Tax recovery through share transfer avoidance and dematerialised share attachment upheld under the Income-tax recovery provisions.

Section 281 of the Income-tax Act was treated as a declaratory recovery provision, so a share transfer made during pending proceedings and found to be part of a tax-avoidance arrangement could be disregarded for recovery purposes, especially where adequate consideration and prior protection under section 178 were not shown. Section 226(5) read with the Third Schedule was also explained as permitting recovery by distraint and sale of movable property, with prohibitory orders over dematerialised shares treated as a form of actual seizure. Clerical error in the authorisation date did not invalidate the action, and notice-based or alternate-remedy objections did not defeat the attachment in the recovery context.

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Issues: (i) Whether the transfer of shares fell within section 281 of the Income-tax Act, 1961 and could be treated as void for recovery purposes. (ii) Whether the prohibitory attachment of shares under section 226(5) read with the Third Schedule to the Income-tax Act, 1961 was valid, including the question of authorisation and procedure.

Issue (i): Whether the transfer of shares fell within section 281 of the Income-tax Act, 1961 and could be treated as void for recovery purposes.

Analysis: Section 281 was treated as a declaratory provision operating in aid of recovery. On the facts, the transfer of shares was found to be part of a pre-planned arrangement to avoid tax, and the transfer was held to have taken place during the pendency of proceedings. The Court rejected the contention that the provision was inapplicable merely because the transfer also gave rise to the tax liability. It further held that the transfer was not shown to be for adequate consideration or to be protected by the prior no-objection under section 178.

Conclusion: Section 281 applied against the assessee, and the transfer could be treated as ineffective for recovery purposes.

Issue (ii): Whether the prohibitory attachment of shares under section 226(5) read with the Third Schedule to the Income-tax Act, 1961 was valid, including the question of authorisation and procedure.

Analysis: The Court held that section 226(5), read with the Third Schedule, permitted recovery by distraint and sale of movable property and that the prohibitory orders in respect of dematerialised shares could be treated as falling within the concept of actual seizure. The objection that the Commissioner's authorisation was lacking was rejected on the explanation that the date in one order was a clerical error. The Court also held that the procedural objections based on notice and alternate remedy did not defeat the attachment in the recovery context.

Conclusion: The attachment proceedings were held to be valid and within jurisdiction.

Final Conclusion: The writ petition was rejected because the Revenue's recovery action was upheld as lawful, and the impugned attachment of shares was sustained.

Ratio Decidendi: A transfer effected during the pendency of income-tax proceedings, with the object of defeating recovery, may be disregarded for recovery purposes under section 281, and prohibitory attachment of dematerialised shares can be sustained under section 226(5) read with the Third Schedule as a form of actual seizure.

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