Asset Reconstruction Company (India) Ltd. vs Commissioner of Income Tax - Range - 4 and Others

J.B. Pardiwala, J.—In this writ petition under Art. 226 of the Constitution, the petitioner, a company incorporated under the Companies Act, 1956 and registered as reconstruction and securitization company with Reserve Bank of India under Sec. 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ("S.A.R.F.A.E.S.I. Act" for short), has prayed for the following reliefs :

A. Be pleased to issue a writ of declaration that impugned claim, by the first respondent Income Tax Department, by way of attachment of assets covered by Sec. 13(2) notice, for priority over the petitioner for realization of income tax dues, is contrary to law and thus illegal;

B. Be pleased to issue a writ of mandamus or any other appropriate writ, order or declaration directing the first respondent, Income Tax Department to allow the petitioner to exercise its rights under the S.A.R.F.A.E.S.I. Act and the rules made there under unhampered without any regard for the attachment orders passed by it for realization of Income Tax dues of the second respondent company;

C. Pending admission and final hearing of the present petition, be pleased to stay the operation and implementation of the impugned attachment of the assets covered by Sec. 13(2) notice ordered by the first respondent, Income Tax Department;

D. Be pleased to grant such other and further relief/s as may be deemed fit in the interest of justice.

The facts giving rise to this petition can be summarized as under :

1.1. Petitioner-Asset Reconstruction Company (India) Ltd. (hereinafter referred to as "A.R.C.I.L." for short) is a company incorporated under the Companies Act, 1956 and registered as reconstruction and securitization company with Reserve Bank of India under Sec. 3 of the S.A.R.F.A.E.S.I. Act. The petitioner, in the normal course of business, takes over the debts of the companies from Banks and Financial Institutions. In such an event, the Banks that have lend money to the borrowers assign such debts in favour of the petitioner, and the petitioner thereafter steps into the shoes of the lending Banks. Accordingly, in terms of the provisions of Sec. 5(4) of the S.A.R.F.A.E.S.I. Act, all rights and liabilities of the lending Banks with Respect to the debts are assigned to the petitioner through a Trust formed for this purpose.

1.2. Second respondent is a company incorporated as a Public Limited Company under the Companies Act, 1956 and having its registered office at Ahmedabad. It is now a company-in-liquidation and its affairs are looked after by the Official Liquidator appointed by this Court.

1.3. Second respondent - Mardia Steels Limited availed of financial assistance/loans under agreements by I.F.C.I. Limited, Bank of Rajasthan Limited, Axis Bank Limited, Bank of India and J. P. Morgan Chase Bank N.A., ICICI Bank Limited, General Insurance Company Limited, L.I.C. of India, Unit Trust of India, New India Assurance Company Limited and Oriental Insurance Company Limited for the purpose and on the terms stated in the agreements. The said loan together with all underlying security interest and all right, title and interest thereon have been acquired by the petitioner A.R.C.I.L. as a sole trustee of A.R.C.I.L./Mardia Steel Limited Trust-I, A.R.C.I.L.-Mardia Steel Limited Trust-II, A.R.C.I.L.-Mardia Steel Limited Trust-Ill, BIO-SBPS-017-1 Trust and A.R.C.I.L.-Mardia Steel Limited Trust-IV under Assignment Agreements dated 31-3-2008, 11-7-2008 and 27-9-2008 respectively and in terms of Sec. 5 of the S.A.R.F.A.E.S.I. Act.

1.4. Second respondent and/or guarantors defaulted in payment of interest and principal instalments of the loans, and thereby, have failed and neglected to clear the said over-dues. As a result, the loan amounts have been classified as Non-Performing Assets in the Books of Account in accordance with the directives pertaining to asset classification issued by the Reserve Bank of India.

