TaxTMI 
TaxTMI 
2026 (2) TMI 212
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....ting a taxable income of Rs. 8,55,710/-. After being selected for scrutiny, notice under Section 143(2) of the Income-tax Act, 1961 (the I-T Act) was issued on 31.07.2012. Pursuant thereto, an assessment order under Section 143(3) was issued on 31.03.2014 raising a demand of Rs. 2,64,00,385/- along with penalty of Rs. 10,000/- under Section 272A(1)(c) and interest of Rs. 57,74,710/-. The total demand of Rs. 3,21,87,295/- was certified by the Tax Recovery Officer (TRO) on 19.02.2016. Notice in ITCP-1 under Rule 2 of the Second Schedule to the I-T Act (Rule 2 notice) was issued by the TRO to the assessee in default/third respondent on 24.02.2016. Such notice was received by the third respondent on 26.02.2016. 2. As security in relation to amounts due in present or in future to the petitioner of the value of Rs. 50,00,000/-, the third respondent created a mortgage by deposit of title deeds in favour of the petitioner. Such mortgage was evidenced by memorandum of deposit of title deeds dated 16.11.2016 (the MoDT). The property described in paragraph 1 above was the property mortgaged in favour of the petitioner. Thereafter, in 2018, the third respondent and his wife stood as suretie....
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.... petitioner prior to the date of attachment of the property, and contended that, until the order of attachment was communicated to the jurisdictional Sub Registrar and such attachment was reflected in the encumbrance certificate, it was not possible for the petitioner, as a third party lender, to be aware of the attachment. Therefore, he contended that the petitioner qualifies as a bona fide mortgagee for adequate consideration, who is entitled to protection under the proviso to Section 281 (1) of the I-T Act. By virtue thereof, learned counsel contended that the mortgage is not void. In support of this contention, learned counsel relied on the judgment of the Division Bench of the High Court of Andhra Pradesh and Telengana in ICICI Bank Limited v. Tax Recovery Officer (2019) 105 Taxmann.com 257). Learned Counsel also relied on Tarapore & Co. v. Tax Recovery Officer [2008] 174 Taxman 461. 7. In response to the contention of the revenue that the petitioner was aware of income tax proceedings on account of receiving notice under Section 133(6) of the I-T Act, learned counsel submitted that the said provision pertains to a request for information in relation to proceedings under th....
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....sequently, being aware about the assessment proceedings against the third respondent. He also contended, in this regard, that the benefit of the proviso to Section 281(1) of the I-T Act is not available after the Rule 2 notice is received. In support of this contention, he relied upon the language of Section 281(1) to contend that it only operates during the pendency of any proceedings under the I-T Act or after the completion thereof, but before the service of the Rule 2 notice. 12. With regard to the applicability of a defence in common law that the petitioner is a bona fide mortgagee / transferee for valuable consideration, learned standing counsel contended that Parliament consciously provided for such a defence at the pre-Rule 2 notice stage, but omitted such defence at subsequent stages. In view thereof, he contended that such defence is not available to the petitioner. Discussion, analysis and conclusions Scope and applicability of Section 281 of the I-T Act 13. At the outset, it is pertinent to discuss the scope and applicability of Section 281 of the I-T Act. Section 281(1) of the I-T Act reads as under: "Certain transfers to be void. 281. (1)....
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....nt filed the return of income for AY 2011-12 on 08.02.2012. The case was selected for scrutiny and a notice under Section 143(2) of the I-T Act was issued to the third respondent on 31.07.2012. Since the self-assessment of the assessee was not accepted, a proceeding under the I-T Act had commenced. Pursuant thereto, the assessment order under Section 143(3) was issued on 31.03.2014 and the Rule 2 notice was issued on 24.02.2016 and served on the third respondent on 26.02.2016. Thus, Section 281(1) operated only up to 26.02.2016. Creation of mortgage in favour of the petitioner 17. Whether a mortgage was created in favour of the petitioner and, if so, the nature and date of creation thereof fall for consideration next. As mentioned earlier, the MoDT is dated 16.11.2016. The operative paragraph thereof is as under: "I hereby confirm the title deeds mentioned in the first schedule relating to the property as more fully described in the Second Schedule hereto, have been delivered and deposited by with full and complete knowledge and at my own will to and with the Company by way of deposit of title deeds with an intent to create an Equitable Mortgage for securing the repa....
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....ion to proceed on the basis that the date of creation of mortgage was subsequent to 26.02.2016, i.e. the date of receipt of the Rule 2 notice. Hence, Section 281(1) is not applicable for purposes of testing the validity of the mortgage. As a corollary, the proviso thereto, including the exemption for bona fide transfers for adequate consideration, cannot be relied on by the petitioner. In view thereof, the Second Schedule warrants close consideration. Before doing so, I intend to briefly examine whether the debt currently sought to be enforced by the petitioner is secured by the mortgage. 21. The extract from the MoDT reveals that the deposit of title deeds is intended as security for the repayment of a sum of Rs. 50 lakhs borrowed by the petitioner. It, however, cannot be discerned therefrom as to when this amount was borrowed by the third respondent. Logically, it should have been borrowed not later than 16.11.2016, i.e. the date of execution of the MoDT. The security provided under the MoDT, however, appears to cover both present and future debts. 22. In order to correlate the mortgage with the alleged unpaid debt of the petitioner, it is necessary to examine the applicati....
