Allowing the appeal against the order of single judge, the division Bench held that, there is no provision under the Income-tax Act, 1961, which creates a charge in respect of tax or any sums that may become payable under it. The 1961 Act does not create a charge towards recovery of dues. Section 281 of the 1961 Act only declares certain transactions to be void and cannot be understood as creating a charge in favour of the Department in respect of dues arising thereunder. What emerges from a reading of section 281 of the 1961 Act is that (a) the provision is intended to operate during the pendency of any proceeding or after the completion thereof and before the service of notice under rule 2 of the Second Schedule to the Act, (b) the provision is a statutory declaration of any charge or transfer created by an assessee during the pendency of any proceeding or after its completion under the Act and before service of notice under rule 2 of the Second Schedule to the Act, being void in respect of the tax or any sum payable as a result of completion of the proceeding or otherwise, (c) the voidity though is with reference to and governs transfers during the pendency of any proceeding or after its completion under the Act and before service of notice under rule 2 of the Second Schedule, but becomes operational only on completion of the proceeding consequent to which sums become payable under the Act since there could be instances where on completion of the proceeding, there may be no liability for the voidity to operate but once the sum becomes payable on completion of proceeding, the declaration of voidity would relate back and cover any transfer made prior to the completion of any proceeding under the Act, (d) section 281 of the 1961 Act does not create a charge, it is a negative declaration in the sense that certain transactions, viz., any charge or transfer made during the pendency of the proceeding and on completion thereof and before issuance of notice under rule 2 of the Second Schedule are declared void to the extent of sums payable on completion of such proceeding, (e) the declaration of voidity under section 281 of the 1961 Act, is not absolute, but comes with exceptions, viz., that the charge or transfer though made during the pendency of proceedings under this Act or after completion but before issuance of notice, the charge or transfer, may still not be void if is made for adequate consideration and without notice of pendency of such proceedings or notice of such tax or sum being payable by the assessee or if the transfer is made with the previous permission of the Assessing Officer, and (f) the declaration of validity under section 281 of the 1961 Act, is not absolute but only in respect of any tax or sum payable by the assessee as a result of completion of proceedings under the Act.

Section 281 of the 1961 Act as it originally stood provided that charge or transfers would be void only if it “is with an intent to defraud revenue”. Section 281 of the 1961 Act was amended whereby, the expression “intent to defraud revenue” was omitted. Consequently, any transfer during the pendency of any proceeding under the Act or after completion thereof before service of notice under rule 2 of the Second Schedule shall be void against any claim in respect of any tax or any other sum payable by the assessee as a result of completion of the proceeding.

A non obstante clause is a legislative device intended to give an overriding effect and ensure that the provisions have their full operation.

The non obstante clauses in section 26E of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and section 31B of the Recovery of Debts and Bankruptcy Act, 1993 are not limited in their operation only in the event of inconsistency, but are intended to give primacy to the rights of secured creditors to recover all other debts and expressly include revenues, taxes, cesses or other rates payable to the Central Government or a State Government or local authority.

According to the Statement of Objects and Reasons of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016 which introduced sections 26E of the 2002 Act and 31B of the 1993 Act, priority was accorded to secured creditors in repayment of debts in order to augment economic growth and ease of doing business. Therefore, section 281 of the 1961 Act which declares certain transactions to be void, and sections 26E of the 2002 Act and 31B of the 1993 Act cannot operate simultaneously without conflict and the conflict is inevitable. Sections 26E of the 2002 Act and 31B of the 1993 Act presuppose an existence of a valid charge or mortgage and if the declaration of voidity in section 281 of the 1961 Act destroys the very foundation on which sections 26E of the 2002 Act and 31B of the 1993 Act exists, a banker or a financial institution can take advantage of the priority provided therein. Once the security interest is declared a nullity, it will be non est and there is no question of applying the 2002 Act and the 1993 Act and consequentially, no question of priority. This would essentially lead to a conflict, as primacy to section 281 will render the priority accorded to secured creditors nugatory. Heydon’s rule, commonly known as the rule of “purposive construction”, provides that when the material words are capable of bearing two or more constructions, the most firmly established rule for construction of such words of all statutes in general (be they penal or beneficial, restrictive or enlarging of the common law). Applying the rule of purposive construction, the non obstante clause contained in sections 26E and 31B of the 2002 Act and the Recovery of Debts and Bankruptcy Act, which were introduced to give primacy to secured creditors and expressly provide that they would prevail over all taxes, cesses, etc., ought to be construed or interpreted in a manner that would promote and not defeat the object of Parliament to protect and safeguard the interest of secured creditors, intended in larger public interest and as a matter of policy. When two competing Acts construed to further the purposes behind them produce a conflict ; the court may resolve the conflict by taking into consideration which Act represents “the superior purpose”. Section 26E of the 2002 Act and section 31B of the 1993 Act which were introduced with a specific purpose to override and grant priority to recovery of debts due to secured creditors over all other debts, taxes and cesses must be understood as prevailing over section 281 of the 1961 Act, in the event of conflict of priority. Parliament must be understood to have given priority to secured creditors under section 26E of the 2002 Act and section 31B of the 1993 Act, fully aware and conscious of the status and importance that taxes enjoy under the Constitution. Therefore, with regard to operation of section 281 of the 1961 Act vis-a-vis the operation of sections 26E of the 2002 Act and 31B of the 1993 Act, according priority to secured creditors shall prevail. Accordingly, that the orders of attachment passed by the Tax Recovery Officer being subsequent to the mortgage created in favour of the secured creditors were liable to be set aside.(AY. 2009-10 to 2011-12)