2018 (4) TMI 677 - HC - Indian Laws

Lifting of Attachment of properties - Jurisdiction of Tax Recovery Officer - Held that - 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. There cannot be any doubt that a sale is a contractual transaction. For a contract to be valid, it must be made by the free consent of parties competent to contract. The Hon ble Supreme Court in Tax Recovery Officer Versus Gangadhar Viswanath Ranade (Decd.) 1998 (9) TMI 1 - SUPREME COURT has held that it is the function of the civil Court to declare a transaction 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. Petition allowed in part.

Issues Involved:
1. Jurisdiction of the Tax Recovery Officer (TRO) to declare transactions null and void.
2. Applicability of Section 281 of the Income Tax Act, 1961.
3. Validity of attachment orders under Rule 2 and Rule 51 of the Second Schedule to the Income Tax Act.
4. Rights of bona fide purchasers under the proviso to Section 281.
5. Competence of the defaulter-assessee to deal with the property post-service of notice under Rule 2.
6. Interpretation of conflicting judicial decisions.

Issue-wise Detailed Analysis:

1. Jurisdiction of the Tax Recovery Officer (TRO) to declare transactions null and void:
The court held that the TRO does not have the jurisdiction to declare a transaction null and void. This is a function reserved for the civil courts. The Supreme Court in Tax Recovery Officer II, Sadar, Nagpur vs. Gangadhar Vishwanath Ranade clarified that the TRO can only attach property in possession of the assessee or a third party on behalf of the assessee but cannot declare transactions void. The Madras High Court reiterated this in Sancheti Leasing Company Ltd. vs. Income Tax Officer.

2. Applicability of Section 281 of the Income Tax Act, 1961:
Section 281(1) states that any charge or transfer of assets by an assessee during the pendency of proceedings or after the completion thereof but before the service of notice under Rule 2 of the Second Schedule shall be void against any tax claims unless it is for adequate consideration and without notice of the tax arrears. The court noted that the defaulter-assessee received the notice under Rule 2 on 05.01.2013, and the sale transactions occurred thereafter, making the transactions void under Section 281(1).

3. Validity of attachment orders under Rule 2 and Rule 51 of the Second Schedule to the Income Tax Act:
Rule 2 requires the TRO to serve a notice to the defaulter to pay the arrears within fifteen days. Rule 51 stipulates that any attachment of immovable property relates back to the date of the notice under Rule 2. The court upheld the attachment orders, stating that they relate back to 05.01.2013, the date on which the notice was served.

4. Rights of bona fide purchasers under the proviso to Section 281:
The proviso to Section 281 protects bona fide purchasers who acquire property for adequate consideration and without notice of tax arrears. However, the court found that since the purchasers bought the property after the notice under Rule 2 was served, they could not claim the benefit of the proviso.

5. Competence of the defaulter-assessee to deal with the property post-service of notice under Rule 2:
Rule 16(1) of the Second Schedule renders the defaulter incompetent to deal with the property once a notice under Rule 2 is served. The court held that the defaulter-assessee, having been served with the notice, was not competent to transfer the property, and thus, the sale was invalid.

6. Interpretation of conflicting judicial decisions:
The petitioners argued for the application of the Gujarat High Court's decision, which favored the assessee. However, the court preferred the reasoning of the Punjab and Haryana High Court, which supported the Revenue's stance. The court emphasized that if only one interpretation is possible, it should be in favor of the Revenue.

Conclusion:
The court quashed the portion of the orders where the TRO declared the transactions null and void, as this is within the purview of the civil courts. However, the court upheld the attachment of the properties, stating that the TRO's refusal to lift the attachment was valid. The petitioners were advised to seek remedy in civil court if they wished to challenge the attachment.

Final Order:
The writ petitions were partly allowed, quashing the TRO's declaration of the transactions as null and void, while sustaining the attachment orders. No costs were awarded, and connected miscellaneous petitions were closed.

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