1.5. Second respondent is in liquidation. The second respondent having failed to repay the amount, was served with a notice dated 24-12-2009 under Sec. 13(2) of the S.A.R.F.A.E.S.I. Act. Thereafter, petitioner, in exercise of powers under Sec. 13(4) of the S.A.R.F.A.E.S.I. Act, read with Rules 8 and 9 of the Security Interest (Enforcement) Rules, 2002, took possession of the secured assets of the borrower company and advertised the possession notice in Economic Times (English edition) and Financial Express (Gujarati edition) on April 10, 2010, thereby informing second respondent and the public in general that the petitioner A.R.C.I.L. has taken over the possession of the properties described in the notice.

1.6. At that stage, a major development took place. 1st respondent i.e. Income Tax Department, vide letter dated 8-11-2010, informed the petitioner that the assets of the second respondent company is under attachment of the Income Tax Department. Further, the Department also informed that the outstanding in the case of the company as per the record is to the tune of Rs. 36.33 crores excluding interest, under Sec. 220, Clause 2 of the Income Tax Act, 1961 for the Assessment Years 1993-1994 to 1996-1997. It appears that Department also informed that they already filed an affidavit of proof of debt before the Official Liquidator on 16-9-2009, claiming the outstanding dues and the property has been attached by the Income Tax Department. Respondent No. 1 asserted that the claim of Income Tax Department on the assets of the assessee company should be exhausted before the sale of assets of the company i.e. respondent No. 2.

1.7. It is in the background of the above-referred facts and development that the petitioner seeks a declaration that it must be allowed to take measures and to exercise its rights under the S.A.R.F.A.E.S.I. Act for realizing its dues unhampered by the attachment dated 20th June, 2009 of the Income Tax Department. The basis of petitioner''s claim is that the secured dues have a priority over the dues of the Income Tax Department.

We have heard learned Counsel Mr. Shalin Mehta, appearing for Mr. Hemang M. Shah for the petitioner A.R.C.I.L., learned Senior Counsel Mr. Manish R. Bhatt, appearing with Mrs. Mauna Bhatt for respondent No. 1-Income Tax Department, and learned Advocate Mr. R. M. Desai, appearing for the Official Liquidator.

Learned Counsel for the petitioner put forward the following contentions.

3.1. By virtue of Sec. 35 of the S.A.R.F.A.E.S.I. Act, the provisions of S.A.R.F.A.E.S.I. Act would override the provisions of Income Tax Act, 1961. He relied on Sec. 35 of the S.A.R.F.A.E.S.I. Act, which reads as under :

The provisions of this Act to override other laws :- The provisions of this Act shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time-being in force or any instrument having effect by virtue of any such law.

3.2. He would submit that while taking any measures under Sec. 13(4) of the S.A.R.F.A.E.S.I. Act, the attachment order passed under the Income Tax Act would have to yield because the provisions of the S.A.R.F.A.E.S.I. Act are to have effect notwithstanding anything inconsistent therewith contained in the Income Tax Act or any instrument having effect by virtue of the Income Tax Act.

3.3. He would further submit that the Income Tax Act has no provision creating first charge or giving priority to the Income Tax dues over the dues of the secured creditor, the secured dues would get priority over crown debt (dues of the Income Tax Department) at common law. He referred to Chapter XVII-D of the Income Tax Act, 1961, which provides for collection and recovery of tax. Section 222 of the Act, which provides for Certificate to Tax Recovery Officer, reads as under :

(1) When an assessee is in default or is deemed to be in default in making a payment of tax, the Tax Recovery Officer may draw up under his signature a statement in the prescribed form specifying the amount of arrears due from the assessee (such statement being hereafter in this Chapter and in the Second Schedule referred to as "Certificate") and shall proceed to recover from such assessee the amount specified in the certificate by one or more of the modes mentioned below, in accordance with the rules laid down in the Second Schedule -

(a) Attachment and sale of the assessee''s movable property;

(b) Attachment and sale of the assessee''s immovable property;

(c) Arrest of the assessee and his detention in prison;

(d) Appointing a Receiver for the management of the assessee''s movable and immovable properties.

