Under the 1922
Act, the only recourse available to the IT Department in a case where the
assessee was found to have effected a transfer of his assets, was to file a
suit under section 53 of the Transfer of Property Act, 1882, or to move a
petition for insolvency adjudication of the assessee. These courses were beset
with several difficulties and the need for a specific
provision to protect the interests of revenue was acutely felt. Therefore,
section 281 was introduced for the first time at the time of the enactment of
the 1961 Act.
Section 281 provides that if
during pendency of any proceedings under the Act or after completion thereof,
an assessee creates a charge on or parts with the possession of any of his
assets in favour of any other person, such charge or transfer shall be held
void if any tax was payable by the assesse as a result of completion of the
said proceedings unless such charge or transfer was made-
(a) For adequate consideration and without any
notice of pendency of such proceedings or tax payable by assesse; or
(b) With prior permission of Assessing Officer.
CBDT Circular No. 179, dated 30.09.1975
It is stated in the circular no 179
dated 30.09.1975 that this new provision has been made in order to
protect the interests
of the revenue
in cases where
the raising of demand is likely
to take time because of investigations
and there is apprehension that the assessee, may thwart the ultimate collection
of that demand .
The fact
that section 281, as originally enacted, was substituted by the Taxation Laws
(Amendment) Act, 1975, with effect from 01.10.1975. The scope and effect of the
present section 281 of the Act was explained by the CBDT, vide its Circular
No. 179, dated 30.09.1975. The aforesaid Circular is reproduced as follows :
Certain transfers to be void -
Section 281
25. Under section 281, transfers effected by an
assessee during the pendency of any proceeding under the Income-tax Act with
the intention to defraud the revenue are regarded as 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 such proceeding. This provision is applicable in cases where
the assessee creates a charge on any of his assets, or parts with the
possession thereof by way of sale, mortgage, exchange or any other mode of
transfer whatsoever. Bona fide purchasers for value without
notice are, however, protected against the operation of this section. The
Amending Act has substituted a new section for the existing section 281 with a
view to enlarging the scope of the provision. The main changes are as follows:
(i) Creation of any charge on, or transfer of,
assets made not only during the pendency of proceedings but also after
completion thereof but before the service of notice by the Income-tax Officer
under rule 2 of the Second Schedule will be void.
(ii) The
Department would no longer be under obligation to prove that the charge was
created or the transfer was made with the intention to defraud the revenue.
(iii) Assets
covered by the provisions of the new section have been defined to mean land,
building, machinery, plant, shares, securities and fixed deposits in banks
to the extent to which they do not form part of the stock-in-trade
of the business of the assessee.
(iv) The charge
or transfer shall not be void if made for adequate consideration and without
notice of pendency of such proceedings or, as the case may be, without notice
of such tax or other sum payable by the assessee. The charge or transfer shall
also not be void if the charge is created or the transfer is made with the
previous permission of the Income-tax Officer.
(v) The
new provision will apply only if the amount of tax or other sum payable or
likely to be payable exceeds Rs. 5,000 and the assets charged or transferred
exceeds Rs. 10,000 in value.
TAXATION LAWS (AMENDMENT) ACT, 1975-I
26. The provisions of new section 281 will apply in
relation to any charge created or transfer made on or after 01.10.1975. Charges
created or transfers made before that date will continue to be governed by the
earlier provision.
[Section 73 of the Amending Act]
Object
of section 281
The object of
section 281 is to safeguard the interests of the Revenue against unscrupulous
assesses who may fraudulently part with their assets to avoid payment of
taxes. Bona fide transactions for adequate consideration
are, however, protected from the sweep of this section.
Under section 281 of the Act,
transfer effected by an assessee during the pendency of any proceeding under
the Act, with the intention to defraud
the revenue, are regarded as 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 such proceedings.
However, the charge or transfer
shall not be void, if made for adequate consideration and without notice of
pendency of such proceedings or, as the case may be, without notice of such tax
or other sum payable by the assessee. In other words, this provision is applicable in cases where the assessee created a
charge on any of his assets, or parts with the possession thereof by way of
sale, mortgage, exchange or any other mode of transfer whatsoever. Bona fide
purchasers of value without notice are, however, protected against the
operation of this section.
