Completed recovery sale to a stranger auction purchaser remains valid despite later reduction of the underlying tax demand.

A completed recovery sale in favour of a stranger auction purchaser was treated as remaining valid despite later reduction or cancellation of the underlying tax demand, particularly where the assessee did not invoke the prescribed statutory remedies to set aside the sale in time. The challenge based on alleged non-service of demand notices failed because the objection was not clearly raised before the recovery authorities and was brought only after a long delay. The combined sale proclamation covering recovery certificates against the assessee and the firm was held not to create any material illegality. The limitation rule was also held inapplicable retrospectively to a sale completed before its insertion.

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Issues: (i) Whether a sale confirmed in recovery proceedings could be invalidated because the underlying tax demand was later reduced or wiped out in appeal and whether the recovery certificate had to be amended or cancelled; (ii) whether the alleged non-service of demand notices vitiated the recovery proceedings and the auction sale; (iii) whether the inclusion of recovery certificates against the assessee and the firm in one sale proclamation was illegal; and (iv) whether the sale was barred by limitation under rule 68B of the Second Schedule to the Income-tax Act, 1961.

Issue (i): Whether a sale confirmed in recovery proceedings could be invalidated because the underlying tax demand was later reduced or wiped out in appeal and whether the recovery certificate had to be amended or cancelled.

Analysis: The sale had already been held and the auction purchaser had complied with the sale conditions. The Court applied the statutory scheme under the Second Schedule, including the provisions governing setting aside and confirmation of sale, and relied on the principle that where a stranger auction purchaser has acquired title in a duly conducted sale, subsequent reversal or reduction of the underlying demand does not, by itself, undo the completed sale. The assessee had not availed the prescribed remedies for setting aside the sale at the appropriate stage.

Conclusion: The contention failed and the sale was not liable to be set aside on that ground.

Issue (ii): Whether the alleged non-service of demand notices vitiated the recovery proceedings and the auction sale.

Analysis: The pleadings did not contain a clear and timely factual challenge to service of demand notices before the Tax Recovery Officer or the Commissioner. The petitioner had knowledge of the recovery proceedings and the proposed auction, but did not raise the objection in the statutory forum or seek relief under the relevant rules for setting aside the sale. The challenge was raised belatedly after a long lapse of time.

Conclusion: The challenge based on non-service of demand notices was rejected.

Issue (iii): Whether the inclusion of recovery certificates against the assessee and the firm in one sale proclamation was illegal.

Analysis: The Court held that the petitioner was liable both in his individual capacity and as a partner, and the combined proclamation for the total recoverable amount did not create any material illegality or irregularity affecting the sale. The objection therefore did not furnish a basis to invalidate the auction proceedings.

Conclusion: The combined sale proclamation was held not to be illegal.

Issue (iv): Whether the sale was barred by limitation under rule 68B of the Second Schedule to the Income-tax Act, 1961.

Analysis: Rule 68B was introduced with effect from 1 June 1992, whereas the auction sale in question had taken place in 1980. The limitation provision had no retrospective application to invalidate a sale completed before its insertion.

Conclusion: The limitation argument was rejected.

Final Conclusion: The recovery sale and the consequential confirmation were upheld, and the writ petition was dismissed with costs.

Ratio Decidendi: A completed recovery sale in favour of a stranger auction purchaser is not invalidated merely because the underlying demand is later reduced or cancelled, especially where the assessee failed to pursue the specific statutory remedies against the sale in time.

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