Explanation : For the purpose of this sub-section, the assessee''s movable or immovable property shall include any property which has been transferred, directly or indirectly on or after the 1st day of June, 1973, by the assessee to his spouse or minor child or son''s wife or son''s minor child, otherwise than for adequate consideration, and which is held by, or stands in the name of, any of the persons aforesaid; and so far as the movable or immovable property so transferred to his minor child or his son''s minor child is concerned, it shall, even after the date of attainment of majority by such minor child or son''s minor child, as the case may be, continue to be included in the assessee''s movable or immovable property for recovering any arrears due from the assessee in respect of any period prior to such date.

(2) The Tax Recovery Officer may take action under sub-sec. (1), notwithstanding that proceedings for recovery of the arrears by any other mode have been taken.

Schedule II to the Act deals with ''Procedure for Recovery of Tax''.

3.4. He has relied on Part Ill-Attachment and Sale of Immovable Property, which provides as under -

Attachment

Attachment of the immovable property of the defaulter shall be made by an order prohibiting the defaulter from transferring or charging the property in any way and prohibiting all persons from taking any benefit under such transfer or charge.

Service of notice of attachment

A copy of the order of attachment shall be served on the defaulter.

The order of attachment shall be proclaimed at some place on or adjacent to the property attached by beat of drum or other customary mode, and a copy of the order shall be affixed on a conspicuous part of the property and on the notice board of the office of the Tax Recovery Officer.

Attachment to relate back from the date of service of notice

Where any immovable property is attached under this Schedule, the attachment shall relate back to, and take effect from, the date on which the notice to pay the arrears, issued under this Schedule, was served upon the defaulter.

3.5. He would submit that reading of the aforesaid provisions of law makes it clear that the Income Tax Act provides for how the tax arrears due may be recovered. The Act nowhere provides for priority of the State right over the rights of the secured creditor. He would submit that neither Sec. 222, nor the provisions in Schedule II to the Act provides for any charge much less first charge. They provide only for the machinery for realization of income tax dues.

3.6. He submitted that the position of law has been made very clear by catena of Supreme Court judgments as well as this High Court judgments holding that it is only when there is a specific provision in the statute conferring first charge over the property, crown debt is entitled to have priority over the claim of secured creditors. In absence of any such provision, secured debt would prevail over the crown debt. He placed reliance on the following case-laws :

Central Bank of India Vs. State of Kerala and Others, .

Union of India (UOI) and Others Vs. SICOM Ltd. and Another, .

2011 (2) GLR 18 - Kotak Mahindra Bank Ltd., Mumbai v. District Panchayat, Baroda.

2010 (2) GLH 525 : 2010 (3) GLR 2132 - Baroda City Co-operative Bank Ltd. v. State of Gujarat.

Recent decision of this Court in Spl.C. A. No. 13196 of 2008 in the case of Recovery Officer v. Bank of India,

3.7. He further submitted that being a secured creditor, A.R.C.I.L. is also entitled to have priority over the dues of the Income Tax Department under the Companies Act, 1956 more particularly when the borrower, Mardia Steel Limited is in liquidation. He has drawn our attention to Sec. 529A of the Companies Act, which provides that the dues of the secured creditor and workmen are to be paid in priority over all other dues falling under Sec. 530 of the Act. The dues of the Income Tax Department would fall under Sec. 530 of the Companies Act and are to be paid only after full satisfaction of the dues of the secured creditor - A.R.C.I.L. and dues of the workmen under Sec. 529A of the Act.

Per contra, learned Senior Counsel Mr. Manish R. Bhatt appearing for the Income Tax Department submitted that the arrears of demand outstanding in the case of the company as per the records of the office of respondent No. 1 is Rs. 36.33 crores excluding interest payable under Sec. 220(2) of the Income Tax Act, 1961 for the Assessment Years 1993-1994 to 1996-1997 and the affidavit of proof of debt had already been filed on 16-9-2009 before the Official Liquidator.

4.1. He would, therefore, submit that Department had already lodged the claim of outstanding demand and the property in question had been attached by the Income Tax Department. Therefore, according to him the claim of Income Tax Department on the assets of the assessee company was required to be satisfied prior in point of time. He submitted that vide letter dated 8-11-2010, petitioner was requested to take note of the above dues of the Department.

