The Delhi High Court has ruled that the Income Tax Department cannot indefinitely attach properties on the mere suspicion of tax evasion without pursuing the necessary steps for resolution. The judgment, delivered by Justice Sachin Datta, emphasized that attachment must be followed by subsequent recovery proceedings as per Section 222 of the Income Tax Act, 1961.
Case Background
The case arose from a petition filed by Fasttrack Tieup Pvt. Ltd., which had successfully bid for two helicopters in an auction conducted by Punjab National Bank (PNB). The helicopters originally belonged to Summit Aviation Pvt. Ltd., a company that had defaulted on both tax payments and loan repayments. Due to pending tax liabilities, the Income Tax Department had issued a prohibitory order, preventing the release of the helicopters.
Secured Creditor’s Priority Over Tax Dues
PNB, as a secured creditor, argued that its claims held precedence over tax dues, citing Supreme Court rulings such as:
Read Also:- Delhi High Court: Assessee Must Receive Notice Before Extending Seizure Period Under CGST Act
"Government debts have precedence only over unsecured creditors. The Income Tax Act does not provide for paramountcy of tax dues over secured creditors." – Bombay Stock Exchange vs. V.S. Kandalgaokar (2015) 2 SCC 1
Further supporting this stance, the petitioner highlighted:
- The bank’s legal right to auction the helicopters under the hypothecation agreement.
- The absence of any statutory provision granting tax dues priority over secured loans.
- The Income Tax Department’s failure to object before the auction was conducted.
Legal Observations by the Court
The High Court noted that Section 222 of the Income Tax Act mandates a two-step process: attachment followed by sale. Justice Sachin Datta remarked:
Read Also:- Delhi High Court Dismisses Petition Over Dual Applications for Recruitment Exam
"It is impermissible to keep the properties attached indefinitely without pursuing subsequent steps to resolve the matter."
Furthermore, the court highlighted that the tax authorities had been informed well in advance about the auction but failed to intervene at the appropriate stage. Instead, they attempted to block the transfer post-auction, which the court found unjustified.
Key Takeaways
- Tax authorities cannot indefinitely attach assets without initiating resolution steps.
- Secured creditors hold priority over tax dues in the absence of statutory provisions stating otherwise.
- Failure of tax authorities to object before the auction amounts to tacit approval of the sale.
The Delhi High Court ruled in favor of the petitioner and directed the Income Tax Department to withdraw the prohibitory order, allowing the release of the helicopters.
