(6) of the second schedule of
the Income Tax Act. If the respondent authority wants to
have the transactions nullified, it is the respondent who
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must go to the civil court to seek declaration to that
effect. If the writ petitioners want the attachment to be
lifted, it is for them to move the civil Court and obtain
relief as provided in Rule 11(6) of the second schedule of
the Income Tax Act.”
29.Relying on these judgments, the learned senior standing counsel
reiterated that even as per the petitioner, the corporate guarantee was
provided by the NEPC India Limited and the directors of these two
Companies, NEPC India Limited and M/s.NEPC Agro Foods Ltd. are one
and the same and even as per the impugned order, the tax arrears to the
Income Tax Department was fixed not only on NEPC Agro Foods Limited
but also to its Directors who is having interest over the NEPC India Limited
also. If at all M/s.NEPC Agro Foods Limited is an independent entity and
unconnected with NEPC India Limited, then it is for the petitioner to
adjudicate the same before the Tax Recovery Officer by filing an
application under Schedule II Rule 11 of the Income Tax Act. This apart,
the defaulter has not been impleaded as party respondent in the writ petition.
Therefore, those facts are to be adjudicated and if at all the judgment made
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by the Income Tax Department is not in consonance with the Income Tax
Officer, then the petitioner may elaborate the same before the Tax Recovery
Officer who in turn is competent to pass an order either way by considering
the merits and demerits of the case. Instead the High Court cannot go into
those facts and circumstances which all are to be established through certain
documents which all are to be produced by the defaulter and the defaulter
being not a party to the writ petition, the petitioner Bank cannot assume the
role of the Income tax arrears defaulters and make certain submissions.
Drawing inference on these lines, the learned senior standing counsel
appearing for the Income Tax Department reiterated that even presuming
the petitioner's case is to be considered, the writ petition would not be an
appropriate proceedings and the application before the Tax Recovery
Officer under Schedule II Rule 11 of the Income Tax Act would be an
appropriate procedure for adjudication of these facts. Thus, the writ petition
is to be rejected.
ANALYSIS:
30.Let us now consider the scope of Section 281 of the Income Tax
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Act. Chapter XXIII Section 281 of the Income Tax Act contemplates
certain transfers to be void. Sub-clause (1) enumerates that “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 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". A close reading of the above provision would
reveal that where during the pendency of any proceedings under this Act or
after the completion thereof, but before service of notice under rule 2 of the
Second Schedule, if any charge is created by an assessee in favour of any
other person shall be void as against any claim in respect of any tax or any
other some payable by the assessee. Therefore, it is unambiguous that,
during pendency of the proceedings if any charge is created, then such
charge created by way of sale, mortgage, gift, exchange or any other mode
of transfer whatsoever shall be void.
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31.Schedule II Rule 11 of the Income Tax Act which contemplates
investigation by Tax Recovery Officer. Sub-Clause (1) to Rule 11 states
that "where any claim is preferred to, or any objection is made to the
attachment or sale of, any property in execution of a certificate, on the
ground that such property is not liable to such attachment or sale, the Tax
Recovery Officer shall proceed to investigate the claim or objection".
32.Sub-clauses (5) and (6) to Rule 11 of the Income Tax Act reads as
under:
(5) Where the Tax Recovery Officer is satisfied that
the property was, at the said date, in the possession of the
defaulter as his own property and not on account of any
other person, or was in the possession of some other
person in trust for him, or in the occupancy of a tenant or
other person paying rent to him, the Tax Recovery Officer
shall disallow the claim.
(6) Where a claim or an objection is preferred, the
party against whom an order is made may institute a suit
in a civil court to establish the right which he claims to the
property in dispute; but, subject, to the result of such suit
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(if any), the order of the Tax Recovery Officer shall be
conclusive.
33.A perusal of the entire Rule would reveal that it is not an appeal or
Revision. It is an investigation by the Tax Recovery Officer, which is
contemplated. Therefore, any third person if involved in such transfer of
property, which is declared as void under Section 281 of the Income Tax
Act may submit an application for investigation by Tax Recovery Officer.
Therefore, the statute does not assume that every third person is liable under
the Income Tax Act. Schedule II Rule 11 of the Income Tax Act is a
beneficial provision in respect of the person, who was otherwise cheated by
any of the defaulter of tax arrears, who in turn can submit an application for
further investigation in order to cull out the truth or genuinity with reference
to the transactions or transfers. Therefore, the Tax Recovery Officer during
the pendency found that the charge created in favour of the petitioner Bank
is valid, then he can pass appropriate orders withdrawing the attachment
made under the provisions of the Act. If the Tax Recovery Officer is of an
opinion that the attachment made under the provisions of the Act was prior
to the mortgage or otherwise, then he can pass appropriate orders
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confirming the attachment. However, the said Rule is not relatable to
declaration or in the form of an appeal by any third person. It is only an
enabling provision for effective adjudication of the actual facts and to find
out the genuinity of certain transfers made during the pendency of the
Income tax proceedings and with reference to the provision under Section
281 of the Income Tax Act.
