Tax Recovery Officers Vs Bank Of India

TAX recovery Officer   Vs     Bank of India on 6 September, 2011

Author: Mr.S.J.Mukhopadhaya, Mr.Justice J.B.Pardiwala,

THE HIGH COURT OF GUJARAT AT AHMEDABAD


SPECIAL
CIVIL APPLICATION No. 13196 of 2008
With

SPECIAL
CIVIL APPLICATION No. 888 of 2009
For
Approval and Signature:
HONOURABLE
THE CHIEF JUSTICE MR. S.J. MUKHOPADHAYA HONOURABLE
TAX RECOVERY OFFICER - Petitioner(s)MR.JUSTICE J.B.PARDIWALA
Versus

BANK
OF INDIA & 2 - Respondent(s)Appearance :-MR
KM PARIKH for Petitioner(s) : 1, NOTICE SERVED BY DS for
Respondent(s) : 1,
RULE SERVED for Respondent(s) : 1, MR BJ
TRIVEDI for Respondent(s) : 1, MR JT TRIVEDI for Respondent(s) : 1,
MS JIGNASA B TRIVEDI for Respondent(s) : 1, SERVED BY
AFFIX.-(R) for Respondent(s) : 2, MR BHARAT T RAO for
Respondent(s) : 3,
............................................................................

CORAM
:

HONOURABLE
THE CHIEF JUSTICE MR. S.J. MUKHOPADHAYA



HONOURABLE
MR.JUSTICE J.B.PARDIWALA

Date
: 6-9-2011

CAV
JUDGMENT

(Per
: HONOURABLE THE CHIEF JUSTICE MR. S.J. MUKHOPADHAYA)


1. As
both the cases have been preferred by a common petitioner, i.e. the Tax Recovery Officer, Panchmahal Range, Godhra, and a common question of law is involved, they were heard together, and being disposed of by this common judgement.



2. The
only question involved in the present case is whether the charge created by the respective borrowers in favour of their respective secured creditor Banks is saved under the proviso to sub-sec.(1) of Sec.281 of the Income Tax Act, 1961, or is void as against the claim of tax payable by the borrower - assessee in favour of the Revenue - the writ petitioners.


3. To
determine the issue, it is necessary to notice the relevant facts of each case, as discussed hereunder:


4. S.C.A.
No.13196 of 2008:- The
case of the petitioner is that the 2nd respondent M/s. Somani Cement Company Limited, which is the borrower of 1st respondent Bank - Bank of India, is one of the assessee in default, and is liable to pay huge outstanding demand of more than Rs.27 crores to the petitioner Department for the assessment year 1992-93, 1993-94, 1994-95, 1995-96, 1996-97, 1997-98, 1998-99 under the Income Tax Act, 1961.


5. The
1st respondent Bank of India initiated recovery proceeding against the 2nd respondent borrower for recovery of secured debts. The petitioner Tax Recovery Officer, Godhra, in the meantime, has issued demand notice to the 2nd respondent, which has failed to pay huge income tax dues, and consequently the petitioner - Department passed an order of attachment of immoveable property on 7/18 October 2002, and attached the immoveable property. The warrant of attachment of moveable or immoveable property under Rule 20 of the 2nd Schedule was issued on 26th December 2002, thereby, the moveable assets of the 2nd respondent were also attached.


6. Similarly,
one M/s. Shreyas Equipment Limited failed to pay the outstanding tax demand. The petitioner - Department passed an order of attachment of immoveable property on 18th October 2002. Panchmana was also prepared on the same date. Thereby, the moveable and immoveable properties of the 2nd respondent were attached by the petitioner - Department.


7. The
respondent Bank of India moved before the Recovery Officer, Debt Recovery Tribunal, for recovery of the amount; on 20th November 2002 the Debt Recovery Tribunal passed an order of attachment of immoveable property of the 2nd respondent. The petitioner - Department having come to know of the order of attachment passed by the Debt Recovery Tribunal, issued a notice of attachment under Rule 31 of the 2nd Schedule on 23rd January 2003 to the Registrar, Debt Recovery Tribunal, Ahmedabad, in R.P. No.980.



