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)

J U D G M E N T

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.   

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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.

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