Tax Recovery Officer Cannot Declare Sale Made By Assessee In Favour Of 3rd Party As Void: Madras High Court

The Madras High Court has held that a tax recovery officer cannot declare a sale made by the assessee in favour of a third party void if he finds that the property of the assessee was transferred by the assessee to a third party with an intention to defraud the revenue.

The bench of Justice C. Saravanan has observed that the Income Tax Department will have to file a suit in terms of Rule 11 (6) of the 2nd Schedule of the Income Tax Act, 1961, though under Rule 11 (6) of the 2nd Schedule of the Income Tax Act, 1961, the party against whom an order of attachment is made has to institute a suit in a civil court to establish the right which he claims over the property in dispute, and subject to the result of such suit (if any), the order of the Tax Recovery Officer shall be conclusive.

The petitioner/assessee has challenged the order passed by the second respondent/the Tax Recovery Officer-III under Rule 11(1) of the Second Schedule of the Income Tax Act, 1961. There is a long history of litigation between the petitioner and the respondent, who had defaulted in payment of tax, and the Income Tax Department. The respondent's Return of Income Tax for the Assessment Year 2008-09 and Assessment Year 2009-10 resulted in a demand for tax arrears along with interest under Section 220(2) for the Assessment Year 2008-09 and a sum of Rs. 16,21,470 along with interest under Section 220(2) of Rs. 32,428 for the Assessment Year 2009-10.

As the respondent had defaulted in payment of tax, the respondent income tax authorities issued a demand notice under Rule 2 of the Second Schedule to the Income Tax Act, 1961. Another demand notice was issued, demanding the respondent pay arrears of tax along with interest. As the fourth respondent failed to pay the arrears of tax, the property of the respondent was attached by the Income Tax Department.

The petitioner and the respondent had earlier entered into a sale agreement for the sale of one of the properties together with land in Coimbatore District.

The petitioner contended that the respondent had the option to file a civil suit. However, to date, the respondent has not filed a suit against the petitioner. The sale in favor of the petitioner is binding. Though the department has no jurisdiction to declare that the sale deed is registered as void under the provisions of the Income Tax Act, 1961,.

The department contended that the sale was void by operation of law in terms of Rule 16(1) of the II Schedule of the Income Tax Act, 1961. It is therefore submitted that the sale, which is said to have taken place on February 24, 2012, vide Document No. 1981 pursuant to the sale agreement dated February 19, 2009, was void ab initio. Even if the department was not required to declare the sale as void, by operation of Rule 16 of the II Schedule of Income Tax Act, 1961, the sale was indeed void.

The court relied on the decision of the Supreme Court in the case of Tax Recovery Officer II, Sadar, Nagpur vs. . Gangadhar Vishwanath Ranade in view of the amendment to Section 281 of the Income Tax Act, 1961, with effect from October 1, 1975, under the Taxation Laws (Amendment) Act, 1975. The expression “with the intention to defraud the Revenue” in Section 281 of the Income Tax Act, 1961, has been deleted. After reproducing Sub-Rule (4), (5), and (6) of Rule 11 of the 2nd Schedule to the Income Tax Act, 1961, the Hon'ble Supreme Court Court held that the Tax Recovery Officer has to examine who is in possession of the property and in what capacity.

The Court held that a Tax Recovery Officer can attach property in the possession of the assessee in his own right or in the possession of the tenant or third party on behalf of or for the benefit of the assessee.

Counsel For Petitioner: A.L.Gandhimathi

Counsel For Respondent: S.Premalatha

Case Title: K.N.Subramaniam Versus PCIT

Citation: 2024 LiveLaw (Mad) 116

Case No.: W.P.No.5336 of 2023 and WMP.Nos.5361, 5362 & 10301 of 2023

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