8. In
the meantime, the Recovery Officer, Debt Recovery Tribunal, passed an order on 19th December 2002 for sale of immoveable property fixing 30th January 2003 as the date for auction sale.



9. On
16th January 2003, the counsel for the 2nd respondent appeared before the Recovery Officer, Debt Recovery Tribunal, Ahmedabad, in R.P. No.980, and agreed to cooperate with the 1st respondent Bank for recovery the certified dues. At the instance of the 1st respondent Bank of India, the Recovery Officer, Debt Recovery Tribunal II, Ahmedabad issued fresh sale proclamation on 26th October 2004 fixing 27th December 2004 as the date of auction. The second public auction also failed and resulted in an unsuccessful attempt.


10. The
1st respondent Bank of India filed an application on 16th December 2005 requesting the Recovery Officer, Debt Recovery Tribunal II, Ahmedabad, to hold the public auction on 27th February 2006. The case was accordingly adjourned. The auction was deferred for one month i.e. 27th February 2006. In the meantime, on 21st February 2006, the Recovery Officer, Debt Recovery Tribunal, passed an order to attach moveable assets of the 2nd respondent and re-fix the public auction on 27th April 2006.



11. On
24th April 2006, the Recovery Officer considered the objection filed by the Sales Tax Department of the State, Income Tax Department as also by the Gujarat Industrial Corporation Limited, which claimed their dues.


12. In
the meantime, the Bank of India issued advertisement on 10th April 2006 in local newspapers for public auction of moveable and immoveable property of the 2nd respondent. The petitioner Department lodged objection and made claim on 17th April 2006 before the Recovery Officer, Debt Recovery Tribunal II, Ahmedabad in R.P. No.980. In view of the objection raised by the Sales Tax Department of the State, Income Tax Department and Gujarat Industrial Corporation Limited and their claims, the intending bidders withdrew themselves from the public auction.


13. On
12th July 2007, the Recovery Officer, Debt Recovery Tribunal II, Ahmedabad, directed that till the objections of Income Tax Department, Sales Tax Department of the State and Gujarat Industrial Corporation Limited are decided, sale of moveable and immoveable assets will not take place; only after such decision, the auction sale may proceed. After hearing the parties, by order dated 9th may 2008, the Recovery Officer, Debt Recovery Tribunal II, Ahmedabad, rejected the objections raised by the Income Tax Department and decided to recover the dues of the Bank of India first, and observed that after such recovery, if any amount remains as balance, the dues of the Income Tax Department, Sales Tax Department and others can be paid.


14. Against
the said order, the petitioner - Department filed appeal u/Sec.30 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (hereinafter referred to as `the R.D.D.B. Act') before the Presiding Officer Debt Recovery Tribunal II Ahmedabad in Appeal No. 69 of 2008.



15. During
the pendency of the said appeal, on 6th August 2008, the Recovery Officer, Debt Recovery Tribunal II Ahmedabad, held public auction and highest offer of M/s. AAYFA Infrastructure of Rs.60 lakhs was accepted. The sale of moveable and immoveable property was subsequently confirmed in favour of said M/s. AAYFA Infrastructure.



16. The
Presiding Officer, Debt Recovery Tribunal II, Ahmedabad, dismissed the Appeal No.69 of 2008 by order and judgement dated 7th October 2008.



17. S.C.A.
No. 888 of 2009:- In this case, the 2nd respondent M/s. Kanugo Tubes (India) Limited (hereinafter referred to as `KTL'), is the assessee of petitioner Income Tax Department, and is the borrower of 1st respondent Bank of Baroda. The said 2nd respondent obtained financial assistance from Bank of Baroda, and created charge of equitable mortgage by depositing the original title deed of the property in question in favour of said Bank of Baroda on 1st June 1989. It was extended from time to time.


18. The
2nd respondent KTL, which was initially constituted as a partnership firm with effect from 3rd November 1988, filed its income tax returns for the assessment years 1990-91, 1991-92, 1992-93, 1993-94, 1994-95 and for succeeding assessment years with the concerned Assessing Officer. It failed to repay the outstanding dues of Bank of Baroda, and therefore, the Bank of Baroda filed an application u/Sec.19 of the R.D.D.B. Act before the Debt Recovery Tribunal II, Ahmedabad, in Original Application No.187 of 1998. After contest, the Recovery Certificate was issued by the Presiding Officer, Debt Recovery Tribunal, on 8th March 2001 in favour of the Bank of Baroda against the 2nd respondent.



