priority of income tax claims over bankers lien on borrowrs depsoit account
girish parmar
(Querist) 23 February 2011
This query is : Resolved
The Bank has extended Cash Credit and non fund based facility to the Borrower. Against the Borrower's outstanding loans, the Bank has marked lien over the fixed deposit of Borrower. Meanwhile IT Department has issued notice under Section 226(3) to the Bank directing the Bank to remit the FD proceeds towards satisfaction of IT dues against the Borrower / Assessee. The Bank's contention is that it hsa the first right to adjust the FD proceeds against its loan account outstandings and any surplus credit balance in the Borrowers accounts only would be remitted. Please advise whether the IT Authorities have priority of charge ahead of Banks right of Lien? What are implications if despite notice by IT Authirities the Bank refuses to remit the proceeds claiming its right to adjust the dues against outstanding dues?
s.subramanian
(Expert) 23 February 2011
IT department has priority for the recovery of the Income tax dues. The bank cannot refuse to comply with the demand of the IT Department.
A V Vishal
(Expert) 23 February 2011
The income tax (I-T) department won’t have first claim to any dues recovered from debtors, the Debt Recovery Tribunal (DRT) II, in Mumbai, said in a precedent setting ruling signed and issued on Monday.
The ruling has major significance because several debtors used to appeal to the income tax appelate tribunal against the claims of the I-T department which would claim first lien on the dues, thus effectively stalling for years the efforts of banks to recover their secured dues.
The case relates to Karnataka Bank Ltd, which had gone to the DRT against Aprit Diamonds & Jewellery, Ashok B Mehta, Priyadarshan A Mehta and Aprit Exports for defaulting on dues of Rs 8.08 crore.
The DRT ruled in favour of Karnataka Bank. But the I-T department intervened, claiming first lien on the proceeds of the recovery as it was recovering government dues.
The recovery officer of DRT II rejected the I-T department’s contention that as the government’s revenue collecting agency, it had priority over all creditors, including Karnataka Bank.
Recovery officer (DRT II) SS Iyer quoted from the ruling delivered by justices S Rajendra Babu and R C Lahoti of the Supreme Court in the Dena Bank v/s Bhikhabhai Prabhudas Paresh case while rejecting the I-T department’s contention.
“...However, the crown’s preferential right to recovery of debts over other creditors is confined to ordinary or unsecured creditors.... Rashbehary Ghose states in law of mortgage, (‘It seems a government debt in India is not entitled to precedence over a prior secured debt’),” the Supreme Court held.
Iyer in his order stated: “The prayer of the intervenor (I-T department) claiming priority over the claim of Karnataka Bank is rejected. After satisfying the recovery certificate, if any surplus amount is available from the sale proceeds of the immovable properties at Opera House and Marwah Industrial Estate, the same may be paid to the intervenor (I-T) to satisfy its claim.”
The presiding officer of the DRT II had issued a recovery certificate in 2003 for Rs 8.08 crore plus interest and costs to Karnataka Bank against its four dafaulters.
The certificate declared that the outstanding dues were secured by equitable mortgage of immovable property. The property was subsequentally auctioned by the recovery officer, netting Rs 2.9 crore.
Meanwhile, the I-T department intervened in the case seeking a lien on the recoveries for the assessment year 1997-1998 against the defendants for Rs 69.25 lakh.
Karnataka Bank’s counsel contended that the claims of the I-T department could be considered only after satisfying the claim by the bank first.
girish parmar
(Querist) 23 February 2011
Dear Mr. Vishal,
Thanks for a detailed and quick reply. However, facts in the instant case are slightly distinct. The case law quoted by you refers to charge created by the Bank over the Asesse's properties, whereas in the instant case The Bank only has a lien over FD proceeds / credit balance in the CC account. Lien does not qualify as a charge over assets. In such a case would the above judgement help?
s.subramanian
(Expert) 23 February 2011
Yes. That is the basic difference which is very subtle in nature. A right of lien is a creation of statute i.s. The Banking Regulation Act. It cannot be equated to a charge specifically created for the loan. This judgement will not apply to this case at all.
girish parmar
(Querist) 23 February 2011
Dear Mr. Subramaniam,
Thanks.
I generally subscribe to your views.
However, I doubt whether IT Act has any specific provision on the lines of certain VAT Acts (e.g. in Gujarat, Maharastra) according priority of Tax dues over secured creditors claims. Though the Sch 1 & 2 of IT Act does refer to recovery of dues as arreas of land revenue, the laws applicable to various Land Revenue Code also differs in different states. I feel SC has not yet directly dealt with this issue (reg. IT dues priority) though VAT dues matters have been settled for VAT specific Acts.
A V Vishal
(Expert) 23 February 2011
REFER THE SECOND SCHEDULE, PROCEDURE FOR RECOVERY OF TAX OF THE INCOME TAX ACT.
A V Vishal
(Expert) 23 February 2011
ALSO REFER THE RECOVERY OF DEBTS DUE TO BANKS AND FINANCIAL INSTITUTIONS ACT, 1993
Guest
(Expert) 01 March 2011
Banks cannot have overriding lien over and above the claim of the Income Tax Department over the property of a tax defaulter till the property is in the name of the assessee and is not legally transferred in the name of the Bank.
soumitra basu
(Expert) 15 March 2011
The Income tax department should not and has no priority on the property which has already charged and lien to bank.
I think Mr. Vishal is correct.
