MANU/GJ/0284/2014

Equivalent/Neutral Citation: 2014:GUJHC :4480-DB, [2014]362ITR374(Guj)

IN THE HIGH COURT OF GUJARAT

Special Civil Application No. 2894 of 2004
Decided On: 12.02.2014
Karsanbhai Gandabhai Patel Vs. Tax Recovery Officer
Hon'ble Judges/Coram:
Akil Abdul Hamid Kureshi and S.G. Gokani, JJ.
Counsels:
For Appellant/Petitioner/Plaintiff: B.S. Soparkar, Advocate and Mrs. Swati Soparkar
For Respondents/Defendant: Sudhir M. Mehta, Advocate
Case Note:
Income Tax Act, 1961
• Recovery - Attachment and sale of property TRO passed an order under
section 281 declaring transaction of transfer in favour of assessee void--A
construction company had defaulted in making payment of income-tax dues
arising out of various assessment orders. TRO, vide its order dated 8-11-2005,
attaching properties of the construction company declared that all the sales,
including sales to assessee, were void in terms of section 281 as several
demand notices were served on defaulter construction company before the
date of transfer of the properties. Assessee submitted that order was passed
by TRO without any notice to him and in any case, TRO had no jurisdiction to
declare any sale transaction as void under section 281. Thereafter, TRO
proceeded with the auction sale of the properties under attachment to recover
the dues of defaulter. Held: The action of TRO in declaring the transfer of
property to be void was without jurisdiction. Moreover, TRO ought to have
given an opportunity to assessee of being heard before passing such order,
which was not done in the present case.
Income Tax Act, 1961, Section 281
JUDGMENT
Akil Abdul Hamid Kureshi, J.
1. The petitioners have challenged an order dated November 8, 1995, passed by the Tax
Recovery Officer ("the TRO"), Valsad, under section 281 of the Income-tax Act, 1961
("the Act" for short). The facts are as under:
The petitioners purchased different units in a constructed building situated in Bilimora
Nagarpalika known as Mazda Estate constructed by Mazda Estate and Finance Pvt. Ltd.
("Mazda" for short). The construction was completed in the year 1991 or 1992. The
petitioners had booked their respective shops in the said building. Upon completion of
the construction, the petitioners were put in possession of such shops in the year 1991-

