Landmark Judgements of Supreme Court on Section 222 [Certificate by Tax Recovery Officer]
Rigours of rule 2 and rule 16 of Schedule II are not applicable where sale of attached property is pursuant to order passed by Debt Recovery Tribunal (DRT) over which a charge has already been created prior to issuance of notice under rule 2 of Schedule II
Section 222, read with rules 2 and 16 of the Schedule II to the Income-tax Act, 1961 - Collection and recovery of tax - Certified proceeding - It is trite law that, unless there is preference given to the Crown debt by a statute, the dues of the secured creditor have preference over Crown debts.
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.
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 attached property is pursuant to the order passed by the DRT over which a charge has already been 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, there is force in the submissions made on behalf of the assessee.
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 assessee. Respondent No. 4 is restrained from enforcing the attachment order. [In favour of assessee] – [Connectwell Industries (P) Ltd. v. Union of India (2020) 272 Taxman 1 : 115 taxmann.com 87 (SC)]
Certificate proceedings - Government of India has priority and precedence in matter of areas of tax due to it from a person over decretal debt due to a creditor from said person Section 222 of the Income-tax Act, 1961 [Corresponding to section 46(2) of the Indian Income-tax Act, 1922], read with article 372(1) of the Constitution of India - Section 46(2) does not deal with the doctrine of the priority of Crown debts at all; it merely provides for the recovery of the arrears of tax due from an assessee as if it
were an arrear of land revenue. This provision cannot be said to convert arrears of tax into arrears of land revenue either ; all that it purports to do is to indicate that after receiving the certificate from the ITO, the Collector has to proceed to recover the arrears in question as if the said arrears were arrears of land revenue. Other alternative remedies for the recovery of arrears of land revenue are prescribed by sub-section (3) and (5) of section 46. In making a provision for the recovery of arrears of tax, it cannot be said that section 46 deals with or provides for the principle of priority of tax dues at all; and so, it is impossible to accede to the argument that section 46 in terms displaces the application of the said doctrine in the instant proceedings.
The Recovery Act is concerned with public demands of various kinds, and it would not be reasonable to suggest that any of its provisions are intended to deal directly or even indirectly with the principle of law which is involved. These provisions merely indicate the manner in which and the procedure according to which public debts should be recovered. There is no positive provision in respect of the government's claim to recover arrears of tax. Rule 22 to which corresponds to Order XXI, rule 52, of the Code of Civil Procedure, can no doubt be invoked to recover arrears of tax; but that is because the procedure prescribed by the said rule applies to the recovery of public debts and tax arrears can be treated as public debts inasmuch as by virtue of section 46(2) of the Income-tax Act they became recoverable as arrears of land revenue. It is difficult to accept the argument that the application of the doctrine of priority of arrears of tax over private debts can be said to be displaced by any of the provisions of the Recovery Act. That being so, it must be held that the High Court was right in coming to the conclusion that the Government of India was entitled to claim priority in the matter of arrears of tax due from respondent No. 2 over the decretal debt due to the appellant from the same debtor. The result was, the appeal failed and was dismissed. (Related Assessment years : 1946-47 and 1947-48) – [Builders Supply Corporation v. Union of India (1965) 56 ITR 91 (SC)]