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priority of income tax claims over

bankers lien on borrowrs depsoit
account
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girish parmar (Querist)

 23 February 2011

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

Dhingra: 1962dcg@gmail.com (Expert)

Click to Talk
 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.

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