Case title:
State Bank Of India Vs. The Tax Recovery Officer
Date of Order:
1st September, 2022
Bench:
Justice R Mahadevan and Justice Mohammed Shaffiq
Parties:
Petitioner- State Bank of India
Respondent- The Tax Recovery Officer
SUBJECT
The Madras High Court has ruled that, in the event of a priority conflict, the entitlement of secured creditors under the Recovery of Debts and Bankruptcy Act and SARFAESI Act to collect debt must take precedence over statutory obligations under the Income Tax Act. The right to recover under the Income Tax Act of 1961 must give way to the provisions under the SARFAESI Act and the Recovery of Debts and Bankruptcy Act even if recovery proceedings are quashed for any reason, according to a bench of Justices R Mahadevan and Mohammed Shaffiq.
IMPORTANT PROVISIONS
- Section 26E of the SARFAESI Act: Priority to secured creditors
Regardless of any other laws currently in effect, obligations owed to any secured creditor following the registration of a security interest must be paid before all other debts as well as all revenues, taxes, cesses, and other rates owed to the Central Government, State Government, or local authority.
- Section 31B of the Recovery of Debts and Bankruptcy Act : Priority to secured creditors
In spite of any other laws currently in effect, secured creditors' rights to collect secured debts due and payable to them through the sale of assets over which a security interest has been created shall take precedence over all other debts and government obligations, including revenues, taxes, cesses, and rates owed to the federal government, state government, or local authority.
OVERVIEW
- The court was deliberating over a number of writ appeals filed by financial institutions contesting a single judge's ruling that the income tax department's debts would take precedence over secured creditors' debts.
- The single judge had stated that even though the SARFESI Act and the Debt Recovery Act give secured creditors the advantage, it is important to remember that income tax is a component of a country's sovereignty and is required for achieving constitutional goals and objectives, so recovering tax debts should take precedence.
ISSUES RAISED
The main issue here was whether income tax dues take precedence over dues of secured creditors as mentioned under Section 26E of the SARFAESI Act and Section 31B of the Recovery of Debts and Bankruptcy Act.
JUDGEMENT ANALYSIS
- The division bench concluded that it was apparent from the law and other Supreme Court rulings that "under common law, priority of crown debts would prevail solely over unsecured creditors."
- The Court also made it clear that merely seizing property due to a tax default does not result in a charge.
- The Court ruled that such property attachment was simply intended to stop a tax defaulter's property from being sold, and it did not automatically give the government or the creditors rights to the property.
CONCLUSION
The court resolved all of the Writ Appeals after carefully examining the facts and circumstances of all the relevant Writ Petitions. There would be no order related to cost. As a result, all associated petitions were also dismissed.
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