Andhra HC (Pre-Telangana)
Shriya Bhupal, D/O Somanadri Bhupal, ... vs 1.The Asst. Commissioner Of Income Tax, ... on 2 May, 2018
Author: J.Uma Devi
Bench: J.Uma Devi
HONBLE SRI JUSTICE V.RAMASUBRAMANIAN AND HONBLE Ms. JUSTICE J.UMA DEVI
Writ Petition No.11629 of 2007
02-05-2018
Shriya Bhupal, D/o Somanadri Bhupal, Major, R/o. 6-3-215, Road No.1, Banjara Hills, Hyderabad Petitioner
1.The Asst. Commissioner of Income Tax, Circle 2(3), Hyderabad 2. The Tax Recovery Officer, Range 16, Room No.315, 3rd Floor
3.The Prudential Construction Co. Ltd., (in liquidation), Rep. by the Official Liquidator, High Court of A.P., Hyderabad, 3-5
Respondents
Counsel for Petitioner:Mr. S.Ravi, Senior Counsel
Counsel for Respondents 1&2: Mr. J.V. Prasad,
Senior Standing Counsel
Counsel for Respondent No.3: Mr. M.Anil Kumar for O.L.
(Not present)
<Gist:
>Head Note:
? Cases referred:
1. (1998) 6 SCC 658
2. [2000] 246 ITR 814
3. [1995] 214 ITR 594
4. [1998] 234 ITR 30
5. 260 ITR 6
6. AIR 1945 Madras 66
7. AIR 1960 SC 70
8. (2011) 245 CTR 437 (P&H)
HONBLE SRI JUSTICE V.RAMASUBRAMANIAN
AND
HONBLE Ms. JUSTICE J.UMA DEVI
Writ Petition No.11629 of 2007
Order: (per V.Ramasubramanian, J.)
The petitioner has come up with the above writ petition
challenging an order of the Assistant Commissioner of Income Tax
passed under Section 281 of the Income Tax Act, 1961 and an order
of attachment of the property passed by the Tax Recovery Officer
under Rule 48 of the Second Schedule to the Income Tax Act, 1961.
2. Heard Mr. S.Ravi, learned Senior Counsel appearing for the
petitioner and Mr. J.V. Prasad, learned Senior Standing Counsel
appearing for the Department.
3. The 3rd respondent-Company which is the assessee,
became liable to pay income tax to the tune of Rs.1,92,27,635/-, for
the period from 1995-96 to 2002-03. The 3rd respondent-Company
was ordered to be wound up, by the Company Court in C.P.No.119
of 2002 by order dated 08-01-2003.
4. The 3rd respondent-Company admittedly owned two
immoveable properties, one in Jubilee Hills, Hyderabad and another
in Chakkarpur, Gurgaon District. By two registered sale deeds dated
20-6-2001 and 22-6-2001 bearing Document Nos.2038/2001 and
2057/2001, the 3rd respondent-Company sold the property at Jubilee
Hills, Hyderabad to the petitioner herein.
5. It appears that before the sale, the 3rd respondent-Company
made an application for the issue of a certificate under Section 230A
of the Act, in May, 2000. But the Assessing Officer refused to issue a
Certificate under Section 230A on the ground that there was a
demand for income tax arrears of Rs.36,73,050/-, due from the
Company.
6. But subsequently, Section 230A itself was repealed with
effect from 01-6-2001. Therefore, the 3rd respondent-Company sold
the Jubilee Hills property to the petitioner herein under two
registered sale deeds dated 20-6-2001 and 22-6-2001, as stated
above.
7. Upon coming to know of the sale, the Assistant
Commissioner of Income Tax issued a show cause notice under
Section 281 of the Income Tax Act calling upon the petitioner to
show cause why the sale should not be declared void. It was stated
in the show cause notice that the 3rd respondent-Company is part of
the GVK Group of Companies, that the sale was actually in favour of
the grandchild of the Chairman of the said Group of Companies and
that the sale consideration was far below the market value of the
property, indicating clearly that the sale was with a view to defraud
the Revenue.
8. The petitioners father gave a reply to the show cause
notice on 20-01-2005 claiming that the market value of the property
was found to be Rs.3,000/- per square yard and that since some
transactions had taken place even at Rs.2,700/- per square yard, the
petitioner purchased the property by offering Rs.2,750/- per square
yard.
9. Not satisfied with the reply, the Assistant Commissioner of
Income Tax passed an order dated 12-4-2005, declaring the sale to
be void in terms of Section 281 of the Income Tax Act, by pointing
out that the certified value of the land as per the Sub Registrar was
Rs.53,32,500/- and that the property had been sold for a sum of
Rs.36,71,250/-, with a view to defraud the Revenue, when the
Company was in liquidation.
