The Tax Recovery Officer cannot declare a mortgage void ab initio, as transfers are only void against tax claims and privileges held earlier, highlighting the necessity of valid enforcement processes in tax recovery post Rule 2 notice.

ORDER :

SENTHILKUMAR RAMAMOORTHY, J. 

Factual Background

An immovable property bearing Plot No.6A, Vanchi Nagar Extension, 7th Street, Korattur, Chennai-600 080 in S.No.1222, Korattur Village, Ambattur Taluk, Tiruvallur District, and admeasuring about 1288 sq.ft. was purchased by the third respondent herein under sale deed dated 26.02.2016 from Perfect Medical Enterprises (P) Limited. The third respondent had earlier filed the return of income for the Assessment Year (AY) 2011-12 electronically on 08.02.2012 admitting a taxable income of Rs.8,55,710/-. After being selected for scrutiny, notice under Section 143 (2) of the Income-tax Act, 1961 (the I-T Act) was issued on 31.07.2012. Pursuant thereto, an assessment order under (3) was issued on 31.03.2014 raising a demand of Rs.2,64,00,385/- along with penalty of Rs.10,000/- under Section 272A(1)(c) and interest of Rs.57,74,710/-. The total demand of Rs.3,21,87,295/- was certified by the Tax Recovery Officer (TRO) on 19.02.2016. Notice in ITCP-1 under Rule 2 of the Second Schedule to the I-T Act (Rule 2 notice) was issued by the TRO to the assessee in default/third respondent on 24.02.2016. Such notice was received by the third respondent on 26.02.2016.

2. As security in relation to amounts due in present or in future to the petitioner of the value of Rs.50,00,000/-, the third respondent created a mortgage by deposit of title deeds in favour of the petitioner. Such mortgage was evidenced by memorandum of deposit of title deeds dated 16.11.2016 (the MoDT). The property described in paragraph 1 above was the property mortgaged in favour of the petitioner. Thereafter, in 2018, the third respondent and his wife stood as sureties in respect of a loan taken by a partnership firm, Vimal Enterprises, from the petitioner.

3. Meanwhile, a penalty order under Section 271 (1)(c) of the I-T Act was issued on 21.03.2017 levying a penalty of Rs.1,83,23,700/- along with interest of Rs.31,15,029/- on the third respondent under Section 220 (2) of the I-T Act. This was also certified by the TRO on 12.09.2018. In relation to all the dues, the property of the third respondent was attached by issuing notice dated 24.09.2019 along with a copy thereof to the Sub Registrar, Villivakkam, Chennai-40. In order to realize the tax dues, an auction sale of the attached property was scheduled on 07.03.2022. The petitioner objected to the conduct of such auction by relying on the mortgage created in its favour by the third respondent. After considering the objections of the petitioner, order dated 21.04.2022 was issued. The said order is impugned in this writ petition.

Counsel and their contentions

4. Mr.S.Sridhar, learned counsel, advanced oral arguments on behalf of the petitioner. Mr.Avinash Krishnan Ravi, junior standing counsel, advanced arguments on behalf of respondents 1 and 2. In spite of service of notice on 26.07.2022, the third respondent did not enter appearance and contest the matter.

5. The first contention of Mr.S.Sridhar, learned counsel for the petitioner, was that the TRO does not have the authority or jurisdiction to declare the mortgage in favour of the petitioner as void ab initio. By relying on the judgment of the Hon'ble Supreme Court in Tax Recovery Officer v. Gangadhar Vishwanath Ranade [1998] 234 ITR 188 (SC) ['Gangadhar Ranade'], he submitted that the Income- Tax Department is required to file a suit if it intends to seek a declaration that the transfer is void. He