4.2. Counsel would submit that in the case of respondent No. 2 a demand of Rs. 48.73 crores was raised on 23-3-1999 pursuant to the assessment for the period of 1-4-1986 to 9-1-1997 and the demand was continuously monitored for collection. In this case the claim of demand was made to the Official Liquidator on 17-9-2008 by filing Form No. 66 by the Assistant Commissioner of Income Tax (O.S.D.)-I, Circle-4, Ahmedabad.

4.3. Though, respondent No. 1-Department has not specifically pleaded in its affidavit-in-reply about Sec. 281 of the Income Tax Act, learned Counsel for the Income Tax Department during the course of his arguments, raised this point very vociferously and submitted that in view of sub-sec. (1) of Sec. 281 of the Income Tax Act, 1961, the charge created against the properties in question by mortgaging the property by respondent No. 2 - assessee borrower in favour of the financial institutions, who in-turn assigned their debts in favour of the petitioner A.R.C.I.L. during pendency of the proceedings under the Income Tax Act, 1961, is void as against any claim in respect of income tax and other sum payable by respondent No. 2 company in favour of respondent No. 1-Department. This contention has been the main trump-card for respondent No. 1-Income Tax Department.

In rejoinder, learned Counsel for the petitioner submitted that the equitable mortgage dated 17-9-1997 created by the borrower in favour of the lender financial institutions like ICICI, Central Bank of India, U.T.I. Bank and Bank of India is not a void transfer in terms of Sec. 281 of the Income Tax Act, 1981 for two reasons - namely that application of Sec. 281 is not at all pleaded by the Income Tax Department and an issue which is not pleaded cannot be allowed to be raised at the stage of oral argument, and secondly, Sec. 281 defence cannot be raised by the Income Tax Department as a collateral challenge in a petition filed by a third party (in this case A.R.C.I.L.). To this effect, reliance was placed on the decision of the Supreme Court in the case of The Tax Recovery Officer II, Sadar, Nagpur Vs. Gangadhar Vishwanath Ranade (Dead) Through Mrs. Shobha Ravindra Nemiwant, , which holds that the Income Tax Department being a creditor, is required to file a suit for declaration that the charge or transfer in favour of the secured creditor is void under Sec. 281 of the Income Tax Act. It appears that in the present case, the Commissioner of Income Tax, Range IV, Ahmedabad has not filed any suit for declaration that the equitable mortgage dated 17-9-1997 created by the borrower in favour of the aforesaid four financial institutions is void under Sec. 281 of the Act.

The charge over the secured assets created by the borrower in favour of the financial institutions and the subsequent assignment of security interest by the financial institutions in favour of A.R.C.I.L. are saved by virtue of the proviso to Sec. 281 of the Income Tax Act. The two conditions set out in proviso (i) are fulfilled in this case for the charge or transfer to be not void. The equitable mortgage dated 17-9-1997 is for adequate consideration as can be seen from the contents of Para 2 of the memorandum of entry (pages 273 to 293 of the paper book). Also, there is no mention at all in the said document that any proceedings under the Income Tax Act is pending against the assessee [Mardia Steel Ltd. (in liquidation)].

Apart from the fact that the transferee had no actual notice of the pendency of any proceedings under the Income Tax Act against the assessee, it cannot be said that the transferee had constructive notice of the same. This argument of constructive notice raised by the Income Tax Department in Tax Recovery Officer Vs. Industrial Finance Corporation of India and Another, was turned down by the Division Bench of this Court in judgment dated 22-6-2011. Even otherwise, as per the say of the Income Tax Department, the first notice of demand was sent to the assessee on 28-12-2005. The claim of the Income Tax Department was lodged with the Official Liquidator on 17-9-2008. Contrast this with the execution of the equitable mortgage by the borrower in favour of the financial institutions as back as 17-9-1997. Obviously, the financial institutions cannot be said to have had constructive notice of the pendency of the Income Tax proceedings against the assessee.