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92. On May 17, 18, 1995, all the petitioners executed separate sale deeds with Mazda
for purchase of respective units.
Mazda had defaulted in making payment of income-tax dues to the extent of Rs. 19.88
lakhs arising out of various assessment orders. The case of Mazda was, therefore,
referred to the Tax Recovery Officer, Mumbai, for recovery. Under the instruction of the
Tax Recovery Officer, Mumbai, the property in question was attached on May 22, 1995.
Finally, the Tax Recovery Officer, Valsad, by the impugned order dated November 8,
2005, declared that all the sales mentioned therein including those in favour of the
present petitioners were void in terms of section 281 of the Act. In the said order, he
recorded that several demand notices were issued to Mazda for different assessment
years between 1989 and 1994. Such demand notices were served on the defaulter
before the date of transfer of the properties. He, therefore, declared the transactions as
void.
Under communication dated December 20, 1995, the petitioners raised objection to the
said order dated November 8, 1995, contending, inter alia, that such order was passed
without any notice to them and in any case, the Tax Recovery Officer had no jurisdiction
to declare any transaction as void under section 281 of the Act. There was no response
to this communication by the respondents.
Many years later, the petitioners once again wrote to the Department on October 21,
2003, and requested for withdrawal of the order under section 281 of the Act. Yet
another letter was written for the same purpose on December 18, 2013, by the
petitioners. Finally, the Tax Recovery Officer, Navsari, wrote to the directors of Mazda
on February 3, 2004, indicating that the Department would proceed with the auction
sale of the properties under attachment to recover the dues of Mazda. Thereupon, the
petitioners filed the present petition.
Learned counsel, Shri Bandish Soparkar, for the petitioners submitted that in terms of
section 281 of the Act, the Tax Recovery Officer had no jurisdiction to declare the
transaction as void. If at all, the Department would have to file civil suit for such
purpose which, in the present case, was not done. He further submitted that the
petitioners had purchased the properties for adequate consideration without notice of
the dues of the defaulter. The petitioners could never bring such facts to the notice of
the Tax Recovery Officer and avail of the proviso to section 281(1) of the Act since the
petitioners were never heard before the impugned order was passed.
2. In support of his contentions, he relied on the following decisions:
(1) In the case of TRO v. Gangadhar Vishwanath Ranade (Decd.)
MANU/SC/0600/1998 : [1998] 234 ITR 188 (SC).
(2) In the case of Ms. Ruchi Mehta v. Union of India MANU/MH/1158/2007 :
[2007] 294 ITR 614 (Bom).
3. On the other hand, learned counsel, Shri Sudhir Mehta for the Department opposed
the petition. Relying on section 281 of the Act, he contended that the transactions in
question were void. The defaulter was duly served with notices for recovery of the
unpaid tax long before the properties were transferred. In support of his submissions,
he relied on the following decisions:
(1) In the case of Abdul Jamil v. Secretary, Income-tax Department,
MANU/TN/0103/1998 : [1998] 101 Taxman 332 (Mad).
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 (2) In the case of Palani Gounder v. Income-tax Revenue Department
MANU/TN/0417/1996 : [1998] 229 ITR 59 (Mad).
4 . Having thus heard the learned counsel for the parties and having perused the
documents on record, it emerges that notices were issued to the defaulter during the
years 1989 to 1994 for recovery of unpaid taxes. Such taxes were, however, not paid.
In the meantime, the defaulter sold certain properties to various persons including the
petitioners. Such sale deeds were executed on or around May 17/18, 1995. It was only
thereafter that the Department attached the property in question by issuing an order
dated May 22, 1995. On November 8, 1995, the Tax Recovery Officer, Valsad, passed
the impugned order declaring the sale transactions as void. This order was passed
without any notice to the petitioners.
5. Section 281 of the Act provides certain transfers to be void. Sub-section (1) thereof,
which is relevant for our purpose, reads as under:
281.(1) Where, during the pendency of any proceeding under this Act or after
the completion thereof, but before the service of notice under rule 2 of the
Second Schedule, any assessee creates a charge on, or parts with the
possession (by way of sale, mortgage, gift, exchange or any other mode of
transfer whatsoever) of any of his assets in favour of any other person, 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 or otherwise:
Provided that such charge or transfer shall not be void if it is made--
(i) for adequate consideration and without notice of the
pendency of such proceeding or, as the case may be, without
notice of such tax or other sum payable by the assessee ; or
(ii) with the previous permission of the Assessing Officer.
6. Sub-section (1) of section 281 thus provides that where during the pendency of any
proceedings under the Act, or after the completion thereof, but before the service of
notice under rule 2 of the Second Schedule, any assessee creates a charge on, or parts
with the possession by way of sale, mortgage, gift, exchange or any other mode of