10. Immediately upon the said order being passed, the
petitioner did not come to Court challenging the same. However,
when the Tax Recovery Officer issued an order of attachment on 10-
05-2007 under Rule 48 of the Second Schedule to the Income Tax
Act, 1961, the petitioner has come to Court challenging not only the
order of attachment but also the order under Section 281. In other
words, the petitioner did not take steps, for a full period of two years
from 12-4-2005, (the date of the order under Section 281) upto 10-5-
2007, the date of attachment. Keeping this in mind, let us now go to
the main thrust of the argument of Mr. S.Ravi, learned Senior
Counsel appearing for the petitioner.
11. Placing reliance upon the decision of the Supreme Court
in The Tax Recovery Officer II v. Gangadhar Vishwanath
Ranade , which was followed by the Madras High Court in Sancheti
Leasing Co. Ltd. v. Income Tax Officer , it is contended by the
learned Senior Counsel for the petitioner that the Tax Recovery
Officer cannot declare any transfer made by the assessee in favour
of a third party as void and that if the Department finds that a
property of the assessee has been transferred with the intention to
defraud the Revenue, it will have to file a suit under Rule 11(6), to
have the transfer declared void under Section 281. Paragraph-9 of
the decision of the Supreme Court in Gangadhar Vishwanath
Ranade reads as follows:
9. The Tax Recovery Officer, therefore, has to examine
who is in possession of the property and in what capacity. He can
only attach property in possession of the assessee in his own
right, or in possession of a tenant or a third party on behalf of/for
the benefit of the assessee. He cannot declare any transfer made
by the assessee in favour of a third party as void. If the
Department finds that a property of the assessee is transferred by
him to a third party with the intention to defraud the Revenue, it
will have to file a suit under Rule 11(6) to have the transfer
declared void under Section 281.
12. As a matter of fact, even before the Supreme Court settled
the law as above in Gangadhar Vishwanath Ranade, the Calcutta
High Court held in Srimati Preeti Rungta v. Income Tax Officer
that the Income Tax Officer does not have the power to pass an
order on his own under Section 281. The Calcutta High Court relied
upon the decision of the Bombay High Court in the very same
Gangadhar Vishwanath Ranades case, before it came to be
approved by the Supreme Court.
13. Similarly, the Karnataka High Court in Murthy Associates
v. Tax Recovery Officer also followed the decision of the Bombay
High Court in Gangadhar Vishwanath Ranade and laid down the
principles of law that emerged out of various decisions as follows:
(1) That the provisions of Section 281 of Income Tax Act,
are declaratory by statute itself.
(2) That for the purpose of proceedings against
a property which has been transferred or on which a charge is
created, for an intention of the Income Tax Officer to proceed
against the said property could be by passing an order under
Section 281. Even if the order is not passed the transfer contrary
to Section 281 would be void against the Revenue. If the order is
passed it will be considered to be only a declaration of the
intention of the Revenue authorities to proceed against the said
property.
(3) The dispute could be agitated by the Tax Recovery
Officer under Rule 11 of Schedule II to the Income Tax Act and
the finality is given to the order passed by the civil court under
Rule 11(6).
14. After the Supreme Court upheld the decision of the
Bombay High Court in Gangadhar Vishwanath Ranade, the Madras
High Court held in Sancheti Leasing Co. Ltd., as follows:
7. The Supreme Court of India in its recent decision
rendered in the case of TRO v. Gangadhar Vishwanath Ranade
(Dead) MANU/SC/0600/1998 : [1998] 234 ITR 188 (SC) has held
that if the Department finds that the assessee has transferred a
property to a third party with the intention to defraud the Revenue,
the Revenue will have to file a suit under Rule 11(6) of Schedule II
to the Income Tax Act to have the transfer declared void under
Section 281 of the Income Tax Act.
8. It is, therefore, clear that the Income Tax Officer had no
jurisdiction to declare the transaction of sale to which the
petitioners were parties as purchasers, as void. The impugned
order, insofar as it affects the petitioners interest in the property
is, therefore, set aside. The writ petitions are allowed accordingly.
Consequently, W.M.P. Nos.10903 and 26026 of 1994 are closed.
15. Therefore, it is the contention of Mr. S.Ravi, learned
Senior Counsel for the petitioner, that the impugned orders are
contrary to law and liable to be set aside.