Having heard learned Counsel for the parties and having considered various contentions raised by all the parties, we shall now proceed to examine the case on merits as to whether petitioner A.R.C.I.L. is entitled to any relief as prayed for in the petition or not.

Before we deal with the main contention as regards Sec. 281 of the Income Tax Act, which is the only contention probably needs to be dealt with, we may reiterate the position of law so far as priority of dues of the Government is concerned over the debts of the Banks, which have been secured by the borrower by creating mortgage. The question relating to priority of dues of the Government fell for consideration before the Supreme Court and other High Courts from time to time. Taking into consideration the different decisions of the Supreme Court, a Division Bench of this Court in the case of Baroda City Co-operative Bank Ltd. v. State of Gujarat, reported in 2010 (3) GLR 2132 : 2010 (2) GLH 525, held as under:

From the judgments referred to above, it will be evident that -

(a) The arrears of tax due to the State can claim priority over the unsecured debt.

(b) If first charge by way of priority is not claimed under the statute, the said doctrine is not applicable.

(c) Normally, the doctrine of first charge/priority of State will prevail over the private debt which is an unsecured debt.

(d) In normal course, the doctrine of first charge/priority cannot prevail over secured debts, but if first charge of the State is over the secured debts, both debts being equal, the State can claim priority even over the secured debts, and

(e) The secured debts under the Securitization Act or debt under the R.D.D.B. Act has no first charge, and thereby, cannot compete with first charge/priority claim of the State if made under the statute.

A specific question whether the Central Excise Department can claim priority over the secured debt of a secured creditor under the Central Excise Act, 1944 also fell for consideration before different High Courts and the Supreme Court. A Full Bench of the Madras High Court in the case of U.T.I. Bank Ltd. v. Dy. Commissioner of Central Excise, Chennai II Division, reported in 2007 (1) Law Weekly, 50 while dealing with the Central Excise Act, 1944, the Customs Act, 1962 and the S.A.R.F.A.E.S.I. Act, 2002, considered whether the Crown''s debts, for which there is no priority or charge is created under the statute, should have precedence over the secured creditors or not. Considering the facts of the said case that the U.T.I. Bank had taken possession of the property under Sec. 13(4) of the S.A.R.F.A.E.S.I. Act and having noticed that there are no specific provisions under the Central Excise Act or the Customs Act to claim first charge, as provided under other enactments, the Full Bench held that generally the dues to the Government i.e. tax, duties, etc. (Crown''s debts) get priority over ordinary debts; only when there is a specific provision in the statute claiming first charge over the property, the Crown''s debt is entitled to have priority over the claim of others. In absence of any such provision to claim first charge, the Government cannot claim precedence under the Central Excise Act over the claim of the secured creditor under the S.A.R.F.A.E.S.I. Act, 2002.

Similar question fell for consideration before the Supreme Court in the case of Union of India (UOI) and Others Vs. SICOM Ltd. and Another, . Having noticed the provisions of the Central Excise Act, 1944, the Supreme Court has rejected the claim of the Government to have first charge over the secured debt.

The same very issue also fell for consideration before a Division Bench of this Court in the case of Kotak Mahindra Bank v. District Magistrate, reported in 2011 (1) GLR 18. In the said case, the proceeding under the Central Excise Act, 1944 was initiated on 24-2-1987 and 26-2-1991 when Rule 173Q(2) and Rule 211 of the Central Excise Rules, 1944 were in vogue, At the time, the first order of confiscation was passed, the authority had jurisdiction under Rule 173Q(2) to confiscate the land, building, plant, machinery, etc.. The said order was set aside and remitted for de novo decision. The final order was passed on 25-2-2006, by this time both Rule 173Q (2) and Rule 211 stood omitted. Having noticed the different provisions of the Central Excise Act, 1944, Central Excise Rules, 1944 and the Central Excise Rules, 2001 including Rule 28 of the Central Excise Rules, 2001 which related to the property to be vested in the Central Government on confiscation, and different decisions of the High. Courts and Supreme Court, this Court held that Excise and Customs Department of the Central Government cannot claim any priority over the secured debt of a secured creditor as created under the S.A.R.F.A.E.S.I. Act.

