2014 (4) TMI 411 - HC - Income Tax

Recovery of tax dues from the buyer of property - defaulter sold certain properties to various persons including the petitioners. - Validity of transfer u/s 281 of Income Tax Act Unpaid tax Creation of Charge Held that - Judgment in T.R.O. v. Gangadhar Vishwanath Ranede 1998 (9) TMI 1 - SUPREME Court followed wherein it was held that, the Tax Recovery Officer is required to examine whether the possession of the third party is of a claimant in his own right or in trust for the assessee or on account of the assessee. If he comes to a conclusion that the transferee is in possession in his or her own right, he will have to raise the attachment. If the Department desires to have the transaction of transfer declared void under Section 281, the Department being in the position of a creditor, will have to file a suit for a declaration that the transaction of transfer is void under Section 281 of the Income-tax Act The action of the TRO in declaring the transfer of property to be void was without jurisdiction. - no hesitation in striking down the order dated 8th November 1995 - Rule is made absolute accordingly Decided in favour of petitioner.

Summary

Issues:
Challenge to order by Tax Recovery Officer under section 281 of the Income Tax Act 1961.

Detailed Analysis:
The petitioners contested an order dated 8th November 1995 by the Tax Recovery Officer (TRO) under section 281 of the Income Tax Act 1961. The petitioners had purchased units in a building constructed by Mazda Estate and Finance Pvt. Ltd. The TRO declared sales void due to Mazda's tax default. The petitioners objected to the order, stating lack of notice and TRO's jurisdictional limitations. Despite objections, the TRO proceeded with auction plans. The petitioners argued that the TRO lacked authority to declare transactions void under section 281 without a civil suit. They contended they bought properties in good faith without notice of Mazda's dues. The petitioners cited legal precedents to support their claims.

Legal Provisions and Interpretation:
Section 281(1) of the Act deems transfers void if made during or after proceedings without notice or for adequate consideration. The proviso allows exceptions if made with the Assessing Officer's permission or for adequate consideration without notice. The judgment emphasized the need for both parties to transact without notice for the transfer to be valid. It highlighted the requirement for the transferee to establish the transaction's adequacy and lack of notice. The court noted that section 281 does not empower Revenue authorities to unilaterally declare transactions void, necessitating a civil suit for such declarations.

Precedents and Court Decisions:
The judgment referred to legal cases supporting the petitioners' arguments. The Supreme Court and Bombay High Court decisions in T.R.O. v. Gangadhar Vishwanath Ranade and Ms. Ruchi Mehta v. UOI emphasized TRO's lack of power to unilaterally void transfers under section 281. The courts stressed the need for proper hearings and civil suits for such declarations. The Madras High Court case of Sancheti Leasing Company Ltd v. Income Tax Officer further supported the limitations on TRO's authority in declaring transfers void.

Final Decision:
The judgment concluded that the TRO's order declaring the transactions void was invalid. Citing the Supreme Court's decision in Gangadhar Vishwanath Ranade, the court emphasized the need for civil suits to void transactions under section 281. The court found in favor of the petitioners, striking down the TRO's order dated 8th November 1995.