2016 (11) TMI 257 - HC - Income Tax

Attachment order - recovery orders - property in question was owned by the directors of Baldev Ship Breakers Ltd. Baldev Ship Breakers Ltd. as well as both the directors were in arrears of tax - sale of property - Held that - Mere communication to the bank would not take shape of the attachment of the property which can be so in terms of rule 48 of the Procedure for Recovery of tax, which happened only on 23.3.2009, that is, long after the property for realisation of the dues of the bank, was sold to Arvindsinh V. Jadeja who in turn, sold part of it to the petitioner. At best, this communication put the bank to notice that the borrower had also other dues. It only guards the bank against a possible future claim from the income tax department. However, in any case, such communication would not make the title of the petitioner imperfect. Despite such communication by incometax department to the bank, the moot question would be, did the department have a prior charge over the property which before raising of the dues of the department was already mortgaged in favour of the financial institution? Even if the bank had disregarded such a communication of the incometax department and not shared with the department, proceeds of the sale of such property, at best, it may be a dispute between the incometax department and the bank and in any case, cannot harm the petitioner who was the subsequent purchaser for consideration without notice. On such grounds, petition is allowed. Impugned attachment is lifted qua the properties in question. We clarify that this would have no effect on the rest of the properties stated to have been purchased by Arvindsinh V. Jadeja which are not the subject matter of this petition.

Summary

Issues:
Challenge to order of attachment by Tax Recovery Officer on immovable property for unpaid tax dues.

Analysis:
1. The petitioner challenged an order of attachment by the Tax Recovery Officer on an immovable property due to unpaid tax dues by the previous owner. The property was purchased by the petitioner in good faith without notice of any pending claims.

2. The facts revealed that the property was initially owned by a defaulter who had outstanding tax arrears. The property was mortgaged with a bank, and after the bank assigned its debts to a company, the property was sold to a third party who later sold it to the petitioner. The petitioner acted in good faith and completed the purchase before the tax recovery order was issued.

3. The Revenue contended that the attachment order was valid under Rule 48 of the Procedure for Recovery of Tax, relating back to the date of notice issued to the defaulter. However, the communication from the income tax department to the bank did not constitute an attachment of the property at that time.

4. The Court found that the communication to the bank regarding the tax arrears did not establish a prior charge over the property by the income tax department. The property had already been sold to the petitioner in a legitimate transaction, and any dispute between the department and the bank did not affect the petitioner's title.

5. The Court allowed the petition, lifted the attachment on the specific properties in question, and clarified that it would not impact other properties purchased by the third party. The judgment emphasized the petitioner's status as a subsequent purchaser for value without notice, protecting their rights in the transaction.

6. In conclusion, the petition was disposed of in favor of the petitioner, affirming their bona fide purchase and rejecting the department's claim of priority over the property. The judgment highlighted the importance of protecting the rights of innocent purchasers in such cases.