16. However, Mr. J.V. Prasad, learned Senior Standing
Counsel for the Revenue, contended that irrespective of whether the
Income Tax Officer had the power to declare a transfer to be void or
not, the right of the Tax Recovery Officer to investigate into the
objection of anyone to the attachment of a property is guaranteed by
Rule 11 and that even before the stage prescribed by sub-rule (6) of
Rule 11 could be reached, the petitioner had rushed to Court. In
other words, the contention of the learned Senior Standing Counsel
for the Department is that Rule 11 of the Second Schedule to the
Income Tax Act contains a scheme that provides for an investigation
to be made by the Tax Recovery Officer into any claim or objection
made by a party. On the culmination of such an investigation, the
Tax Recovery Officer is entitled under sub-rule (5) of Rule 11 to
disallow the claim. It is only after the disallowance of such a claim
that the party against whom an order is made, may institute a suit in
a Civil Court. Therefore, the learned Senior Standing Counsel for the
Department contended that the attempt of the Tax Recovery Officer
to make an investigation in terms of Rule 11 cannot be aborted
through this writ petition. In this connection, the learned Senior
Standing Counsel for the Department relied upon a decision of the
Bombay High Court in Twinstar Holdings Ltd. v. Anand Kedia,
Deputy CIT . In that case, the Supreme Court held that Rule 2 of the
Second Schedule will have to be invoked first and that thereafter
Rule 11 will automatically come into force.
17. In response to the above contentions of the learned Senior
Standing Counsel for the Department, it was argued by Mr. S.Ravi,
learned Senior Counsel for the petitioner, that attachment and sale
of properties are prescribed as modes of recovery under Rule 4 of
the Second Schedule and that in order to invoke Rule 4, the
properties sought to be attached and sold should be that of the
defaulter and that only in cases where Rule 4 is satisfied, the
procedure prescribed in Rule 11 for investigation can be followed. In
other words, it is his contention that unless a declaration is secured
from a Civil Court under Section 281 that a transfer is void, the
property cannot be treated as that of the defaulter to enable the Tax
Recovery Officer to order attachment under Rule 4 and thereafter to
proceed with the investigation under Rule 11.
18. We have carefully considered the rival submissions. Since
the sheet anchor of the case of the petitioner is the decision of the
Supreme Court in Gangadhar Vishwanath Ranade, we may first look
at it in greater detail.
19. It is seen from paragraph-2 of the decision of the Supreme
Court in Gangadhar Vishwanath Ranade that notices under Rule 2
of the Second Schedule were served on the assessee on 21-10-
1972 and the immoveable property being the residential house of
the assessee was attached by the Tax Recovery Officer on 23-10-
1972. Objections were filed to the order of attachment on the ground
that the property had already been mortgaged in the year 1967 in
favour of a Nationalised Bank and that subsequently the property
was also conveyed by the assessee to his wife and daughter in the
year 1969. In fact, objections were filed both by the Bank of
Maharashtra as well as by the wife and daughter of the assessee.
After the receipt of the objections, a show cause notice was issued
on 21-01-1974 under Section 281. Pursuant to the show cause
notice, an enquiry was held, evidence was recorded and an order
was passed on 09-5-1974 declaring that the transfer in favour of the
wife and daughter was void. This order, when challenged before the
High Court of Bombay, the High Court held that the proceedings
taken pursuant to the declaration or expression of an opinion by the
Income Tax Officer under Section 281 were a mere prelude to the
procedure for the recovery of tax and that the declaration made by
the Income Tax Officer on 09-5-1974 did not affect the rights of the
parties that could be considered in the proceedings under Rule 11.
20. The decision of the High Court of Bombay was rendered
on 09-01-1981. Thereafter, the Tax Recovery Officer proceeded with
the investigation under Rule 11 of the Second Schedule and passed
an order overruling the objections filed by the objectors and
declaring that the mortgage in favour of the Bank and the
conveyance in favour of the wife and daughter of the assessee were
illegal and void and holding that the property was liable to
attachment and sale. This order of the Tax Recovery Officer was
challenged by the assessee by filing a fresh writ petition before the
High Court. The High Court set aside the order of the Tax Recovery
Officer by a decision reported in Gangadhar Vishwanath Ranade v.
Income Tax Officer [1989] 177 ITR 163.
21. While setting aside the order of the Tax Recovery Officer,
in the second round of litigation, the Bombay High Court upheld the
contention of the assessee and objectors that the Tax Recovery
Officer had no power under Rule 11 of the Second Schedule to
declare as void, a transfer of property effected by the assessee
during the pendency of proceedings. The High Court held that
Section 281 merely declared what the law was, but did not prescribe
any adjudicatory machinery for deciding a question which may arise
under Section 281 and that in order to declare a transfer as
fraudulent under Section 281, appropriate proceedings would have
to be taken in accordance with law, in the same manner as are
required to be taken under Section 53 of the Transfer of Property
Act, 1882.