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.... third respondent cannot be gleaned from the documents on record. Against this factual matrix, I turn to the Second Schedule to the I-T Act and consider the implications of actions taken thereunder. Scope and applicability of the Second Schedule to the I-T Act 25. The Second Schedule to the I-T Act deals with the procedure for recovery of tax. Significantly, the substantive provisions referred to therein are Sections 222 and 276 of the I-T Act and not Section 281 thereof. Section 222 deals with the issuance of a statement by the TRO specifying the amount of arrears due from the assessee. This statement is referred to as certificate. Section 222(1), in relevant part, reads as under: "222.(1) When an assessee is in default or is deemed to be in default in making a payment of tax, the Tax Recovery Officer may draw up under his signature a statement in the prescribed form specifying the amount of arrears due from the assessee (such statement being hereafter in this Chapter and in the Second Schedule referred to as "certificate") and shall proceed to recover from such assessee the amount specified in the certificate by one or more of the modes mentioned below, in accordan....
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....considers that the claim or objection was designedly or unnecessarily delayed. (2) Where the property to which the claim or objection applies has been advertised for sale, the Tax Recovery Officer ordering the sale may postpone it pending the investigation of the claim or objection, upon such terms as to security or otherwise as the Tax Recovery Officer shall deem fit. (3) The claimant or objector must adduce evidence to show that- (a) (in the case of immovable property) at the date of the service of the notice issued under this Schedule to pay the arrears, or (b) (in the case of movable property) at the date of the attachment, he had some interest in, or was possessed of, the property in question. (4) Where, upon the said investigation, the Tax Recovery Officer is satisfied that, for the reason stated in the claim or objection, such property was not, at the said date, in the possession of the defaulter or of some person in trust for him or in the occupancy of a tenant or other person paying rent to him, or that, being in the possession of the defaulter at the said date, it was so in his possession, not on his own account or as his own p....
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....prescribes the procedure for recovery of tax. The provisions set out therein become applicable only after a certificate has been drawn up by the TRO under Section 222 of the I-T Act. (ii) The TRO is entitled to resort to any one of the modes of recovery specified in Rule 4 after the lapse of the 15-day notice period for payment of arrears under Rule 2. (iii) All questions relating to the execution, discharge or satisfaction of the certificate, as between the TRO and the defaulter or representatives of such defaulter, are required to be determined by the TRO in terms of Rule 9 unless a suit is brought on the ground of fraud. Any person aggrieved against an order of the TRO may institute a civil suit to establish his right. Unless held otherwise by a civil court, the determination by the TRO is conclusive. (iv) In order to release a property from attachment or sale, the claimant or objector should adduce evidence that he had some interest in or was in possession of the property on the date of service of the Rule 2 notice in the case of immovable property and on the date of attachment in the case of movable property. (v) Once Rule 2 notice has been ....
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....d the same on the date of issuance of the Rule 2 notice (i.e. 24.02.2016). Curiously, as was recorded earlier, the relevant immovable property was purchased by the third respondent on 26.02.2016. The sale deed reveals that the registration was concluded at about 5.00 p.m. on the said date. Given that the property was purchased on the date of receipt of the Rule 2 notice, there is no reason to conclude that the third respondent was not the owner of the relevant immovable property on the date of service of the Rule 2 notice. For reasons indicated above and as a combined reading of Rules 2 and 4 of the Second Schedule shows, the relevant date is the date of service of such notice and not the date of issuance thereof. Therefore, the contention of learned counsel for the petitioner cannot be countenanced. 33. Because the mortgage was created after service of the Rule 2 notice, the mortgagor/third respondent was required to obtain the permission of the TRO before doing so as per Rule 16(1). In the absence of such permission, he was not competent to mortgage the property. The implications of such mortgage call for consideration next. 34. Rule 16(2) provides that any private transfer....
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....it will have to file a suit under Rule 11(6) to have the transfer declared void under Section 281." While concluding as above, the Hon'ble Supreme Court also took note of Rules 11(4), (5) and (6) of the Second Schedule. 36. The follow-on question is whether the amendment to Section 281 has altered the position by rendering it unnecessary for the TRO to approach a civil court. The text of both Section 281 - which, as noticed earlier, operates during the pendency of proceedings under the I-T Act and after the conclusion thereof, but until service of notice under Rule 2 of the Second Schedule - and Rule 16(2) of the Second Schedule indicate clearly that transfers are not either void ab initio or even liable to be declared void. Instead, under Section 281(1), such transfer is void as against any claim in respect of any tax or any other sum payable by the assessee; and under Rule 16(2), it is void against claims enforceable under the attachment. In neither case, the statute provides that such transfer would be completely unenforceable. 37. In my view, the Second Schedule is intended to enable the TRO to recover arrears from a defaulting assessee or his representatives in in....