Karnail Singh v Union of India

Punjab And Haryana High Court

15 February 2011

CW.P. No. 9454 of 2005

The Judgment was delivered by : Hon’ble Justice Adarsh Kumar Goel

This petition seeks quashing of order dated 15-2-2005 passed by the Income-tax Officer, Karnal attaching the property of the petitioner and declaring sale in his favour by his predecessor to be void on the ground that the said vendor was in default of income-tax dues.

Case set out in the petition is that he purchased the property in dispute vide sale deed dated 9-9-1996. Later on he came to know that the impugned order was affixed at the shop declaring the sale in his favour to be void under section 281 of the Income-tax Act, 1961 (in short “the Act”) and attaching the property. The order was addressed to Satpal Manocha vendor of the petitioner who had failed to pay dues to the department. The dues were recoverable in the year 2003 which were after the sale. The petitioner filed an application seeking a copy of order. Since the petitioner had purchased the property which was free from all encumbrances, the same could not be attached under section 222 of the Act. Moreover, the order was passed behind the back of the petitioner without affording any opportunity of hearing.

In the reply filed on behalf of the Income-tax Department, stand taken is that the sale in favour of the petitioner was a sham transaction to defraud the revenue. The property in dispute belonged to respondent No. 4 against whom outstanding demand since 1995 was pending for the dues from the year 1985-86 to assessment year 1992-93 as follows :-

The sale deed was got registered at Delhi even though both the parties are at Karnal and the property was also at Karnal. Ownership of the property was not got transferred in the records of the Municipal Council. The original sale in favour of the predecessor of the petitioner on 16-3-1986 was for Rs. 2,65,000 while sale in favour of the petitioner after 10 years has been shown for Rs. 2,45,000 by way of undervaluation. The shop was not occupied by the petitioner and was still lying vacant. Since the sale was a sham transaction to defraud the revenue, the sale was void under section 281 of the Act and the property could be attached to recover the arrears.

We have heard learned counsel for the parties.

In support of his contention that Income-tax Officer had no jurisdiction to annul even a fraudulent sale to recover its dues, reliance has been placed by learned counsel for the petitioner on the judgment of the Hon’ble Supreme Court in TRO v. Gangadhar Vishwanath Ranade [1998] 234ITR 188/100 Taxman 236 1998 Indlaw SC 1246 holding that the power of the Tax Recovery Officer (TRO) under Rule 11 of the Second Schedule to the Act was only to attach the property in possession of the assessee. If the property is transferred to third party with the intention to defraud the revenue, remedy of the department is to file a suit under Rule 11(6).

Learned counsel for the respondents submits that the judgment relied upon is distinguishable and after taking into account the said judgment, the Calcutta High Court in Jaymac Lasetron (P.) Ltd. v. CIT[2000] 245 ITR 734/[2001] 116 Taxman 231 2000 Indlaw CAL 279 held that section 281 of the Act statutorily declared a transaction with an intention to defraud the revenue to be void and it was not necessary for the revenue to file a suit to get such transaction annulled. Moreover, in the judgment of the Hon’ble Supreme Court, unamended provision of section 281 was interpreted since dispute involved was for period prior to amendment. In 1975, by amendment, the words “with the intention to defraud the revenue” have been deleted. In view of the said amendment, no suit was necessary and statutory declaration in section 281 could be invoked.

Thus, the question for consideration is whether the department could proceed against the property of the assessee in default ignoring a transfer thereof during pendency of any proceedings without filing a suit.

Sections 222 and 281 of the Act are as under :-

“222. (1) When an assessee is in default or is deemed to be in default in making a payment of tax, the Tax Recovery Officer may draw up under his signature a statement in the prescribed form specifying the amount of arrears due from the assessee (such statement being hereafter in this Chapter and in the Second Schedule referred to as “certificate”) and shall proceed to recover from such assessee the amount specified in the certificate by one or more of the modes mentioned below, in accordance with the rules laid down in the Second Schedule-

(a) attachment and sale of the assessee’s movable property;

(b) attachment and sale of the assessee’s immovable property;

(c) arrest of the assessee and his detention in prison;

(d) appointing a receiver for the management of the assessee’s movable and immovable properties.