22. The decision of the Supreme Court in Gangadhar
Vishwanath Ranade [1998] 234 ITR 188 (SC) arose out of the
decision of the Bombay High Court in the second round of litigation,
challenging the proceedings under Rule 11. Therefore, the Supreme
Court indicated in paragraph-7 of its decision that the question
required to be answered by the Supreme Court was whether in a
proceeding under Rule 11, the Tax Recovery Officer can declare a
transfer as void under Section 281. After pointing out in paragraph-8
of its decision, that there is a difference between the prescription
contained in Section 281 and the power of the Tax Recovery Officer
contained in Rule 11 of the Second Schedule, the Supreme Court
held in paragraph-9 of its decision that the Tax Recovery Officer
cannot declare any transfer as void and that if the Department finds
that a transfer had been effected with the intention to defraud the
Revenue, the Department will have to file a suit under Rule 11(6).
23. Before confirming the decision of the Bombay High Court
that the Tax Recovery Officer cannot make a declaration under
Section 281, the Supreme Court took note of the similarity in the
language employed in Order XXI, Rules 60 and 61 with the
language employed in sub-rules (4) and (5) of Rule 11 of the Second
Schedule. The Supreme Court also found similarity between the
language employed in Order XXI, Rule 63 of the Code of Civil
Procedure with the language employed in Rule 11(6). Thereafter,
the Supreme Court indicated in paragraph-12 as to what should be
done in such cases. It reads as follows:
12. 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.
24. From a careful consideration of what had transpired in
Gangadhar Vishwanath Ranades case, it can be concluded that in
the first round of litigation, the Bombay High Court held the order
passed under Section 281 as a mere declaration of an opinion and
as a mere prelude to the procedure prescribed under Rule 11. In the
second round of litigation, the very order passed by the Tax
Recovery Officer under Rule 11(5) was set aside on the ground that
the remedy of the Income Tax Officer was to go before the Supreme
Court. In other words, after refusing in the first round of litigation, to
set aside the declaration made under section 281, the very same
Bombay High court set aside the order under Rule 11 and came to a
contrary conclusion. But the same was approved by the Supreme
court.
25. There are two crucial issues with regard to the decision in
Gangadhar Vishwanath Ranade. The first is that it is a fundamental
principle that once a statute declares a transfer to be void, the Court
cannot impose a burden upon the Revenue to go to the Civil Court
and seek a declaration. Over and above a statutory declaration,
there cannot be a judicial declaration. The declaration by a taxing
statute of certain transactions to be void, cannot be equated to the
declaration contained in the Indian Contract Act about the nullity and
voidity of certain contracts. Transactions and transfers between two
private parties are in the realm of a contract. Therefore, there cannot
be an statutory declaration of the nullity and voidity of such
transactions or transfers. It is in those cases that the mere
declaration by statute of certain transactions between private parties
to be null and void would not be sufficient and the party asserting the
void nature of the transaction may have to go to a Civil Court to get a
judicial declaration.
26. But in respect of the prescriptions contained in the
Taxation Statutes where the transactions created or transfers made
with a view to defraud the Revenue are declared as void, the same
logic as applicable to transactions between private parties may not
apply. To say that unless the Tax Recovery Officer goes to a
civil Court and gets a judicial declaration for giving effect to the
statutory declaration contained in Section 281, is to reduce the
effect of Section 281 of the Income Tax Act, 1961 to the level of
Sections 24, 25, 26, 27, 29 or 30 of the Indian Contract Act, 1872.
27. In order to understand the scope of Section 281 of the
Income Tax Act, 1961, we must compare the said provision with
similar provisions contained in certain statutes in the realm of public
law that declare certain transfers to be void. For instance, Section 55
of the Presidency Towns Insolvency Act, 1909 declares any transfer
of property (except one made before or in consideration of marriage
and except one made in favour of a purchaser in good faith and for
a valuable consideration) to be void as against the official assignee,
if the transferor is adjudged insolvent within two years after the date
of transfer. Section 56 of the same statute goes a step further and
declares every transfer of property, every payment made, every
obligation incurred and every judicial proceeding taken or suffered
by any person unable to pay his debts, void, if such a person is
adjudged insolvent on a petition presented within three months and
if such a transfer or payment made or obligation incurred was with
a view to give that creditor a preference over other creditors. Though
Section 56(2) saves the rights of a person making title in good faith
and for valuable consideration through or under a creditor of the
insolvent, sub-section (1) of Section 56 creates a deeming fiction
that every transfer made or obligation incurred is fraudulent.
