Recovery of tax: Certificate proceedings: Section 222: Assessee’s leasehold property (DDA lessor) auctioned by TRO for recovery of tax: DDA demanded 50% unearned increase for mutation: Not a condition of auction notice: Amount payable by Department and not by the purchaser.

The assessee’s leasehold property was put to auction by the TRO for realisation of income-tax dues. The DDA was the lessor. The purchasers called upon the DDA to mutate the property and called upon the TRO to get the sale certificate registered. The DDA demanded 50% unearned increase for mutation of the property in favour of the purchasers. Disputes arose as to the liability to pay unearned increase and whether the same was payable by the purchasers or by the Income-tax Department or by the original sub-lessee, i.e., the defaulter assessee. As the disputes could not be resolved, the purchasers filed writ petition which was allowed by the Single Judge of the Delhi High Court by issuing a direction that the Department would deposit unearned increase with the DDA.

On appeal by the Revenue the Division Bench of the Delhi High Court held as under:

“(i) The deed of the sub-lease clearly stipulates that 50% unearned increase is payable on the transfer of the leasehold rights in the property and the decision of the lessor in respect of market value shall be final and binding. The second proviso gives pre-emptive right to the lessor to purchase the property after deducting 50% unearned increase. Unearned increase is also payable in case of involuntary sale or transfer, whether it is by or through an executing or insolvency Court.

(ii) The terms of the lease are binding upon the lessor and the lessee. Under section 108(j) of the Transfer of Property Act, 1882 a lessee is entitled to transfer leasehold right, which he enjoys, to a third party, subject to a contract to the contrary. However, the lessee continues to be liable for the terms and conditions of the lease.

(iii) Rule 4 of the Second Schedule to the Act permits and allow the TRO to recover the arrears of tax by attachment and sale of defaulter’s immovable property. Thus, what can be sold and attached is a defaulter’s immovable property, i.e., the interest of the defaulter in the immovable property and not interest of a third person in the immovable property. Obviously, DDA’s interest could not have been sold or transferred for recovery of the defaulter’s dues. The right of the defaulter in the immovable property could be sold and transferred.

(iv) What the Act permits and allows is that the TRO can sell the right, title and interest of the defaulter assessee and nothing more. If the said right, title and interest is hedged with the conditions or fetters, the sale will be made subject to the said conditions/fetters. The rights of the lessor do not get affected. Thus, unearned increase is payable. (v) The second question is who is liable to pay the unearned increase. The plea of the Department is that 50% unearned increase is payable by the original sub-lessee and not by the Department or the TRO.

(vi) The Single Judge has, in the impugned judgment, specifically referred to and has quoted the public notice by which sale was made. The terms and conditions of said notice did not stipulate that the bidder would have to pay 50% unearned increase or bear such burden. There was no such stipulation. The sub-lease deed or copy thereof was with the Department and it had finalised the terms of sale. In case 50% unearned increase was to be paid separately by the purchaser, it should have been so indicated and mentioned. This would have resulted in a lower bid amount. It is not the case of the Department that sale consideration paid by the purchasers was less than the market price.

(vii) The terms of auction did not stipulate that the original sub-lessee shall pay 50% unearned increase. The TRO had agreed and promised to issue sale certificate to the auction purchaser, whose bid was accepted. It is only on payment of 50% unearned increase that an effective transfer can be made by the said sale certificate. In these circumstances, it is for the Department to make payment of unearned increase. Of course, in case its dues are still payable, it is open to them to take appropriate proceedings against the defaulter assessee in accordance with law.”