Text of Section 281
CERTAIN TRANSFERS TO BE VOID:
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.
Scope of Section 281 and Rule 11 of second schedule
In the case of Mrs. Farhana Sait v. ACIT & ors (2009)
308 ITR 257 (Mad) the Hon’ble Madras
High Court held that the Tax Recovery
Officer had no jurisdiction to declare the `oral gift’ void. The Hon’ble Court
also considered the scope of
section 281 and rule 11 of Second
Schedule and observed that
the powers of the Tax Recovery Officer under rule 11 of the
Second Schedule to the Act are somewhat different. Under rule 11(1), where any
claim was preferred to, or any
objection was made to the
attachment or the sale of, any property in execution of a certificate on
the ground that such property was
not liable to such attachment or sale, the Tax Recovery officer shall proceed
to investigate the claim or objection. The Tax Recovery Officer, therefore, has
to examine as to who was in possession of the property and in what capacity and
could only attach the property in
the possession of
the assessee in his own
right or in
the possession of a tenant or a third party on behalf
of or for the
benefit of the assessee. He cannot declare
any transfer made by the assessee in favour of a third party, void. If
the Department finds that a property of the assessee was transferred by him in
favour of a
third party with
an intention to defraud the Revenue,
it would have to
file a suit
under rule 11(6)
to have the transfer declared “void” under section
281 of the Act.
Applicability of the Section 281
The provisions of section 281 are applicable if all of the
following conditions are satisfied:
(i) Any assessee
creates a charge on, or parts with the possession of, any of his assets in
favour of any other person. The parting of possession may be by way of sale,
mortgage, gift, exchange or any other mode of transfer whatsoever.
(ii) Such creation of
charge or parting of possession takes place either:
(a) During the pendency of proceeding under this
Act, or
(b) After the
completion of any proceedings, but before the service of notice under rule
2 of the Second Schedule.
If both of the above conditions are fulfilled, 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.
Circumstances where charge or transfer shall not be void
[Proviso to Section 281]
(i) The charge or transfer
shall not be void if made for adequate consideration and without notice of
pendency of such proceedings or, as the case may be, without notice of such tax
or other sum payable by the assessee; or
(ii) The charge or transfer shall also not be void
if the charge is created or the transfer is made with the previous permission
of the Assessing Officer.
CBDT Circular No. 4/2011 [F. No.
402/69/2010-ITCC], Dated : 19.07.2011
Subject : Section 281 of the income-tax act, 1961 –
Certain transfers to be void – Guidelines for prior permission under section
281 to create a charge on the assets of business
References
have been received by the Board regarding issuance of guidelines for granting
of prior permission u/s 281 of the IT Act, 1961 to transfer or create a charge
on the assets of the assessee. The Board has considered the matter and in order
to have uniformity on the issue, it has been decided that:
1. The taxpayers should apply in the prescribed
form annexed hereto titled “Application u/s 281 of the IT Act, 1961” which
would be available on the departmental website, as well as with the Assessing
Officers.
2. The taxpayer would have to file the form at
least thirty days prior to the proposed date of transaction.
3. The circumstances under which prior
permission u/s 281 should be granted by the Assessing Officers are as follows:
(i) If there is no demand outstanding and there is no likelihood of
demand arising in the next six months, then the permission should be granted.
(ii) If undisputed demand is outstanding and there is no likelihood
of demand arising in next 6 months, then the taxpayer should pay the same along
with interest due thereon and then permission should be granted.
(iii) If there is disputed demand outstanding, then the taxpayer should
obtain stay for the same and indemnify the outstanding demand by way of bank
guarantee or sufficient assets or by Department retaining the first charge on
the assets proposed to be transferred or on which such charge is being created,
to the extent of such demand. Thereafter, the permission u/s 281 would be
granted by the A.O.
(iv) If demand is likely to arise in the next six month, then the A.O.
should explore the possibility of action prescribed u/s 281B.
4. There would be only one level of intervention
i.e., at the level of the range head for granting permission. The cases in
which A.O. would require such approval would be where
(a) value of assets being transferred or on which charge is being
created, or
(b) the amount of charge being created is Rs. Ten crores or
more.
