KARSANBHAI GANDABHAI PATEL SHOP NO. 7 vs. TAX RECOVERY OFFICER

ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI)

Petitioners have challenged an order dated 8th November 1995 passed by the Tax Recovery Officer (TRO), Valsad under section 281 of the Income Tax Act 1961 (‘the Act’ for short). Facts are as under: The petitioners purchased different units in a constructed building situated in Bilimora Nagarpalika known as Mazda Estate constructed by Mazda Estate and Finance Pvt. Ltd. (‘Mazda’ for short). The construction was completed in the year 1991 or 1992. The petitioners had booked their respective shops in the said building. Upon completion of the construction, the petitioners were put in possession of such shops in the year 1991-92. On 17th/18th May 1995, all the petitioners executed separate sale deeds with Mazda for purchase of respective units.

Mazda had defaulted in making payment of income tax dues to the extent of Rs.19.88 lacs arising out of various assessment orders. The case of Mazda was therefore referred to TRO, Mumbai for recovery.

Under the instruction of TRO, Mumbai, the property in question was attached on 22.5. 95. Finally, TRO, Valsad by the impugned order dated 8th November 2005 declared that all the sales mentioned therein including those in favour of the present petitioners were void in terms of section 281 of the Act. In the said order, he recorded that several demand notices were issued to Mazda for different assessment years between 1989 and 1994. Such demand notices were served on the defaulter before the date of transfer of the properties. He, therefore, declared the transactions void.

Under communication dated 20th December 1995, the petitioners C/SCA/2894/2004 JUDGMENT raised objection to the said order dated 8.11.95 contending, inter alia, that such order was passed without any notice to them and in any case, TRO had no juri iction to declare any transaction as void under section 281 of the Act. There was no response to this communication by the respondents.

Many years later, the petitioners once again wrote to the department on 21.10.03 and requested for withdrawal of the order under section 281 of the Act. Yet another letter was written for the same purpose on 18.12.2013 by the petitioners. Finally, the Tax Recovery Officer, Navsari wrote to the directors of Mazda on 3rd February 2004 indicating that the department would proceed with the auction sale of the properties under attachment to recover the dues of Mazda. Thereupon, the petitioners filed the present petition.

Learned counsel Shri Bandish Soparkar for the petitioners submitted that in terms of section 281 of the Act, the TRO had no juri iction to declare the transaction as void. If at all, the department would have to file civil suit for such purpose which in the present case was not done. He further submitted that the petitioners had purchased the properties for adequate consideration without notice of the dues of the defaulter. The petitioners could never bring such facts to the notice of the TRO and avail of the proviso to section 281(1) of the Act since the petitioners were never heard before the impugned order was passed.

In support of his contentions, he relied on the following decisions: (1)In the case of T.R.O. v. Gangadhar Vishwanath Ranede, 234 ITR 189 (SC). C/SCA/2894/2004 JUDGMENT (2)In the case of Ms.Ruchi Mehta v. UOI, 294 ITR 614 (Bom).

On the other hand, learned counsel Shri Sudhir Mehta for the department opposed the petition. Relying on section 281 of the Act, he contended that the transactions in question were void. The defaulter was duly served with notices for recovery of the unpaid tax long before the properties were transferred. In support of his submissions, he relied on following decisions: (1)In the case of Abdul Jamil v. Secretary, Income-tax Department, (1998) 102 Taxman 332 (Madras). (2)In the case of Palani Gounder v. I.T. Revenue Department, 229 ITR 59.

Having thus heard the learned counsel for the parties and having perused the documents on record, it emerges that notices were issued to the defaulter during the years 1989 to 1994 for recovery of unpaid taxes.

Such taxes were, however, not paid. In the meantime, the defaulter sold certain properties to various persons including the petitioners. Such sale deeds were executed on or around 17/18th May 1995. It was only thereafter that the department attached the property in question by issuing an order dated 22.5. 95. On 8.11.95, the TRO, Valsad passed the impugned order declaring the sale transactions as void. This order was passed without any notice to the petitioners.

Section 281 of the Act provides certain transfers to be void. Sub- section (1) thereof, which is relevant for our purpose, reads as under: C/SCA/2894/2004 JUDGMENT “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 nay 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 maybe, without notice of such tax or other sum payable by the assessee; or (ii) with the previous permission of the Assessing Officer.”

Sub-section (1) of section 281 thus provides that where during the pendency of any proceedings under the 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 any 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 completion of the said proceedings or otherwise.

