The Delhi High Court ruled that the dues of a secured creditor take precedence over the tax dues owed to the Income Tax Department.
In a significant ruling, the Delhi High Court has held that the Income Tax Department cannot indefinitely attach properties without taking further steps to resolve the matter. The judgment came in favor of Fasttrack Tieup Pvt. Ltd., reinforcing that mere attachment of properties without subsequent recovery actions is impermissible under the law.
Background of the Case
The case was heard by Justice Sachin Datta, who examined the scope of Section 222 of the Income Tax Act. This section empowers the Tax Recovery Officer (TRO) to attach and sell the assessee’s movable property to recover outstanding tax dues. However, the court noted that while the department had initiated attachment proceedings through a prohibitory order, no further action had been taken to recover the outstanding amount.
The court emphasized that keeping properties under attachment indefinitely without pursuing recovery steps is unjustified and legally unsustainable.
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Summit Aviation’s Financial Default and Property Attachment
In 2008, Summit Aviation Private Limited secured financial assistance from Punjab National Bank (PNB) to purchase helicopters through a hypothecation agreement. Under this agreement, three helicopters — two existing and one proposed — were hypothecated as security against the loan.
However, Summit Aviation defaulted on its repayment obligations and failed to maintain financial discipline as per the hypothecation agreement dated 12.05.2008. Consequently, PNB decided to take possession of the two existing helicopters to recover its dues.
Meanwhile, the Income Tax Department issued a prohibitory order due to outstanding liabilities of Rs. 2783.73 lacs owed by Summit Aviation. PNB communicated with the department, expressing its intent to auction the helicopters and asserting that its charge over the assets had priority over the income tax dues.
Auction of Helicopters and Legal Dispute
Subsequently, PNB published a notice in Financial Express and Jansatta newspapers, inviting bidders to participate in the auction of the two helicopters. A corrigendum was also issued to provide additional information to potential bidders, including details about applicable hangar charges and the existing prohibitory order from the Income Tax Department.
The petitioner argued that the continued attachment of the helicopters prevented the Directorate General of Civil Aviation (DGCA), M/s Yathi Air Services, and SAR Aviation Services from releasing the helicopters to the petitioner.
Court’s Ruling
The Delhi High Court ruled that the dues of a secured creditor (in this case, PNB) take precedence over the tax dues owed to the Income Tax Department. Therefore, the attachment order issued by the department cannot obstruct the auction sale in favor of the petitioner.
Key Takeaways from the Judgment
- The Income Tax Department cannot indefinitely attach properties without taking steps to recover the dues.
- The rights of secured creditors take precedence over income tax dues.
- The attachment order should not prevent legitimate recovery actions by secured creditors.
Case Details
- Case Title: Fasttrack Tieup Pvt. Ltd. vs. Union of India
- Case No.: W.P.(C) 15237/2023 and CM APPLs. 60975/2023, 17044/2024
- Date: 24.02.2025
- Petitioner’s Counsel: Rana Mukherjee
- Respondent’s Counsel: Nidhi Banga
This ruling reinforces the importance of resolving tax recovery matters promptly and respecting the rights of secured creditors in financial disputes.
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