M/S Connectwell Industries … vs Union Of India Through The … on 6 March, 2020


Supreme Court of India

M/S Connectwell Industries … vs Union Of India Through The … on 6 March, 2020

Author: L. Nageswara Rao

Bench: L. Nageswara Rao, Hemant Gupta

                                               Non-Reportable


            IN THE SUPREME COURT OF INDIA
             CIVIL APPELLATE JURISDICTION

               CIVIL APPEAL NO. 1919 OF 2010


M/s. Connectwell Industries Pvt. Ltd.     .... Appellant(s)

                         Versus

Union of India
Through Ministry of Finance & Ors.      …. Respondent(s)



                       JUDGMENT

L. NAGESWARA RAO, J.

1. 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 (hereinafter referred to

as ‘the Act’) for recovery of the dues. The Writ Petition

was dismissed by the High court, aggrieved by which

the Appeal has been filed.

[1]

2. Biowin Pharma India Ltd. (hereinafter referred to

as ‘BPIL’)- Respondent No.5 herein obtained a loan from

the Union Bank of India. Property situated in Plot No.D-

11 admeasuring 1000 sq. mtrs. situated at Phase-III,

Dombivli Industrial Area, MIDC, Kalyan along with plant

machinery and building was mortgaged as security to

Union Bank of India-Respondent No.5 herein.

Respondent No.-5 filed OA No.1836 of 2000 before the

Debt Recovery Tribunal III, Mumbai (hereinafter referred

as ‘the DRT’) for recovery of the loan advanced to BPIL.

The DRT allowed the OA filed by Respondent No.5 and

directed BPIL to pay a sum of Rs.4,76,14,943.20/- along

with interest at the rate of 17.34% per annum from the

date of the application till the date of payment and/or

realisation. A recovery certificate in terms of the order

passed by the DRT was issued and recovery proceedings

were initiated against BPIL. The Recovery Officer, DRT

III (Respondent No.2) attached the property on

29.11.2002. Respondent No.2 issued a proclamation of

sale of the said property on 19.08.2004. A public

[2]
auction was held on 28.09.2004. The DRT was informed

that there were no bidders except the Appellant. The

offer made by the Appellant to purchase the property

for an amount of Rs.23,00,000/- was accepted by

Respondent No.2. On 14.01.2005, a certificate of sale

was issued by Respondent No.2 in favour of the

Appellant. The possession of the disputed property was

handed over to the Appellant on 25.01.2005 by

Respondent No.2 and a certificate of sale was registered

on 10.01.2006.

3. The Maharashtra Industrial Development

Corporation (hereinafter referred to as ‘the MIDC’)

informed Respondent No.2 that it received a letter dated

23.03.2006 from the Tax Recovery Officer, Range 1,

Kalyan, Respondent No.4 herein stating that the

property in dispute was attached by Respondent No.4

on 17.06.2003. The Appellant requested the Regional

Officer, MIDC by a letter dated 10.04.2006 to transfer

the property in dispute in its favour in light of the Sale

Certificate issued by DRT on 25.01.2005. As the MIDC

[3]
failed to transfer the plot in the name of the Appellant,

the Appellant filed a Writ Petition before the High Court

seeking a direction for issuance of ‘No Objection’ in

respect of the plot and to restrain Respondent No.4 from

enforcing the attachment of the said plot, which was

performed on 11.02.2003.

4. The question posed before the High Court is

whether the Appellant who bona fide purchased the

property in auction sale as per the order of the DRT is

entitled to have the property transferred in its name in

spite of the attachment of the said property by the

Income Tax Department. Relying upon Rule 16 of

Schedule II to the Act, the High Court came to the

conclusion that there can be no transfer of a property

which is the subject matter of a notice. The High Court

was also of the view that after an order of attachment is

made under Rule 16(2), no transfer or delivery of the

property or any interest in the property can be made,

contrary to such attachment. The High Court held that

notice under Rule 2 of Schedule II to the Act was issued

[4]
on 11.02.2003, and the property in dispute was

attached under Rule 48 on 17.06.2003, whereas the

sale in favour of the Appellant took place on 09.12.2004

and the sale certificate was issued on 14.01.2005.

Therefore, the transfer of the property made

subsequent to the issuance of the notice under Rule 2

and the attachment under Rule 48, is void. The

submission made on behalf of the Appellant that the

sale in favour of the Appellant was at the behest of the

DRT and not the defaulter i.e., BPIL was not accepted by

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

[5]
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

[6]
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

[7]
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 Others1, Union of India & Ors. v. Sicom Ltd. &

Anr.2, Bombay Stock Exchange v. V.S.

1 (2000) 5 SCC 694
2 (2009) 2 SCC 121

[8]
Kandalgaonkar & Ors.3, Principal Commission of

Income Tax v. Monnet Ispat and Energy Ltd.4]

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.

3 (2015) 2 SCC 1
4 (2018) 18 SCC 786

[9]

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

[10]
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.

11. The judgment of the High Court is set aside and

the Appeal is allowed. The MIDC is directed to issue a

‘No Objection” certificate to the Appellant. Respondent

No.4 is restrained from enforcing the attachment order

dated 17.06.2003.

……………………………….J.
[L. NAGESWARA RAO]

…………………………..J.

[DEEPAK GUPTA]

New Delhi,
March 06, 2020.

[11]



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