Case: M/S CONNECTWELL INDUSTRIES PVT.LTD Vs. UNION OF INDIA THROUGH THE MINISTRY OF FINANCE &amp; ORS

the High Court. In view of the above findings, the High Court dismissed the Writ Petition. 5. It was submitted by Mr. Basava Prabhu Patil, learned Senior Counsel and Mr. Amar Dave, learned counsel appearing on behalf of the Appellant that the property in dispute was mortgaged by the BPIL in 2000 and the recovery certificate was issued pursuant to the order passed by the DRT in 2002. They submitted that the property was attached by Respondent No.2 on 29.11.2002, prior to the issuance of the notice by the Income Tax Officer under Rule 2 of Schedule II to the Act on 11.02.2003. According to them, the rigours of Rule 2 and Rule 16 of Schedule II are not applicable to the instant case as a charge over the property was created prior to the issuance of the notice under Rule 2 of Schedule II to the Act. It was argued that a government debt in India is not entitled to have precedence over a prior secured debt. 6. Mr. Arijit Prasad, learned Senior Counsel appearing for the Union of India submitted that BPIL was in default of a payment of income tax and a penalty arose therefrom, due to which a notice under Rule 2 of Schedule II to the Act was issued on 11.02.2003 by following the prescribed procedure. He submitted that no property which is the subject matter of a notice can be transferred after the issuance of a notice under Rule 2. Mr. Prasad also submitted that the immovable property was attached in accordance with Rule 48 of Schedule II on 17.06.2003. Undisputedly, the sale in favour of the Appellant took place subsequent to the order of attachment dated 17.06.2003. He urged that the Appellants are not entitled to any relief and the High Court was right in dismissing the Writ Petition as the Crown debt is entitled to priority in view of the provisions of Schedule II to the Act and thus any transfer of the property, which is subject matter of attachment under Rule 16(2) is void. 7. As Rules 2 and 16 of Schedule II to the Act would fall for interpretation in this case, the same read as under : Issue of Notice 2. When a certificate has been drawn up by the Tax Recovery Officer for the recovery of arrears under this Schedule, the Tax Recover Officer shall cause to be served upon the defaulter a notice requiring the defaulter to pay the amount specified in the certificate within fifteen days from the date of service of the notice and intimating that in default steps would be taken to realize the amount under this Schedule. 16.1 Where a notice has been served on a defaulter under rule 2, the defaulter or his representative in interest shall not be competent to mortgage, charge, lease or otherwise deal with any property belonging to him except with the permission of the Tax Recovery Officer, nor shall any civil court issue any process against such property in execution of a decree for the payment of money. 8. 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. [See:- Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. and Others (2000) 5 SCC 694 , Union of India & Ors. v. Sicom Ltd. & Anr. (2009) 2 SCC 121 , Bombay Stock Exchange v. V.S. Kandalgaonkar & Ors. (2015) 2 SCC 1 , Principal Commission of Income Tax v. Monnet Ispat and Energy Ltd. (2018) 18 SCC 786 ] 9. 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. The crucial provision for adjudication of the dispute in this case is Rule 16. 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. 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. However, the property can be transferred with the permission of the Tax Recovery Officer. According to Rule 16(2), if an attachment has been made under Schedule II to the Act, any private transfer or delivery of the property shall be void as against all claims enforceable under the attachment. 10. There is no dispute regarding the facts of this case. 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. 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 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. The High Court held that Rule 16(2) is applicable to this case on the ground that the actual sale took place after the order of attachment was passed by Respondent No.4. The High Court failed to take into account the fact that the sale of the property was pursuant to the order passed by the DRT with regard to the property over which a charge was already created prior to the issuance of notice on 11.02.2003. 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, we find force in the submissions made on behalf of the Appellant.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]8. 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 debts10. There is no dispute regarding the facts of this case. 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. 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 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. The High Court held that Rule 16(2) is applicable to this case on the ground that the actual sale took place after the order of attachment was passed by Respondent No.4. The High Court failed to take into account the fact that the sale of the property was pursuant to the order passed by the DRT with regard to the property over which a charge was already created prior to the issuance of notice on 11.02.2003. 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, we find force in the submissions made on behalf of the Appellant.