Court Protects Bonafide Property Buyer from Tax Recovery, Voids Attachment Order

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Case Name:

Rekhadevi Omprakash Dhariwal Vs Tax Recovery Officer ( High Court of Gujarat)

Special Civil Application No. 1492 of 2018

Key Takeaways:

1. A bonafide purchaser who buys property after due diligence cannot be made to suffer for tax dues of the original owner.

2. The Tax Recovery Officer doesn't have the authority to declare a sale transaction null and void.

3. For a property transfer to be void under Section 281 of the Income Tax Act, notice under Rule 2 of the 2nd Schedule must be served before the transfer.

4. Unreasonable delay in declaring a sale void can be grounds for quashing such an order.

Issue:

Can the Tax Recovery Officer declare a property sale null and void and auction the property for tax recovery when the buyer purchased it without knowledge of any tax attachment

Facts:

1. The petitioner, Rekhadevi Omprakash Dhariwal, purchased a property through a registered sale deed on 11.12.2008.

2. The property originally belonged to Shri Virenkumar C. Thakkar, who had outstanding tax dues.

3. The Income Tax Department had allegedly attached the property on 28.09.2006 for tax recovery.

4. The petitioner claimed to have no knowledge of this attachment when purchasing the property.

5. On 26.05.2015, the TRO declared the sale deed null and void and ordered the property to be auctioned.

6. The petitioner challenged this order in the Gujarat High Court

Arguments:

Petitioner's Arguments:

1. The sale deed was executed after due diligence, including public advertisement and obtaining a title clear certificate.

2. The petitioner had no knowledge of any tax attachment on the property at the time of purchase.

3. The Sub-Registrar's office only received the attachment order on 26.06.2015, well after the sale.

4. The TRO has no jurisdiction to declare a sale transaction null and void.

5. There was an unreasonable delay of six and a half years in declaring the sale void

Revenue's Arguments:

1. The property was attached on 28.09.2006 for tax recovery from the original owner.

2. The attachment order was sent to the Sub-Registrar concerned.

3. The sale should be considered void as per Section 281 of the Income Tax Act.

Key Legal Precedents:

1. (TRO) Tax Recovery Officer-II, Sardar Nagpur V/s Gangadhar Vishwanath Ranade, 1998 (234) ITR 188 SC

2. Karsanbhai Gandabhai Patel V/s Tax Recovery Officer, (2014) 3 taxmann.com 415 (Gujarat)

3. Nitaben Harishbhai Shah V/s Tax Recovery Officer (SCA No. 16626 of 2017 dated 20.12.2017)

These cases establish that the TRO doesn't have the authority to declare a sale void and that bonafide purchasers should be protected.

Judgement:

The Gujarat High Court ruled in favor of the petitioner:

1. The court set aside the TRO's order dated 26.05.2015 that declared the sale deed null and void.

2. The subsequent communication dated 19.12.2017 ordering the auction of the property was also set aside.

3. The court emphasized that the petitioner, being a bonafide purchaser for consideration after due diligence, cannot be made to suffer for the tax dues of the original owner.

4. The court noted that the Sub-Registrar only received the attachment order on 26.06.2015, almost six and a half years after the sale deed was executed.

FAQs:

Q1: Can a Tax Recovery Officer declare a property sale null and void?

A1: No, according to this judgment, a Tax Recovery Officer doesn't have the jurisdiction or authority to declare a sale transaction null and void.

Q2: What protection does a bonafide property buyer have against tax recovery claims?

A2: A bonafide purchaser who buys property after due diligence (like public advertisement and title clear certificate) is protected and cannot be made to suffer for the tax dues of the original owner.

Q3: What is the significance of Rule 2 of the 2nd Schedule to the Income Tax Act?

A3: Rule 2 provides for issuance of notice for recovery of arrears. The court emphasized that notice under this rule must be served before a property transfer for it to be potentially void under Section 281 of the Income Tax Act.

Q4: How important is the timing of property attachment in such cases?

A4: It's crucial. In this case, the fact that the Sub-Registrar only received the attachment order years after the sale was a key factor in the court's decision to protect the buyer's rights.

Q5: Can unreasonable delay in declaring a sale void be grounds for quashing such an order?

A5: Yes, in this case, the court considered the delay of six and a half years in declaring the sale void as unreasonable, which contributed to the decision to set aside the TRO's order.

1. Rule. Learned advocate Mrs. Mauna M. Bhatt waives service of rule on behalf of respondent no.1 and learned AGP Mr. Chintan Dave waives service of rule on behalf of respondent no.2.

2. With the consent of all, the petition is taken of for final disposal.

3. The present petition under article 226 of the Constitution of India challenges the order dated 26.05.2015 passed by TRO, Ahmedabad (respondent no.1) under rule ­16 of the second schedule of the Income Tax Rules. Under the impugned order, sale deed dated 11.12.2008 of property situated at 142, Sardar Patel Colony, Sardar Patel Co­operative Housing Society, Navrangpura, Ahmedabad was declared null and void, and the property was also ordered to be auctioned under communication dated 19.12.2017.

