Important Points
1. In a proceeding under Rule 11 of the Second Schedule to the Income-tax Act, the Tax Recovery Officer cannot declare a transfer as void under Section 281.
2. If the TRO comes to a conclusion in proceeding under Rule 11(4) of the Second Schedule to the Income-tax Act that the transferee is in possession in his/her own right he will have to realise the attachment.
3. Tax Recovery Officer cannot declare any transfer made by the assessee in favour of a third party as void; if the Department finds a property of the assessee is transferred by him to a third party with intention to defraud the Revenue it will have to file a suit under Rule 11(6) of the Second Schedule of the Income-tax Act to have the transfer declared void under Section 281.

Headnote:(i) Income Tax Act, 1961-Second Schedule, Rule 11-Procedure for recovery of tax-Attachment-In Rule 11 proceedings transfer cannot be declared as void under Section 281-If property is found to have transferred with intention to defraud Revenue, department will have to file a suit under Rule 11(6) to have transfer declared void-If TRO comes to conclusion that transferee is in possession in his/her own right he will have to raise the attachment. (Paras 8 to 12)
       (ii) Income Tax Act, 1961-Section 281-Second Schedule, Rule 11-Void transaction-Declaration of-In proceeding under Rule 11 of Second Schedule-Tax Recovery Officer cannot declare a transfer as void under Section 281-Tax Recovery Officer cannot declare any transfer made by assessee in favour of third party as void-If property is found to have transferred by assessee with intention to defraud Revenue, Department will have to file a suit under Rule 11(6) to have transfer declared void under Section 281-If TRO comes to conclusion that transferee is in possession in his own right he will have to raise the attachment.
       Held : Section 281 declares as void any transfer made by the assessee during the pendency of proceedings under the Act, with the intention to defraud the Revenue. The powers of the Tax Recovery Officer, however, under Rule 11 of the Second Schedule to the Income-tax Act are somewhat different. Under Rule 11(1) where any claim is preferred to or any objection is made to the attachment or sale of any property in execution of a certificate on the ground that such property is not liable to such attachment or sale, the Tax Recovery Officer shall proceed to investigate the claim or objection. The Tax Recovery Officer, therefore, has to examine two is in possession of the property and in what capacity. He can only attach property in possession of the assessee in his own right, or in possession of a tenant or a third party on behalf of/for the benefit of the assessee. He cannot declare any transfer made by the assessee in favour of a third party as void. If the Department finds that a property of the assessee is transferred by him to a third party with the intention to defraud the Revenue, it will have to file a suit under Rule 11(6) to have the transfer declared void under Section 281. (Paras 8 & 9)
       The provisions, therefore, of Rule 11 are analogous to those of Order XXI Rules 58 to 61 and 63 of the Code of Civil Procedure as they stood prior to the amendment of the Civil Procedure Code in 1976. In fact, the language of Order XXI Rules 60 and 61 is similar to the language of Rule 11(4) and Rule 11(5) of the Second Schedule to the Income-tax Act. Similarly, the language of Order XXI Rule 63 is similar to the language of Rule 11(6). Rules 59 to 62 of Order XXI, prior to the amendment of 1976, provide for a summary investigation into possession as distinct from a thorough trial of ultimate right. No doubt, it is impossible to separate altogether the question of possession and of title. Thus, if the judgment-debtor was in possession, he may have been in possession as agent or trustee for another; and this has to be enquired into. To that extent title may be a part of the inquiry. Similarly, if the property attached is claimed by a third party who adduces evidence to show that he was possessed of the property under some kind of a title, the property will have to be released from attachment. The procedure is not meant to decide intricate questions of law as to title to the property. Therefore, were a claim is made to the property attached, by someone claiming to be a transferee from the judgment-debtor and the claim is disallowed, the claimant can institute a suit under Order XXI Rule 63 to establish his title to the property. In suit a suit it would be open to the attaching creditor to plead in defence that the transfer was in fraud of the general body of creditors and was void under Section 53 of the Transfer of Property Act. Similarly, if the claim of the transferee is allowed, the attaching creditor may sue on behalf of himself and all other creditors under Section 53 of the Transfer of Property Act for a declaration that the transfer was void as it was in fraud of the creditors. (Para 10)
       In the present case the Tax Recovery Officer could not have examined whether the transfer was void under Section 281 of the Income-Tax Act. His adjudication of the transfer as void under Section 281 is without jurisdiction. The Tax Recovery Officer has relied upon the earlier order of the Income Tax Officer dated 9.5.1974 declaring that the transaction is void under Section 281 of the Income-tax Act. In the earlier proceedings, however, although the High Court has not set aside the order of the Income Tax Officer, the High Court has expressly held that the order amounted only to an intention or declaration on the part of the Department to treat the transaction as void under Section 281. Such a declaration cannot affect the legal rights of the parties affected under Rule 11. The High Court expressly held that the rights of the parties under Rule 11 were not affected in any way by this declaration. The Department, therefore, cannot proceed on the assumption that the transaction is void under Section 281, nor can the Tax Recovery Officer, while proceeding under Rule 11, declare a transaction of transfer as void under Section 281 by relying on the Order of 9.5.1974 or otherwise. His jurisdiction relates to examining possession and only incidentally any question of right to possession as claimed by the Objector. The High Court has, therefore, rightly set aside the order of the Tax Recovery Officer. (Para 13)
       Further held : However, the right of the Department to have the transfer declared as void under Section 281 of the Income-tax Act, as it stood at the relevant time, is not thereby taken away. We are informed that the property continues to be under attachment by virtue of interim orders passed in this appeal. The Department may, if it so desires, take appropriate proceedings in accordance with law for having the transfer declared as void under Section 281 of the Income-tax Act. (Para 14)

