State Bank of India Vs. Tax Recovery Officer and ors. - Court Judgment

Excerpt:
- - (4) where, upon the said investigation, the tax recovery officer is satisfied that, for the reason stated in the claim or objection, such property was not, at the said date, in the possession of the defaulter or of some person in trust for him or in the occupancy of a tenant or other person paying rent to him, or that, being in the possession of the defaulter at the said date, it was so in his possession, not on his own account or as his own property, but on account of or in trust for some other person, or partly on his own account and partly on account of some other person, the tax recovery officer shall make an order releasing the property, wholly or to such extent as he thinks fit, from attachment or sale. (5) where the tax recovery officer is satisfied that the property was, at..... s.n. jha, j. 1. these two writ petitions between the same parties involving the same point have been heard together and are disposed of by this common order. 2. the facts of the case may be noticed from the writ petition in cwjc no. 1367 of 1998(r). the petitioner, state bank of india, granted cash credit facility to the extent of rs. 28.77 lakhs to respondent no. 2, jai steel industry, on june 12, 1989, against equitable mortgage of the immovable properties including the factory premises. as the said respondent defaulted in repaying the dues, the petitioner-bank instituted mortgage suit no. 76 of 1996 seeking a money decree in the court of the first subordinate judge, dhanbad. the said suit on transfer under the provisions of the recovery of debts due to banks and financial institutions.....

Judgment:

S.N. Jha, J.

1. These two writ petitions between the same parties involving the same point have been heard together and are disposed of by this common order.

2. The facts of the case may be noticed from the writ petition in CWJC No. 1367 of 1998(R). The petitioner, State Bank of India, granted cash credit facility to the extent of Rs. 28.77 lakhs to respondent No. 2, Jai Steel Industry, on June 12, 1989, against equitable mortgage of the immovable properties including the factory premises. As the said respondent defaulted in repaying the dues, the petitioner-bank instituted Mortgage Suit No. 76 of 1996 seeking a money decree in the court of the first Subordinate Judge, Dhanbad. The said suit on transfer under the provisions of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, is now pending before the Debts Recovery Tribunal at Patna. It appears that the income-tax liability of the proprietor of Jai Steel Industry, Shri T.N. Malhotra, was assessed by the income-tax authorities at Rs. 89,48,174 for recovery of which Certificate No. 82 of 1994-95 and Certificates Nos. 4, 5, 6 and 7 of 1997-98 were instituted before the Tax Recovery Officer, Dhanbad, The Tax Recovery Officer after attachment of the properties in question belonging to Jai Steel Industry issued sale proclamation on March 27, 1998, fixing April 14, 1998, as the date of sale. The petitioner-bank filed its claim/objection before the Tax Recovery Officer on April 9, 1998. According to the petitioner, a preliminary hearing took place on May 1, 1998, when the Tax Recovery Officer solicited the opinion of Standing Counsel, Income-tax Department. No hearing on the claim/objection, according to the petitioner, took place thereafter. However, the petitioner's representative was informed on May 14, 1998, that the claim/objection had been rejected. From the copy of the order which was made available on May 15, 1998, it transpired that the claim/objection had been rejected on May 1, 1998, itself. From the order, copy whereof has been marked annexure-3 to the writ petition, it further appears that the claim/objection was summarily rejected on the grounds that the property in question was in the possession of the defaulter, i.e., Sri T.N. Malhotra, representing Jai Steel Industry, and that the claim/objection had been filed unnecessarily to delay the proceeding. The petitioner has approached this court challenging the aforesaid order.

3. The facts of the case in CWJC No. 1371 of 1998(R) are almost the same except that in that case the petitioner-bank has already obtained a decree for Rs. 7 crores against the respondent Data Cables Private Ltd. in Title (Mortgage) Suit No. 65 of 1995, from the court of the first Subordinate Judge, Dhanbad. The property in question belonging to Data Cables Pvt. Ltd. is sought to be auction-sold after attachment by the Tax Recovery Officer, Dhanbad, for recovery of sum of Rs. 1,83,44,070 in Certificates Nos. 1, 2 and 4 of 1997-1998.

4. The Income-tax Department has filed a counter affidavit in CWJC No. 1371 of 1998(R). The Department has taken the stand that no evidence-documentary or oral--was produced by the petitioner before the Tax Recovery Officer in support of its claim/objection and even if it be assumed that the mortgage exists with respect to the property in question, no final decree has yet been passed by the competent court. A stand has also been taken that while the dues of the petitioner-bank are contractual in nature, the dues of the Income-tax Department are statutory having overriding effect over contractual obligations. The Department has also stated that the petitioner-bank cannot be said to be the owner of the properties in question nor can he be said to be in possession thereof, and, therefore, the rejection of the claim/objection cannot be said to be illegal or arbitrary.