34.Looking into the provisions of the SARFAESI Act, more
specifically, Section 26E, which contemplates priority to secured creditors
which reads that "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 of State Government or local authority".
35.Let us now consider Section 31B of the Recovery of Debts and
Bunkruptcy Act, 1993 and the said section Section 31B was inserted by Act
44 of 2016 with effect from 01.09.2016. The said provision also deals with
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priority to secured creditors, which reads that "notwithstanding anything
contained in any other law for the time being in force, the rights of secured
creditors to realise secured debts due and payable to them by sale of assets
over which security interest is created, shall have priority and shall be paid
in priority over all other debts and Government dues including revenues,
taxes, cesses and rates due to the Central Government, State Government or
local authority".
36.It is necessary to consider the conflicting provisions of the Income
Tax Act, SARFAESI Act and Recovery of Debts and Bunkruptcy Act, 1993.
37.On the one hand, the Income Tax Act states that, where during the
pendency of any proceedings under the Income Tax Act or after completion
thereof, any assessee creates a charge on or parts with the possession by
way of mortgage, sale, etc. Shall be void against any claim in respect of any
tax. So also, the SARFAESI Act states that Section 26E contemplates that
the secured creditors shall be paid in priority over all other debts and all
revenues, taxes, cesses and other rates payable to the Central Government of
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State Government or local authority. Therefore, equal weightage is given in
respect of the secured creditors. So also Section 31B of Recovery of Debts
and Bunkruptcy Act, 1993 states that sale of assets over which security
interest is created, shall have priority and shall be paid in priority over all
other debts and Government dues including revenues, taxes, cesses and
rates due to the Central Government, State Government or local authority.
38.Thus, conflicting provisions in these three independent statutes are
creating heart burning issues between the secured creditors as well as the
Tax Department. Some of the decisions are in favour of the Tax Department
and some of the decisions are in favour of the Banks. With reference to
Section 26E of the SARFAESI Act and Section 31B of the Recovery of
Debts and Bankruptcy Act, 1993, judgments are given in favour of the
Banks in view of the fact that the said provisions contemplates priority over
the Government dues is to be given to the Banks. The tenor of Section 281
of the Income Tax Act which contemplates that any such transaction made
during the pendency of any proceedings under the Income Tax Act shall be
void. Thus, the understanding would be that if the proceedings under the
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Income Tax Act are pending at the time of creating mortgage, sale, gift,
etc., then Section 281 of the Income Tax Act would be pressed into
operation. The next question is at the time of creation of mortgage, sale, gift
etc., the Income Tax Proceedings are pending as contemplated under
Section 281 of the Income Tax Act, such transactions became void. Thus, it
is unambiguous that the transactions or transfers made during the pendency
of the Income tax proceedings are void. This being the purposive
interpretation to be adopted, all transfers, mortgages etc., made during the
pendency of the Income tax proceedings shall became void under Section
281 of the Income Tax Act. Once Section 281 of the Income Tax Act was
pressed into service and the transactions or transfers became void, any
mortgage, transfer etc., thereafter would be of no validity. In other words,
the transfer or transactions made against the void transactions under the
Income Tax Act are invalid in the eye of law. Therefore, even before
invoking the provisions of the SARFAESI Act and DRT Act, Section 281 of
the Income Tax Act intervenes and declares the transactions or transfers as
void, if any such transactions or transfers are made during the pendency of
the Income Tax proceedings. In such circumstances, invoking the provisions
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of the SARFAESI Act or DRT Act for the purpose of claiming priority
would not arise at all. Law expects that the parties to be prudent and careful.
Before mortgage, transfer or transactions, an enquiry is required by the
respective parties as the buyer must beware (caveat emptor) of the
encumbrances or the statutory implications or the genuinity of the title etc.,
Thus, the principles of caveat emptor would be applicable in such
circumstances, where a transactions or transfers are made during the
pendency of the Income tax proceedings. In such cases, the Income tax
proceedings are known only to the tax defaulter and not to the third party
purchaser or the mortgagee Bank or otherwise. Thus, the void transfers or
transactions made during the pendency of the Income tax proceedings
cannot be the subject matter for any mortgage or further transfers or
transactions etc., This being the possible perceptions, the Courts are bound
to consider, which transaction will prevail over and which Act would be
applicable with reference to the facts and circumstances.
