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2018 (3) TMI 1931 - HC - Income TaxRecovery proceedings - attachment orders - petitioners herein purchased the properties that are the subject matter of these writ petitions from the said defaulter-assessee thereafter. Subsequent to the said purchases, orders of attachment were made - HELD THAT - Vendor of the writ petitioners herein is a defaulter- assessee and that he alienated the subject properties only after receipt of notice under Rule 2 of the Second Schedule to the Income Tax Act. Secondly, the orders of attachment were issued by the respondent only after such purchase by the writ petitioners herein. Going by the plain language of the Section 281(1) of the Income Tax Act it is clear that the main provision is concerned only with those transactions executed by the assessee during the pendency of any proceedings under the Income Tax Act or after the completion thereof, but before the service of notice under Rule 2 of the second schedule. In this case, it is evident from the face of the record and it is again not in dispute that notice under Rule 2 of second schedule was served on the defaulter on 05.01.2013 and that the sale transactions executed by the said defaulter-assessee took place thereafter. Therefore, this Court is of the view that it would not be open to the purchasers to claim the benefit of the proviso to Section 281(1) of the Act. More than anything else, as rightly pointed out by the learned standing counsel for the respondent Department, 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. This legal effect of Rule 51 of second schedule cannot be overcome. In this case, this Court therefore comes to the conclusion that the attachment made subsequent to the purchase by the writ petitioner would relate back to and take effect from 05.01.2013 onwards. As strongly contended by the learned counsel for the petitioners, if two interpretations are possible, the one that is beneficial to the assessee must be preferred. But in this case, this Court has absolutely no doubt that on a plain reading of the relevant provisions, only one interpretation is possible and that one is in favour of the Revenue. Petitioners would submit that Rule 11(3)(a) of the second schedule cannot have an over-riding effect over the proviso to Section 281 of the Income Tax Act. But as held by the learned single Judge of this Court in 1998-2-L.W.288 (cited supra), the Section 281 and Rule 11 of the second schedule operate distinctly and independent of each other. Yet the orders impugned in these writ petitions cannot sustained as such. The Hon'ble Supreme Court in GANGADHAR VISWANATH RANADE (DECD.) 1998 (9) TMI 1 - SUPREME COURT has held that it is the function of the civil court to declare a transactions to be null and void and that the Tax Recovery Officer cannot exercise the said function. Therefore, the respondent clearly erred in declaring the transactions to which the petitioners are parties as null and void. Therefore, the orders impugned in these writ petitions stand quashed to that extent. It would certainly be open to the petitioners herein to avail the remedy set out in Rule 11(6) of the second schedule of the Income Tax Act. If the respondent authority wants to have the transactions nullified, it is the respondent who must go to the civil court to seek declaration to that effect. If the writ petitioners want the attachment to be lifted, it is for them to move the civil Court and obtain relief as provided in Rule 11(6) of the second schedule of the Income Tax Act. The orders impugned in these writ petitions are quashed to the extent indicated above. The stand of the respondent in declining to lift the attachment already made is sustained. The order of the respondent declaring the transactions in question as null and void is quashed.
Issues Involved:
1. Jurisdiction of Tax Recovery Officer to declare transactions null and void. 2. Applicability of Section 281 of the Income Tax Act, 1961. 3. Protection of bonafide purchasers under the proviso to Section 281. 4. Competency of the defaulter-assessee to deal with the property post notice under Rule 2 of the Second Schedule. 5. Interpretation and application of Rule 11(3), Rule 16(1), and Rule 51 of the Second Schedule to the Income Tax Act. 6. Validity of attachment of property post-purchase by the petitioners. 7. Requirement for civil court declaration to nullify transactions. Issue-wise Detailed Analysis: 1. Jurisdiction of Tax Recovery Officer to Declare Transactions Null and Void: The petitioners contended that the Tax Recovery Officer (TRO) does not have the jurisdiction to declare transactions as null and void under Section 281 of the Income Tax Act, 1961. This was supported by the Supreme Court's decision in Tax Recovery Officer II, Sadar, Nagpur vs. Gangadhar Vishwanath Ranade, which held that the TRO can only attach property in possession of the assessee and cannot declare transactions void. The Madras High Court affirmed this, stating that only a civil court can make such declarations. 2. Applicability of Section 281 of the Income Tax Act, 1961: Section 281(1) of the Income Tax Act, 1961, states that any transfer of assets by an assessee during the pendency of proceedings or after completion but before service of notice under Rule 2 of the Second Schedule is void against tax claims. The proviso protects transactions made for adequate consideration and without notice of tax arrears. The court noted that the sale transactions by the defaulter-assessee occurred after the notice under Rule 2 was served, making the transactions void under Section 281(1). 3. Protection of Bonafide Purchasers under the Proviso to Section 281: The petitioners argued that they were bonafide purchasers for adequate consideration without notice of tax arrears, thus protected under the proviso to Section 281. However, the court held that since the transactions occurred after the notice under Rule 2 was served, the proviso did not apply. The court cited the Punjab and Haryana High Court's decision in Karnail Singh vs. Union of India, which emphasized that statutory declaration of voidness under Section 281 cannot be ignored. 4. Competency of the Defaulter-Assessee to Deal with the Property Post Notice under Rule 2 of the Second Schedule: The court examined Rule 16(1) of the Second Schedule, which states that a defaulter-assessee cannot deal with the property post-notice under Rule 2 without the TRO's permission. Since the defaulter-assessee was served with the notice under Rule 2, he became incompetent to sell the property, rendering the transactions void. 5. Interpretation and Application of Rule 11(3), Rule 16(1), and Rule 51 of the Second Schedule to the Income Tax Act: Rule 11(3) requires the claimant to show interest in the property at the date of notice for immovable property. The court noted that the petitioners did not have any interest or possession of the property at the date of notice under Rule 2. Rule 51 states that attachment relates back to the date of notice, reinforcing the voidness of the transactions. 6. Validity of Attachment of Property Post-Purchase by the Petitioners: The court concluded that the attachment of the property post-purchase by the petitioners relates back to the date of notice (05.01.2013), making the attachment valid. The court rejected the petitioners' argument that Rule 11(3)(a) should override the proviso to Section 281, affirming that both operate independently. 7. Requirement for Civil Court Declaration to Nullify Transactions: The court quashed the TRO's declaration of the transactions as null and void, reiterating that only a civil court can make such declarations. The petitioners were advised to seek relief through civil court as provided in Rule 11(6) of the Second Schedule if they wished to lift the attachment. Conclusion: The court partially allowed the writ petitions, quashing the TRO's declaration of transactions as null and void but sustaining the attachment of the property. The petitioners were directed to seek civil court intervention for further relief. No costs were awarded, and connected miscellaneous petitions were closed.
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