5. Mr. Kameshwar Prasad, learned counsel for the petitioner, submitted that in terms of the provisions of Rule 11 of the Second Schedule to the

Income-tax Act, 1961, where any claim is preferred or objection is raised to the attachment or sale of any property in execution of a certificate, the Tax Recovery Officer is bound to make an investigation into the claim or objection but no such investigation was made in the present case. Instead, the Tax Recovery Officer summarily rejected the claim/objection on the basis of the opinion of standing counsel for the Department without affording any opportunity of hearing to the petitioner to adduce evidence. Mr. Prasad in support of his contention placed reliance on R.K. Raghavan v. Union of India : [1983]140ITR894(Mad) .

6. Mr. Debi Prasad, appearing on behalf of the Income-tax Department, submitted that Rule 86 of the Second Schedule provides for appeal against original orders passed by the Tax Recovery Officer which the petitioner could have preferred. Under Rule 11(6) of the Second Schedule, further, it is open to the petitioner to institute a suit in the civil court and establish its right in the properties in dispute. In these premises, this court may not interfere with the impugned order. Mr. Debi Prasad, however, very fairly agreed that the claim/objection of the petitioner has not been considered on the merits and the matter, therefore, may be remitted for fresh consideration.

7. The provision for the recovery of the income-tax from a defaulter-assessee is contained in Section 222 of the Income-tax Act, which provides that when an assessee is in default or is deemed to be in default in making payment of tax, the Income-tax Officer may forward to the Tax Recovery Officer a certificate under his signature specifying the amount of arrears due from the assessee, and the Tax Recovery Officer on receipt of such certificate, shall proceed to recover from such assessee the amount specified therein in accordance with the rules laid down in the Second Schedule by (a) attachment and sale of the assessee's movable property, (b) attachment and sale of the assessee's immovable property, (c) arrest of the assessee and his detention in prison, and (d) appointing a receiver for the management of the assessee's movable and immovable properties.

8. The rules providing for procedure for recovery of tax under Section 222 are contained in the Second Schedule to the Act. The provision relevant for the purpose of the instant case regarding investigation of claim or objection by the Tax Recovery Officer is contained in Rule 11 of the said Schedule. It would be useful to quote the said rule, in extenso, as hereunder :

'11. 1. Where any claim is preferred to, or any objection is made to the attachment or sale of, any property in execution of a certificate, on the ground that such property is not liable to such attachment or sale, the Tax Recovery Officer shall proceed to investigate the claim or objection :

Provided that no such investigation shall be made where the Tax Recovery Officer considers that the claim or objection was designedly or unnecessarily delayed.

(2) Where the property to which the claim or objection applies has been advertised for sale, the Tax Recovery Officer ordering the sale may postpone it pending the investigation of the claim or objection, upon such terms as to security or otherwise as the Tax Recovery Officer shall deem fit.

(3) The claimant or objector must adduce evidence to show that-

(a) (in the case of immovable property) at the date of the service of the notice issued under this Schedule to pay the arrears, or

(b) (in the case of movable property) at the date of the attachment, he had some interest in, or was possessed of, the property in question.

(4) Where, upon the said investigation, the Tax Recovery Officer is satisfied that, for the reason stated in the claim or objection, such property was not, at the said date, in the possession of the defaulter or of some person in trust for him or in the occupancy of a tenant or other person paying rent to him, or that, being in the possession of the defaulter at the said date, it was so in his possession, not on his own account or as his own property, but on account of or in trust for some other person, or partly on his own account and partly on account of some other person, the Tax Recovery Officer shall make an order releasing the property, wholly or to such extent as he thinks fit, from attachment or sale.

(5) Where the Tax Recovery Officer is satisfied that the property was, at the said date, in the possession of the defaulter as his own property and not on account of any other person, or was in the possession of some other person in trust for him, or in the occupancy of a tenant or other person paying rent to him, the Tax Recovery Officer shall disallow the claim.

(6) Where a claim or an objection is preferred, the party against whom an order is made may institute a suit in a civil court to establish the right which he claims to the property in dispute ; but, subject, to the result of such suit (if any), the order of the Tax Recovery Officer shall be conclusive.'

The above provisions, it would appear, are akin to the provisions of Rules 58 to 63 of Order 21 of the Code of Civil Procedure, as they stood prior to the 1976 Amendment (Act 104 of 1976). In order to point out the similarity between the two sets of provisions those rules may also be quoted in extenso as hereunder :--

'58. Investigation of claims to, and objections to attachment of, attached property.--(1) Where any claim is preferred to, or any objection is made to the attachment of, any property attached in execution of a decree on the ground that such property is not liable to such attachment, the court shall proceed to investigate the claim or objection with the like power as regards the examination of the claimant or objector, and in all other respects, as if he was a party to the suit :

Provided that no such investigation shall be made where the court considers that the claim or objection was designedly or unnecessarily delayed.