If under the law there is a first charge created with the State, even a secured creditor which has secured interest on the property, cannot claim any right, the State having first charge over such property. But in the present case, such issues are not required to be determined in absence of any provision creating first charge over the property under the Income Tax Act. There is no such provision laid down under the Income Tax Act, under which, the Income Tax Department can claim priority over the secured creditor.

The only question which arises for determination as noticed above is whether the mortgage made by respondent No. 2 company in favour of their respective secured creditor Banks is saved under the proviso to sub-sec. (1) of Sec. 281 of the Income Tax Act, 1961 or is void as against the claim of tax payable by the borrower - assessee in favour of the Revenue. For determination of the aforesaid issue, it is necessary to notice Sec. 281 of the Income Tax Act, 1961, which reads as follows :

(1) Where, during the pendency of any proceeding under this Act or after the completion thereof, but before the service, of notice under Rule 2 of the Second Schedule, any assessee creates a charge on, or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever) of, any of his assets in favour of any other person, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of the completion of the said proceeding or otherwise :

Provided that such charge or transfer shall not be void if it is made -

(i) for adequate consideration and without notice of the pendency of such proceeding or, as the case may be, without notice of such tax or other sum payable by the assessee; or

(ii) with the previous permission of the Assessing Officer.

(2) This Section applies to cases where the amount of tax or other sum payable or likely to be payable exceeds five thousand rupees and the assets charged or transferred exceed ten thousand rupees in value.

Explanation :- In this Section, "assets" means land, building, machinery, plant, shares, securities and fixed deposits in banks, to the extent to which any of the assets aforesaid does not form part of the stock-in-trade of the business of the assessee.

Similar issue fell for consideration before the Madhya Pradesh High Court in the case of State of Madhya Pradesh v. Abhaykumar, reported in 1992 (86) STC 88, wherein almost similar provision i.e. Sec. 33A of the Madhya Pradesh General Sales Tax Act, 1958 fell for consideration. The Indore Bench of the Madhya Pradesh High Court held that the transfer was for a valuable consideration and it was without notice of the pendency of the proceeding under the Sales Tax Act, and therefore, the transfer falls under the exception created by the proviso to Sec. 33A of the said Act. Similar was the view expressed by a Division Bench of the Madhya Pradesh High Court (Gwalior Bench) in the case of Pooranchand Ved Prakash v. State of Madhya Pradesh, reported in 1973 (31) STC 170.

Section 281 of the Income Tax Act also fell for consideration before the Division Bench of this Court in the case of Tax Recovery Officer Vs. Industrial Finance Corporation of India and Another, with another case wherein by judgment dated 22nd June, 2011, this Court taking into consideration the facts that the transfer of property was made for valuable consideration without notice of proceeding of recovery of arrears of income tax held that the financial institution was entitled to protection under the proviso to clause (1) of sub-sec. (1) of Sec. 281 of the Income Tax Act against the arrears of income tax dues of the revenue.

Petitioner has specifically pleaded that the financial institutions had no inkling of initiation of any proceedings in respect of outstanding dues of the Income Tax Department. As a matter of fact, petitioner itself had no knowledge about the same. It is also not in dispute that the transfer was made on payment of consideration i.e. on receipt of credit facility by respondent No. 2 borrower and no proceeding was brought to the knowledge of the petitioner or the financial institutions who advanced the loan in favour of respondent No. 2-Company. At this stage, learned Counsel for the Income Tax Department vociferously submitted that though the charge or transfer was for adequate consideration, but it cannot be said that it was without notice of the pendency of such proceeding under the Income Tax Act or without notice of such tax or other sum payable by the assessee.

