I-T dept has no prior claim to dues: DRT

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.

Notes a tax law observer: "The case is a precedent setting one as it safeguards the rights of secured creditors over that of the Union government. Secondly, and more importantly, the Debt Recovery Tribunal has become a fast track recovery mechanism for banks. The DRT has correctly pre-empted the I-T department's attempt to usurp the proceeds of the bank that has duly pursued with its legal options. Now that it has succeeded in getting the DRT order, the I-T department attempted to intervene and carry off its dues claiming prior lien, which was rejected."