Bank have Priority over Tax Dues: Hyderabad HC allows SBI to claim Income Tax Refund credited to Defaulters [Read Judgment]

The High Court of Hyderabad upheld the claim of the State Bank of India (SBI) over the income tax refund credited in the defaulters’ bank account with them and held that bank credits have priority over the government dues including the service tax dues as per section 31-B of the Recovery of Debts and Bankruptcy Act, 1993

The petitioner State Bank of India (SBI),  init’s banking activity had sanctioned limits of Rs. 820 Crores to the respondent, M/s SEW Infrastructures Limited, Greenlands, Hyderabad with working capital limits of Rs.198 crores (Fund based) and Rs.622 Crores (Non-Fund based) and the limits were renewed during February, 2016 along with consortium Banks. In the year 2019, the company received an Income Tax Refund Order for Rs.35,75,95,400/-

The petitioner bank  initiated proceedings under the SARFAESI Act, 2002 by issuing a demand notice under Section 13 (2) of the Act and also took possession of respondent’s properties under Section 13 (4) of the said Act including the refund amount

The other respondents, Directorate General of GST Intelligence issued the impugned notice to the Petitioner Bank invoking Section 87 of the Finance Act, 1994 stating that respondent company owes Rs.59,20,19,079/- towards dues of Service Tax and the same should be adjusted with the refund credited.

The division bench consisting of Justice M.S. Ramachandra Rao, and Justice T. Amarnath Goud held that the Directorate General of GST Intelligence claim for the Income Tax refund amount credited to the respondent company’s Bank account with the petitioner Bank cannot prevail over petitioner’s claim for the same by way of adjustment to it’s dues.

While allowing the Writ Petition the court set aside the notice issued by the Regional Provident Fund Commissioner (RPFC); and it is held that the petitioner Bank is entitled to appropriate the sum of Rs. 35,75,95,400/- deposited towards Income Tax refund by the respondent, the Deputy Commissioner of Income-tax in the Bank account of the respondent company with the petitioner’s branch at CCG Branch at Hyderabad towards dues owed to petitioner by the respondent company.

Referring to the decision in Bank of Baroda vs. State of Gujarat and Ors, the bench held that “We respectfully agree with the said view and hold that having regard to the clear language contained in Sec.31-B of the Recovery of Debts and Bankruptcy Act, 1993 giving priority to rights of secured creditors (to realize secured debts due and payable to them by the sale of assets over which security interest is created) over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local authority, the law has undergone a sea change; and in view of Sec.31-B of the Recovery of Debts and Bankruptcy Act, 1993 and sec.26E of the SARFAESI Act,2002 w.e.f.1.9.2016 the claims of secured creditors such as the petitioner Bank have priority over the claims of the respondents 1-3 for service tax dues.”