28. Similarly, Section 53 of the Provincial Insolvency Act, 1920
declares every transfer of property (except the one made in
consideration of marriage or made in favour of a purchaser in good
faith and for a valuable consideration) as voidable as against the
Official Receiver. Section 54 of the Provincial Insolvency Act, 1920
declares every transfer of property, every payment made, every
obligation incurred and every judicial proceeding suffered by a
person unable to pay his debts to be void as against the Receiver, if
it was done with a view to give that creditor a preference over other
creditors. Section 54(1) also creates a deeming fiction that the
transfer or payment made or obligation incurred, as is referred to
therein, will be deemed fraudulent.
29. But there are certain distinguishing features between
(i) Section 55 of the Presidency Towns Insolvency Act, 1909 and
Section 53 of the Provincial Insolvency Act, 1920 and
(ii) Section 56 of the Presidency Towns Insolvency Act, 1909 and
Section 54 of the Provincial Insolvency Act, 1920. These features
are:
(i) Section 55 of the Presidency Towns Insolvency Act declares
every transfer of property (except those exempted) as void as
against the official assignee. In contrast, Section 53 of the Provincial
Insolvency Act declares every transfer of property merely voidable
as against Receiver and stipulates that it may be annulled by Court,
if the transferor is adjudged insolvent within two years of the transfer;
(ii) Section 56(1) of the Presidency Towns Insolvency Act declares
every transfer of property, every payment made, every obligation
incurred and every judicial proceeding suffered, deemed to be
fraudulent and void as against the official assignee. Though Section
54(1) of the Provincial Insolvency Act also declares every transfer of
property, every payment made, every obligation incurred and every
judicial proceeding suffered to be deemed fraudulent and void,
Section 54(1) of the Provincial Insolvency Act adds a rider viz., and
shall be annulled by the Court.
30. Annulment by Court has been prescribed both in Section
53 and Section 54(1) of the Provincial Insolvency Act, though such a
requirement is not stipulated in Sections 55 or 56 of the Presidency
Towns Insolvency Act. In addition, Section 53 of the Provincial
Insolvency Act though contains all the ingredients of Section 55 of
the Presidency Towns Insolvency Act, uses the word voidable in
contrast to the word void used in Section 55 of the Presidency
Town Insolvency Act.
31. The reason as to why we have taken a detour from the
Income Tax Act to the Insolvency Act is that the difference between
these two enactments came up for consideration before a Full Bench
of the Madras High Court and later before the Supreme Court. In
The Official Receiver, Guntur v. Narra Gopalakrishniah , the
question that was referred to the Full Bench was as to whether the
decision of the Privy Council in Mahomed Siddique Yousuf v. Official
Receiver, Calcutta would apply to the orders of adjudication under
the Provincial Insolvency Act as well as to the orders of adjudication
under the Presidency Towns Insolvency Act. The English Courts
were then following the leading judgment in ex parte Learoyd, which
arose under Sections 10 and 12 of the Bankruptcy Act, 1869. While
answering the said question, the Full Bench of the Madras High
Court held as follows:
Section 54 of the Provincial Insolvency Act says that every
transfer of property, every payment made, every obligation
incurred and every judicial proceeding taken or suffered by any
person unable to pay his debts as they became from his own
money in favour of any creditor with a view of giving that creditor a
preference over the other creditors, shall, if such person is
adjudged insolvent on a petition presented within three months
after the date thereof, be deemed fraudulent and void as against
the receiver and shall be annulled by the Court. The words shall
be annulled by the Court do not appear in the corresponding
section of the Presidency Towns Insolvency Act, Section 56.
Therefore, we have these differences between the two
Acts (1) under the Provincial Insolvency Act, the publication in
the Official Gazette of the order of adjudication is not evidence of
the fact stated therein as is the case in the Presidency Towns
Insolvency act; (2) the order of adjudication under the Provincial
Insolvency Act relates back only to the date of the petition asking
for the adjudication, whereas in the Presidency Towns Insolvency
Act, it relates back to the very act of insolvency itself; and (3) the
Provincial Insolvency Act requires a fraudulent transfer to be
annulled by a direct order of the Court which is not the case under
the Presidency Towns Insolvency Act.
32. Therefore, Courts have made a distinction between
a statutory provision that declares a transfer void and a statutory
prescription that makes a transfer merely voidable. Courts have also
made a distinction between statutory prescriptions which, in addition
to declaring a transaction to be void, also require the annulment by a
Court and statutory prescriptions which declare transactions to be
void without the requirement of annulment by Court.
