2025 (1) TMI 329 - HC - Income Tax

Attachment of Property by the Income Tax Department - Seeking release of property attached by the Income Tax Department for the tax dues of the previous owner/ 2nd respondent - property was purchased by the petitioners in a court auction - HELD THAT - As per proviso to Section 281 it is evident that, if the transfer is made for an adequate consideration and without notice of the pendency of the proceedings by the Income Tax Department or without notice of such tax due from the assessee, the transfer cannot be deemed to be void. There is nothing to indicate that the proceedings initiated by the Income Tax Department was known to the petitioners-the purchasers in the court auction. It is also relevant to mention at this juncture that, pursuant to the auction held on 14.01.2009, petitioners had deposited an amount far in excess of the decree amount. They had to deposit Rs. 59,000/- over and above the decree amount with the court to be appropriated to the judgment debtor. Thus, it is evident that the petitioners had purchased the property in the court auction for adequate consideration and that too, without notice of the pendency of the proceedings initiated by the Income Tax Department. Since, the purchase of the property in a court auction was a bona fide transaction as evident from the sequence of events mentioned above, it is explicit that the proviso to Section 281 (1) will apply in respect of the property purchased by the petitioners. The attachment effected by the Income Tax Department is in respect of 51 cents of property, while the petitioners had purchased only 6 cents out of the said extent. It is submitted across the Bar that a multi-storied building is even existing on the remaining extent of property and therefore, no prejudice would befall the Income Tax Department, if they proceed against the remaining extent. In the decision in S. Mathews v. The Secretary Ambalappuzha North Grama Panchayath and others 2022 (7) TMI 1565 - KERALA HIGH COURT had, in a similar situation, observed that, in the facts of the said case, since the sale was without notice of the proceedings initiated by the Income Tax Department, the benefit of proviso to Section 281 of the Income Tax Act, 1961 ought to be accorded to the petitioner therein. Thus, claim petition put forth by the petitioners ought to have been allowed and the Income Tax Department could not have proceeded against the bona fide purchaser of the property covered by Ext. P2 sale certificate issued in favour of the petitioners.

Summary

1. ISSUES PRESENTED and CONSIDERED

The legal judgment addresses the following core issues:

• Whether the property purchased by the petitioners in a court auction can be subjected to attachment by the Income Tax Department for the tax dues of the previous owner, the 2nd respondent.
• Whether the petitioners, as bona fide purchasers, are protected under Section 281 of the Income Tax Act, 1961, from such attachment.
• The validity of the Ext. P8 order issued by the Income Tax Department rejecting the petitioners' claim and whether it should be quashed.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Attachment of Property by the Income Tax Department

• Relevant legal framework and precedents: The primary legal consideration is Section 281 of the Income Tax Act, 1961, which deals with the voidability of certain transfers during the pendency of tax proceedings.
• Court's interpretation and reasoning: The court analyzed whether the petitioners' purchase was a bona fide transaction, considering the timelines and lack of notice about the tax proceedings.
• Key evidence and findings: The petitioners purchased the property in a court auction on 14.01.2009, without knowledge of the Income Tax Department's provisional attachment, which was confirmed after their purchase.
• Application of law to facts: The court applied the proviso to Section 281, determining that the purchase was for adequate consideration and without notice of pending tax proceedings, thus protecting the transaction from being voided.
• Treatment of competing arguments: The Income Tax Department argued for the attachment based on their proceedings, but the court found the petitioners' lack of notice critical.
• Conclusions: The court concluded that the petitioners' purchase was protected under Section 281, and the attachment by the Income Tax Department was not applicable to the 6 cents purchased by the petitioners.

Issue 2: Quashing of Ext. P8 Order

• Relevant legal framework and precedents: The court considered the procedural fairness and legal protection accorded to bona fide purchasers under the Income Tax Act.
• Court's interpretation and reasoning: The court found that the Income Tax Department's rejection of the petitioners' claim was unjustified given the bona fide nature of the purchase.
• Key evidence and findings: The court noted the petitioners' compliance with legal procedures and the absence of any notice of tax proceedings at the time of purchase.
• Application of law to facts: The court applied the legal protections under Section 281 to determine that the Ext. P8 order was improperly issued.
• Treatment of competing arguments: The court weighed the petitioners' bona fide status against the Income Tax Department's procedural actions, favoring the former.
• Conclusions: The court quashed the Ext. P8 order and directed the release of the attachment over the petitioners' property.

3. SIGNIFICANT HOLDINGS

• Preserve verbatim quotes of crucial legal reasoning: "Since, the purchase of the property in a court auction was a bona fide transaction as evident from the sequence of events mentioned above, it is explicit that the proviso to Section 281 (1) will apply in respect of the property purchased by the petitioners."
• Core principles established: The court reinforced the protection of bona fide purchasers under Section 281 of the Income Tax Act, emphasizing the importance of notice and adequate consideration in determining the validity of property transfers amidst tax proceedings.
• Final determinations on each issue: The court held that the property purchased by the petitioners is not subject to the Income Tax Department's attachment, and the Ext. P8 order was quashed, directing the release of the property from attachment.

The judgment underscores the legal protection afforded to bona fide purchasers in property transactions, particularly in the context of tax proceedings, and clarifies the application of Section 281 of the Income Tax Act in such scenarios.