19. The
Recovery Officer, Debt Recovery Tribunal II, Ahmedabad, at the instance of Bank of Baroda, initiated Recovery Proceeding No.685 for recovery of certified dues from the 2nd respondent.


20. The
assessing officer of Income Tax Department passed order of assessment u/Sec.143(3) read with Sec.147 on 29th December 2000 against the 2nd respondent for Assessment Year 1995-96. When the matter was pending, the Recovery Officer, Debt Recovery Tribunal II, Ahmedabad, passed an order of attachment of immoveable property in question on 24th April 2003.


21. The
petitioner - Department also passed an order of attachment of the very same immoveable property of 2nd respondent company on 22nd September 2003 for recovery of arrears of tax for the assessment year 1995-96 and assessment year 1997-98, which was duly served on the 2nd respondent. A panchnama was also drawn showing attachment of the immoveable property of the 2nd respondent situated at G.I.D.C., Kalol. Proclamation of sale was made by the petitioner Department on 23rd February 2004 in respect of attached immoveable property of the 2nd respondent fixing the sale attachment of the property as described therein. A public notice was also issued by the petitioner Department on 4th March 2004 in the local daily (Sandesh), Panchmahal Publication, Dahod Edition, in respect of sale of attached assets and properties of the 2nd respondent and other defaulters. Pursuant to the public notice for auction for attached properties, the Bank of Baroda by letter dated 5th March 2004 requested the petitioner Department not to dispose of the assets of the 2nd respondent for the reasons mentioned in the said letter.



22. According
to the petitioner, it lodged claim of recovery of tax arrears from the 2nd respondent company for the assessment years 1996-97 and 1997-98, vide letter dated 23rd August 2004, and has also lodged claim of recovery of tax arrears with the Debt Recovery Tribunal II, Ahmedabad, on 23rd August 2004, 28th September 2005, 17th June 2006, 3rd August 2006, 14th June 2007 and 28th September 2007. The petitioner Department requested the Debt Recovery Tribunal to consider the same in accordance with law claiming priority over the dues of the 2nd respondent.


23. The
Debt Recovery Tribunal II, Ahmedabad, issued a notice on 11th July 2008 incorporating therein the terms of sale proclamation and passed consequential orders. The public auction of the immoveable property was fixed on 18th November 2008, which was held on the said date in favour of highest successful auction purchaser; the matter was adjourned to 2nd December 2008.


24. At
that stage, petitioner Income Tax Department lodged 3rd party objection on 16th December 2008 in the Recovery Proceedings No.685 with the Debt Recovery Tribunal II, Ahmedabad. The Recovery Officer, Debt Recovery Tribunal II, Ahmedabad, by its order dated 22nd December 2008 rejected the application.



25. Learned
counsel for the petitioner would submit that the Income Tax Department having first charge over the property, it was not open to the Recovery Officer, Debt Recovery Tribunal II, Ahmedabad, to auction sale the same very property. It was also contended that the Income Tax Department has priority over the property than the charge created in favour of the Banks.


26. A
specific stand has been taken that the mortgage made in favour of the Banks by the assessee (borrower) is void as against the claim of tax of the Income Tax Department as per sub-sec.(1) of Sec.281 of the Income Tax Act, 1961.



27. Per
contra, according to learned counsel for the Banks, in absence of any statutory provision, the Income Tax Department cannot claim either first charge or priority over the secured charge of the Banks.


28. It
was also contended that the mortgage having been made prior to the assessment proceedings, and in absence of any notice to the Banks regarding pendency of the Income Tax proceedings, the mortgage as made in favour of the Banks cannot be held to be void, it stands saved under proviso to sub-sec.(1) of Sec.281 of the Income Tax Act, 1961.



29. Before
we decide the issue, certain relevant facts are required to be noticed in the case of both the assessee 2nd respondents of each case vis-à-vis the mortgage created in favour of the 1st respondent Bank of each case.



