The charges created against the property, by the mortgaging of the property by the assessee-borrower in favour of the financial institution during the pendency of any proceedings under the Income-tax Act, 1961, cannot be declared as void against any claim in respect of income tax if the same was made for adequate consideration and without notice of the pendency of such proceedings, or without notice of tax or other sum payable by the assessee, as held by GujHC in TRO v Industrial Finance Corpn of India and Ors — In favour of: The assessee; Special Civil Application No 3786 of 2010 with Special Civil Application No 6961 of 2010.
TRO v Industrial Finance Corpn. of India and Ors.
High Court of Gujarat
Special Civil Application No. 3786 of 2010 with Special Civil Application No. 6961 of 2010
S.J. Mukhopadhaya and K.M. Thaker, JJ
Decided on: 22 June 2011
Counsel appeared:
Manish R. Bhatt, Sr. Adv. with Mauna M. Bhatt for the Petitioner in SCA No. 3786 of 2010
Gaurang H. Bhatt for the Petitioner in SCA No. 6961 of 2010
S.N. Soparkar and Mihir Thakore, Sr. Advs. with Maulik G. Nanavati for the Respondent 1
Manav A. Mehta for the Respondent 2
Judgment
S.J. Mukhopadhaya, J
1. The first writ petition - Special Civil Application No. 3786 of 2010 has been preferred by the
Tax Recovery Officer, Income-tax Commissioner's Office, Gandhinagar against the action taken
by the 1st respondent - M/s Industrial Finance Corporation of India (hereinafter referred to as "the
1st respondent - financial institution") under Section 13(4) of the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter
referred to as "the SARFAESI Act"). A prayer has been made to restrain the 1st respondent -
financial institution from parting with possession, transferring or otherwise dealing with the
properties of the 2nd respondent - Parekh Platinum Ltd. (hereinafter referred to as "the 2nd
respondent - borrower Company").
2. The question involved in the first writ petition is whether, in view of sub-section (1) of Section
281 of the Income-tax Act, 1961, the charge created against the property in question by
mortgaging the property by the 2nd respondent - assessee borrower in favour of the 1st
respondent - financial institution during pendency of any of the proceedings under the Income-tax
Act, 1961 is void as against any claim in respect of tax and other sum payable by the 2nd
respondent - assessee in favour of the petitioner - revenue.
3. The second writ petition - Special Civil Application No. 6961 of 2010 has been preferred by
the Assistant Commissioner of Customs, against the same very measures taken by the 1st
respondent - financial institution under Section 13(4) of the SARFAESI Act. The order dated
7.10.2009 passed by the Debts Recovery Tribunal - I, Ahmedabad in Securitization Application
No. 35 of 2009 has been challenged, whereby the said Tribunal, on hearing the parties, observed
that the public auction and the subsequent proceedings made by the 1st respondent - financial
institution shall be subject to the final outcome of the Securitization Application pending before
the Debts Recovery Tribunal.
4. The question involved in the second writ petition is as to whether the Excise and Customs
Department of the Central Government have priority over the secured debt of the 1st respondent -
financial institution.
5. For determination of the issue, it is relevant to notice certain facts as placed by the parties and
appear from the record and detailed hereunder.
According to the petitioner - revenue of the first petition - SCA No. 3786 of 2010, for the
Assessment Year 1996-97 (Financial Year 1995-96) onwards, the assessments were made and a
sum of Rs.242 Crores plus interest, penalty and other charges are due to be recovered by the
petitioner - revenue from the 2nd respondent - assessee. The petitioner had no knowledge that the
2nd respondent - assessee took loans from the 1st respondent - financial institution and created a
charge on the property in question by mortgaging the property. The 1st respondent - financial
institution, as a secured creditor, has taken physical and actual possession of the secured assets on
3.9.2009 under Section 13(4) of the SARFAESI Act. The Authorized Officer of the 1st
respondent - financial institution issued a public notice for sale of the secured assets on 8.9.2009
published in the local daily "Business Standard" and "Gujarat Samachar". The petitioner -
revenue had no knowledge that the measures have been taken by the 1st respondent - financial
institution, the secured creditor, for recovery of their dues by taking recourse under section 13(4)
of the SARFAESI Act and, therefore, the petitioner - revenue could not approach the Debts
Recovery Tribunal at the appropriate time.