5. The timelines for
granting/refusing permission u/s 281 by the A.O. are as follows:
(i) If there is no demand outstanding and there is no likelihood of
demand arising in the next six months, then the A.O. should grant the
permission within ten working days of the receipt of the application.
(ii) If undisputed demand is outstanding and there is no likelihood
of demand arising in next 6 months, then the A.O. should grant permission
within ten working days of payment as in para 3(ii) above.
(iii) If there is disputed demand outstanding and the taxpayer has
obtained stay and indemnified the demand, then the A.O. should grant the
permission within ten working days of the indemnification of the demand.
(iv) If demand is likely to arise in the next six months and the A.O.
is considering actions prescribed u/s 281B for the assets excluding the asset
under consideration, then the A.O. should grant the permission within fifteen
working days of the receipt of the application.
(v) If the taxpayer does not pay the undisputed outstanding demand
or his application for stay of disputed demand is rejected or he is unable to
indemnify the outstanding demand, the application shall be disposed of within a
period of ten working days. In case the permission is not being granted, a
speaking and reasoned order conveying refusal would be issued with the approval
of the Range head within ten working days of expiry of time given to the
taxpayer to pay the undisputed demand or rejection of his stay application, as
the case may be.
These time limits should be
followed scrupulously by the A.Os.
6 The validity of the letter granting
permission u/s 281 would be:
(i) One hundred and eighty days from the date of issue of approval,
or
(ii) Service of order of attachment u/s 281B whichever is earlier.
7. Once the asset is transferred or charge is
created, the taxpayer should submit the documents, in this regard, to the A.O.
for his record.
8. This circular shall come into force with
immediate effect.
Attachment of property - Transfer
of property before assessment order was passed – Transfer is not void – Order
of attachment by Tax recovery Officer is held to be void
On a writ petition challenging the order of attachment the Court held that,the guarantor had filed a return of income on July 31, 2009. His case wasselected for scrutiny. Notices under section 143(2) were issued in
September 2010 and February 2011. A notice under section 142(1) was issued on February 23, 2011. The order of assessment was passed only on December 27, 2011 under section 143(3) . Consequently, the demand notice under section 156 was issued only on December 27, 2011, giving the managing partner of the guarantor thirty days' time. Even if the period of thirty days was counted from the date of the notice, i. e., December 27, 2011, the notice period would expire on January 26, 2012. Therefore, the managing partner of the guarantor became an assessee-in-default in terms of section 220(4) only on January 26, 2012. The tax recovery certificate was issued on January 9, 2014. The order of attachment was issued on March 14, 2018. But the mortgage was created by the guarantor in favour of the bank on July 11, 2011, much before the order of assessment was passed under section 143(3) on December 27, 2011. Hence the creation of the mortgage could not be said to have automatically become void in terms of section 281(1) merely because of the pendency of the proceedings under sections 143 and 142 . It required something more to be done, but it was not done in this case. As a matter of fact even an investigation under rule 11 was not carried out. Therefore, the order of attachment was illegal. On the date on which the order of attachment was passed, the property had already been sold by the bank, in exercise of the power conferred upon the bank under the 2002 Act. The order of attachment was set aside. The Sub-Registrar was to proceed to register the sale certificate issued by the bank upon compliance with the necessary formalities. (Related Assessment year : 2009-10) – [ICICI Bank Ltd. v. TRO (2019) 411 ITR 518 : 308 CTR 262 : 176 DTR 428 (T&AP)]
On a writ petition challenging the order of attachment the Court held that,the guarantor had filed a return of income on July 31, 2009. His case wasselected for scrutiny. Notices under section 143(2) were issued in
September 2010 and February 2011. A notice under section 142(1) was issued on February 23, 2011. The order of assessment was passed only on December 27, 2011 under section 143(3) . Consequently, the demand notice under section 156 was issued only on December 27, 2011, giving the managing partner of the guarantor thirty days' time. Even if the period of thirty days was counted from the date of the notice, i. e., December 27, 2011, the notice period would expire on January 26, 2012. Therefore, the managing partner of the guarantor became an assessee-in-default in terms of section 220(4) only on January 26, 2012. The tax recovery certificate was issued on January 9, 2014. The order of attachment was issued on March 14, 2018. But the mortgage was created by the guarantor in favour of the bank on July 11, 2011, much before the order of assessment was passed under section 