Recovery of tax: Power of TRO u/s. 281: Petitioner had purchased a property from one ‘M’ on 17-05-1995: TRO having found that ‘M’ inspite of several demand notices issued during years 1989 to 1994 had not paid income tax dues passed an order u/s. 281 declaring above sale transaction as void: TRO had no power u/s. 281 to declare sale transaction as void:

The petitioner purchased a property from one ‘M’ on 17-05-1995. ‘M’ had defaulted in making payment of income tax dues for various assessment years. The Assessing Officer issued several demand notices on ‘M’ during the years 1989 to 1994 for recovery of the unpaid taxes. However, ‘M’ had not paid such taxes. Thereupon the Tax Recovery Officer (TRO) attached the above property by issuing an order dated 22-05-1995. Thereafter, he passed an order dated 08- 11-1995 u/s. 281 declaring the above sale transaction as void. He passed the order without any notice to the petitioner. Later on 03-02-2004, he wrote to ‘M’ indicating that the department would proceed with the auction sale of the property under attachment to recover the dues of ‘M’. The Gujarat High Court allowed the writ petition filed by the petitioner and held as under:

“i) Section 281 provides certain transfers to be void. S/s. (1) thereof provides that where, during the pendency of any proceedings under the Act or after the completion thereof, but before the service of notice under rule 2 of the Second Schedule, any assessee creates a charge on, or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer) of, any of his assets in favour of any other person, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of completion of the said proceedings or otherwise. Proviso to s/s. (1), however, provides that such charge or transfer shall not be void if made for adequate consideration and without notice of pendency of such proceedings or without notice of such tax or other sum payable by the assessee or with the permission of the Assessing Officer.

ii) It can thus be seen that, even if the transaction 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.

iii) 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.

 iv) It is, therefore, that the Courts have read into this provision the requirement of hearing the transferee also. Quite apart from this, Courts have taken a view that s/s. (1) of section 281 only provides for the eventuality of the transaction hit by the said provision 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.

v) The Bombay High Court in the case of Gangadhar Vishwanath Ranade (No. 2) vs. T.R.O. [1989] 177 ITR 176 held that u/s. 281, the TRO has no power to declare a transfer as void. This decision of the Bombay High Court was carried in appeal before the Supreme Court. The Apex Court in TRO vs. Gangadhar Vishwanath Ranade [1998] 234 ITR 188/100 Taxman 236 confirmed the view of the Bombay High Court.

vi) The issue involved in the instant case is squarely covered by the decision of the Supreme Court in the case of Gangadhar Vishwanath Ranade (supra). Therefore, the order passed by the Tax Recovery Officer u/s. 281 was liable to be set aside.”