Further case of the petitioner - revenue is that the 2nd respondent, who is an assessee, being
defaulter, has not paid huge outstanding income-tax demand with interest and penalty till date for
the Assessment Years 1996-97, 1998-99, 1999-2000, 2000-01, 2001-02 and for the block
assessment period; the secured assets have already been attached by the petitioner - revenue on
20.12.2004. Therefore, such property of the 2nd respondent - assessee could not have been
attached nor possession of the same could have been taken by the 1st respondent - financial
institution claiming it to be the secured creditor, the charge created by mortgage on the same
property by the 2nd respondent - borrower assessee in favour of the 1st respondent being void in
view of sub-section (1) of section 281 of the Income-tax Act, 1961. It is stated that an equitable
mortgage has been created by the 2nd respondent on 4.1.1999 in respect of the immovable
property as described in the case without obtaining any previous permission from the Assessing
Officer at the time of creating the equitable mortgage. Therefore, such charge on mortgage
created by the 2nd respondent - assessee as borrower in favour of the 1st respondent - financial
institution has to be declared as void as against all the claims in respect of outstanding tax
demand with interest, penalty, charges, etc. totalling to Rs.242 crores due and payable by the 2nd
respondent to the petitioner - revenue and to that extent, the mortgage created by the 2nd
respondent in favour of the 1st respondent requires to be declared as void and not binding on the
petitioner - revenue, the Income-tax department. The same is not legal, valid and enforceable by
the 1st respondent against the petitioner - revenue in the eye of law. Consequently, it be held and
declared that the 1st respondent - financial institution is not entitled to exercise power under the
SARFAESI Act in the capacity of a secured creditor on the basis of the so called mortgage which
is void.
The aforesaid submission was highlighted by the learned counsel appearing on behalf of the
petitioner - revenue of the first petition.
Further case of the petitioner - revenue is that the action of the 1st respondent - financial
institution of issuance of public notice for sale is ex-facie illegal, arbitrary, null and void and
unenforceable in the eye of law. The Authorized Officer of the 1st respondent - financial
institution has failed to indicate and mention the encumbrances in the nature of prior attachment
over the property of the 2nd respondent - assessee made by the Income-tax Department on
20.12.2004. To that extent, the 1st respondent - financial institution has committed breach of the
provisions of Rule 8(6) and Rule 9(7) to (9) of the Security Interest (Enforcement) Rules, 2002.
To that extent, the impugned action of the 1st respondent - financial institution under the
SARFAESI Act requires to be quashed and set aside.
It appears that an appeal under section 17 of the SARFAESI Act along with a petition for
condonation of delay has been filed by the petitioner - revenue, the Tax Recovery Officer,
Income-tax Commissioner's Officer, Gandhinagar before the Debts Recovery Tribunal,
Ahmedabad on 12.3.2010. Therein, as the action of 2002 and 2009 is challenged, the petition for
condonation of delay has been filed and the matter is pending.
The 2nd respondent, the assessee of the petitioner - revenue as also borrower of the 1st
respondent - financial institution, has also challenged the measures taken by the 1st respondent
under section 13(4) of the SARFAESI Act by filing another appeal under section 17 of the
SARFAESI Act, being Securitization Appeal No. 35 of 2009 pending in the Court of the Debts
Recovery Tribunal, Ahmedabad. Therein also, similar plea has been taken by the 2nd respondent
against the measures taken by the 1st respondent apart from the other pleas relating to pendency
of the appeal before the Appellate Authority constituted under the Sick Industrial Companies
(Special Provisions) Act, 1985; the steps taken for One Time Settlement between the 2nd
respondent - borrower and the 1st respondent - financial institution and also alleged violation of
certain provisions of the SARFAESI Act and the Rules framed thereunder. Before this Court also,
similar plea has been taken by the 2nd respondent, as taken by the petitioner - revenue.
6. In the second writ petition, the Assistant Commissioner of Customs while raising the question
of charge over the property created in favour of the 1st respondent - financial institution, has
made out a claim on the following facts.
7. The Director General of Foreign Trade, New Delhi had granted EPCG License No. 01500634
on 16.7.1997 to the 2nd respondent. At that time, the 2nd respondent had executed the requisite
bond in favour of the Customs Department regarding duly payment of the Customs duty
alongwith interest at the rate of 15% per annum on the said Customs duty amount in case the
export obligation is met with.
8. The 2nd respondent has failed to discharge export obligation, as per the notification No.
29/1997 dated 1.4.1997, and the condition of the EPCG license during 1997-98 itself. The
petitioner of the second writ petition - Customs Department, therefore, issued a duty demand
notice on 30.12.2004 directing the 2nd respondent to pay a sum of Rs.65,30,96,269/- alongwith
interest at the rate of 15% per annum from 16.7.1998, failing which recovery proceedings under
Section 142 of the Customs Act, 1962 shall be initiated against the 2nd respondent.
9. The 2nd respondent by its letter dated 1.7.2009 informed the Central Board of Excise and
Customs (CBEC) admitting its liability regarding EPCG license issued for Rs.92,21,76,150/- on
16.7.1997 and having export obligation of Rs.553 crores approx. It has actually made the import
of Rs.64.19 crores and as such the export commitment was for Rs.385 crores approx. The 2nd
respondent has also admitted therein that it could not fulfill its export obligation under the EPCG
due to various reasons. Similarly, the export obligation under certain advance licenses were also
not fulfilled due to various natural calamities. It further intimated that as per section 22 of the
Sick Industrial Companies (Special Provisions) Act, 1985, as the matter is pending with the
BIFR/AAIFR not to take any action and ultimately requested to grant extension of time of 5 years
to discharge those monetary obligations.