However, the most important question which we need to address is as to whether will it be permissible for us to touch this issue of Sec. 281 of the Income Tax Act and relying on the same whether we can come to the conclusion as to whether the charge or transfer was void and the situation is not saved by the proviso to Sec. 281(1) of the Income Tax Act. We are of the view that we cannot touch this issue for two obvious reasons. Firstly, respondent No. 1-Department has not taken up this plea in its affidavit-in-reply. As a matter of fact, this point has not been pleaded at all by respondent No. 1-Department. It is only during the course of arguments that the learned Counsel for the Department touched this issue and relying on Sec. 281 of the Income Tax Act, submitted that the transfer or charge can be said to be void and the situation would not be saved by the proviso to Sec. 281. The position of law is well settled. In our opinion, when a point which is ostensibly a point of law is required to be substantiated by facts, the party raising the point, if he is a respondent in a writ petition, must plead and prove such facts by evidence which must appear from the counter-affidavit. If the facts are not pleaded or the evidence in support of such facts is not annexed to the counter, the Court will not entertain the point. In this context, it would be expedient to rely upon a judgment of the Hon''ble Supreme Court in the case of Bharat Singh and Others Vs. State of Haryana and Others, , where in the Hon''ble Supreme Court in Paragraph 13 held as under:

In our opinion, when a point which is ostensibly a point of law is required to be substantiated by facts, the party raising the point, if he is the writ petitioner, must plead and prove such facts by evidence which must appear from the writ petition and if he is the respondent, from the counter-affidavit. If the facts are not pleaded or the evidence in support of such facts is not annexed to the writ petition or to the counter-affidavit, as the case may be, the Court will not entertain the point. In this context, it will not be out of place to point out that in this regard there is a distinction between a pleading under the CPC and a writ petition or a counter-affidavit. While in a pleading, that is, a plaint or a written statement, the facts and not evidence are required to be pleaded, in a writ petition or in the counter-affidavit not only the facts but also the evidence in proof of such facts have to be pleaded and annexed to it. So, the point that has been raised before us by the appellants is not entertainable.

Yet again in a very recent pronouncement of the Supreme Court in the case of The National Textile Corporation Ltd. Vs. Nareshkumar Badrikumar Jagad and Others, the Supreme Court in Paras 7 and 8 held as under :

Pleadings and particulars are necessary to enable the Court to decide the rights of the parties in the trial. Therefore, the pleadings are more of help to the Court in narrowing the controversy involved and to inform the parties concerned to the question in issue, so that the parties may adduce appropriate evidence on the said issue. It is a settled legal proposition that "as a rule relief not founded on the pleadings should not be granted". A decision of a case cannot be based- on grounds outside the pleadings of the parties. The pleadings and issues are to ascertain the real dispute between the parties to narrow the area of conflict and to see just where the two sides differ. (Vide : Trojan and Co. Ltd. Vs. Rm. N.N. Nagappa Chettiar, ; State of Maharashtra Vs. Hindustan Construction Company Ltd., ; and Kalyan Singh Chouhan Vs. C.P. Joshi, .

In Ram Sarup Gupta (Dead) by Lrs. Vs. Bishun Narain Inter College and Others, , this Court held as under :

... in the absence of pleadings, evidence if any, produced by the parties cannot be considered...... no party should be permitted to travel beyond its pleading and that all necessary and material facts should be pleaded by the party in support of the case set up by it.

Similar view has been reiterated in Bachhaj Nahar Vs. Nilima Mandal and Another, .

The second reason why we do not propose to touch this Sec. 281 is as to whether the Department in a writ petition by A.R.C.I.L. can take up this plea of Sec. 281 and submit that the charge of transfer be declared as void? We have come across a ruling of the Supreme Court in the case of The Tax Recovery Officer II, Sadar, Nagpur Vs. Gangadhar Vishwanath Ranade (Dead) Through Mrs. Shobha Ravindra Nemiwant, , where the Supreme Court considered Sec. 281 of the Income Tax Act and examined the issue as to whether a Tax Recovery Officer can declare any transfer made by the assessee in favour of a third party as void. The Supreme Court held in Paragraphs 7, 8 and 9 as under :