143(3) on December 27, 2011. Hence the creation of the mortgage could not be said to have automatically become void in terms of section 281(1) merely because of the pendency of the proceedings under sections 143 and 142 . It required something more to be done, but it was not done in this case. As a matter of fact even an investigation under rule 11 was not carried out. Therefore, the order of attachment was illegal. On the date on which the order of attachment was passed, the property had already been sold by the bank, in exercise of the power conferred upon the bank under the 2002 Act. The order of attachment was set aside. The Sub-Registrar was to proceed to register the sale certificate issued by the bank upon compliance with the necessary formalities. (Related Assessment year : 2009-10) – [ICICI Bank Ltd. v. TRO (2019) 411 ITR 518 : 308 CTR 262 : 176 DTR 428 (T&AP)]
Failure by
Department to bring on record service of notice under Rule 2 - Charge
registered by Sub-Registrar six and a half years after sale deed registered in
favour of purchaser - TRO cannot declare a transaction of
sale of attached property null and void under section 281, if notice for
recovery under rule 2 of Schedule II was not served upon owner/ defaulter,
prior to sale of said property - Order declaring
transfer null and void and notice for auction of property set aside
Allowing the petition, that the petitioner being a bona fide
purchaser for consideration after due diligence could not be made to suffer on
account of the tax dues that ran in the name of the original owner. The sale
deed was for a consideration and the index copy was also issued in connection
with the transaction. The public notice for executing the sale deed was issued
in vernacular newspaper on October 26, 2007 and thereafter, a search was
carried out. The search report dated October 1, 2008 was also on record along
with the title clearance certificate of the advocate. It was evident from the
documents that the property in question was free from all encumbrances having
clear title and was available for transaction. The documents produced along
with the additional affidavit being the order under section 179(1), the
certificate under section 222, the order of attachment and panchnama drawn
were all against the defaulting assessee VCT, and the petitioner was not in the
picture. The proviso to section 281 provided that such transfer or
charge might not be declared void if such a transfer or charge was made for
adequate consideration and without notice of pendency or completion of such
proceeding or without the notice of any tax liability or other sum payable by
the assessee. According to the procedure for recovery of tax, rule 16 of
Schedule II to the Act provides for issuance of notice for recovery of arrears
by the Tax Recovery Officer upon the defaulter requiring the defaulter to pay
the amount specified in the certificate within fifteen days from the date of
the service of the notice and intimating that in default, steps would be taken
to realize the amount. Rule 16 of Schedule II to the Act provides for private
alienation to be considered void in certain cases and requires service of
notice on the defaulter under rule 2. In the affidavit as well as the
additional affidavit the Department had not brought on record service of notice
under rule 2 of Schedule II. Moreover, it was evident from the affidavit filed
on behalf of the Sub-Registrar that for the first time the order of attachment
was given effect to by him only on June 26, 2015, when the charge was
registered which was six and a half years after the sale deed was registered in
favour of the petitioner. The order of the Tax Recovery Officer declaring the
transfer null and void and the subsequent communication for auction of the
property were to be set aside. (Related Assessment year : 1998-99) – [Rekhadevi Omprakash Dhariwal v. TRO (2018) 406 ITR
368 : 304 CTR 430 : 257 Taxman 109 : 168 DTR 427(Guj)]
Tax Recovery officer (TRO) has no
jurisdiction to declare transaction of transfer of property as null and void in
proceedings under rule 16 of Second Schedule to Act
Allowing the petition the Court held
that ; Tax Recovery officer (TRO) has no jurisdiction to declare transaction of
transfer of property as null and void in proceedings under Rule 16 of Second
Schedule to Act. Followed, TRO v. Gangadhar Vishwanath Ranade (1998) 234 ITR
188 (SC) and Co-ordinate Bench in case of Karsanbhai Gandabhai Patel v. TRO
(2014) 43 taxmann.com 415 (Guj) and held that TRO had no power to declare
transfer as void and the status of the department being a creditor, will have
to file a suit for a declaration that the transaction of transfer is void under
Section 281 of the Act. – [Nitaben Harishbhai Shah v. TRO (2018) 406 ITR 347 : 302 CTR 406 : 253 Taxman 222 :
163 DTR 442 (Guj)]
Tax Recovery Officer
could not declare a transaction of transfer as void, if revenue wants to have
transaction nullified, it must go to civil court to seek declaration to that
effect - Attachment of property by TRO
already sold by defaulter - Sustains attachment on immovable
property sold by tax defaulter after serving demand notice
Madras
High Court refuses to lift attachment on immovable property purchased by