10. According to the petitioner of the second writ petition, the Customs department, by letters
dated 30.9.2009 and 8.10.2009, has informed the 2nd respondent about the outstanding Customs
duty amount to be recovered from the 2nd respondent - Company. The Customs department has
also issued certificate under section 142(1)(ii)(C) of the Customs Act, 1962 and under the
Customs (Attachment of Property of Defaulters for Recovery of Government Dues) Rules, 1995
and forwarded the same to its Ahmedabad office and Gandhinagar office. The Customs
department has also submitted an application dated 8.10.2009 before the Debts Recovery
Tribunal - I, Ahmedabad in the pending Securitization Application No. 35 of 2009 filed by the
2nd respondent under section 17 of the SARFAESI Act and lodged its claim of recovery of the
amount from the 2nd respondent.
11. The Customs department had appeared and attended the hearing of the said Securitization
Application No. 35 of 2009 before the Debts Recovery Tribunal -I, Ahmedabad and on 1.4.2010
the Tribunal recorded the statement of the 1st respondent - financial institution regarding
disclosure of the events of the sale process in respect of the properties of the 2nd respondent. The
Customs department has submitted its application dated 5.4.2010 for intervening as a party
respondent in the Securitization Application No. 35 of 2009. The matter was adjourned and
having realized that earlier the Tribunal passed an order on 7.10.2009 (impugned order) allowing
the 1st respondent - financial institution to sell the properties subject to the decision of the appeal,
has preferred the writ petition, particularly when it also came to know that other writ petition
being SCA No. 3786 of 2010 has been filed by the Income-tax Department before this Court.
12. The 1st respondent - financial institution while opposed the prayer, has supported the action
taken under section 13(4) of the SARFAESI Act. According to the learned counsel appearing on
behalf the 1st respondent - financial institution, the charge created by the 2nd respondent -
borrower in favour of the 1st respondent - financial institution by mortgaging the property cannot
be held to be void in view of clause (i) of the proviso to sub-section (1) of Section 281 of the
Income-tax Act, 1961. According to him, the charge having created for adequate consideration
and no notice of pendency of the income-tax proceedings having issued or served on the 1st
respondent - financial institution by the petitioner - revenue, the charge so created by mortgage
cannot be held to be illegal or void. It is stated that the 1st respondent is a "financial institution"
as defined under section 4A of the Companies Act, 1956. The 2nd respondent is the borrower in
respect of different financial facilities which at the request of the 2nd respondent - borrower
Company were granted by the 1st respondent in its favour. Apart from availing the financial
facilities from the 1st respondent - financial institution, the 2nd respondent has also taken loans
from different banks and financial institutions, such as State Bank of India, Dena Bank, State
Bank of Saurashtra, Corporation Bank, Bank of India, IDBI, GSFC besides others. The 2nd
respondent - borrower Company has intentionally not made the other secured creditors, who have
also charge over the assets of the borrower Company, parties in the present proceeding.
Therefore, the present petition is not maintainable.
13. The 1st respondent claims to have granted financial assistance by way of foreign currency
loan to the 2nd respondent - borrower Company on the terms and conditions contained in the loan
agreement and other security documents. As a security for the due repayment of the dues, the 2nd
respondent - borrower Company created security interests in favour of the 1st respondent -
financial institution by way of hypothecation of movable properties and by mortgage of
immovable properties by executing the loan agreement/security documents in the year 1997 as
per the details given hereunder:-
(i) Joint Mortgage created on 21.1.1999, by deposit of title deeds with IFCI on pari pasu
basis with SBI, on the Company's immovable properties situated at GIDC Gem and
Jewellery Park, Village Bhat, District Gandhinagar in the State of Gujarat.
(ii) Deed of Hypothecation dated 15.1.1997, executed by the Company in favour of IFCI
Limited creating a first charge on the Company's movables at Bhat including movable
machinery, machinery spares, tools and accessories, present and future.
(iii) Personal Guarantee furnished by Shri Jaisukhlal J. Parekh, Shri Rajesh J. Parekh and
Shri Rajnikant J. Parekh on 16.1.1997.
(iv) Corporate Guarantee of Arraycom (India) Ltd. (Formerly Parekh Micro Electronics
(India) Ltd. furnished on 15.1.1997.
(v) Pledge Agreement, executed on 27.1.1999 for pledge of 1,00,00,000 equity shares of
face value of Rs10/- each in favour of IFCI Ltd.
Details of Secured Assets
Movable properties: The whole of the movable properties of the Borrower (Respondent No.