39.More elaborately the facts at the first instance to be considered and
then the application of law which is to be applied at the first instance also to
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be considered. For instance in the case where the income tax proceedings
are pending under the Income Tax Act and if a mortgage is entered into by
the tax defaulter with any Bank, then it is the duty of the Bank to ensure that
no other proceedings are pending and it is the duty of the person who is
borrowing loan to inform the same to the Bankers. Under these
circumstances, the Income Tax Department is alien to the transaction of
mortgage between the bank and the tax defaulter and therefore, the Act will
automatically come to the rescue of the Income Tax Department declaring
such transfers as void under Section 281 of the Income Tax Act.
40.Where the Bank entered into a mortgage well before the pendency
of proceedings under the Income Tax Act, then Section 26E of the
SARFAESI Act would be applicable and in such circumstances, the Bank
will hold priority over all other claim including the Government dues. Even
in such circumstances, this Court has to consider the other principles which
all are to be followed in such cases. Admittedly, the SARFAESI Act and
Recovery of Debts and Bunkruptcy Act, 1993 provides priority to the
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secured creditors and the Income Tax Act provides priority to the tax arrears
to be recovered. Under these circumstances, this Court is inclined to
consider the common law Doctrine of priority of crown debts.
41.The “doctrine of constitutional priority” will have precedence over
the other priorities. If the priority clause is provided under various
enactments, the question arises as to which priority is to be held precedence
over the other priorities. The test of traceability and recognition under the
constitutional provisions would be the proper procedure to form an opinion.
42.In the present scenario, the SARFAESI Act and the DRT Act
provides priority to secured creditors, i.e. the banks hold priority. The
Income Tax Act contemplates any such mortgage or sale during the
pendency of any proceedings under the Income Tax Act shall be void.
Thus, this Court has to test the supremacy on the basis of the constitutional
recognition, which is supreme than the statutes enacted under the
constitution. The taxation laws are constitutionally recognised with
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reference to the sovereignty and the policies of the Government. Thus the
supremacy of the Constitution overtakes the statutes enacted and such
enactments constitutionally recognised directly takes precedence over the
other statutes.
43.The principles of 'doctrine of constitutional priority' is to be
defined as, in the event of the similar provisions of priority under various
enactments, then the statute which is recognised directly by the Constitution
for the purpose of upholding the sovereignty and integrity of the Nation is
to be considered as holding precedence over the other statutes providing
priority.
44.The Constitutional Bench of the Hon'ble Supreme Court of India
in the case of Builders Supply Corporation vs. Union of India [1965 AIR
1061] considered the principles laid down in the case of Kaka Mohamed
Ghouse Sahib and Co. vs. United Commercial Syndicate and others
[(1886) ILR 7 Mad. 434], wherein the Madras High Court has held that it is
a settled principle of constitutional law that as between creditors of the same
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rank the Government is entitled to priority and the republican character of
the Constitution of India has not abrogated this general doctrine of priority
of State debts. In dealing with this question, Justice Ramamurti has referred
to the relevant decisions in relation to the arrears of income tax due to the
Government and has pointed out there is a consensus of judicial opinion on
the question that the arrears of tax due to the State can claim priority over
private debts. This position has not been seriously disputed.
45.Similarly, the basic justification for the claim of priority made by
the Income Tax Department in the present case rests on the well recognised
principle that the State is entitled to raise money by taxation, because unless
adequate revenue is received by the State, it would not be able to function as
sovereign Government at all. It is essential that as a sovereign the Sate
should be able to discharge its primary governmental functions and in order
to able to discharge such functions efficiently, it must be in possession of
necessary funds and this consideration emphasises the necessity and the
wisdom of conceding to the State, the right to claim priority in respect of its
tax dues.
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46.In this context, Part XII of the Constitution of India, more
specifically, Article 265 which states that tax not to be imposed save by
authority of law; Article 266 speaks about Consolidated funds and public
accounts of India and the States; Article 267 states Contingency fund;
Article 268 states Duties levied by the Union but collected and appropriated
by the States; Article 268A denotes service tax levied by Union and
collected and appropriated by the Union and the States; Article 269 states
taxes levied and collected by the Union but assigned to the States; Article
269A denotes levy and collection of goods and service tax in course of
inter-state trade or commerce and Article 270 states that taxes levied and
distributed between the Union and the States. The chapter deals with the
taxes and its constitutional importance are to be considered by this Court.
