Recovery of Tax — Strangers to the decree are afforded protection by the Court because they are not connected with the decree.

[Janatha Textiles & Ors. v. Tax Recovery Officer & Anr.,
(2008) 301 ITR 337 (SC)]

The appellant M/s. Janatha Textiles was a registered firm
with four partners, viz., Radhey Shyam Modi, Pawan Kumar Modi, Padmadevi
Modi and Indira Chirmar. The firm and its partners were in arrears of tax for
the A.Ys. 1985-86, 1986-87, 1987-88, 1989-90. All the demands pertaining to the
A.Ys. 1986-87 to 1989-90 had been stayed by various income-tax authorities and
these demands were never enforced for collection. The demand pertaining to the
A.Y. 1985-86 was alone enforced.

The agricultural lands owned by the partners of the
appellant-firm at Bodametlapalem had been attached and sold in public auction on
August 5, 1996, after following the entire procedure laid down under the Second
Schedule to the Income-tax Act, 1961. Nine people participated in the public
auction held on August 5, 1996. The sale was confirmed in favour of L. Krishna
Prasad who offered the highest price. No procedural irregularity or illegality
in public auction process was alleged by the appellant.

Even after issuance of sale proclamation, the
respondent-Department issued communication in SR No. 2/94 dated July 15, 1996,
informing the appellants that a sum of Rs.5,68,913 was due as on that date
towards tax, interest and penalty under the 1961 Act. The said amount, however,
does not include interest payable u/s.220(2) of the 1961 Act. The appellant-firm
acknowledged receipt of the letter on July 17, 1996, and had not contradicted
the quantum of tax and interest as mentioned in the said letter. It was made
clear that the demand for the A.Y. 1985-86 alone was being enforced.

In an SLP, learned counsel for the appellants contended that
even though they had filed objections at various stages of the notice issued for
the auction sale, the respondent-Department without disposing of the said
objections proceeded with the sale and, therefore, on that ground the sale
conducted by the respondent-Department was illegal and unsustainable. The
appellants further submitted that with reference to the A.Y. 1985-86, the
application for waiver of interest was pending before the authorities and
further the stay application filed before the Commissioner was not disposed of.
Even on that count also the sale conducted by the respondent-Department on
August 5, 1996, was illegal and unsustainable. The appellant contended that the
High Court had failed to notice that the nature of the lands in the auction
notice was wrongly mentioned as dry lands. In fact the said lands were a mango
orchard and building structure and of much higher value. The auction ought to be
vitiated on this ground alone.

The appellant also submitted that the appellants had received
the notice of demand as defaulters in their individual capacity and also as the
partners of the firm. However, the respondent-Department had failed to give
notice of demand to the appellants qua their shares. They did not receive
notices indicating their respective shares. It was asserted on behalf of the
respondent-Department that the amount fetched in the public auction was more
than reasonable.

The Supreme Court observed that the appellant had never
complained about fixing of the reserve price before holding of auction, though
they were intimated of the same through sale proclamation. In pursuance of the
notice issued by the Supreme Court, the respondent-Department had filed the
counter-affidavit. Respondent No. 2 (auction purchaser) also had filed a
separate counter-affidavit. Respondent No. 2 in the counter-affidavit stated
that it was totally incorrect to suggest that the auction sale did not fetch the
actual market value of the property. Respondent No. 2 also mentioned in the
counter-affidavit that the said lands were agricultural dry lands and there were
no mango gardens as alleged by the appellant. There were, however, a few mango
trees scattered all over the land.

The respondent-Department in the counter-affidavit stated
that the appellant-firm had alternative efficacious remedy by way of filing a
petition under Rules 60 and 61 of the Second Schedule to the 1961 Act. The
appellant ought to have availed of the statutory remedy for ventilating its
grievances instead of filing a petition before the High Court.

The Supreme Court further observed that there was another
very significant aspect of this case, which pertained to the rights of the
bona fide purchaser for value. The Supreme Court held that the law makes a
clear distinction between a stranger who is a bona fide purchaser of the
property at an auction sale and a decree-holder purchaser at a court auction.
Strangers to the decree are afforded protection by the Court, because they are
not connected with the decree. Unless the protection is extended to them court
sales would not fetch the market value or fair price of the property. The
Supreme Court held that the appeal was devoid of any merit and was accordingly
dismissed.