The question which is now required to be answered is whether in a proceeding under Rule 11 of the Second Schedule to the Income Tax Act, the Tax Recovery Officer can declare a transfer as void under Sec. 281. Sec. 281, as it stood at the relevant time provided as follows :

Sec. 281 : Where, during the pendency of any proceeding under this Act, any assessee creates a charge on or parts with the possession by way of sale, mortgage, exchange or any other mode of transfer whatsoever, of any of his assets in favour of any other person with the intention to defraud the Revenue, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of the completion of the said proceeding :

Provided that such charge or transfer shall not be void if made for valuable consideration and without notice of the pendency of the proceeding under this Act.

Section 281 declares as void any transfer made by the assessee during the pendency of proceedings Under the Act, with the intention to defraud the Revenue. The powers of the Tax Recovery Officer, however, under Rule 11 of the Second Schedule to the Income Tax Act are somewhat different. Under Rule 11(1) where any claim is preferred to or any objection is made to the attachment or sale of any property in execution of a Certificate on the ground that such property is not liable to such attachment or sale, the Tax Recovery Officer shall proceed to investigate the claim or objection. Under Rule 11(4), (5) and (6), it is provided as follows :

Rule 11(4) : Where, upon the said investigation the Tax Recovery Officer is satisfied that for the reason stated in the claim or objection, such property was not, at the said date, in possession of the defaulter or of some person in trust for him or in the occupancy of a tenant or other person paying rent to him, or that, being in the possession of the defaulter at the said date, it was so in his possession, not on his own account or as his own property, but on account of or in trust for some other person, or partly on his own account and partly on account of some other person, the Tax Recovery Officer shall make an order releasing the property, wholly or to such extent as he thinks fit, from attachment or sale.

Rule 11(5) : Where the Tax Recovery Officer is satisfied that the property was, at the said date, in the possession of the defaulter as his own property and not on account of any other person, or was in the possession of some other person in trust for him, or in the occupancy of a tenant or other person paying rent to him, the Tax Recovery Officer shall disallow the claim.

Rule 11(6) : Where a claim or an objection is preferred, the party against whom an order is made may institute a suit in a Civil Court to establish the right which he claims to the property in dispute; but, subject to the result of such suit (if any), the order of the Tax Recovery Officer shall be conclusive.

The Tax Recovery Officer, therefore, has to examine who is in possession of the property and in what capacity. He can only attach property in possession of the assessee in his own right, or in possession of a tenant or a third party on behalf of for the benefit of the assessee. He cannot declare any transfer made by the assessee in favour of a third party as void. If the Department finds that a property of the assessee is transferred by him to a third party with the intention to defraud the Revenue, it will have to file a suit under Rule 11(6) to have the transfer declared void under Sec. 281.

Thus, what can be deduced from the judgment of the Supreme Court in the case of Tax Recovery Officer-II, Sadar, Nagpur v. Gangadhar Vishwanath Ranade (supra) is that if the Department finds that a property of the assessee is transferred by him to a third party with the intention to defraud the Revenue, it will have to file a Suit under Rule 11(6) of the Second Schedule to the Income Tax Act to have the transfer declared void under Sec. 281 of the Act.

Therefore, it is difficult for us to accept this contention of the learned Counsel for the Department that the charge or transfer by respondent No. 2 in favour of the financial institutions can be said to be a void charge or transfer. In the above view of the matter, the petition is allowed. It is declared that the claim put forward by respondent No. 1-Income Tax Department by way of attachment of assets covered by Sec. 13(2) notice for priority over the petitioner for realization of the income tax dues is contrary to the settled position of law and illegal. It will be open for the petitioner to exercise his right under the S.A.R.F.A.E.S.I. Act and the Rules made thereunder and the Income Tax Department shall not in any manner hamper or restrain the petitioner in proceeding further under the S.A.R.F.A.E.S.I. Act, regardless of the attachment orders passed by the Income Tax Department for realization of income tax dues of respondent No. 2-Company. Rule is made absolute.