33. Keeping this distinction in mind, we can take a look at the
decision of a 3-member Bench of the Supreme Court in RM. NL.
Ramaswami Chettiar v. The Official Receiver . Though the main
question that arose for consideration before the Supreme Court in
that case was about limitation, the Supreme Court compared the
relevant provisions of the Presidency Towns Insolvency Act and the
Provincial Insolvency Act. In his separate but concurring judgment,
Subba Rao, J. pointed out that under Section 56 of the Presidency
Towns Insolvency Act, the transfer of a property in favour of a
creditor with a view to give a preference to him over other creditors
shall be deemed fraudulent and void as against the official assignee,
whereas under Section 54 of the Provincial Insolvency Act, the said
transfer has to be annulled by the Court. After pointing out the
distinction between the two, Subba Rao, J. referred with approval, to
the decision of the Full Bench of the Madras High Court in Narra
Gopalakrishniah.
34. If we keep in mind the distinguishing features between the
Presidency Towns Insolvency Act and the Provincial Insolvency Act
and the way they were interpreted by the Full Bench of the Madras
High Court and the Supreme Court, it will be clear that Section
281(1) of the Income Tax Act, 1961, which does not prescribe the
requirement of annulment by Court, cannot be interpreted differently.
Section 281(1) of the Income Tax Act does not use the expression
voidable as used in Section 53 of the Provincial Insolvency Act.
Section 281 of the Income Tax Act does not also impose the rider
shall be annulled by Court as used in Sections 53 and 54(1) of the
Provincial Insolvency Act. Therefore, it is not possible to hold that
the Tax Recovery Officer should go to the Civil Court, file a suit and
get a declaration that the transfer was void. In our considered
view, the statutory declaration contained in Section 281(1) does
not require to be baptised by a judicial declaration.
35. In fact, any interpretation to be given to
Section 281(1) should be in conformity with Rule 11(6).
Rule 11(6) opens a window for a person aggrieved by an order of
attachment following a declaration under Section 281 to move the
Civil Court. In other words, a person in whose favour a transfer is
made and which is declared void under Section 281 is not without a
remedy. He is conferred with a right to seek the raising of the
attachment and in the event of his suffering an order under Rule
11(5), he is made entitled statutorily (though by a subordinate
legislation) to move the Civil Court to get such a declaration set at
naught.
36. In fact, the Bombay High Court in the second round of
litigation in Gangadhar Vishwanath Ranade (which came to be
upheld by the Supreme Court in the reported decision cited earlier),
with great respect, fell into an error in comparing Section 281 of the
Income Tax Act, 1961 with Section 53 of the Transfer of Property
Act, 1882. Section 53 of the Transfer of Property Act deals with
fraudulent transfers made by a party with intent to delay or defraud
the creditors. But Section 53 does not make such proceedings void.
It only makes the transfer voidable at the option of any creditor so
defeated.
37. Therefore, there were two distinguishing features between
Section 53 of the Transfer of Property Act, 1882 and Section 281 of
the Income Tax Act, 1961: (i) Section 53(1) of the Transfer of
Property Act makes the transfer of immoveable property created with
intent to defeat or delay the creditors as voidable, while Section 281
of the Income Tax Act makes such transfers void and (ii) The
Revenue cannot be equated to a mere creditor whose interest is
sought to be protected by Section 53(1). The tax due to the State is
a crown debt and the statute has declared the transfers made with a
view to defraud the Revenue as void. Therefore to say that the Tax
Recovery Officer, like any other creditor may have to go to the
Civil Court seeking a judicial declaration to give effect to the
statutory declaration under Section 281, is irreconcilable with
the scheme of the Act.
38. Section 281 of the Income Tax Act reads as follows:
281. Certain transfers to be void.
(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.
39. Mr. S.Ravi, learned Senior Counsel for the petitioner, may
be right to a limited extent in contending that it is not all transfers that
are declared void by Section 281, but that certain exceptions are
carved out by the proviso to sub-section (1) of Section 281. But it is
precisely for this reason that the Income Tax Officer is given a
limited jurisdiction under Rule 11 of the Second Schedule.
40. Rule 11 of the Second Schedule reads as follows:
11. Investigation by Tax Recovery Officer.
(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 other wise 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.
41. It is seen from Rule 11 that the scheme envisaged therein
is as follows:
(i) Whenever a claim or objection is made to the attachment or
sale of a property, the Tax Recovery Officer may initiate
investigation into the claim.
(ii) The claimant or objector should adduce evidence,
in the course of such investigation to show that on the date of
service of notice under Rule 2, asking the assessee to pay the
arrears, the objector or claimant had an interest in or was possessed
of the property in question.
