Natural justice in transfer voidness proceedings requires hearing affected purchasers before an adverse order is passed.

A transfer cannot be declared void under section 281(1) of the Income-tax Act, 1961 against purchasers who are directly and adversely affected unless they are given a meaningful opportunity to be heard and their explanation is considered. The court held that, where the purchasers had replied to the show-cause process and were impacted by the adverse declaration, compliance with natural justice required both consideration of their response and a hearing before any voidness order was made. The order was therefore quashed insofar as it affected the purchasers.

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Issues: Whether an order declaring a transfer void under section 281(1) of the Income-tax Act, 1961 could be sustained when the purchasers, who were directly affected and had replied to the show-cause notice, were not given an opportunity of hearing and their explanation was not considered.

Analysis: The first proviso to section 281(1) protects transfers for adequate consideration made without notice of the pendency of proceedings or of outstanding tax liability. The purchasers were directly affected by the proposed declaration of invalidity, had itself filed a reply though the notice was not addressed to them, and the impugned order was passed without hearing them and without considering their explanation. In such circumstances, compliance with the principles of natural justice required not only consideration of their reply but also a hearing before any adverse order was made.

Conclusion: The impugned order, insofar as it affected the purchasers, could not be sustained and was quashed in their favour.

Ratio Decidendi: A person directly and adversely affected by proceedings under section 281(1) of the Income-tax Act, 1961 must be given a meaningful opportunity of hearing and consideration of its explanation before an order declaring the transfer void is passed.

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