Explanation.-For the purposes of this sub-section, the assessee’s movable or immovable property shall include any property which has been transferred, directly or indirectly on or after the 1st day of June, 1973, by the assessee to his spouse or minor child or son’s wife or son’s minor child, otherwise than for adequate consideration, and which is held by, or stands in the name of, any of the persons aforesaid; and so far as the movable or immovable property so transferred to his minor child or his son’s minor child is concerned, it shall, even after the date of attainment of majority by such minor child or son’s minor child, as the case may be, continue to be included in the assessee’s movable or immovable property for recovering any arrears due from the assessee in respect of any period prior to such date.

(2) The Tax Recovery Officer may take action under sub-section (1), not withstanding that proceedings for recovery of the arrears by any other mode have been taken.”

“281.(1) Where, during the pendency of any proceeding under this Act or after the completion thereof, but before the service of notice under rule 2 of the Second Schedule, any assessee creates a charge on, or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever) of, any of his assets in favour of any other person, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of the completion of the said proceeding or otherwise:

Provided that such charge or transfer shall not be void if it is made-

(i) for adequate consideration and without notice of the pendency of such proceeding or, as the case may be, without notice of such tax or other sum payable by the assessee; or

(ii) with the previous permission of the Assessing Officer.

(2) This section applies to cases where the amount of tax or other sum payable or likely to be payable exceeds five thousand rupees and the assets charged or transferred exceed ten thousand rupees in value.

Explanation.-In this section, “assets” means land, building, machinery, plant, shares, securities and fixed deposits in banks, to the extent to which any of the assets aforesaid does not form part of the stock-in-trade of the business of the assessee.”

The Rules laid down in the Second Schedule to the Act contain procedure for recovery of tax by way of attachment and sale of the property. On transfer of property for recovery of dues, title to the property gets vested in transferee under Rule 6. Rule 11 provides that if any objection is raised to the attachment and sale, the same can be decided by the Tax Recovery Officer. Rule 11(6) provides that if the Tax Recovery Officer decides the objection by which an objector is aggrieved, such objector can file a suit to establish his case and subject to result of such suit, the order of the Tax Recovery Officer is conclusive. Rule 11 is reproduced below:-

“11. (1) Where any claim is preferred to, or any objection is made to the attachment or sale of, any property in execution of a certificate, on the ground that such property is not liable to such attachment or sale, the Tax Recovery Officer shall proceed to investigate the claim or objection :

Provided that no such investigation shall be made where the Tax Recovery Officer considers that the claim or objection was designedly or unnecessarily delayed.

(2) Where the property to which the claim or objection applies has been advertised for sale, the Tax Recovery Officer ordering the sale may postpone it pending the investigation of the claim or objection, upon such terms as to security or otherwise as the Tax Recovery Officer shall deem fit.

(3) The claimant or objector must adduce evidence to show that-

(a) in the case of immovable property at the date of the service of the notice issued under this Schedule to pay the arrears, or

(b) in the case of movable property at the date of the attachment, he had some interest in, or was possessed of, the property in question.

(4) Where, upon the said investigation, the Tax Recovery Officer is satisfied that, for the reason stated in the claim or objection, such property was not, at the said date, in the possession of the defaulter or of some person in trust for him or in the occupancy of a tenant or other person paying rent to him, or that, being in the possession of the defaulter at the said date, it was so in his possession, not on his own account or as his own property, but on account of or in trust for some other person, or partly on his own account and partly on account of some other person, the Tax Recovery Officer shall make an order releasing the property, wholly or to such extent as he thinks fit, from attachment or sale.

(5) Where the Tax Recovery Officer is satisfied that the property was, at the said date, in the possession of the defaulter as his own property and not on account of any other person, or was in the possession of some other person in trust for him, or in the occupancy of a tenant or other person paying rent to him, the Tax Recovery Officer shall disallow the claim.

(6) Where a claim or an objection is preferred, the party against whom an order is made may institute a suit in a civil court to establish the right which he claims to the property in dispute; but, subject to the result of such suit (if any), the order of the Tax Recovery Officer shall be conclusive.”

A perusal of the above provisions show that the Tax Recovery Officer is entitled to issue a certificate and recover the amount by way of attachment and sale of assessee’s property. If such property is transferred during the pendency of proceedings, the same does not affect the recovery from the said property. The questions relating to validity of attachment and sale can be decided by the Tax Recovery Officer. Of course, such decision is final only subject to result of suit, if any, preferred by the objector.