2/Borrower Company) including its movable plant and machinery, machinery spares, tools and
accessories and other movables, both present and future (save and except book debts) whether
installed or not and whether now lying loose or in cases or which are now lying or stored in or
about or shall hereafter from time to during the continuance of the security of these presents by
brought into or upon or be stored or be in or about all the borrower's factory premises and
godowns situated at GIDC Gen and Jewellery Complex, Village Bhat, District Gandhinagar, in
the State of Gujarat and/or be in or about all the Borrower's factories, premises and godowns
anywhere or wherever else the same may be or be held by any aprty to the order or disposition of
the borrower or in the course of transit or on high seas or on order, delivery, howsoever and
wheresoever in the possession of the Borrower and either by way of substitution or addition.
Immovable properties: All piece and parcel of non-agricultural freehold land being lying and
situated at Plot No. 66, GIDC Gem and Jewellery Park, Post Bhat, District Gandhinagar - 380428
of Revenue Survey Nos. 43/A, 43/2, 44/1, 44/2, 53/A, 54/!A, 54/2A, 60/1+2 and 61 within the
village limits of Bhat, District Gandhinagar containing 1,20,000 sq. mts.
The amounts outstanding and repayable to the 1st respondent as on 31.12.2002 were as under:-
Principal Rs.51,26,01,210/-
Interest Rs.15,85,31,057/-
Total Rs.67,11,32,267/-
According to the 1st respondent, further as on 11.9.2009, a sum of Rs.173,31,39,698/- is due and
payable by the 2nd respondent - borrower Company to the 1st respondent alone.
14. A joint meeting of the financial institutions and banks was held on 10.2.2003 wherein the
financial institutions and banks representing more than 75% of the amount of debts decided to
proceed against the 2nd respondent - borrower Company under the SARFAESI Act. The 1st
respondent received various letters from various secured creditors requesting the 1st respondent -
financial institution to initiate action under section 13 of the SARFAESI Act, thereby given
consent as per section 13(9) of the SAFAESI Act. The 1st respondent - financial institution has
taken consent of the secured creditors representing more than 75% of the value of the amount
outstanding as required under section 13(9) of the SARFAESI Act, as detailed below:-
S. No. Date Consent of Secured Creditors
1 18.02.2003 Dena Bank
2 19.02.2003 Corporation Bank
3 20.02.2003 State Bank of India
4 20.02.2003 Gujarat State Financial Corporation
5 22.02.2003 Indian Bank
6 26.02.2003 Allahabad Bank
7 28.02.2003 Bank of India
8 28.02.2003 State Bank of Saurashtra
9 10.03.2003 Industrial Investment Bank of India Ltd.
15. ARCIL, assignee of debts of Dena Bank, appointed "Resolution Commercial Management
Company" as a facilitator for resolving the loan account of the 2nd respondent - borrower
Company. On 28.8.2008, the "Resolution Commercial Management Company" informed the 1st
respondent that ARCIL intends to proceed under section 13(4) of the SARFAESI Act and gave its
consent for the same. The 1st respondent - financial institution being the lead institution duly
issued a notice under section 13(2) of the SARFAESI Act on 29.4.2003. The 2nd respondent -
borrower Company approached the BIFR with a sole objective to avoid proceeding under the
SARFAESI Act. Reference Case No. 240 of 2004 was registered before the BIFR, but the same
was rejected by the BIFR on 19.3.2008 on the ground that the 2nd respondent - borrower
Company has approached the BIFR with unclean hands by manipulating the Company's accounts.
The 2nd respondent - borrower Company has approached the 1st respondent - financial institution
for One Time Settlement and offered to pay the total sum of Rs.29.96 crores towards the
settlement of dues of the 2nd respondent - borrower Company. However, the proposal being on
the lower side was not acceptable to the 1st respondent - financial institution. On 25.7.2007, the
1st respondent - financial institution has informed the 2nd respondent - borrower Company that
the 1st respondent is only agreeable to consider the proposal of the 2nd respondent - borrower
Company envisaging an aggregate payment of Rs.36 crores immediately. Since the terms and
conditions of the settlement were not complied with by the 2nd respondent - borrower Company
and the payment was not made, by letter dated 1.5.2008 the 1st respondent revoked the One Time
Settlement proposal as was given to the 2nd respondent - borrower Company. Since the secured
creditors decided to proceed ahead under the SARFAESI Act, the 2nd respondent - borrower
Company filed two writ petitions before this Court in SCA No. 9945 of 2008 and SCA No. 3 of
2009. Thereafter they filed a Special Leave Petition before the Supreme Court to stay the auction.
However, the Supreme Court dismissed the Special Leave Petition as a consequence of which the
secured assets of the 2nd respondent - borrower Company were sold. Subsequently, the sale
proceeds were also distributed amongst the secured creditors.