4. The fact in brief are that the petitioner acquired the afore mentioned property by executing a sale deed dated 11.12.2008 for a consideration through the power of attorney of the original owner Shri Virenkumar C. Thakkar. The transaction was carried out after due diligence like public advertisement and title clear certificate.

5. It appears that aforementioned property was attached on 28.09.2006, towards the outstanding Income Tax dues of Shri Virenkumar C. Thakkar- original owner. It appears that sale deed was thereafter, executed in favour of the petitioner. However, the petitioner had no knowledge of such attachment and the petitioner gained knowledge of such attachment subsequently on 29.09.2011. Thereafter, the petitioner made efforts to find out the details with regard to such attachment, however, ultimately, the petitioner received order dated 26.05.2015 declaring the sale of the property as null and void.

6. The petitioner entered into the communication with the department on various occasions with a request to withdraw the order of declaring the sale as null and void and at that time, the petitioner came to know on the basis of order dated 26.05.2015, which was affixed on the property along with Index no. II that the charge of the Income Tax Department has been registered on 08.12.2017 and thereafter, on 19.12.2017, the respondent issued a notice of auction to satisfy the outstanding demand of Income Tax Department against Shri Virenkumar C. Thakkar- original owner. It is at this stage that the petitioner was constrained to file the petition.

7. Learned advocate for the petitioner submitted that the impugned order of declaring the sale deed dated 11.12.2008 as null and void is not only arbitrary and illegal but also without any jurisdiction. It is submitted that therefore, the subsequent action of auctioning the property under communication dated 19.12.2017 is also illegal.

8. It is submitted that the impugned order declaring the sale dated 11.12.2008 as null and void is also required to be quashed as the same is made after unreasonable delay of six and a half years and therefore, the action of the respondent does not fall within a reasonable period.

9. It is submitted that the respondent no.1 has no jurisdiction, power or authority to declare the sale transaction as null and void and the same is contrary to the ratio of the Apex Court in the case of (TRO) Tax Recovery Officer­II, Sardar Nagpur V/s Gangadhar Vishwanath Ranade,1998 (234) ITR 188 SC as well as decision of this Court in the case of Karsanbhai Gandabhai Patel V/s Tax Recovery Officer, (2014)3 taxmann.com 415 (Gujarat). Learned advocate for the petitioner also relied upon judgment of this Court in SCA No. 16626 of 2017 in case of Nitaben Harishbhai Shah V/s Tax Recovery Officer dated 20.12.2017. It is submitted that, when the petitioner entered into the transaction in connection with the property the petitioner had taken due diligence by issuing public advertisement as well as getting title clear certificate wherein, nothing was reflected to show encumbrance of the respondent department over the said property in connection with the tax dues of the original owner. It is submitted that for this purpose the Registrar of concern area was also joined as party respondent, who has filed an affidavit wherein the stand of the petitioner is supported as even from the affidavit of the Sub­Registrar, Memnagar, the order of attachment was received by for the first time only on 26.05.2015 subsequent to which the charge was registered in Index II. Therefore, as the petitioner is bonafide purchaser for consideration and that too when the property stood clear of any encumbrances, the right of the petitioner over the property can not be impinged. The petitioner thereafter, took this Court to the due diligence by the petitioner before the purchase of such property like public advertisement in news paper as well as title clear certificate.

10. As against this, learned advocate for the respondent revenue submitted that the property in question originally belonged to Shri Virenkumar C. Thakkar and when the assessment order under Section 144 read with Section 147 of the Income Tax Act for the Assessment Year 1998­99 was passed on 23.03.2006 and was served upon said Shri Virenkumar C. Thakkar wherein, demand of Rs.1,25,66,670/­ was communicated. The said demand was certified by the Assessment Officer on 22.08.2006 and Tax Recovery Certificate was issued on said Shri Virenkumar C. Thakkar on 06.09.2006. On the account of default by said Shri Virenkumar C. Thakkar, the immovable property of such defaulter being 142, Sardar Patel Colony, Sardar Patel Co­operative Housing Society, Navrangpura, (SIC.) Ahmedabad was attached by TRO by issuing ITCP- 16 on 28.09.2006 and the copies were also sent to the Sub­Registrar concerned.

11. Learned advocate for the respondent took this Court through the documents produced on record which contain notice of demand, the certificate, the order of attachment of immovable property as well as the panchnama by which such property is attached.

12. Learned AGP on behalf of respondent no.2 draws attention of this Court to the affidavit of the Sub- Registrar, Memnagar­3, Ahmedabad City wherein, responding to the contentions raised by the respondent no.1, regarding attachment of the property and submitted that the order of attachment was received by Sub­Registrar of Memnagar only on 26.06.2015 and subsequent there to the charge was registered in Index II.