Undoubtedly, tax is the backbone of our Nation's economy and it holds top
priority. In this context, the tax collected goes to the welfare of the people
in general, however the mortgage or sale transaction between the bank and
the tax defaulter can be at no circumstances be compared with the
constitutional importance of tax being collected from the people for the
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purpose of achieving the constitutional goals and perspectives. Therefore,
the provisions of various Acts if there are conflicting provisions or grant of
priority to various institutions, then the Constitution of India will be the
guiding factor to form an opinion and confer priority. The nature of
transaction, the implications, Constitutional importance and the other
principles enunciated under the Constitution of India are the principal
factors to be considered to form an opinion that, which claim shall be given
priority over the other claims as various statutes enacted by the Parliament
gives priority to such institutions irrespective of the fact that the other Acts
are also providing similar priority to other institutions.
47.In support of the said observation, this Court would like to draw
the attention with reference to the judgment of the Three Judges Bench of
the Hon'ble Supreme Court of India in the case of Central Bank of India
vs. State of Kerala and others [Civil Appeal No.95 of 2005 dated
27.02.2009], wherein the Apex Court considered the provisions of the DRT
Act and SARFAESI Act and the following observations are made:
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“33.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 Securitisation Act, the provisions contained in
those Acts cannot override other legislations. Section 38C
of the Bombay Act and Section 26B of the Kerala Act also
contain non obstante clauses and give statutory
recognition to the priority of State's charge over other
debts, which was recognized by Indian High Courts even
before 1950. In other words, these sections and similar
provisions contained in other State legislations not only
create first charge on the property of the dealer or any
other person liable to pay sales tax, etc. but also give
them overriding effect over other laws. In Builders Supply
Corporation v. Union of India [(1965) 2 SCR 289], the
Constitution Bench considered the question whether tax
payable to the Union of India has priority over other
debts. After making a reference to the judgments of the
Bombay High Court in Bank of India v. John Bowman
and Ors., [AIR 1955 Bom. 305], Madras High Court
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in Kaka Mohammad Ghouse Sahib & Co. v. United
Commercial Syndicate and others [(1963) 49 I.T.R. 25]
and Manickam Chettiar v. Income-tax Officer, Madura,
[(1938) 6 ITR 180], the Court held :
(i) "The Common Law doctrine of the priority of
Crown debts had a wide sweep but the question in the
present appeal was the narrow one whether the Union of
India was entitled to claim that the recovery of the
amount of tax due to it from a citizen must take
precedence and priority over unsecured debts due from
the said citizen to his other private creditors. The weight
of authority in India was strongly in support of the
priority of tax dues.
(ii) The Common Law doctrine on which the Union
of India based its claim in the present proceedings had
been applied and upheld in that part of India which was
known as `British India' prior to the Constitution.
The rules of Common Law relating to substantive
rights which had been adopted by this country and
enforced by judicial decisions, amount to `law in force' in
the territory of India at the relevant time within the
meaning of Art. 372(1). In that view of the matter, the
contention of the appellant that after the Constitution was
adopted the position of the Union of India in regard to its
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claim for priority in the present proceedings had been
alerted could not be upheld.
(iii) The basic justification for the claim for priority
of Government debts rests on the well-recognised
principle that the State is entitled to raise money by
taxation, otherwise it will not be able to function as a
sovereign government at all. This consideration
emphasizes the necessity and wisdom of conceding to the
State the right to claim priority in respect of its tax dues."
34. In State Bank of Bikaner and Jaipur v. National
Iron and Steel Rolling Corporation and others [(1995) 2
SCC 19], the Court again recognized the priority of the
State's statutory first charge under Section 11-AAAA of
the Rajasthan Sales Tax Act, 1954 vis-`-vis claim of the
bank to recover its dues from the borrower.
35. In Dena Bank v. Bhikhabhai Prabhudas Parekh
& Co. and others [(2000) 5 SCC 694], the Court reviewed
case law on the subject and observed:
"The principle of priority of government debts is
founded on the rule of necessity and of public policy. The
basic justification for the claim for priority of State debts
rests on the well-recognised principle that the State is
entitled to raise money by taxation because unless
adequate revenue is received by the State, it would not be
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able to function as a sovereign Government at all. It is
essential that as a sovereign, the State should be able to
discharge its primary governmental functions and in
order to be able to discharge such functions efficiently, it
must be in possession of necessary funds and this
consideration emphasises the necessity and the wisdom of
conceding to the State, the right to claim priority in
respect of its tax dues (see Builders Supply Corpn.). In the
same case the Constitution Bench has noticed a
consensus of judicial opinion that the arrears of tax due
to the State can claim priority over private debts and that
this rule of common law amounts to law in force in the
territory of British India at the relevant time within the
meaning of Article 372(1) of the Constitution of India and
therefore continues to be in force thereafter. On the very
principle on which the rule is founded, the priority would
be available only to such debts as are incurred by the
subjects of the Crown by reference to the State's
sovereign power of compulsory exaction and would not
extend to charges for commercial services or obligation
incurred by the subjects to the State pursuant to
commercial transactions. Having reviewed the available
judicial pronouncements their Lordships have summed up
the law as under:
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1. There is a consensus of judicial opinion that the
arrears of tax due to the State can claim priority over
private debts.