16. In present case, we have noticed that an appeal under section 17 of the SARFAESI Act with a
petition for condonation of delay has already been preferred by the petitioner - revenue before the
Debts Recovery Tribunal, Ahmedabad against the measures taken by the 1st respondent -
financial institution under section 13(4) of the SARFAESI Act. The auction of the immovable
property is under challenge. The 2nd respondent has also filed Securitization Appeal No. 35 of
2009 against such measures taken by the 1st respondent under section 13(4) of the SARFAESI
Act and the said matter is also pending before the Debts Recovery Tribunal, Ahmedabad. In this
background, it is not desirable to decide the question whether the measures taken by the 1st
respondent under section 13(4) of the SARFAESI Act are against any of the provisions of the
SARFAESI Act or the Rules framed thereunder and thereby illegal or not. The secured assets
having already been sold, the auction purchaser having not been impleaded as a party respondent
to the present writ petition, the other financial institutions and banks with whom the auction
amount has already been distributed being not parties to the present petition, it is not desirable to
decide the question of validity of the measures taken by the 1st respondent under section 13(4) of
the SARFAESI Act.
17. The only question which is required to be determined, for which the case was heard, as
already noticed, is whether in view of sub-section (1) of Section 281 of the Income-tax Act, 1961,
the charge created against the property in question by mortgaging the property by the 2nd
respondent - assessee borrower in favour of the 1st respondent - financial institution during
pendency of any of the proceedings under the Income-tax Act, 1961 is void as against any claim
in respect of income-tax and other sum payable by the 2nd respondent - assessee in favour of the
petitioner - revenue.
18. It is not in dispute that a proceeding under the Income-tax Act, 1961 is pending since
Assessment Year 1996-97 (Financial Year 1995-96) as also the proceeding under the Income-tax
Act, 1961 for the subsequent Assessment Years 1998-99 onwards against the 2nd respondent -
assessee, which is a borrower of the 1st respondent - financial institution. The charge has been
created by the 2nd respondent as borrower in favour of the 1st respondent - financial institution
by way of equitable mortgage on 21.1.1999 in respect of the immovable property in dispute,
during pendency of the proceeding under the Income-tax Act. Therefore, the rigor of sub-section
(1) of section 281 of the Income-tax Act, 1961 is attracted in respect of the mortgaged property in
question.
19. The stand of the 1st respondent is that the mortgage created by the 2nd respondent in favour
of the 1st respondent is saved by the proviso to sub-section (1) of section 281 of the Income-tax
Act and, therefore, not void.
20. It is not in dispute that the 1st respondent has advanced loan to the 2nd respondent for which
the loan agreement was executed between the parties. The 2nd respondent having received such
loan created an equitable mortgage by depositing the title documents in favour of the 1st
respondent. Thus, it is evident that the mortgage has been made by the 2nd respondent in favour
of the 1st respondent, having received the consideration of amount by way of loan.
21. The parties have not disputed that at the time of creation of the mortgage in favour of the 1st
respondent - financial Company, Mr ND Shah, Director of the 2nd respondent - borrower
Company executed a declaration and undertaking on 21.1.1999 stating that the properties of the
Company mortgaged to the 1st respondent - financial institution are free from all encumbrances
(statutory or otherwise), claims and demands, and that "no proceedings are pending or initiated
against the borrower under the Income Tax Act, 1961, Public Demands Recovery Act or under
other law in force in India for the time being and that no notice has been received or served on the
Company under Rules 2, 16, 21 and 51 of the Second Schedule of the Income Tax Act, 1961
and/or any other law that there is no pending attachments whatsoever issued or initiated against
the said immovable properties or any of them or any part thereof". It was further declared that
"the Company has paid all rents, royalties and all public demands including provided fund dues,
gratuity dues, Employees' State Insurance Dues, Income Tax, Sales Tax, Corporation Tax and all
other taxes and revenues payable to the Government of India or to the Government of any State
or to any Local Authority and that at present there are no arrears of such dues, rents, royalties,
taxes and revenues due and outstanding and that no attachments or warrants have been served on
the Company in respect of Sales Tax, Income Tax, Government Revenues and other Taxes."
The aforesaid facts have not been disputed by the petitioner - revenue.
22. The learned counsel for the 1st respondent while referred to section 281 of the Income-tax
Act, 1961 submitted that the said provision does not prescribe any adjudicatory machinery for
deciding any question which may arise under it. In order to declare a transfer fraudulent under
section 281, appropriate proceeding will have to be taken out by the department before the
competent Civil Court. In absence of such declaration, the creation of mortgage in favour of the
1st respondent cannot be declared to be bad.
23. It is specifically pleaded by the 1st respondent that no notice of pendency of the income-tax
proceeding was served on the 1st respondent on or before the execution of the equitable mortgage
deed by the 2nd respondent in favour of the 1st respondent. Therefore, according to the counsel
for the 1st respondent, the mortgage created by the 2nd respondent in favour of the 1st respondent
is saved under clause (i) of the proviso to sub-section (1) of Section 281 of the Income-tax Act,
1961.
