Madras HC: Recovery Officer Can’t Invalidate a Sale Made by an Individual in Favour of a 3rd Party

The Madras High Court ruled that a tax recovery officer could not declare a sale that the taxpayer made in favor of a third party void if he discovers that the property of the taxpayer was transferred by the taxpayer to a third party to defraud the revenue.

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

The applicant has contested the order passed through the second respondent/the Tax Recovery Officer-III under Rule 11(1) of the Second Schedule of the Income Tax Act, 1961. A long history of litigation is there between the applicant and the respondent, who had defaulted in tax payments, and the Income Tax Department.

The Return of Income Tax of the respondent for the Assessment Year 2008-09 and Assessment Year 2009-10 consequence in a demand for tax arrears including an interest under Section 220(2) for the AY 2008-09 and a sum of Rs. 16,21,470 including with interest under Section 220(2) of Rs. 32,428 for the AY 2009-10.

The respondent’s income tax authorities issued a demand notice under Rule 2 of the Second Schedule to the Income Tax Act, 1961 as the respondent had defaulted in tax payment.

Another notice of demand seeks respondent pay arrears of tax along with interest. Since the fourth respondent was unable to pay the arrears of tax, the respondent’s property was attached by the Income Tax Department. For the sale of one of the properties together with land in Coimbatore District the applicant and the respondent had earlier entered into a sale agreement.

The applicant argued 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 applicant is binding. 

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 council argued 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.

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Hence the sale, which is stated to have been conducted on February 24, 2012, vide Document No. 1981 under the sale agreement dated February 19, 2009, was void ab initio. Despite if the council was not needed 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.

In the decision of the Supreme Court, the court relied on the case of Tax Recovery Officer II, Sadar, Nagpur vs. Gangadhar Vishwanath Ranade for the revision to Section 281 of the Income Tax Act, 1961, wef October 1, 1975, under the Taxation Laws (Amendment) Act, 1975. The expression “to defraud the Revenue” in Section 281 of the Income Tax Act, 1961, has been removed. Post 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 ruled that the Tax Recovery Officer is needed to analyze who is in possession of the property and what capacity. The Court ruled that a Tax Recovery Officer can attach property in the possession of the taxpayer in his own right or in the possession of the tenant or third party on behalf of or for the advantage of the taxpayer.