Tax Recovery Officer Has No Power to Declare Mortgage Void Ab Initio, Can Only Enforce Attachment: Madras HC in Sree Gokulam Chit Case [Read Order]

In a recent judgment, the Madras High Court held that a Tax Recovery Officer has no power to declare a mortgage void ab initio and can only proceed to enforce attachment under the Income Tax Act.

The case arose from income tax proceedings against Shri S. Elangovan for the assessment year 2011-12. After scrutiny, a large tax demand with interest and penalty was raised and a recovery certificate was issued. A notice under Rule 2 of the Second Schedule was served on the assessee on 26 February 2016.

On the same date, the assessee purchased a property in Korattur, Chennai. Later, in November 2016, he created an equitable mortgage over the property in favour of Sree Gokulam Chit and Finance by depositing the title deeds. In 2019, the Tax Recovery Officer attached the property for recovery of tax dues and later proposed to auction it. The petitioner objected to the auction claiming rights as a mortgagee.

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The Tax Recovery Officer rejected the objection and passed an order declaring that the mortgage was void ab initio. Aggrieved by this, the petitioner approached the High Court.

The petitioner's counsel argued that the Tax Recovery Officer had no authority to declare the mortgage void ab initio and that, at most, the mortgage could be ineffective only against tax recovery. The revenue counsel argued that after service of the Rule 2 notice, the assessee could not mortgage the property without permission of the Tax Recovery Officer.

JusticeSenthilkumar Ramamoorthy observed that Section 281 of the Income Tax Act applies only till the service of the Rule 2 notice. Since the mortgage was created after the notice was served, the protection available to bona fide transfers was not applicable.

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The court further observed that Rule 16 of the Second Schedule only restricts the effect of such a mortgage against tax claims and does not make it void in law. The court explained that the Tax Recovery Officer’s role is limited to recovery of tax dues and he cannot decide the validity of a mortgage created in favour of a third party.

The court set aside the impugned order to the extent it declared the mortgage void ab initio. At the same time, it pointed out that the income tax department is free to proceed with sale of the attached property and recover its dues. Any surplus amount, if available, has to be dealt with as per law.

Accordingly, the writ petition was partly allowed and disposed of.

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