2024 (2) TMI 1115 - HC - Income Tax

Tax Recovery Officer can attach property but cannot declare sales void without civil suit proceedings

The HC dismissed a writ petition challenging attachment of assets by Tax Recovery Officer during recovery proceedings. The court held that while Tax ... Recovery proceedings - Attachment of assets of the 4th respondent - alienation/transfer as contrary to section 281 of IT Act - claim of ownership of the property - void sale agreement - as alleged sale by an assessee in default with an intention to defraud revenue Whether the impugned order is liable to be quashed or whether the petitioner or the fourth respondent should be relegated to approach the Civil court in terms of the Section 11(6) of the Second Schedule to the Income Tax Act, 1961 or whether the fourth respondent who has failed to file the Civil suit in terms of decision of the Hon'ble Supreme Court in [2017 (10) TMI 1648 - SC ORDER] is entitled to have audience before this Court. HELD THAT:- Tax Recovery Officer has to examine who is in possession of the property and in what capacity. Tax Recovery Officer can attach property in possession of the assessee in his own right, or in possession of the tenant or 3rd party on behalf of/for the benefit of the assessee. The Court however concluded that Tax Recovery Officer cannot declare sale made by the assessee in favour of a 3rd party as void, if he finds that the property of the assessee was transferred by the assessee to a 3rd party with “ an intention to defraud the revenue'. As mentioned above, the expression “intention” has been deleted in the amended Section. The Court further held that, the Income Tax Department will have to file a suit in terms of Rule 11 (6) of the 2nd Schedule of the Income Tax Act, 1961, though under Rule 11 (6) of the 2nd Schedule of the Income Tax Act, 1961, the party against whom an order of attachment is made, has to institute a suit in a civil court to establish the right which he claims over the property in dispute and subject to the result of such suit (if any), the order of the Tax Recovery Officer shall be conclusive. Therefore, the ratio laid down by the Hon'ble Supreme Court in Tax Recovery officer II, Sadar, Nagpur Vs. Gangadhar Vishwanath Ranade [1998 (9) TMI 1 - SUPREME COURT] cannot be applied to the facts of the present case. Further, Tax Recovery officer is not required to declare the sale between the petitioner and the fourth respondent as invalid as the sale is void abinito. The petitioner has to institute a suit in a civil court to establish the right which he claims over the property in dispute. Therefore, this writ petition is liable to be dismissed and it is accordingly dismissed. Issues Involved:1. Validity of the impugned order dated 16.02.2023 passed by the Tax Recovery Officer-III.2. Ownership and genuineness of the sale deed dated 24.02.2012.3. Jurisdiction of the Tax Recovery Officer to declare a sale deed void.4. Applicability of Section 281 of the Income Tax Act, 1961.5. Requirement for civil proceedings to establish property rights.Summary:1. Validity of the Impugned Order:The writ petitioner challenged the impugned order dated 16.02.2023 issued by the Tax Recovery Officer-III under Rule 11(1) of the Second Schedule of the Income Tax Act, 1961. This order followed the Court's directions in WP.No.20953 of 2019 and WMP.No.20137 of 2019 dated 14.10.2022. The Court had directed the Tax Recovery Officer to approach the matter with an open mind, hear the petitioner and the third respondent, and pass an order in accordance with the law.2. Ownership and Genuineness of the Sale Deed:The impugned order declared the sale deed dated 24.02.2012 as a 'FORGED DOCUMENT' based on circumstantial and corroborative evidence, including disarranged entries in the thumb impression register and financial incapacity of the objector. The fourth respondent denied executing the sale deed and provided forensic evidence to substantiate the claim of forgery. The Tax Recovery Officer concluded that the sale deed was not genuine and directed the registration authorities to cancel it and restore the title to the Assessee in default.3. Jurisdiction of the Tax Recovery Officer:The petitioner argued that the Tax Recovery Officer lacked jurisdiction to declare the sale deed void under the Income Tax Act, 1961. The Court referred to the decision in Sri Sivalaya Advances and Ors. Vs. Tax Recovery Officer-2, which held that declaring a transaction null and void is the function of the civil court, not the Tax Recovery Officer. The petitioner was advised to seek relief through civil proceedings as provided in Rule 11(6) of the Second Schedule of the Income Tax Act.4. Applicability of Section 281 of the Income Tax Act:The Court examined the changes in Section 281 of the Income Tax Act, 1961, which now states that any transfer of assets during the pendency of proceedings or after the completion thereof but before the service of notice under Rule 2 of the Second Schedule shall be void against any tax claim. The Court noted that the law had evolved since the decision in Tax Recovery Officer II vs. Gangadhar Vishwanath Ranade, and the expression 'with the intention to defraud the Revenue' had been deleted.5. Requirement for Civil Proceedings:The Court concluded that the petitioner must institute a suit in a civil court to establish the right claimed over the disputed property. The Tax Recovery Officer's order was deemed conclusive unless challenged through civil proceedings. Consequently, the writ petition was dismissed, and the petitioner was given liberty to file a suit in accordance with the law. No costs were awarded, and connected miscellaneous petitions were closed.