24. Section 281 of the Income-tax Act, 1961 reads as follows:-
"281. Certain transfers to be void,- (1) 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 proceedings or otherwise:
Provided that such charge or transfer shall not be void if it is made -
(i) for adequate consideration and without notice of the pendency of such proceeding or,
as the case may be, without notice of such tax or other sum payable by the assessee; or
(ii) with the previous permission of the Assessing Officer.
(2) This section applied to cases where the amount of tax or other sum payable or likely
to be payable exceeds five thousand rupees and the assets charged or transferred exceed
ten thousand rupees in value.
Explanation:- In this section, "assets" means land, building, machinery, plant, shares,
securities and fixed deposits in banks, to the extent to which any of the assets aforesaid
does not form part of the stock-in-trade of the business of the assessee."
25. The petitioner - revenue, the Tax Recovery Officer, has not disputed the fact that no notice of
pendency of any income-tax proceeding was served on the 1st respondent - financial institution
on or before the equitable mortgage made by the 2nd respondent - borrower Company in favour
of the 1st respondent - financial institution. It is not the case of the petitioner - revenue that no
adequate consideration was made before creating the charge by equitable mortgage by the 2nd
respondent in favour of the 1st respondent - financial institution.
26. The learned counsel for the petitioner referred to the Annual Reports of 1993-94 onwards of
the 2nd respondent - borrower Company to show that in the report dated 30.9.1997 i.e. much
prior to the creation of the equitable mortgage, the 2nd respondent has shown under the heading
"Contingent Liabilities Not Provided For", including "the taxation matter under appeal"
Rs.815.98 lacs (Previous Year Rs.54.01 lacs). It was contended on behalf of the petitioner -
revenue that the 1st respondent - financial institution before allowing the loan in favour of the 2nd
respondent - borrower Company must have noticed the Annual Reports of the Company to find
out the liability of repayment and thereby it is to be accepted that they have knowledge of liability
of payment of tax dues by the 2nd respondent in favour of the petitioner - revenue. However,
such submission cannot be accepted as a fact cannot be presumed that the 1st respondent had the
knowledge of income-tax liability of the 2nd respondent - borrower Company and/or pendency of
any income-tax proceeding against the 2nd respondent - borrower Company, particularly while
executing the agreement, the Director on behalf of the 2nd respondent had specifically mentioned
in the agreement that there was no income-tax dues and no such proceeding was pending. As the
fact cannot be presumed, the aforesaid submission made on behalf of the petitioner - revenue
cannot be accepted.
27. Under the proviso to sub-section (1) of Section 281, the charge or transfer shall not be void if
made - (i) for adequate consideration and without notice of the pendency of such proceedings, or
(ii) without notice of tax or other sum payable by the assessee. There is nothing on record to
suggest that any notice was given by the revenue to the 1st respondent relating to pendency of
such income-tax proceeding or liability of any tax payable by the 2nd respondent - assessee in
favour of the petitioner - revenue. As the proviso to sub-section (1) of Section 281 stipulates a
notice relating to such pendency of the income-tax proceeding or payment of tax payable by the
assessee, the revenue cannot take the plea that the 1st respondent had knowledge of the pendency
of the proceeding and thereby it is open to the 1st respondent to derive advantage of clause (i) of
the proviso to sub-section (1) of section 281 of the Income-tax Act, 1961, so far as it relates to
charge created by the 2nd respondent in favour of the 1st respondent - financial institution by
equitable mortgage of the immovable property in question, as against any claim in respect of any
tax or any other sum payable by the assessee as a result of completion of any proceeding or
otherwise by the petitioner - revenue.
28. Similar matter fell for consideration before the Madhya Pradesh High Court in the case of
State of Madhya Pradesh v. Abhaykumar, reported in (1992) 86 Sales Tax Cases 88. Therein the
State revenue referring to the provisions of section 33-A of the Madhya Pradesh General Sales
Tax Act, 1958 contended that the transfer as against the revenue was void. The Indore Bench of
the Madhya Pradesh High Court having noticed the provision of section 33-A of the Madhya
Pradesh General Sales Tax Act, 1958, which was almost similar to the present sub-section (1) of
section 281 of the Income-tax Act, 1961, held that the transfer was for a valuable consideration
and it was without notice of the pendency of the proceeding under the Sales-tax Act and,
therefore, the transfer falls under the exception created by the proviso to section 33-A of the said
Act. The finding of the lower Court was upheld and the second appeal preferred by the State of
Maharashtra was dismissed.