petitioner from a tax defaulter, noting that demand notice under Rule 2 of
second schedule (as mandated under section 281) was served upon tax defaulter
prior to the execution of the sale transaction, remarks that “Themoment such a
notice was served ..., by virtue of Rule 16(1) of the second schedule, he became
incompetent to deal with the property.”; Citing section 11 of the Contract Act
1872, High Court holds that since defaulter-assessee was not competent to deal
with the property, he could not have passed any valid or legal title to the
purchaser (petitioner); Rejecting petitioner’s stand that the defaulter vendor
ceased to have any interest in the property on the date when attachment was
made, High Court highlights significant distinction between Rule 11(3)(a)
(pertain to immovable property) and Rule 11(3)(b) (pertaining to movable
property), states that the date of attachment is not relevant for the former;
Rules that “any attachment of an immovable property made under the second
schedule would relate back to and take effect from the date on which the notice
to pay the arrears issued under II schedule was served on the defaulter.”;
However, quashes TRO's order to the extent it declared the transaction as null and
void, holds that only a civil court can declare a transaction as null and void,
relies upon Supreme Court ruling in Gangadhar Vishwanath Ranade. – [D. S. Senthilvel (2018) 405 ITR 202 : 256
Taxman 179 : 166 DTR 278 :92 taxmann.com 354 (Mad)]
Certain transfers to be void – Property under
attachment – Alternative remedy -Purchase of property is held to be void- If
petitioner’s claim was that property was not liable for such attachment, then
she had to make a claim before Tax Recovery Officer – Writ is not maintainable
Purchase of
property by petitioner was declared void as it was under attachment proceedings
for recovery of tax dues of vendor. Petitioner filed writ stating that she
was a bona fide purchaser of said property for adequate consideration and as on
date of purchase, there were no encumbrances/charge on property. Further, there
were no income-tax dues payable by petitioners vendor and to that effect, a
certificate was issued by Assistant Commissioner. It was also submitted
that Tax Recovery Officer attached petitioner’s property for arrears of vendor
long after petitioner had purchased property and therefore, notice of
attachment would not bind petitioner. Dismissing the petition the Court held
that; if petitioner’s claim was that property was not liable for such
attachment, then she had to make a claim before Tax Recovery Officer and for
such reason, petitioner could not have approached writ court invoking
jurisdiction under Article 226 of Constitution of India. – [Champa Devi v. Tax Recovery
Officer (2018) 257 Taxman 296 : 170 DTR 36 (Mad.)]
The assessee company was liable to
pay income tax for period 1995-96 to 2002-03 but was declared to be wound up.
The assessee company owned two immoveable properties and by two registered sale
deeds, it sold property to the Petitioner. Prior to the execution of such sale
deed, the assesseecompany had made an application with the Assessing Officer to
issue certificate under Section 230A [an erstwhile provision mandating a
certificate from the Assessing Officer stating that all the liability under the
Act have either been discharged or satisfactory provisions have been made for
the same, before registering any document for transfer of property], which was
rejected by the Assessing Officer as there were demands for income-tax arrears
from the assessee. However, after the said section itself was repealed, the
said sale deeds were executed. Noting the above, the ACIT passed an order under
section 281 declaring that sale of two immoveable properties to as void, since
the sales consideration was far below the market value of property and thus
indicating that the sale was done with view to defraud the Revenue. An order
was also passed for attachment of property. The Petitioner filed the present
writ petition against the said order passed under section 281 and the order of
attachment. The Court dismissed the petitioner’s argument that the Tax Recovery
Officer, like any other creditor has to go to the Civil Court seeking a
judicial declaration to give effect to the statutory declaration u/s 281,
holding that the Revenue cannot be equated with a mere creditor and tax due to
the state is crown debt. It observed that the Petitioner had taken chance by
going ahead with the purchase even after knowing about non-payment of tax
arrears by the assessee and rejection of application for a Certificate under
section 230A. It thus declined to set aside the order of attachment and the
order under section 281 declaring the sale to be void. – [ACIT v. Prudential Construction Co. Ltd. (2018) 102 CCH 52 (AP)]
The
Court dismissed the writ petition filed by the Petitioner who had purchased an
immovable property from the assessee against the Assessing Officer’s order
declaring the sale of the said property by the assessee to the petitioner to be
void in terms of section 281, since the said sale was below market price and
there was outstanding demand of tax arrears payable by the assessee.