30. In
S.C.A. No.13196 of 2008, the income tax proceeding relates to assessment year 1992-93 onwards initiated against the assessee - 2nd respondent M/s. Somani Cement Company Limited. The petitioner has not made it clear as to since which date income tax proceeding is pending against the 2nd respondent assessee, i.e. prior to 25th October 1994 or thereafter. Registered Folio No. 163, which relates to creation of charge by 2nd respondent in favour of Bank of India, shows that the Board of Directors of the Company on 25th October 1994 handed over and deposited the title deeds of the land in question with the Bank of India. Therein, moveable and immoveable properties of borrower were mentioned, which are situated in village Kharsalia via Vijalpur, Survey Nos. 350/1, 350/4, 350/5 and 350/6 of Mouje Jitpura, Taluka Godhra, District Panchmahals. In the said mortgage deed, it was specifically mentioned by the 2nd respondent that "no proceeding for recovery of tax are pending against the 2nd respondent company under the Income Tax Act, 1961 or any other law, and that no notice has been issued and/or served upon the Company under Rule 2, 16, 51 or any other Rules of the 2nd Schedule of the Income Tax Act, 1961." Such specific disclosure made therein being relevant is quoted hereunder:
"Mr.
Govind Gendalal Somani further assured and declared to the Bank on behalf of the Company that the title deeds deposited with the Bank are the only title deeds in respect of the said immovable properties which are equitably mortgaged to the Bank and that the Company is the absolute owner of the said immovable properties and that the company has marketable title thereto and that there is no mortgage, charge or lien or other encumbrance or attachment on the said immovable properties or any part or parts thereof in favour of any Government or the Income Tax Department or any other Government Department, or any person, firm or company, body corporate or society or entity whomsoever and that the Company has not entered into any agreement for sale thereof or any part or parts thereof and that no such mortgage, charge or lien or other encumbrances whatsoever will be created or attachment allowed to be levied on the said immovable properties or any part or parts thereof in favour of or by or on behalf of any Government or Government Department or any person, firm, company, body corporate or society or entity whatsoever other than the Bank so long as the Company continues to be indebted to or liable to the Bank on any account in any manner whatsoever, and that no proceedings for recovery of taxes are pending against the company under the Income tax Act or any other law, and that no notice has been issued and/or served upon the Company under Rules 2, 16, or 51 or any other rules of the Second Schedule to the Income tax Act, 1961 (as amended) or under any other law and that there is no pending attachment whatsoever levied howsoever on the said immovable properties."


31. The
above mentioned fact had not been disputed by the petitioner Recovery Officer, Income Tax Department.


32. So
far as the 2nd case S.C.A. No.888 of 2009 is concerned, the petitioner has accepted that equitable mortgage was created by the 2nd respondent - KTL in favour of Bank of Baroda on 1st June 1989, which was extended from time to time.



33. The
petitioner itself has stated that the 2nd respondent filed returns as per the returns of income tax for the assessment years 1990-91, 1991-92, 1992-93, 1993-94, 1994-95 for all successful years with the concerned assessing officer, when it was a partnership firm. It is only when the 2nd respondent was made a Company under the Companies Act, 1956, from 21 February 1995 the arrears of tax were not paid for the assessment years 1995-96 and assessment year 1997-98. Thus, it is evident that the income tax proceeding was initiated by the petitioner Income Tax Department much after the mortgage made by 2nd respondent in favour of the Bank (on 1st June 1989).



34. It
is a settled law that the State will have priority over the unsecured creditor in recovery of its dues. One may raise the question whether State can claim priority over the debts of the Bank, which have been secured by the borrower by creating mortgage.


35. A
charge is a wider term, which also includes mortgage. A mortgagor can mortgage the property with the mortgager's interest in the property with a Bank or financial institution, which becomes a secured creditor within the meaning of Sec.2(ze) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.


36. If
under the law there is a first charge created with the State, even a secured creditor, which has secured interest on the property, cannot claim any right, the State having first charge over such property.



37. But,
in the present case, such issues are not required to be determined in absence of any provision creating first charge over the property under the Income Tax Act. There is no such provision laid down under the Income Tax Act, under which, the Income Tax Department can claim priority over the secured creditor.


