1988 (2) TMI 5 - HC - Income Tax

Summary

Issues:
1. Declaration sought regarding the validity of rules 16 and 51 of the Second Schedule to the Income-tax Act, 1961, under article 19(1)(f) of the Constitution.
2. Declaration sought regarding the attachment date of a property by the Tax Recovery Officer.
3. Dispute over the rights of a second mortgagee in a property attached for tax recovery.

Analysis:
The petitioner in this case sought a declaration that rules 16 and 51 of the Second Schedule to the Income-tax Act, 1961, were ultra vires article 19(1)(f) of the Constitution. The petitioner also contested the attachment date of a property by the Tax Recovery Officer, arguing that it should take effect only from the date of the attachment order and not from the date of service of notice under rule 2 of the Second Schedule. The case involved a defaulter, P. R. Damodaram Chetty, against whom tax recovery proceedings were initiated. The Tax Recovery Officer attached a house owned by the defaulter, in which the petitioner was the second mortgagee. The petitioner claimed to be a bona fide mortgagee without notice of the proceedings against the defaulter.

The petitioner contended that rules 16 and 51 of the Second Schedule were arbitrary and unreasonable, violating article 14 of the Constitution. The petitioner argued that the interests of a bona fide mortgagee, unaware of proceedings against the defaulter, should be safeguarded. However, the Revenue's standing counsel defended the rules, stating they were designed to protect the Revenue against fraudulent transfers by defaulting assessees. The court, after considering the arguments, referred to a judgment of the Madras High Court, which upheld the provisions of rules 16 and 51 as necessary to prevent tax evasion.

The court dismissed the writ petition, ruling that the rules in question were not violative of articles 14 and 19(1)(f) of the Constitution. The court concurred with the Madras High Court's position that such provisions in a taxing statute aimed at preventing tax evasion did not constitute unreasonable restrictions. Therefore, the rights of the Income-tax Department to treat mortgage transactions as void under the rules for recovery were upheld, even if the mortgage was bona fide and made without notice of the ongoing proceedings against the defaulter.