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December 12, 2022

Attachment by Tax officers has no legs if it is previously Mortgage

by CA Shivam Jaiswal in Income Tax, Legal Court Judgement

Attachment by Tax officers has no legs if it is previously Mortgage

Facts of the case

The facts of the case the writs appeal are filed by the Bankers/Financial institutions challenging the orders of a learned Judge wherein it was held that the dues of the Income Tax Department would take precedence over the dues of the secured creditor, though Section 26 E of the SARFAESI Act and Section 31 B of the Recovery of Debts and Bankruptcy Act, expressly provides/grants priority in payment of debts due to a secured creditor over all other debts including revenues, taxes, cesses, etc.The learned Judge proceeded on the basis that tax being an attribute of sovereignty and a necessity for attaining the constitutional goals and objectives, tax dues would prevail and take precedence over the rights of the secured creditors. To arrive at the said conclusion, reliance was placed upon the “doctrine of constitutional priority”.

Tax Recovery Officer who has come up with W.A.No.1385 of 2022, challenging the order of another learned Judge in W.P.No.1251 of 2018, wherein, it was held that Section 281 of the Income Tax Act does not create a charge much less one preferential to the revenue overriding/prevailing over Section 26 E of the SARFAESI Act and Section 31 B of the Recovery of Debts and Bankruptcy Act. The learned Judge proceeded on the premise that the charge was created only when the property was attached by the Revenue / Income Tax Department and when a valid charge exists prior to the attachment, reliance on Section 281 of the Income Tax Act would not serve to disturb the right of the secured creditor under Section 26E of the SARFAESI Act and Section 31 B of the Recovery of Debts and Bankruptcy Act.

Observation of court

There are conflicting views expressed by two learned Judges of this Court, while the first view being that the Revenue would have precedence over all other dues on the basis of the “Doctrine of constitutional priority”, (for the sake of ease of reference, we shall refer to this order as the “first view”), the other learned Judge has taken a view, which appears to be diametrically opposite (for the sake of ease of reference, we shall refer to this order as the “second view”) holding that Section 281 of the Income Tax Act by itself does not create a charge, in any view Section 26 E of the SARFAESI Act and Section 31 B of the Recovery of Debts and Bankruptcy Act, puts the issue of priority of charge beyond the pale of any doubt in favour of the secured creditors even where the competing claim is that of taxes, revenues etc.

Any transfer made by the assessee while legal action is pending under the Income Tax Act, according to the appellant’s argument, is void under Section 281 of the Act. Therefore, the Tax Recovery Officer’s attachment of the immovable property made by the Tax Recovery Officer to secure the dues of the department is legal, lawful, and not perverse.

The respondent bank argued that Section 281 does not prevent the respondent bank from proving its case The assessment proceedings were pending with respect to M/s. Betel Exports, whereas the mortgage was executed by the different individual assessees.

The court held that there is no room for doubt that Section 26 E of the SARFAESI Act and Section 31 B of the Recovery of Debts and Bankruptcy Act which was introduced with a specific purpose to override and grant priority to recovery of debts due to secured creditors over all other debts, taxes, cesses etc., must be understood as prevailing over Section 281 of the Income Tax Act, in the event of conflict of priority. This is also in view of the fact that the Parliament must be understood to have given priority to the secured creditors under Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act, fully aware and conscious of the status and importance that taxes enjoy under the Constitution.

Therefore, Sections 26E and 31B of the SARFAESI Act and Recovery of Debts and Bankruptcy Act, which give priority to secured creditors, should take priority over Section 281 of the Income Tax Act, and the attachment by the Tax Recovery Officer is impermissible

Conclusion

The court held that priority to secured creditors shall prevail, and thus, the attachment by the Tax Recovery Officer is impermissible. The Writ Appeals are disposed of. There shall be no order as to costs. Consequently, connected miscellaneous petitions are closed.

In the High Court of Judicature at Madras

W.A. No.1385 of 2022

Tax Recovery Officer Vs. Union Bank of India

For Appellant : Mr.A.P.Srinivas
For Respondents : Mr.Srinath Sridevan for R-1 Mr.S.Ravikumar, Special Government Pleader for R-2

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