Attachment By Tax Dept. Subsequent To A Mortgage Favouring Secured Creditors Has No Legs: Madras High Court

The Madras High Court has held that the orders of attachment passed by the Tax Recovery Officer or Income Tax Department were subsequent to the mortgage created in favour of the secured creditors and have no legs.

The division bench of Justice R. Mahadevan and Justice Mohammed Shaffiq has observed that even if recovery proceedings are quashed for any reason, the bankers' and financial institutions' rights to claim priority in terms of Section 31 B of the Recovery of Debts and Bankruptcy Act and Section 26 E of the SARFAESI Act would still be available. The right to recover under the Income Tax Act, of 1961, must yield to the provisions under the SARFAESI Act and the Recovery of Debts and Bankruptcy Act, and thus, the exercise of attachment may not serve any useful purpose.

The appellant/tax recovery officer has challenged the order of the judge by which it was held that Section 281 of the Income Tax Act does not create a charge, much less one preferential to the revenue, overriding or prevailing over Section 26 E of the SARFAESI Act and Section 31 B of the Recovery of Debts and Bankruptcy Act. The judge proceeded on the premise that the charge was created only when the property was attached by the Revenue or Income Tax Department and when a valid charge existed prior to the attachment. The judge relied on Section 281 of the Income Tax Act, which would not serve to disturb the rights of the secured creditor under Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act.

The appellant contended that Section 281 of the Income Tax Act declares as void any transfer made by the assessee during the pendency of proceedings under the Act. Therefore, the 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 contended that Section 281 does not obstruct the case of the respondent bank. The assessment proceedings were pending with respect to M/s. Betel Exports, whereas the mortgage was executed by the different individual assessees.

The court has to decide on "priority of charge" under the Income Tax Act vis-à-vis the SARFAESI Act and the Recovery of Debts and Bankruptcy Act. The first view proceeds on the basis that priority must be granted to the recovery of government dues on the basis of the "doctrine of constitutional priority." The second view proceeds on the basis that attachment results in the creation of a charge, and if it is subsequent to a mortgage, the right of the existing mortgagee would prevail.

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 were introduced with the specific purpose to override and grant priority to the 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 a conflict of priorities.

"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," the court said.

The court held that priority to secured creditors shall prevail, and thus, the attachment by the Tax Recovery Officer is impermissible.

Case Title: Tax Recovery Officer Versus Union Bank of India

Citation: 2022 LiveLaw (Mad) 503

Case No: W.A. No.1385 of 2022

Date: 01.09.2022

Counsel For Appellant: Advocate A.P.Srinivas

Counsel For Respondent: Advocates Srinath Sridevan, Special Government Pleader S.Ravikumar

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