Judgment

Mrs. Sujata V. Manohar, J.-This is an appeal from the judgment and order of 15th of December, 1982 of the Bombay High Court reported in (1989) 177 ITR 1761). Under the impugned judgment the High Court has set aside the attachment levied under Rule 11 of the Second Schedule to the Income-tax Act, 1961 by the Tax Recovery Officer on an immovable property originally belonging to the assessee (since deceased). The property was claimed by the wife of the assessee (since deceased) and his daughter, original respondent No. 2 as of their ownership and in their possession in the objections which they had filed against attachment proceedings under Rule 11.

2. For the period relevant to the assessment years in question, the assessee was carrying on business as a partner of a firm known as United Capital Construction Company, and also as a Contractor. For the assessment years 1962-63, 1963-64 and 1964-65 he was assessed to income-tax and the amounts of tax so assessed became final on 7.8.1967. There were also income-tax demands which were outstanding for the subsequent assessment years at the time when the Tax Recovery Officer served notices on the assessee under Rule 2 of the Second Schedule to the Income-tax Act, 1961 on 21.10.1972. Thereafter on 23.10.1972 an immovable property being a residential house of the assessee in Ramdaspeth, Nagpur was attached by the Tax Recovery Officer. In the objections filed by the assessee, original respondent No. 1 it was stated that on 2.12.1967 he had executed a mortgage in respect of this property in favour of the Bank of Maharashtra for raising a loan of Rs. 75,000/-. He further stated that on 21.2.1969 he had executed a trust-deed in respect of the said property in favour of his wife and his daughter. On 27.2.1969 the assessee, the original respondent No. 1 had, by a registered deed, conveyed the said property to his wife and his daughter, original respondent No. 2. Similar objections were filed on behalf of the wife of the assessee and his daughter, original respondent No. 2 claiming that the title to the said property vested in them as full owners and they were in possession of the said property. Objections were also filed by the Bank of Maharashtra. The assessee as well as his wife and his daughter, therefore, contended that on the date when notice was issued under Rule 2 of the Second Schedule to the Income-Tax Act and also on the date when the said property was attached by the Tax Recovery Officer, the property was of the ownership of the wife of the assessee and his daughter, original respondent No. 2 who were also in possession of this property. Hence the property was not liable to attachment for the dues of the assessee, original respondent No. 1.

3. Thereafter a show-cause notice dated 21.1.1974 was issued under Section 281 of the Income-tax Act as then in force, on original respondent No. 1. It seems that the concerned Income Tax Officer held an inquiry, recorded evidence and passed an order dated 9.5.1974 declaring, inter alia, that the transfer in favour of the wife of the assessee and his daughter, original respondent No. 2 of the said immovable property was void as against the Department under Section 281 of the Income-tax Act. This decision was the subject matter of challenge in earlier proceedings before the High Court. The High Court by its judgment and order dated 9.1.1981, in the case of Gangadhar Vishwanath Ranade (No. 1) & Ors. v. Income-tax Officer2 held that the proceedings taken pursuant to the declaration or expression of an opinion by the Income Tax Officer or authority under Section 281 were a mere preclude to the procedure for the recovery of tax and that the order of 9.5.1974 did not, in any way, affect the rights of the parties pertaining to the said property which could be considered in the proceedings under Rule 11.

4. By his order dated 17.9.1981 the Tax Recovery Officer, in the proceedings under Rule 11, overruled the objections filed by the Objectors

Click Here to Read the rest of this document

1998 Supreme(SC) 962

Cases Referred (1)