The petitioner had also challenged
the Tax Recovery Officer’s order for attachment under rule 48 of Second
Schedule to Act. It was noted that prior to the said sale/ purchase, the Assessing
Officer had rejected the assessee’s application for certificate under section
230A on the ground that there was a demand for income tax arrears due from
company. However, subsequently section 230A itself was repealed. It was held
that the clause (i) of section 281(1) which inter alia provides that the
transfer shall not be void if it is made without notice of any tax or other sum
payable by the assessee under the Act was not applicable since, in instant
case, on account of refusal of the Assessing Officer, to issue a certificate under
section 230A, petitioner became aware of arrears of tax and other sums payable
by the assessee. The Court also rejected the petitioner’s plea that if the
Department found that a property of assessee had been transferred with
intention to defraud revenue, it would have to file a suit under rule 11(6), to
have transfer declared void under section 281, holding that if a transfer had
been made by a defaulter in contravention of rule 11(6), it was automatically
void. - [Shriya Bhupal v. ACIT (2018)
95 taxmann.com 230 (AP)]
Certain transfers to be void -
Recovery of tax - Order declaring purchase void in breach of principles of
natural justice and to be quashed
Allowing
the petition the court held that before passing the order under section 281 (1)
of the Act, no opportunity of being heard was given to the transferee.
Therefore, the order under section 281 (1) of the Act was absolutely in breach
of the principles of natural justice and deserved to be quashed and set aside. –
[Arvindkumar Kuberbhai Patel v. DCIT
(2017) 391 ITR 103 : 294 CTR 120 : 150 DTR 24 (Guj)]
Rejection of application for
permission for transfer of asset, without any discussion on merits of any
particular of application, proposed transfer or individual asset was held to be
not valid matter to be decided on merits by the Assessing Officer afresh
The
Assessing Officer rejected assessee's application for permission under section 281
without discussion on the merits of any particular of application, proposed
transfer or individual asset. The assessee filed a writ petition. The High
Court held that section is asset-specific and transfer-or charge-specific and
therefore, the section demands, above all, precision. Such an application
cannot be disposed of by resorting to generalities 'likelihood', 'huge
demands', 'might be revoked', etc. There is no room in considering an
application under section 281 for a response that is speculative, predicated on
imponderables and unknowns such as litigation outcomes or on suppositions that
all stay orders obtained by an assessee are bound to be vacated and an
assessee's appeals lost. Accordingly, since there is no discussion on the
merits of any particular of application, proposed transfer or individual asset,
the matter was to be consdeired denovo by the Assessing Officer. – [Vedanta Ltd. v. ACIT (2017) 160 DTR 440 : 86
taxmann.com 120 (Bom.)]
Recovery of tax - Attachment and
sale of property - Transfer of property during pendency of proceedings - Tax
Recovery Officer has no power to declare sale deed void - Whether conveyance is
a void document - Appropriate proceedings to be taken in civil court
The
assessee purchased a property. A demand was in relation to the assessment year
was raised against the seller of the property. Pursuant to that assessment
order a notice under section 281 was issued to the assessee to show cause why
the sale deed executed by the seller in favour of the assessee should not be
treated as a void document. The assessee's objection was overruled by the
Income-tax Officer holding that there was inadequate consideration for the
transfer of the property by the seller in favour of the assessee and,
therefore, the conveyance was a void document. On a writ, allowing the petition
the court held that the Income-tax Officer had exceeded its jurisdiction in
adjudicating the matter under section 281. He had no jurisdiction to declare the
sale deed as void. Consequently, the order cannot be sustained and was quashed.
