Wednesday, 8 July 2015

Whether if assessee is a secured creditor, in that case even Crown debt could be discharged only after debt of secured creditors stand discharged, so would happen with income tax dues - YES: HC

THE issue before the HC is - Whether if the assessee is a secured creditor, in that case even the Crown debt could be discharged only after the debt of secured creditors stand discharged, so would happen with the income tax dues. YES is the answer.
Facts of the case
The assessee is a State owned Corporation. It is a financial institution governed by the State Financial Corporations Act, 1951. It had sanctioned a term loan to M/s Veekay Developers Private Limited to establish a luxury hotel at Mangalore city. However, the said term loan was transferred to V.K. Clubs and Homes Private Limited. The borrower created an equitable mortgage in favour of the assessee by deposit of title deeds. The title deeds of the properties so mortgaged were relating to portions of the land and buildings on various floors of the commercial building, together with common facilities thereof. By way of further security, borrower created equitable mortgage over free hold right in three shops in the building on the land mentioned supra. The borrower received a notice u/s 143(2) just before the sanction of the loan. Subsequently, the Tax Recovery Officer passed an order attaching the immovable properties including the properties mortgaged by Veekay Developers and V.K. Clubs to the assessee invoking Rule 48 of Second Schedule to the Act to recover tax dues from Sri Vivian Kamath D’Souza, M/s Veekay Developers, M/s Shalimar Constructions and M/s Canara Builders. The order of attachment of immovable properties was called in question before the High Court by the assessee, which was allowed and consequently the order attaching the immovable properties was quashed. The Revenue had questioned the order of the Single Judge passed in Writ Petition by filing this intra Court writ appeal.
Held that,
++ we do not find any ground to interfere in the impugned order. There cannot be any dispute that the transfer was for adequate consideration. The records reveal that the term loan obtained by Veekay Developers and subsequently transferred to V.K. Clubs is to the tune of Rs.211.00 lakhs. Whereas the notice u/s 143(2) is for recovery of Rs.80,03,376/-. Hence it is clear that the transfer was for adequate consideration. It is also clear from the records that, while the transfer by way of mortgage is effected, there was no notice of pendency issued to transferee, of the proceedings initiated by the department. As aforementioned, the notice was issued to the assessee by the Assessing Officer one day prior to sanctioning of the loan. Therefore it is clear that the transfer by way of mortgage was also without notice of pendency of the assessment proceedings. In view of the same, the transfer cannot be held to be void. For the aforementioned finding, we are supported by the judgment of Gujarath High Court in the case of TAX RECOVERY OFFICER .vs. INDUSTRIAL FINANCE CORPORATION OF INDIA AND ANOTHER reported in (2012) 346 ITR 11 (Guj);
++ in another judgment in the case of TAX RECOVERY OFFICER .vs. GANGADHAR VISWANATH RANADE reported in (1998) 234 ITR 188 (SC), SC has observed that Section 281 will have to be read homogeneously with the Rule 11(1) of Second Schedule to Act. The Apex Court in the said judgment has observed that the Tax Recovery Officer could not have examined whether the transfer was void u/s 281. His adjudication of the transfer as void u/s 281 is without jurisdiction. The Tax Recovery Officer has relied upon the earlier order of the ITO, declaring that the transaction is void u/s 281. In the earlier proceedings, however, although HC has not set aside this order of the ITO, the HC has expressly held that the order amounted only to an intention or declaration on the part of the Department to treat the transaction as void u/s 281. Such a declaration cannot affect the legal rights of the parties affected under rule 11. The High Court expressly held that the rights of the parties under rule 11 were not affected in any way by this declaration. The Department, therefore, cannot proceed on the assumption that the transaction is void u/s 281, nor can the Tax Recovery Officer, while proceeding under rule 11, declare a transaction of transfer as void u/s 281 by relying on the order of May 9, 1974, or otherwise. His jurisdiction relates to examining possession, and only incidentally, any question of right to possession as claimed by the objector. The HC has, therefore, rightly set aside the order of the Tax Recovery Officer. The right of the Department to have the transfer declared as void u/s 281, as it stood at the relevant time, is not thereby taken away. We are informed that the property continues to be under attachment by virtue of interim orders passed in this appeal. The Department may, if it so desires, take appropriate proceedings in accordance with law for having the transfer declared as void u/s 281;
++ it is clear that the transfer by way of mortgage by V.K.Developers in favour of assessee was for adequate consideration and was without notice of pendency of the assessment proceedings. Hence the same cannot be declared as void. In view of the same, the Single Judge has rightly set aside the order passed by the Tax Recovery Officer attaching the immovable properties for the purpose of sale. Undisputedly, the respondent is a secured creditor. Hence it is needles to observe that even the Crown debt could be discharged only after the debt of secured creditors stand discharged. In that regard, consciously the concerned Tax Recovery Officer by his letter dated 27.1.2006 has clearly stated that assessee can proceed for sale of the properties involved as the assessee has first charge over the properties and to treat the Income Tax Department as second mortgagor. It is also clearly stated in the said letter that after appropriation of sale proceeds towards dues of the assessee, surplus, if any has to be handed over to Tax Recovery Officer, Range-2, Mangalore for appropriation of Income Tax dues. In view of the same, no interference is called for. Appeal fails and the same stands dismissed.

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