13. The Court has heard the rival submissions and perused the documents on record.

14. The property in question was transacted by a registered sale deed executed on 11.12.2008, which came to be registered on the same day with the Sub- Registrar Office, Ahmedabad­3, in favour of the petitioner and executed by one Shri Mahesh Sanmukhbhai Mistry acting as the power of attorney of original owner Shri Virenkumar Chhotalal Thakkar. This sale deed is for a consideration and index copy is also issued in connection with this transaction. From the documents it appears that the public notice for executing the sale deed was issued in vernacular news paper on 26.10.2007 and thereafter, search was carried out. The search report dated 01.10.2008 is also on record along with the title clearance certificate of the advocate. All these documents go on to suggest that the property in question was free from all encumbrance having title clear and was available for transaction.

15. The petitioner therefore, being bonafide purchaser for consideration after due diligence can not be made to suffer on account of the tax dues running in the name of the original owner. The documents produced along with additional affidavit being the order under Section 179(1) of the Income Tax Act, the certificate under Section 222 of the Income Tax Act, the order of attachment and panchnama drawn are all against the defaulter Shri Virenkumar C. Thakkar, wherein the present petitioner was not in picture. Section 281 of the Income Tax Act provides for declaring certain transfers to be void. Section 281 provides that the pendency or completion of any proceedings in the Income Tax Act but before the service of notice under rule­2 of the 2nd Schedule to the Income Tax Act if any assessee creates a charge or perused with the possession of any of his assets in favour of any other person such charge or transaction has to be void against any tax elaborator. However, proviso to Section 281 provides that such transfer or charge may not be declared void if such transfer or charge is made for adequate consideration and without notice of pendecny or completion of such proceeding or without the notice of any tax liability or other sum payable by the assessee.

16. In somewhat identical fact situation this Court in case of Karsanbhai Gandabhai Patel (Supra) has struck down the order dated 08.11.1995 passed by TRO Valsad under Section 281 of the Income Tax Act in connection with the constructed building purchased by the petitioner therein. While doing so this Court has held as under:

“8. It can thus be sen that even if the transactions creating a charge or parting of possession has been entered into by the assessee during the pendency of any proceedings under the Act or after completion thereof, the eventuality of such charge or transfer being declared void can be avoided provided one of the two conditions contained in the proviso is satisfied. Under such circumstances, the transferee can demonstrate that the transaction had taken place with the previous permission of the Assessing Officer or that the same was entered into for adequate consideration and without notice of pendency of such proceedings or without notice of such tax or other sum payable by the assessee.

9. This element of the transaction being with adequate consideration and without notice would equally apply to the assessee as well as the transferee. In a given case, it may even be open for the assessee to establish that the transaction was for adequate consideration without notice. In a given case, even if the assessee had notice of the pendency or the outstanding tax or sum payable, the transferee can still take shelter of the transactions having been entered into by him for adequate consideration and without notice. It is, therefore, that the courts have read into this provision the requirement of hearing the transferee also. Quite apart from this, as would be clear from the discussion hereinafter, courts have taken a view that Sub- section(1) of Section 281 of the Act only provides for the eventuality of the transaction hit by the said provisions as being void. It does not create any machinery for the Revenue authorities to entertain dispute and declare the transaction to be void for which purpose, only a civil suit would lie.”

17. 2nd Schedule of the Income Tax Act is the procedure for recovery of tax wherein Rule 2 provides for issuance of notice for recovery of arrears by the Tax Recovery Officer upon the defaulter requiring the defaulter to pay the amount specified in the certificate within fifteen days from the date of the service of the notice and intimating that in default, steps would be taken to realize the amount under this schedule Rule 16 provides for considering private alienation to be void in certain cases. This rule requires service of notice on defaulter under Rule 2 and after such service the defaulter or his representative in interest shall not be competent to alienate the property in the manner prescribed belonging to the defaulter without the permission of the TRO it also prohibits for issuance of any process by the Civil Court against such property in execution of a decree for the payment of money. It also provides that where the attachment has been made under this schedule private transfer or delivery of the property attached shall be void as against all claims enforceable under the Attachment Act. From the affidavit as well as from the additional affidavit the department has not been able to bring on record service of notice under Rule 2 of Schedule 2, only documents on record along with the additional affidavit are the order of attachment of immovable property whereas no notice as contemplated under Rule 2 is found on record.

18. Moreover considering the affidavit filed on behalf of the Sub­Registrar, Memnagar­3, Ahmedabad City, it is clear that for the first time the order of attachment was given effect to by the Sub- Registrar, Memnagar only on 26.06.2015, when the charge was registered in Index II. This obviously is almost six and a half years after sale deed in favour of petitioner.

19. In view of the foregoing discussion the impugned order dated 26.05.2015 at Annexure A is set aside, subsequently communication dated 19.12.2017 at Annexure A collectively is also ordered to be set aside.

Rule is made absolute. No order as to costs.

(M.R. SHAH, J)

(A.Y. KOGJE, J)