Ratio in TRO v. Gangadhar Vishwanath Ranade (Decd.) (1998) 234 ITR 188 (SC)
applied. The Income-tax Officer, in order to declare the transfer void under
section 281 and being in the possession of the creditor, is required to file a
suit for declaration to the effect that the transaction of transfer was void
under section 281. An appropriate proceeding in accordance with law is required
to be taken under section 53 of the Transfer of Property Act, 1882. – [Manoj Kabra (Dr.) v. ITO (2014) 364 ITR 541
: 50
taxmann.com 42 (All.)]
Opportunity of being heard
Order
declaring agreement of sale as void within meaning of section 281(1) was passed
without giving assessee any personal hearing, matter needs to be remanded back
on principle of natural justice. - [Shailesh J. Shah
(2014) 51 taxmann.com 522 (Bom.)]
TRO could not declare sale of
property void under section 281 and attach property even if tax was overdue
from seller
TRO
had no power to declare sale transaction as void and attach property even when
several demand notices were issued against the seller of such property. – [Karsanbhai Gandabhai Patel v.
Tax Recovery Officer (2014) 43 taxmann.com 415 (Guj)]
Recovery of tax - Pendency of income
tax proceedings - Transfer can be held void only if transferee had notice of
pendency of income tax proceedings
The
assessee took loans from a financial institution and created a charge on the
property. The Financial institutions as a secured creditor took physical and actual
procession of the secured assets under section 13(4) of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002. It issued public notice of sale of assets. The Writ petition was filed by
theIncome-tax department and Custom department stating that the assessee being
defaulter had not paid huge outstanding income tax demand with interest and
penalty, the secured assets already being attached by department, therefore
such property of assessee could not have been attached nor possession of the
property have been taken by the financial institution to be secured creditor,
hence in view of section 281(1) the transfer was void. The Custom department
also alleged that the assessee had admitted its huge liability. The Court
dismissed the petition stating that the Tax Recovery Officer had not served any
notice of pendency of any income tax proceedings on the financial institutions
on or before execution of the equitable mortgage by the assessee in favour of
financial institutions. Under section 142 of the Customs Act, 1962, no charge
was created in favour of the Customs Department, much less a first charge or
priority of claim over the secured creditors. The Court held that the Financial
Insitutition was entitled to proration and bonafide transfer of the property
having made for valuable consideration from the assessee without serving the
notice under clause (i) of the proviso to sub section (1) of section 281 of the
Act, though the transfer was hit by the main provision of the Act. Accordingly
the writ petition of revenue was dismissed. (Related Assessment years : 1996-97
to 2001-02) – [Tax Recovery Officer v.
Industrial Finance Corporation of India and another (2012) 346 ITR 11 (Guj.)]
Section
281: In respect of tax arrears of tax of husband no recovery proceedings can be
taken against property purchased by the wife from the husband after obtaining
Income Tax Clearance certificate. – [Karnail Singh v. UOI (2011) 63
DTR 336 (P&H)]
It was, inter alia, held
in this case that section 281 of the Act does not prescribe any adjudicatory
machinery for deciding any question which may arise under it. In order to
declare a transfer fraudulent under section 281, appropriate proceedings have
to be taken before the competent Civil Court. Therefore, the sale of property
by agreement, dated 30.7.2002, declared to be null and void by the Department,
vide order, dated 21.9.2004, was an order without jurisdiction, in the absence
of a declaration by a Civil Court to that effect and consequently, the same had
to be set aside. – [Shamim Bano G.
Rathi v. Oriental Bank of Commerce Ltd. (2008) 306 ITR 234 (Bom.)]
It was held in this case that
section 281 of the Income-Tax Act, 1961, does not prescribe any adjudicatory machinery
for deciding any question which may arise under it. In order to declare a
transfer fraudulent under section 281, appropriate proceedings would have to be
taken in accordance with law in the same manner as they are required to be
taken under section 53 of the Transfer of Property Act, 1882. Principles of
natural justice must be followed and opportunity to be heard must be given.
