Income Tax Dues Pending against Borrowers not a Bar for Property Registration Purchased in Auction of Bank : Karnataka HC [Read Order]

The Karnataka High Court ruled that the income tax dues pending against borrowers is not a bar for registering property purchased in an auction conducted by the Canara Bank. The court directed the sub-registrar to issue the sale certificate. The high court heavily criticised the sub-registrar and directed the state government to issue a circular with regards to this issue. Justice M. Nagaprasanna observed that the Sub-Registrar cannot refuse to register a document unless there is a violation under Rule 171 of the Rules. Therefore, the State Government needs to issue a circular based on Rule 171 and the Apex Court's decision to ensure that people are not unfairly denied document registration. The actions of some Sub-Registrars are causing unnecessary court cases. If a document meets legal requirements, any delay in registration is the fault of the Sub-Registrars, who may face penalties when such cases come before the Court. The property in question, located at No.19, 11th Cross, Wilson Garden, Hombegowdanagar, Bengaluru, was owned by Sri Thimme Gowda, Sri T. Raghavendra Gowda, and Sri T. Prasanna Raghavendra Gowda. The owners had mortgaged the property to Canara Bank and subsequently defaulted on their loan, prompting the Bank to initiate proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ( SARFAESI Act ). The property was auctioned on March 19, 2022, where the petitioner emerged as the highest bidder and fulfilled all payment requirements. Canara Bank issued a sale certificate to the petitioner on September 30, 2022. Notably, the original owners have not contested the sale. The petitioners, having paid the necessary stamp duty and fees, approached the Sub-Registrar for the registration of the sale certificate. The Sub-Registrar refused, citing pending Income Tax claims against the former owners. This refusal prompted the petitioner to seek judicial intervention. The Additional Government Advocate, on instructions, submitted that her submissions be treated as her objections to the main petition and contends that the Sub-Registrar is not in a position to register the sale certificate as the Income Tax dues of the borrowers of the property are still pending. It was also submitted that they are statutory dues and unless the statutory dues are cleared by the borrowers, the property would not become free from encumbrance and if the property would not become free from encumbrance, the Sub-Registrar would not register the document. The Court examined the relevant provisions of the SARFAESI Act, particularly Sections 26E and 35, which prioritize secured creditors over other claims and ensure the Act’s supremacy over conflicting laws. Additionally, the Court referenced Rule 171 of the Karnataka Registration Rules, 1965, which delineates the permissible grounds for refusal of document registration. It was determined that none of these grounds applied in this case. Placing the reliance on the decision of the Supreme Court in the case of Punjab National Bank V. Union of India, having identical circumstances, where it was held that “debt owed to the Crown or the State cannot take away the right of a secured creditor in the light of Section 26E and Section 35 of the Act supra” The High Court observed that the Apex Court, after thoroughly reviewing the legal framework, concluded that the dues of a secured creditor, such as a bank or any financial institution, take precedence over the dues of the Central Excise Department as per the Central Excise Act. The Apex Court determined that the provisions of the SARFAESI Act, 2002, superseded those of the Central Excise Act. If the Central Excise Act mentioned in the Apex Court's judgment is replaced with the Income-Tax Department and dues under the Income-Tax Act, the rationale provided by the Apex Court would similarly apply to the current case. The Sub-Registrar, although not formally documented, verbally refused to register the document citing outstanding dues of the Income-Tax Department against the borrowers. This reason is not justifiable for the Sub-Registrar, even if it were documented in writing, observed the High Court. The Court also stated that the Sub-Registrar must operate strictly within the boundaries of the Registration Act and the Registration Rules established by the State. If none of the conditions outlined in Rule 171 of the Rules are met, the Sub-Registrar has no authority to refuse the registration of a document. In this case, the document in question is the sale certificate. While allowing the writ petition, the Karnataka High Court has ordered the issuance of a mandamus to the 2nd respondent/Sub-Registrar, compelling them to promptly register the document presented by the petitioner as soon as they receive a copy of this court order, ensuring no delays. Additionally, the State Government has been directed to circulate a Circular to all Sub-Registrars statewide, aligning with this directive. This direction is to prevent individuals seeking document registration from repeatedly resorting to the courts. It was also mentioned that the Circular must specifically reference the relevant Rules and the apex court judgment cited in this order. The Court has stipulated that compliance with the Circular's issuance must be reported within eight weeks from the date the State Government receives a copy of this court order. Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates