1998 (9) TMI 1 - SC - Income Tax

Recovery - Attachment of an immovable property being a residential house of the assessee - contention of the respondents that the Tax Recovery Officer has no power u/r 11 of the Second Schedule to the Income-tax Act, to declare as void a transfer of property effected by the assessee during the pendency of proceedings against him under the Income-tax Act on the ground that the transfer was with the intention to defraud the Revenue, is accepted

Summary

Issues Involved:
1. Validity of the attachment levied by the Tax Recovery Officer on the immovable property.
2. Jurisdiction of the Tax Recovery Officer under rule 11 of the Second Schedule to the Income-tax Act, 1961.
3. Validity of the transfer of property under section 281 of the Income-tax Act, 1961.

Detailed Analysis:

1. Validity of the attachment levied by the Tax Recovery Officer on the immovable property:
The High Court set aside the attachment levied by the Tax Recovery Officer on the immovable property originally belonging to the deceased assessee. The property was claimed by the wife and daughter of the assessee as their ownership and possession. The Tax Recovery Officer attached the property on October 23, 1972, after serving notices under rule 2 of the Second Schedule to the Income-tax Act, 1961. The objections filed by the assessee and his family claimed that the property was transferred to the wife and daughter before the attachment and thus was not liable for the assessee's tax dues.

2. Jurisdiction of the Tax Recovery Officer under rule 11 of the Second Schedule to the Income-tax Act, 1961:
The High Court upheld the contention that the Tax Recovery Officer has no power under rule 11 to declare a transfer of property as void on the grounds of fraud against the Revenue under section 281. Rule 11(4) and (5) mandate that the Tax Recovery Officer investigate claims or objections to attachment or sale of property and determine possession and the nature of such possession. The Tax Recovery Officer is required to release the property if it is found to be in possession of someone other than the defaulter, in their own right. The Tax Recovery Officer cannot declare any transfer void; if the Department believes a transfer was made to defraud the Revenue, it must file a suit under rule 11(6) to have the transfer declared void.

3. Validity of the transfer of property under section 281 of the Income-tax Act, 1961:
Section 281, as it stood at the relevant time, declared any transfer made by the assessee during the pendency of proceedings, with the intention to defraud the Revenue, as void against any tax claims. The High Court noted that section 281 did not confer exclusive adjudicatory power to income-tax authorities but merely declared the law. Appropriate legal proceedings must be followed to declare a transfer fraudulent. The High Court previously held that the order of May 9, 1974, by the Income-tax Officer, declaring the transfer void under section 281, was merely declaratory and did not affect the rights of the parties under rule 11.

The Supreme Court affirmed the High Court's judgment, stating that the Tax Recovery Officer's jurisdiction is limited to examining possession and cannot extend to declaring transfers void under section 281. The Department must file a suit to have the transfer declared void if it believes the transfer was made to defraud the Revenue. The appeal was dismissed, but the Department retains the right to pursue appropriate legal proceedings to challenge the transfer under section 281.