(iii) If after investigation, the Tax Recovery Officer is satisfied
about the genuineness of the claim or objection
he shall make an order releasing the property, from attachment or
sale.
(iv) If the Tax Recovery Officer is satisfied that the property
was in the possession of the defaulter as his own property or was in
possession of some other person in trust for him, or in the
occupancy of a tenant, the Tax Recovery Officer shall disallow the
claim.
(v) Where an order is made overruling the claim or objection,
the party against whom such an order is made, may institute a suit in
a Civil Court to establish the right which he claims to the property in
dispute.
42. In fact, sub-rule (6) is very clear and unambiguous. Sub-
rule (6) of Rule 11 expressly states that the party against whom an
order is made by the Tax Recovery Officer may institute a suit in a
Civil Court. But in paragraph-9 of its decision in Gangadhar
Vishwanath Ranade, the Supreme Court held as though the Tax
Recovery Officer will have to file a suit under Rule 11(6). This, in our
considered opinion and with great respect to the Supreme Court, is
clearly contrary to the scheme of Rule 11. The contention of Mr.
S.Ravi, learned Senior Counsel for the petitioner, that Rule 4 can be
invoked only if the property was that of the defaulter and that unless
Rule 4 is satisfied, Rule 11 cannot be invoked, does not appear to
be correct. It is no doubt true that Rule 4 enables the Tax Recovery
Officer to proceed to realise the amount by attachment and sale of
the defaulters property. But if a transfer made by the defaulter is
statutorily declared as void, the defaulter automatically continues to
be the owner of the property. If the ownership of the property
continues to be with the defaulter, by virtue of the declaration under
Section 281, Rule 4 can certainly be invoked. If Rule 4 can be
invoked, Rule 11 will automatically follow.
43. In this regard, it may be useful to take note of
Rule 16(1) of the Second Schedule, which reads as follows:
16. Private alienation to be void in certain cases.
(1) Where a notice has been served on a defaulter under
rule 2, the defaulter or his representative in interest shall not be
competent to mortgage, charge, lease or otherwise deal with any
property belonging to him except with the permission of the Tax
Recovery Officer, nor shall any civil court issue any process
against such property in execution of a decree for the payment of
money.
44. Therefore, if a transfer had been made by a defaulter in
contravention of Rule 16(1), it is automatically void and the question
of asking the Revenue to go to the Civil Court to have the transfer
declared as void would not arise.
45. In fact, a similar question arose before the Division Bench
of Punjab & Haryana High Court in Karnail Singh v. Union of
India . That was also a case where an order attaching the property
and the order declaring a sale to be void in terms of Section 281 was
under challenge. Reliance was placed upon the decision of the
Supreme Court in The Tax Recovery Officer II v. Gangadhar
Vishwanath Ranade. But after pointing out that the language of
Section 281 underwent a change under Taxation Laws
(Amendment) Act, 1975 and that Gangadhar Vishwanath Ranade
arose under the unamended provision, the Division Bench of Punjab
& Haryana High Court held that it is no more necessary to drive the
revenue to file a civil suit.
46. At the time when the Supreme Court considered the
import of Section 281, the provision contained the words with the
intention to defraud the revenue. But by the amendment introduced
in 1975, these words deleted. Therefore, irrespective of whether the
transfer was with a view to defraud the revenue or not, the transfer is
declared void by the statute itself. Hence, the question of the
Revenue going to the Court to establish that the transfer was with
intent to defraud the revenue does not arise.
47. It is true that the transferee still has an escape route under
the proviso to sub-section (1) of Section 281. This proviso states that
the transfer shall not be void if it is made (1) for adequate
consideration and without notice of the pendency of the proceeding
or without notice of such tax or other sum payable by the assessee,
or (2) with the previous permission of the Assessing Officer.
48. Therefore, it is possible for the petitioner to contend that
the questions of fact that would make a case fall within the proviso to
sub-section (1) of Section 281 may have to be adjudicated only by a
Civil Court and not by the Tax Recovery Officer and that therefore,
the ratio in Gangadhar Vishwanath Ranade would still be
applicable.
49. But in the case on hand, the said contention is incapable
of being raised by the petitioner. This is for the reason that in May,
2000, an application was made for the issue of a Certificate under
Section 230A. The assessee as well as the petitioner herein were
parties. But the Assessing Officer issued a letter dated 18-09-2000
refusing to issue the certificate on the ground that the assessee was
due to pay arrears of tax to the tune of Rs.36,73,050/-. Thereafter,
Section 230A was omitted by Finance Act, 2001 with effect from 01-
06-2001. Therefore, the petitioner went ahead with the purchase and
got the sale deed registered on 20-06-2001 and 22-06-2001.