Proviso to sub-section (1), however, provides that such charge or transfer shall not be void if made for adequate consideration and without notice of pendency of such proceedings or without notice of such tax or other sum payable by the assessee or with the permission of the Assessing Officer. C/SCA/2894/2004 JUDGMENT It can thus be seen that even if the transactions creating a charge or parting of possession has been entered into by the assessee during the pendency of any proceedings under the Act or after completion thereof, the eventuality of such charge or transfer being declared void can be avoided provided one of the two conditions contained in the proviso is satisfied. Under such circumstances, the transferee can demonstrate that the transaction had taken place with the previous permission of the Assessing Officer or that the same was entered into for adequate consideration and without notice of pendency of such proceedings or without notice of such tax or other sum payable by the assessee.

This element of the transaction being with adequate consideration and without notice would equally apply to the assessee as well as the transferee. In a given case, it may even be open for the assessee to establish that the transaction was for adequate consideration without notice. In a given case, even if the assesee had notice of the pendency or the outstanding tax or sum payable, the transferee can still take shelter of the transactions having been entered into by him for adequate consideration and without notice. It is, therefore, that the courts have read into this provision the requirement of hearing the transferee also.

Quite apart from this, as would be clear from the discussion hereinafer, courts have taken a view that sub-section (1) of section 281 of the Act only provides for the eventuality of the transaction hit by the said provisions as being void. It does not create any machinery for the Revenue authorities to entertain dispute and declare the transaction to be void for which purpose, only a civil suit would lie.

In the case of Gangadhar Vishwanath Ranade v. T.R. O. 177 ITR 176, a Division of the Bombay High Court held that under section C/SCA/2894/2004 JUDGMENT 281 of the Act, the TRO has no power to declare a transfer as void. This decision of the Bombay High Court was carried in appeal before the Supreme Court. The Apex Court in TRO v. Gangadhar Vishwanath Ranade (supra) confirmed the view of the Bombay High Court and held and observed as under: “In the light of this discussion about the provisions of Order XXI, Rules 58 to 63, if we examine Rule 11(4) of the Second Schedule to the Income-tax Act, it is clear that the Tax Recovery Officer is required to examine whether the possession of the third party is of a claimant in his own right or in trust for the assessee or on account of the assessee. If he comes to a conclusion that the transferee is in possession in his or her own right, he will have to raise the attachment. If the Department desires to have the transaction of transfer declared void under Section 281, the Department being in the position of a creditor, will have to file a suit for a declaration that the transaction of transfer is void under Section 281 of the Income-tax Act.”

Later on, once again, the issue came up for consideration before a Division Bench of the Bombay High Court in the case of Ms.Ruchi Mehta (supra). The Bombay High Court followed the decision of the Supreme Court in the case of TRA v. Gangadhar Vishwanath Ranade (supra) and held that the action of the TRO in declaring the transfer of property to be void was without juri iction. The Court also held that the impugned order attaches civil consequences. The authority therefore before passing such order ought to have given an opportunity to the petitioners of being heard. This was not done. This was an additional ground on which the order was struck down.

In the case of Sancheti Leasing Company Ltd v. Income Tax Officer, (2000) 158 CTR (Mad) 190, learned Single Judge of the Madras C/SCA/2894/2004 JUDGMENT High Court following the decision of the Supreme Court in the case of Gangadhar Vishwanath Ranade (supra) held that ITO had no juri iction to declare the transaction of sale to the petitioners as void.

The decisions cited by the counsel for the Revenue arose in different factual background. In the case of Abdul Jamil (supra), the issue arose out of civil proceedings in which the Court found that the vendor had sold the property to the first plaintiff after the issuance of certificate under the Act for recovery of the tax arrears from him. The Court therefore, held that the transaction was hit by the provisions of section 281 as well as rule 16(1) of the Rules.

The case of Palani Gounder (supra), also arose in different factual background. It was a case in which the plaintiff had filed suit for declaration that their purchase of the suit property was for a valid consideration and it was a duly registered sale deed and was therefore not void. The Income Tax Officer had proposed to proceed under section 281 of the Act. The civil court in the suit filed by the plaintiffs found that the transaction was in breach of section 281 of the Act and therefore refused to grant the prayer. It was under such circumstances that the appeal was heard by the learned Single Judge of the Madras High Court and dismissed the same.

The issue is squarely covered by the decision of the Supreme Court in the case of Gangadhar Vishwanath Ranade. We have, therefore, no hesitation in striking down the order dated 8th November 1995 qua the present petitioners. Rule is made absolute accordingly. C/SCA/2894/2004 JUDGMENT (AKIL KURESHI, J.) (MS SONIA GOKANI, J.) (vjn)