(2) Postponement of sale.--Where the property to which the claim or objection applies has been advertised for sale, the court ordering the sale may postpone it pending the investigation of the claim or objection.

59. Evidence to he adduced by claimant--The claimant or objector must adduce evidence to show that at the date of the attachment he had some interest in, or was possessed of, the property attached.

60. Release of property from attachment.--Whereupon the said investigation the court is satisfied that for the reason stated in the claim or objection such property was not, when attached, in the possession of the judgment-debtor or of some person in trust for him, or in the occupancy of a tenant or other person paying rent to him, or that, being in the possession of the judgment-debtor at such time, it was so in his possession, not on his own account or as his own property, but on account of or in trust for some other person, or partly on his own account and partly on account of some other person, the court shall make an order releasing the property, wholly or to such extent as it thinks fit, from attachment.

61. Disallowance of claim to property attached.--(1) Where the court is satisfied that the property was, at the time it was attached in the possession of the judgment-debtor as his own property and not on account of any other person, or was in the possession of some other person in trust for him, or in the occupancy of a tenant or other person paying rent to him, the court shall disallow the claim.

62. Continuance of attachment subject to claim of incumbrancer.--Where the court is satisfied that the property is subject to a mortgage or charge in favour of some person not in possession and thinks fit, to continue the attachment, it may do so, subject to such mortgage or charge.

63. Saving, of suits to establish right to attached property.--Where a claim or an objection is preferred, the party against whom an order is made may institute a suit to establish the right which he claims to the property in dispute, but, subject to the result of such suit, if any, the order shall be conclusive.'

From a comparative reading of the above provisions it would appear that while Rule 11(1) and (2) of the Second Schedule to the Income-tax Act correspond to Rule 58 of Order 21, Civil Procedure Code, Rule 11(3) corresponds to Rule 59, Rule 11(4) corresponds to Rule 60, Rule 11(5) corresponds to Rule 61, and Rule 11(6) corresponds to Rule 63 of Order 21 of the Civil Procedure Code. The provisions of Rule 11 of the Second Schedule to the Income-tax Act, therefore, have to be interpreted in the same manner as the erstwhile provisions of Rules 58 to 63 of Order 21, of the Code of Civil Procedure and there cannot be any doubt, therefore, that the impugned

orders of the Tax Recovery Officer in the present case are not in accordance with law.

9. In terms of the aforementioned provisions of the Code of Civil Procedure, a third party objecting to the attachment of the property could either file a suit or prefer a claim before the execution court, which the execution court was required to decide, albeit summarily, upon evidence, subject to the decision of the court in the suit which could be preferred under Rule 63 against such decision of the execution court on the claim. Although the adjudication was confined to the question of possession, the nature of possession of the judgment-debtor, if any, was also required to be decided.

10. In the present case, as noted above, the order has been passed, ex facie, on the basis of and in accordance with the opinion of standing counsel without any opportunity of further hearing. The observation that the claim/objection has been filed unnecessarily to delay the proceeding is not understandable to me. There cannot be doubt that the petitioner-bank being a mortgagee of the properties in question and having a charge over them was vitally interested in the attachment and the proposed sale of the properties, and even if it be accepted that the claim of the Income-tax Department is statutory in character having priority over claims of creditors, it is doubtful if, in a case of attachment and sale by the executing court in accordance with the provisions of Order 21 of the Code of Civil Procedure, the sale would be subject to the claim for arrears of the tax. However, inasmuch as the Tax Recovery Officer has not gone into the merits of the case and has merely rejected the claim/objection at the very threshold without any argument, I do not think it proper to go into the related aspects of the matter. The claim/objection was filed by the petitioner at the earliest opportunity and it cannot be said that this was done designedly to delay the proceeding. While in CWJC No. 1367 of 1998(R) the suit in question is still pending, in CWJC No. 1371 of 1998(R) the decree has already been passed, the decree of the civil court cannot be summarily brushed aside. From Rule 11(6) it is abundantly clear that the order of the Tax Recovery Officer is subject to the result of the suit which the claimant or objector may prefer against its decision.

11. In these premises, I am of the view that the Tax Recovery Officer committed an error of law in summarily rejecting the claim/objection of the petitioner-bank and the matter requires to be considered again on the merits by him.

12. The impugned orders as contained in annexure-3 in CWJC No. 1367 of 1998(R) and annexure-4 in CWJC No. 1371 of 1998(R) are accordingly quashed with liberty to the Tax Recovery Officer, respondent No. 1, to proceed afresh in the matter in accordance with law. I will make no order as to cost.

Aftab Alam, J.

13. I agree.