transfer any assets in favour of any other person, 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 completion of the said proceedings or otherwise.
7. The proviso to sub-section (1), however, provides that such charge or transfer shall
not be void if made for adequate consideration and without notice of pendency of such
proceedings or without notice of such tax or other sum payable by the assessee or with
the permission of the Assessing Officer.
8 . It can thus be seen that even if the transactions creating a charge or parting of
possession has been entered into by the assessee during the pendency of any
proceedings under the Act or after completion thereof, the eventuality of such charge or
transfer being declared void can be avoided provided one of the two conditions
contained in the proviso is satisfied. Under such circumstances, the transferee can
demonstrate that the transaction had taken place with the previous permission of the
Assessing Officer or that the same was entered into for adequate consideration and
without notice of pendency of such proceedings or without notice of such tax or other
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sum payable by the assessee.
9. This element of the transaction being with adequate consideration and without notice
would equally apply to the assessee as well as the transferee. In a given case, it may
even be open for the assessee to establish that the transaction was for adequate
consideration without notice. In a given case, even if the assessee had notice of the
pendency or the outstanding tax or sum payable, the transferee can still take shelter of
the transactions having been entered into by him for adequate consideration and
without notice. It is, therefore, that the courts have read into this provision the
requirement of hearing the transferee also. Quite apart from this, as would be clear
from the discussion hereinafter, courts have taken a view that sub-section (1) of section
281 of the Act only provides for the eventuality of the transaction hit by the said
provisions as being void. It does not create any machinery for the Revenue authorities
to entertain dispute and declare the transaction to be void for which purpose, only a
civil suit would lie.
10. In the case of Gangadhar Vishwanath Ranade v. TRO ( No. 2) MANU/MH/0131/1982
: [1989] 177 ITR 176 (Bom), a Division of the Bombay High Court held that under
section 281 of the Act, the Tax Recovery Officer has no power to declare a transfer as
void. This decision of the Bombay High Court was carried in appeal before the Supreme
Court. The apex court in TRO v. Gangadhar Vishwanath Ranade (Decd.)
MANU/SC/0600/1998 : [1998] 234 ITR 188 (SC) confirmed the view of the Bombay
High Court and held and observed as under (page 195):
In the light of this discussion about the provisions of Order XXI, rules 58 to 63,
if we examine rule 11(4) of the Second Schedule to the Income-tax Act, it is
clear 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.
11. Later on, once again, the issue came up for consideration before a Division Bench
of the Bombay High Court in the case of Ms. Ruchi Mehta (supra). The Bombay High
Court followed the decision of the Supreme Court in the case of TRO v. Gangadhar
Vishwanath Ranade (Decd.) (supra) and held that the action of the Tax Recovery Officer
in declaring the transfer of property to be void was without jurisdiction. The court also
held that the impugned order attaches civil consequences. The authority, therefore,
before passing such order ought to have given an opportunity to the petitioners of being
heard. This was not done. This was an additional ground on which the order was struck
down.
12. In the case of Sancheti Leasing Co. Ltd v. ITO MANU/TN/0592/1998 : [2000] 246
ITR 814 (Mad); [2000] 158 CTR 190 (Mad), the learned single judge of the Madras High
Court following the decision of the Supreme Court in the case of Gangadhar Vishwanath
Ranade (Decd.) (supra) held that the Income-tax Officer had no jurisdiction to declare
the transaction of sale to the petitioners as void.
1 3 . The decisions cited by the counsel for the Revenue arose in different factual
background. In the case of Abdul Jamil (supra), the issue arose out of civil proceedings

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in which the court found that the vendor had sold the property to the first plaintiff after
the issuance of certificate under the Act for recovery of the tax arrears from him. The
court, therefore, held that the transaction was hit by the provisions of section 281 as
well as rule 16(1) of the Rules.
14. The case of Palani Gounder (supra), also arose in different factual background. It
was a case in which the plaintiff had filed suit for declaration that their purchase of the
suit property was for a valid consideration and it was a duly registered sale deed and
was, therefore, not void. The Income-tax Officer had proposed to proceed under section
281 of the Act. The civil court in the suit filed by the plaintiffs found that the transaction
was in breach of section 281 of the Act and, therefore, refused to grant the prayer. It
was under such circumstances that the appeal was heard by the learned single judge of
the Madras High Court and dismissed the same. The issue is squarely covered by the
decision of the Supreme Court in the case of Gangadhar Vishwanath Ranade. We have,
therefore, no hesitation in striking down the order dated November 8, 1995, qua the
present petitioners. Rule is made absolute accordingly.
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