Similar finding was also given by a Division Bench of the Madhya Pradesh High Court (Gwalior
Bench) in the case of Pooranchand Ved Prakash v. The State of Madhya Pradesh, reported in
(1973) XXXI Sales Tax Cases 170. Therein, the Division Bench of the Madhya Pradesh High
Court, taking into consideration the object of the proviso to section 33-A of the Madhya Pradesh
General Sales Tax, 1958, held that such proviso was to give protection to a bona fide transferee
for consideration. Where, therefore, a transferee acquires property from a dealer bona fide for
valuable consideration without notice of the proceedings for recovery of arrears of sales tax
against that dealer, the transfer will be saved under the proviso even though it is hit by the main
part of the Section. The view that the expression "without notice of the proceedings" in the
proviso refers to the dealer and not to be transferee is not correct.
29. The case of the petitioner of the first writ petition - SCA No. 3786 of 2010 being also covered
by the aforesaid decision, we hold that the 1st respondent - financial institution is entitled to the
protection to the bona fide transfer of the property having made for valuable consideration from
the 2nd respondent - assessee and the same having made without notice of the proceedings for
recovery of arrears of income-tax against the 1st respondent - transferee is saved under clause (i)
of the proviso to sub-section (1) of section 281 of the Income-tax Act, 1961, though the transfer is
hit by the main part of the Section. In absence of any merit, the first writ petition - SCA No. 3786
of 2010 is dismissed, but there shall be no order as to costs.
30. In the second writ petition - SCA No. 6961 of 2010, the Customs department has claimed
priority over the secured creditor, the 1st respondent, in view of section 142 of the Customs Act,
1962. According to it, the claim of the Customs department has priority over the claim of the
secured creditor, the 1st respondent.
31. Section 142 of the Customs Act, 1962 relates to "Recovery of sums due to Government", as
quoted hereunder:-
"142. Recovery of sums due to Government, - (1) Where any sum payable by any person
under this Act including the amount required to be paid to the credit of the Central
Government under Section 28B is not paid,:-
(a) the proper officer may deduct or may require any other officer of customs to deduct
the amount so payable from any money owing to such person which may be under the
control of the proper officer or such other officer or customs; or
(b) the Assistant Commissioner of Customs or Deputy Commissioner of Customs may
recover the amount so payable by detaining and selling any goods belonging to such
person which are under the control of the Assistant Commissioner of Customs of Deputy
Commissioner of Customs or such other officer of customs; or
(c) if the amount cannot be recovered from such person in the manner provided in clause
(a) or clause (b) -
(i) the Assistant Commissioner of Customs or Deputy Commissioner of Customs may
prepare a certificate signed by him specifying the amount due from such person and send
it to the Collector of the district in which such person owns any property or resides or
carries on his business and the said Collector on receipt of such certificate shall proceed
to recover from such person the amount specified thereunder as if it were an arrears of
land revenue; or
(ii) the proper officer may, on an authorization by a Commissioner of Customs and in
accordance with the rules made in this behalf, distrain any movable or immovable
property belonging to or under the control of such person, and detain the same until the
amount payable is paid; and in case, any party of the said amount payable or of the cost
of the distress or keeping of the property, remains unpaid for a period of thirty days next
after any such distress, may cause the said property to be sold and with the proceeds of
such sale, may satisfy the amount payable and the costs including cost of sale remaining
unpaid and shall render the surplus, if any, to such person:
Provided that where the person (hereinafter referred to as predecessor), by whom any
sum payable under this Act including the amount required to be paid to the credit of the
Central Government under Section 28B is not paid, transfers or otherwise disposes of his
business or trade in whole or in part, or effects any change in the ownership thereof, in
consequence of which he is succeeded in such business or trade by any other person, all
goods, materials, preparations, plants, machineries, vessels, utensils, implements and
articles in the custody or possession of the person so succeeding may also be attached and
sold by the proper officer, after obtaining written approval from the Commissioner of
Customs, for the purposes of recovering the amount so payable by such predecessor at
the time of such transfer or otherwise disposal or change.
(2) Where the terms of any bond or other instrument executed under this Act or any rules
or regulations made thereunder provide that any amount due under such instrument may
be recovered in the manner laid down in sub-section (1) the amount may, without
prejudice to any other mode of recovery, be recovered in accordance with the provisions
of that sub-section."
From the aforesaid provision, it will be evident that under section 142, no charge is created in
favour of the Customs department, much less the first charge or priority of claim over a secured
creditor. It only relates to manner in which the amount payable by the assessee is to be recovered.
32. The question relating to priority of dues of the Government fell for consideration before the
Supreme Court and other High Courts from time to time. Taking into consideration the different
decisions of the Supreme Court, a Division Bench of this Court in the case of Baroda City Cooperative
Bank Ltd. v. State of Gujarat, reported in 2010 (3) GLR 2132: 2010 (2) GLH 525, held
as follows:-
"16. From the judgments referred to above, it will be evident that:-
(a) The arrears of tax due to the State can claim priority over the unsecured debt.
