The Petitioner, a State owned Corporation and a Financial Institution governed by The State Financial Corporations Act, 1951 (SFC Act) sanctioned a term loan of Rs. 1,25,00,000 to M/s. Veekay Developers Pvt. Ltd. to establish a Luxury Hotel on 13-09-1995, which term loan was transferred to V.K. Clubs and Homes Pvt. Ltd. By way of security, the borrower—M/s. V.K. Clubs and Homes Pvt. Ltd, created an equitable mortgage by deposit of title deeds, of the portion of land and building. By way of further security, the said borrower created equitable mortgage over freehold rights in three shops. Additional loan of Rs. 86,00,000 was also sanctioned.
The borrower, having failed to repay the amount due together with interest the petitioner invoked section 29 of the SFC Act and took over possession of the properties, mortgaged and furnished as security.
On 05-12-2000, the Tax Recovery Officer, the second respondent, passed an order attaching the immovable properties, including properties mortgaged of the petitioner invoking Rule 48 of II Schedule to the Income-tax Act, 1961 to recover Rs. 80,03,276 towards income tax dues, from Sri Vivian Kamath D’Souza, M/s. Veekay Developers Pvt. Ltd., M/s. Shalimar Constructions and M/s. Canara Builders. On 23-12-2000, he issued a public notice in Udayavani newspaper informing about the attachment of the immovable properties calling upon anybody who had any claim or right to the said properties, to furnish necessary documents in support of the claim.
On 05-01-2001, petitioner brought to the notice of the second respondent the sanction of the loan on 13-09-1995 and 20-03-1998; the mortgage of the immovable properties, as also taking possession of the said properties on 30-12-1998 and 25-02-1999, invoking section 29 of the ‘SFC Act’. This was followed by notice dated 06-05-2005 to the second respondent, in response to which, a letter dated 27-01-2006 was addressed by the Tax Recovery Officer requesting the petitioner to proceed with the sale of the immovable properties as it had the first charge and to treat the Income-tax Department as a second mortgagee and after appropriation of the sale proceeds, hand over the remainder if any, to hand over the same for appropriation towards income-tax dues. The question before the court was
“Whether realisation of income-tax dues from the assessee under the Income Tax Act, 1961 will have priority over the secured debt in terms of the State Financial Corporations Act, 1951?”
The Hon’ble Court referred to the Apex Court decision in Union of India and others vs. Sicom Limited and another (2009) 2 SCC 121, observing that under Article 372 of the Constitution, as also well settled principles of law, statutory provisions will prevail over the Crown debt, and coupled with the non-obstante clause in section 46-B of the SFC Act, it would not only prevail over contracts but also other laws. In other words, the ‘SFC Act’, having provided for recovery of debt in preference to all other debts under any other law, the Financial Corporations were entitled to appropriate the sale proceeds towards the discharge of debt due to it, at the first instance.
Regards the provisions of the State Financial Corporations Act, it is clear that a first charge on the property is created giving priority to the dues of the said statutory authority over all other charges on the property, on the basis of the mortgage. The Income-tax Act, 1961 does not provide for a priority to the statutory charge over all other charges including mortgage under the ‘SFC Act’. The order of the tax recovery officer attaching property mortgaged in favour of the petitioner is quashed and the incometax authorities are restrained from interfering with the process of sale of immovable properties subject matter of mortgage in favour of the Petitioner, for recovery of its dues.
Karnataka State Industrial Investment Development Corporation Ltd vs. CIT, AIR 2013 Karnataka 104.