38. The
only question which arises for determination as noticed above is whether the mortgage made by respective borrowers in favour of their respective secured creditor Banks is saved under the proviso to sub-sec.(1) of Sec.281 of the Income Tax Act, 1961 or is void as against the claim of tax payable by the borrower - assessee in favour of Revenue.



39. For
determination of the aforesaid issue, it is necessary to notice Sec. 281 of the Income Tax Act, 1961, which reads as follows:-
"281.
(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 proceeding 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 applies 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."


40. Similar
issue fell for consideration before the Madhya Pradesh High Court in the case of State of Madhya Pradesh vs. Abhaykumar reported in (1992) 86 Sales Tax Cases 88, wherein almost similar provision i.e. Sec.33-A of the Madhya Pradesh General Sales Tax Act, 1958 fell for consideration. The Indore Bench of the Madhya Pradesh High Court 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. Similar was the view expressed 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.



41. Sec.281
of the Income Tax Act also fell for consideration before the Division Bench of this Court in the case of Tax Recovery Officer v. Industrial Financial Corporation of India in Special Civil Application No. 3786 of 2010 with another case wherein by judgment dated 22nd June 2011, this Court taking into consideration the facts that the transfer of property was made for valuable consideration without notice of proceeding of recovery of arrears of income tax held that the financial institution was entitled to protection under the proviso to clause (1) of sub-sec.(1) of Sec.281 of the Income Tax Act against the arrears of income tax dues of the revenue.



42. In
the case of Bank of India, we have noticed that in the mortgage deed a specific statement was made by 2nd respondent in Special Civil Application No.13196 of 2008 that:
"No
proceeding for recovery of tax are pending against the Company under the Income Tax Act or any other law, and that no notice has been issued and/or served upon the company under Rule 2, 16 or 51 or any other Rules of the second schedule to the Income Tax Act, 1961 (as amended) or under any other law and that there is no pending attachment whatsoever levied howsoever on the said immovable properties"



This
has not been disputed by the petitioner Income Tax Department.


43. The
Bank of India has also specifically pleaded that it had no inkling of any initiation/pendency of proceeding of income tax in respect of outstanding dues of the Income Tax Department. It is also not in dispute that the transfer was made on payment of consideration, i.e. on receipt of credit facility by the borrower, and no proceeding was brought to the knowledge of the respondents.


44. In
the second case, we have noticed that the 2nd respondent M/s. Kanugo Tubes (India) Limited made an equitable mortgage by depositing original title deeds in favour of 1st respondent Bank of Baroda on 1st June 1989 which was extended from time to time. The Income Tax proceeding related to assessment year 1995-96, 1996-97 and 1997-98, notice of which was served on the 2nd respondent. In fact, the returns were was initially filed only for the assessment year 1999 onwards, and therefore, it is clear that the mortgage was created when no proceeding was pending against the 2nd respondent - Kanugo Tubes (India) Limited. We also find that the mortgage was created by the 2nd respondent Kanugo Tubes (India) Limited in favour of Bank of Baroda, it having received financial assistance from the said Bank. Therefore, the consideration amount was passed while transfer by way of mortgage was made, and there was no income tax proceeding pending.



45. In
view of the aforesaid facts, we hold that both the 1st respondents Bank of India and Bank of Baroda are saved under clause (i) of sub-sec.(1) of Sec.281 of the Income Tax Act, 1961, the charge having been created for adequate consideration and without notice of pendency of income tax proceeding. In this background, the petitioner Income tax Department cannot allege that the mortgage made by the 2nd respondent of each case in favour of 1st respondents in both the cases, i.e. Bank of India and Bank of Baroda respectively, are void as against the claim in respect of income tax arrears of the petitioner - Department. In absence of any merit, the writ petitions are dismissed, but there shall be no order as to costs.



(S.J.
MUKHOPADHAYA, C.J.)



(J.B.
PARDIWALA, J.)

(sn
devu pps)



In
view of the findings given in the judgment and the reasons recorded therein, the prayer for interim relief orally requested by the learned counsel for the petitioners is rejected.


(S.J.
MUKHOPADHAYA, C.J.)



(J.B.
PARDIWALA, J.)

mathews/sndevu