Section 222 clearly provides that where assessee is in default, the Tax Recovery Officer (TRO) can issue the requisite certificate and proceed to recover the amount by attachment and sale or other modes specified therein. Section 281 statutorily declares creation of any charge or parting of possession to be void against any claim of tax except where such charge or transfer is for consideration without notice of pendency of proceedings or with the prior permission of the Assessing Officer. It is not the case of the petitioner that any previous permission of Assessing Officer was taken for the transfer. Question whether transfer was for adequate consideration and without notice, is a matter which is yet to be decided. According to the stand of the department, the transfer was during pendency of proceedings for recovery which is a question of fact and if disputed, the same can be gone into in appropriate proceedings. Only question which is required to be gone into at this stage is whether there is absolute bar against attachment or sale being proceeded with under section 222 by invoking section 281 in respect of property transferred during pendency of proceedings. In our view, on plain provisions of the said sections, the department can proceed under section 222 by invoking section 281 without filing the suit. In case attachment or sale or other proceedings are objected to, the TRO is required to decide the said objections under Rule 11 and if a party is aggrieved thereby, a suit can be filed in civil court, in absence of which, order of TRO is conclusive. Since no objections have yet been filed, there is no ground for interference by this Court at this stage. The judgment of Calcutta High Court in Jaymac Lasetron (P.) Ltd. ‘s case 2000 Indlaw CAL 279 (supra) relied upon by the revenue after taking into account judgment of the Hon’ble Supreme Court in Gangadhar Vishwanath Ranade’s case 1998 Indlaw SC 1246 (supra) fully supports the stand of the revenue.

We, may, however, notice the contention raised on behalf of the petitioner that in Gangadhar Vishwanath Ranade’s case 1998 Indlaw SC 1246 (supra), the Hon’ble Supreme Court held that the TRO cannot declare any transfer by the assessee in favour of a third party to be void. The TRO can only examine who is in possession and in what capacity. He can attach property in possession of the assessee in his own right or in possession of a tenant or third party on behalf of or for the benefit of the assessee. This contention is no doubt borne out from the judgment but it is explained on behalf of the revenue that even if declaration by the TRO that the transfer was void is ignored, the statutory declaration of the transaction being void cannot be ignored. No doubt, it may be open to the revenue to file a suit to seek such a declaration but the revenue can also rely upon statutory declaration under section 281 though the TRO cannot grant such a declaration. We may also notice the statutory change in section 281 on account of amendment vide Taxation Laws (Amendment) Act, 1975 with effect from 1-10-1975. In the amended provision, the words “with the intention to defraud the revenue” have been deleted. The judgment of the Hon’ble Supreme Court was rendered on unamended provision. Bona fide transferee is protected from the effect of voidness of the transaction. The question for revenue to file suit would have arisen if it was required to be established that the transfer was to defraud the revenue which is no longer the requirement. Moreover, voidness of the transaction qua the claim of the revenue is statutorily declared which is different from the transaction itself being declared void. Thus, in our view, after the amendment of section 281, the judgment of the Hon’ble Supreme Court is not bar to the revenue invoking section 281 in the circumstances mentioned therein and proceeding under section 222 by way of attachment and sale of assessee’s property ignoring transfer in violation of section 281 subject of course to the statutory remedies of the affected party to raise objections or to file suit.

Contention raised on behalf of the petitioner that no opportunity of hearing before attachment was provided cannot be accepted. Judgment of Bombay High Court in Palanpur Traders Ltd. v. Union of India[1991 ] 187 ITR 132/54 Taxman 265 1990 Indlaw MUM 5255 relied upon by the petitioner is distinguishable. Therein, on facts it was held that the petitioner had taken necessary precaution before purchasing the flat and had purchased the property after permission of the Court. It cannot be held that in every case where proceedings under section 222 are taken in accordance with the procedure laid down therein, the person in whose name the property is transferred, which under section 281 is void, will be entitled to a notice before proceeding with the recovery.

1n view of above, we are unable to interfere with the impugned notice of attachment. The writ petition is dismissed. It is, however, made clear that the petitioner will be at liberty to file objections in accordance with law before the TRO and take his remedy against the decision which may be rendered on such objections, in accordance with law.