2. The common law doctrine about priority of
Crown debts which was recognised by Indian High
Courts prior to 1950 constitutes "law in force" within the
meaning of Article 372(1) and continues to be in force.
3. The basic justification for the claim for priority
of State debts is the rule of necessity and the wisdom of
conceding to the State the right to claim priority in
respect of its tax dues.
4. The doctrine may not apply in respect of debts due to
the State if they are contracted by citizens in relation to
commercial activities which may be undertaken by the
State for achieving socio-economic good. In other words,
where the welfare State enters into commercial fields
which cannot be regarded as an essential and integral
part of the basic government functions of the State and
seeks to recover debts from its debtors arising out of such
commercial activities the applicability of the doctrine of
priority shall be open for consideration."
48.One of the principles, which is impressive in the judgment cited
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supra is that the basic justification for the claim for priority of Government
dues rests on the well recognized principles that the State is entitled to raise
money by taxation otherwise it will not be able to function as sovereign
Government at all. This consideration emphasises the necessity and wisdom
of conceding to the State, the right to claim priority in respect of its tax
dues. The importance of the above reading is to be considered regarding the
present facts and circumstances.
49.Let us consider the dispute raised in the present case. The Income
Tax Department in their counter affidavit had stated that the assessee
defaulter is in arrears to the tune of Rs.34,52,12,985/-. The demands were
raised by the Income Tax Department prior to 31.03.1999, the date of
mortgage to the petitioner bank. The Income Tax Department in other
words claims that the proceedings under the Income Tax Act was pending
even before the date of mortgage. The petitioner relying on the
encumbrance certificate issued by the Registration Department of the State
contends that the attachment is made after the mortgage by the petitioner
bank. However, Section 281 of the Income Tax Act unambiguously states
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that during the pendency of any proceedings under the Income Tax Act.
Thus, pendency of any proceedings is sufficient to treat any other
transfer/mortgage as void.
50. Thus, the mortgages, transactions or transfers are made during the
pendency of the Income Tax proceedings, then all such transfers, mortgages,
transactions are void under Section 281 of the Income Tax Act and any such
mortgage or attachment made by the Bank during the pendency of the
Income tax proceedings, cannot be a ground to claim priority based on the
provisions of the SARFAESI Act or DRT Act.
51. The disputed factors cannot be adjudicated by the High Court
under Article 226 of the Constitution of India and it is for the petitioner to
establish the details regarding the mortgage and the pendency of Income tax
proceedings under the Income Tax Act. It is for the petitioners to produce
the documents in original and adjudicate the same in the manner prescribed
under Schedule II Rule 11 of the Income Tax Act. Thus, it would be
improper to form an opinion regarding the disputed facts between the
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parties to the lis in the present case, which requires adjudication of facts
based on the documents and evidences. High Court cannot conclude the
disputed facts merely based on the affidavits and counter affidavits filed by
the parties in a writ proceedings. However, this Court cannot conclude that
the petitioner Bank holds priority over the Income tax arrears due to the
Income Tax Department. The principles elaborately considered and
discussed in the aforementioned paragraph would highlight the
constitutional importance, which all are to be considered to grant priority to
the institutions. Thus, this Court is inclined to pass the following orders:
(1) The relief as such sought for in the present writ
petition stands rejected.
(2) The petitioner is at liberty to approach the Tax
Recovery Officer by filing an appropriate application under
Schedule II, Rule 11 of the Income Tax Act. In the event of
filing any such application, the Tax Recovery Officer is directed
to investigate the same with reference to the original documents
and pass appropriate orders as expeditiously as possible.
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52. With these directions, the writ petition stands disposed of. No
costs. Consequently, connected miscellaneous petition is closed.
19.07.2021
Index : Yes/No
Speaking Order/Non-speaking Order
cse
To
Tax Recovery Officer VII,
Income Tax Department,
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Company Range IV,
121, M.G.Road,
Chennai – 600 034.
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W.P.No.15437 of 2014
S.M.SUBRAMANIAM, J.
cse
W.P.No.15437 of 2014
19.07.2021
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