The income tax cannot attach property which has recovery certificate issued qua it by DRT, prior to issuance of notice; SC.

Supreme Court of India

Justice L. Nageswara Rao & Justice Deepak Gupta

The SC {M/s. Connectwell Industries Pvt. Ltd. v. Union of India} holds it is trite law that, unless there is preference given to the Crown debt by a statute, the dues of a secured creditor have preference over Crown debts. 

It was held that the property in dispute was mortgaged by BPIL to the Union Bank of India in 2000 and the DRT passed an order of recovery against the BPIL in 2002. It was held that the recovery certificate was issued immediately, pursuant to which an attachment order was passed prior to the date on which notice was issued by the Tax Recovery Officer- Respondent No.4 under Rule 2 of Schedule II to the Act. It was further held that it is true that the sale was conducted after the issuance of the notice as well as the attachment order passed by Respondent No.4 in 2003, but the fact remains that a charge over the property was created much prior to the notice issued by Respondent No.4 on 16.11.2003. It was held that as the charge over the property was created much prior to the issuance of notice under Rule 2 of Schedule II to the Act by Respondent No.4, no right enured in favour of respondent no. 4.

It was held that Rule 2 of Schedule II to the Act provides for a notice to be issued to the defaulter requiring him to pay the amount specified in the certificate, in default of which steps would be taken to realise them. It was held that the crucial provision for adjudication of the dispute in this case is Rule 16. Further held that according to Rule 16(1), a defaulter or his representative cannot mortgage, charge, lease or otherwise deal with any property which is subject matter of a notice under Rule 2. It was also held that Rule 16(1) also stipulates that no civil court can issue any process against such property in execution of a decree for the payment of money. But, in present case, it was held that prior to notice by respondent no. 4 under Rule 2, recovery certificate was issued by the DRT and charge of the bank upon the property had already been created.

In the present case, the Appellant filed the Writ Petition in the High Court of Judicature at Bombay seeking a restraint order against the Tax Recovery Officer, Range 1, Kalyan - Respondent No.4 for enforcing the attachment made under the Income Tax Act, 1961 ( referred to as ‘the Act’) for recovery of the dues. The Writ Petition was dismissed by the High court, aggrieved by which the Appeal had been filed before the SC. The appeal was allowed by the SC and the Income Tax was restrained from enforcing the attachment order.