(b) If first charge by way of priority is not claimed under the statute, the said
doctrine is not applicable.
(c) Normally, the doctrine of first charge/priority of State will prevail over the
private debt which is an unsecured debt.
(d) In normal course, the doctrine of first charge/priority cannot prevail over
secured debts, but if first charge of the State is over the secured debts, both debts
being equal, the State can claim priority even over the secured debts, and
(e) The secured debts under the Securitization Act or debt under the RDDB Act
has no first charge and thereby cannot compete with first charge/priority claim of
the State if made under the statute."
33. A specific question whether the Central Excise Department can claim priority over the
secured debt of a secured creditor under the Central Excise Act, 1944 also fell for consideration
before different High Courts and the Supreme Court. A Full Bench of the Madras High Court in
the case of UTI Bank Ltd. v. The Dy. Commissioner of Central Excise, Chennai II Division,
reported in 2007 (1) Law Weekly, 50 while dealing with the Central Excise Act, 1944, the
Customs Act, 1962 and the SARFAESI Act, 2002, considered whether the Crown's debts, for
which there is no priority or charge is created under the statute, should have precedence over the
secured creditors or not. Considering the facts of the said case that the UTI Bank had taken
possession of the property under section 13(4) of the SARFAESI Act and having noticed that
there are no specific provisions under the Central Excise Act or the Customs Act to claim first
charge, as provided under other enactments, the Full Bench held that generally the dues to the
Government i.e. tax, duties, etc. (Crown's debts) get priority over ordinary debts; only when there
is a specific provision in the statute claiming first charge over the property, the Crown's debt is
entitled to have priority over the claim of others. In absence of any such provision to claim first
charge, the Government cannot claim precedence under the Central Excise Act over the claim of
the secured creditor under the SARFAESI Act, 2002.
34. Similar question fell for consideration before the Supreme Court in the case of Union of India
v. Sicom Ltd., reported in (2009) 2 SCC 121. Having noticed the provisions of the Central Excise
Act, 1944, the Supreme Court has rejected the claim of the Government to have first charge over
the secured debt.
35. The same very issue also fell for consideration before a Division Bench of this Court in the
case of Kotak Mahindra Bank v. District Magistrate, reported in 2011 (1) GLR 18. In the said
case, the proceeding under the Central Excise Act, 1944 was initiated on 24.2.1987 and 26.2.1991
when Rule 173Q(2) and Rule 211 of the Central Excise Rules, 1944 were in vogue. At the time
the first order of confiscation was passed, the authority had jurisdiction under Rule 173Q(2) to
confiscate the land, building, plant, machinery, etc.. The said order was set aside and remitted for
de nova decision. The final order was passed on 25.2.2006, by this time both Rule 173Q(2) and
Rule 211 stood omitted. Having noticed the different provisions of the Central Excise Act, 1944,
Central Excise Rules, 1944 and the Central Excise Rules, 2001 including Rule 28 of the Central
Excise Rules, 2001 which related to the property to be vested in the Central Government on
confiscation, and different decisions of the High Courts and Supreme Court, this Court held that
Excise and Customs department of the Central Government cannot claim any priority over the
secured debt of a secured creditor as created under the SARFAESI Act.
36. The case of the petitioner of the second writ petition, the Assistant Commissioner of Customs
in SCA No. 6961 of 2010 being covered by the decision of the Madras High Court in the case of
UTI Bank Ltd. v. The Dy. Commissioner of Central Excise, Chennai II Division, reported in 2007
(1) Law Weekly, 50, the decision of the Supreme Court in the case of Union of India v. Sicom
Ltd., reported in (2009) 2 SCC 121 and the decision of a Division Bench of this Court in the case
of Kotak Mahindra Bank v. District Magistrate, reported in 2011 (1) GLR 18, we hold that the
Customs Department cannot claim any priority of claim over the claim of the secured creditor, the
1st respondent - financial institution. No relief can be granted in the second writ petition - SCA
No. 6961 of 2010, which is accordingly rejected.
37. So far as the question of taking over possession of the property under section 13(4) of the
SARFAESI Act or auction of sale of the said property under said section 13(4) or distribution of
the assets between the different secured creditors are concerned, they being the matters pending
consideration before the Debts Recovery Tribunal, Ahmedabad in Securitization Appeal No. 35
of 2009 filed by the 2nd respondent and the proposed appeal filed by the petitioner - revenue
alongwith a petition for condonation of delay, we have not expressed any opinion. Therefore, the
present judgment will not affect on the question to be determined by the Debts Recovery
Tribunal, Ahmedabad i.e. whether the measures taken by the 1st respondent - financial institution
in respect of the property in question under Section 13(4) are against the SARFAESI Act or the
Rules framed thereunder, which is to be determined on the basis of the facts and pleadings
independently.
No comments:
Post a Comment