1998 (3) TMI 683 - HC - Income Tax

Summary

Issues Involved:
1. Constitutionality of Section 281 of the Income Tax Act, 1961.
2. Criteria for determining the validity of a transfer under Section 281.
3. Comparison of Section 281 of the Income Tax Act with Sections 53 and 100 of the Transfer of Property Act.
4. Interpretation of Section 281 in conjunction with rules 2, 16, 48, and 51 of Schedule II of the Income Tax Act.

Summary:

Issue 1: Constitutionality of Section 281 of the Income Tax Act, 1961
The court examined whether Section 281, which declares a transfer made by the assessee during the pendency of proceedings as void, offends Article 14 of the Constitution due to the absence of any limitation on the term "pendency of proceedings." The court upheld the constitutionality of Section 281, emphasizing that it is declaratory in nature and aims to prevent fraudulent transfers intended to defraud the revenue.

Issue 2: Criteria for Determining the Validity of a Transfer under Section 281
The court considered whether the knowledge of the pendency of proceedings by the transferor alone is the criterion for the validity of a transfer under Section 281, or if the knowledge of the transferee also matters. The court concluded that Section 281 focuses on the transferor's intent to defraud the revenue and does not safeguard the interests of bona fide purchasers for valuable consideration without notice of the proceedings. The proviso to Section 281 refers to the transferor's knowledge and intent, not the transferee's.

Issue 3: Comparison of Section 281 of the Income Tax Act with Sections 53 and 100 of the Transfer of Property Act
The court addressed whether Section 281 is in pari materia with Sections 53 and 100 of the Transfer of Property Act. It was determined that Section 281 operates independently and should not be read in conjunction with the Transfer of Property Act. The court emphasized that each statute serves different purposes and should be interpreted within its own context.

Issue 4: Interpretation of Section 281 in Conjunction with Rules 2, 16, 48, and 51 of Schedule II of the Income Tax Act
The court examined whether Section 281 should be interpreted together with rules 2, 16, 48, and 51 of Schedule II. It was concluded that Section 281 and Rule 16 deal with different circumstances. Rule 16 declares sales made by the defaulter as void after the receipt of notice under Rule 2, while Section 281 safeguards the interest of the revenue against fraudulent transfers by the assessee. The court found no need to harmonize Section 281 with Rule 16, as they address distinct situations.

Conclusion:
The court upheld the decisions of the lower courts, dismissing the plaintiffs' claims. It was determined that the plaintiffs could not claim title to the property as the sale was void under Section 281 and Rule 16(1) of the Income Tax Act. The second appeal was dismissed with no costs.