2011 (2) TMI 931 - HC - Income Tax

Sham transaction - whether the department could proceed against the property of the assessee in default ignoring a transfer thereof during pendency of any proceedings without filing a suit - The Rules laid down in the Second Schedule to the Act contain procedure for recovery of tax by way of attachment and sale of the property - Rule 11(6) provides that if the Tax Recovery Officer decides the objection by which an objector is aggrieved such objector can file a suit to establish his case and subject to result of such suit the order of the Tax Recovery Officer is conclusive - Tax Recovery Officer is entitled to issue a certificate and recover the amount by way of attachment and sale of assessee s property - This contention is no doubt borne out from the judgment but it is explained on behalf of the revenue that even if declaration by the TRO that the transfer was void is ignored the statutory declaration of the transaction being void cannot be ignored - after the amendment of section 281 the judgment of the Hon ble Supreme Court is not bar to the revenue invoking section 281 in the circumstances mentioned therein and proceeding under section 222 by way of attachment and sale of assessee s property ignoring transfer in violation of section 281 subject of course to the statutory remedies of the affected party to raise objections or to file suit - Decided against the assessee

Issues Involved:
1. Validity of the attachment of property by the Income-tax Officer.
2. Whether the sale of the property to the petitioner was void under Section 281 of the Income-tax Act, 1961.
3. Jurisdiction of the Income-tax Officer to annul the sale.
4. Requirement of filing a suit by the Income-tax Department to challenge the sale.
5. Opportunity of hearing before attachment of property.

Detailed Analysis:

1. Validity of the Attachment of Property by the Income-tax Officer:
The petitioner challenged the order dated 15-2-2005 by the Income-tax Officer, Karnal, which attached the property and declared the sale in favor of the petitioner void. The petitioner argued that the property was purchased free from all encumbrances and could not be attached under Section 222 of the Income-tax Act. The court noted that the Tax Recovery Officer (TRO) is entitled to issue a certificate and recover the amount by way of attachment and sale of the assessee's property. If such property is transferred during the pendency of proceedings, it does not affect the recovery from the said property. The court concluded that the department could proceed under Section 222 by invoking Section 281 without filing a suit.

2. Whether the Sale of the Property to the Petitioner was Void under Section 281 of the Income-tax Act, 1961:
The Income-tax Department contended that the sale in favor of the petitioner was a sham transaction to defraud the revenue, citing outstanding demands against the vendor since 1995. The court highlighted that Section 281 statutorily declares any transfer of property during the pendency of proceedings to be void against any claim of tax unless it is for adequate consideration and without notice of the proceedings or with prior permission of the Assessing Officer. The court emphasized that the question of whether the transfer was for adequate consideration and without notice is a factual matter that can be decided in appropriate proceedings.

3. Jurisdiction of the Income-tax Officer to Annul the Sale:
The petitioner relied on the Supreme Court judgment in TRO v. Gangadhar Vishwanath Ranade, which held that the TRO's power under Rule 11 of the Second Schedule was only to attach property in possession of the assessee and that the department must file a suit to annul a fraudulent sale. However, the court noted that the Calcutta High Court in Jaymac Lasetron (P.) Ltd. v. CIT held that Section 281 statutorily declared a transaction void and it was not necessary for the revenue to file a suit. The court agreed with the Calcutta High Court's interpretation, especially in light of the 1975 amendment to Section 281, which removed the requirement of proving an intention to defraud the revenue.

4. Requirement of Filing a Suit by the Income-tax Department to Challenge the Sale:
The court clarified that after the amendment to Section 281, the revenue could rely on the statutory declaration of voidness without filing a suit. The court recognized that the TRO cannot grant a declaration that a transfer is void but can rely on the statutory declaration under Section 281. The court concluded that the revenue could proceed with attachment and sale under Section 222 by invoking Section 281 without the need for a suit, subject to the statutory remedies available to the affected party to raise objections or file a suit.

5. Opportunity of Hearing Before Attachment of Property:
The petitioner argued that the order was passed behind his back without affording any opportunity of hearing. The court rejected this contention, stating that the procedure laid down in Section 222 does not require a notice before proceeding with the recovery. The court distinguished the case from Palanpur Traders Ltd. v. Union of India, where the petitioner had taken necessary precautions before purchasing the property. The court held that the petitioner was not entitled to a notice before attachment in this case.

Conclusion:
The court dismissed the writ petition, upholding the validity of the attachment order. It clarified that the petitioner could file objections before the TRO and pursue remedies against any decision on such objections in accordance with the law. The judgment emphasized the statutory provisions under Sections 222 and 281, allowing the revenue to proceed with attachment and sale without filing a suit, subject to the affected party's right to challenge the proceedings.

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