It was also held, that the action of
the Tax Recovery Officer passing an order under section 281 declaring the
transfer of the property in favour of the petitioners void was clearly without
jurisdiction. The order also attracted civil consequences. The Tax Recovery
Officer before passing any such order ought to have given opportunity to the
petitioners if in law the Tax Recovery Officer could exercise the jurisdiction
under section 281. That opportunity was also not given. The order, therefore,
must also be set aside for violation of the principles of natural justice and
fair play. The order was not valid. – [Ms.Ruchi Mehta v. Union of India (2007)
294 ITR 614 (Bom.)]
Clause
(i) of the proviso to section 281(1) refers to a bona fide transfer for value -
If stock in trade was converted into investment intentionally to avoid
tax, it will be treated as non genuine transaction and such a conversion was
not alllowed
It was, inter alia, held
in this case that clause (i) of the proviso to section 281(1) refers to a bona
fide transfer for value, without notice of the pendency of
proceedings.
It was also held that the assessee
had transferred the shares under a sham dissolution as an asset. Under the
block assessment orders, the shares were treated as stock-in-trade and
therefore, the Assessing Officer had treated the difference between the market
value of the shares as on 31.3.1999 and the book value as undisclosed business
income. Under that order, the shares had to be valued at market value and not
at cost. In the circumstances, it was not open to the petitioner to contend
that the transfer was for adequate consideration. Therefore, clause (i) of the
proviso had no application. – [Twinstar Holdings Ltd. v. Anand Kedia, DCIT
(2003) 260 ITR 6 (Bom.)]
Until
getting a transaction declared void under section 281 in properly constituted
proceeding, the attachment notice under section 226(3) issued by TRO after
himself treating a particular transaction as void was liable to be quashed. – [Smt.
Preeti Rungta v. ITO (1995) 214 ITR 594 (Cal)]
Neither
the Assessing Officer nor the Tax Recovery Officer is competent to pass an
order declaring the transfer as void under section 281. He has to get such
transfer declared as void by filing a suit before the competent court. – [Smt. Preeti Rungta v. ITO (1995) 214 ITR
594 (Cal)]
It was held in this case that
section 281 of the Income-Tax Act, 1961 and section 53 of the Transfer of Property
Act, 1882, are pari materia. In both the cases, it is only the
creditor or the Revenue defeated or defrauded or delayed, who can take action
or proceedings to get it declared that the transfer is fraudulent. Further, an
order under section 281 means only that the Department has decided to proceed
against the property, transfer being void so far as the claim of Revenue is
concerned. But it does not take the character of any adjudication as to the
nature of transfer. It is merely a step to recover dues from the defaulter. – [Gangadhar Vishwanath Ranade (No.1) v.
ITO (1989) 177 ITR 163 (Bom.)]
KEY NOTE
The
aforesaid judgement of the High Court was, later on, affirmed by the Supreme
Court, in the case of TRO v.
Gangadhar Vishwanath Ranade (Decd.) (1998) 234 ITR 188 : 149 CTR 90 (SC).
In TRO v. Gangadhar V. Ranade, it
was been held that 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. The Tax Recovery Officer (or for that matter Assessing
Officer) cannot declare any transfer made by the assessee in favour of a third
party as void". – [TRO v. Gangadhar
V. Ranade (1998) 234 ITR 188 (SC)]
Income
Tax authority do not have power to declare a transfer null and void. Suit be
filed to have the transfer declared void. – [Ahuja Chaudhury v. UOI (1995)
214 ITR 326 (Cal)]
Property
transferred by the assessee during pendency of recovery proceedings, can be
attached and sold without filing suit. Notice to transferee is invariably not
necessary before taking such action. - [P. Kumar & Co v. UOI (1991)
190 ITR 672 (Bom)]
The
question of validity of transfer arises only when a specific demands are made
against properties and proceedings are taken to recover the same by proceedings
against properties. Where the assessments made for the relevant assessment year
had been set aside and as yet there was no demand outstanding for those years ,
it was held that properties in question could not be sold for recovery of any
tax for said two assessment years. – [B.A.
Basith v. ITO (1981) 128 ITR 434 (Karn)]
