1975 (11) TMI 29 - HC - Income Tax

Summary

Issues Involved:
1. Construction of Section 281 of the Income-tax Act, 1961, and Rule 16 of the Second Schedule.
2. Whether the Tax Recovery Officer must act in accordance with Section 281 during investigations under Rule 11.
3. Validity of the equitable mortgage created by the assessee during the pendency of tax recovery proceedings.
4. Whether the principles of Section 281 apply to recovery proceedings.

Detailed Analysis:

1. Construction of Section 281 of the Income-tax Act, 1961, and Rule 16 of the Second Schedule:
The court examined the statutory provisions of Section 281 and Rule 16. Section 281 states, "Where, during the pendency of any proceeding under this Act, any assessee creates a charge on or parts with the possession by way of sale, mortgage, exchange or any other mode of transfer whatsoever, of any of his assets in favour of any other person with the intention to defraud the revenue, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of the completion of the said proceeding." The proviso to Section 281 protects bona fide transfers made for valuable consideration and without notice of the pendency of proceedings. Rule 16 declares private alienations void during recovery proceedings and states that any private transfer or delivery of the property attached shall be void as against all claims enforceable under the attachment.

2. Whether the Tax Recovery Officer must act in accordance with Section 281 during investigations under Rule 11:
The main contention was whether the Tax Recovery Officer, conducting an investigation under Rule 11, must adhere to the principles of Section 281. The petitioner argued that the officer must consider the principles of Section 281 to protect bona fide transfers. The court noted that Rule 11 postulates a quasi-judicial enquiry into claims and objections raised by a transferee. The officer must address these claims and objections and satisfy himself as to their correctness, which involves an objective satisfaction akin to a judicial or quasi-judicial functionary.

3. Validity of the equitable mortgage created by the assessee during the pendency of tax recovery proceedings:
The petitioner's firm had an equitable mortgage created by the assessee on March 15, 1969, after notices under Rule 2 were issued but before the attachment order under Rule 48. The court emphasized that any charge created or transfer made without bona fides during the pendency of proceedings under the Act shall be void against claims for tax recovery. The burden of proving fraudulent intent lies with the revenue, and once established, the transferee must prove they paid valuable consideration without notice of the pending proceedings.

4. Whether the principles of Section 281 apply to recovery proceedings:
The court determined that Section 281 covers the entire field of proceedings under the Act, including recovery proceedings. The court rejected the narrow interpretation limiting Section 281 to pre-recovery proceedings. The court held that the prohibition and protection under Section 281 continue until all amounts payable under the Act are fully paid. The court concluded that the principles of Section 281 must be read into Rule 16 to protect innocent transferees in recovery proceedings.

Conclusion:
The court quashed Exhibit P-1, stating it was vitiated by an error apparent on the face of the record and null and void as against the transferee. The Tax Recovery Officer must investigate claims or objections afresh, considering whether the transfer was made with intent to defraud the revenue and whether the transferee paid valuable consideration without notice of the pending proceedings. The original petition was allowed, with no order as to costs.