Therefore, the petitioner can hardly take umbrage under clauses (i)
or (ii) of the proviso to sub-section (1) of Section 281.
50. To fall under clause (i) of the proviso to Section 281 (1),
the assessee must show either that the purchase was for adequate
consideration and without notice or the purchase was without notice
of tax or other sum payable by the assessee. But in this case, on
account of the refusal of the Assessing Officer, communicated
through his letter dated 18-09-2000, to issue a Certificate under
Section 230A, the petitioner became aware of the arrears of tax and
other sums payable by the assessee. Hence, the petitioner cannot
take cover under clause (i) of the proviso.
51. The petitioner cannot also take cover under clause (ii) of
proviso, since the purchase was not made with the previous
permission of the Assessing Officer. On the contrary, it was made
after the rejection of permission by the Assessing Officer.
52. Therefore, to say that the revenue should go to the Civil
Court to get a declaration in terms of Section 281 (1) is not borne out
of the scheme. In fact, as rightly pointed out by the Punjab &
Haryana High Court in Karnail Singh, the scheme of Section 281
has now undergone a change. The changes made to Section 281
can be well appreciated, if the unamended and amended provisions
are presented in a tabulation.
Unamended Section 281 considered
in Gangadhar Vishwanath Ranade
Amended Section 281
Section 281: Where, during the
pendency of any proceeding under this
Act, any assessee creates a charge on
or parts with the possession by way of
sale, mortgage, exchange or any other
mode of transfer whatsoever, of any of
his assets in favour of any other person
with the intention to defraud the
revenue, 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;
Provided that such charge or transfer
shall not be void if made for valuable
consideration and without notice of the
pendency of the proceeding under this
Act.
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 businesses of
the assessee.
53. Due to the incorporation of the words with the intention to
defraud the revenue, in Section 281 as it stood at that time, the
burden of proof was on the department. Intention to defraud
correlates to mens rea. Therefore, the same was not capable of
being adjudicated by the Tax Recovery Officer. This is why the
Supreme Court pointed out in Gangadhar Vishwanath Ranade that
the revenue should go to the Civil Court to obtain a declaration that
the transfer was void.
54. Under the unamended provision, which was considered in
Gangadhar Vishwanath Ranade, the revenue should go to the Civil
Court and first establish that there was an intention to defraud the
revenue. Once this is established, the burden will get shifted to the
transferee to show, as per the proviso that the transfer was for
valuable consideration and without notice of the pendency of the
proceeding.
55. But under the amended provision, the question of mens
rea or intention to defraud does not arise. Hence, the entire burden
to show that the transfer falls within the two clauses of the proviso to
sub-section (1) of Section 281 is now upon the assessee under the
amended provision. Hence, it is up to the assessee under the
amended provision, to go to the Civil Court and establish that his
case falls under the proviso.
56. Therefore, we are of the considered view that the
petitioner cannot take shelter under the decision of the Supreme
Court in Gangadhar Vishwanath Ranade. Having come to know of
the fact that the assessee is due to pay arrears of tax and having got
the application for a Certificate under Section 230A rejected, the
petitioner clearly took a chance by going ahead with the purchase.
Therefore, we do not think that the petitioner is entitled to have the
order of attachment and the order declaring the sale to be void set
aside by this Court. As we have pointed out in the first part of the
order, the order declaring the sale to be void was passed in the year
2005. The petitioner did not come to Court immediately. She came
to Court only after the issue of an order of attachment.
57. Therefore, in the given circumstances, the writ petition
lacks merits. Hence, it is accordingly dismissed. The miscellaneous
petitions, if any, pending in this writ petition shall stand closed. No
costs.
_______________________
V.RAMASUBRAMANIAN, J
____________ J.UMA DEVI, J After pronouncement of order, the learned counsel for the petitioner made a request for continuing the interim protection that the petitioner was in enjoyment, during the pendency of the writ petition, to enable her to workout her remedies. The interim protection that the petitioner had was the suspension of the order of attachment subject to condition that the petitioner shall not create any third party interests.
Though we cannot grant suspension of the order of attachment, we can protect the petitioner from further proceedings pursuant to the attachment, upon the same condition namely that the petitioner shall not, for a period of four weeks, alienate or create any third party interests or charge over the property. Accordingly, there will be an interim order, directing the department not to take further steps pursuant to this order, for a period of four (4) weeks, to enable the petitioner to workout her rights against this order. This is subject to the condition stated above.
_______________________ V.RAMASUBRAMANIAN, J ____________ J.UMA DEVI, J Date: 02-05-2018