By TIOL News Service

CHENNAI, APR 20, 2018: THE ISSUE AT HAND BEFORE THE BENCH IN THIS CASE IS whether the Tax Recovery Officer can summarily assume powers under the Indian Contract Act, 1872, to suo motu declare a transaction of sale to be void & without approaching a civil court. NO IS THE VERDICT.

Facts of the case

During the relevant AYs, an individual was served demand notices u/s 156 of the Act, for defaulting in payment of tax. Subsequently, the property which was subject matter of the dispute, was purchased by certain entities. Subsequently, orders of attachment were issued for the property in question. Although these entities filed their objections to such attachment, the Tax Recovery Officer rejected them. Subsequently, the order of attachment was upheld and also declared the sale transaction to be null & void. Hence the purchaser-entities filed the present writs.

On hearing the matter, the High Court held that,

++ two facts are not in dispute. The vendor of the purchasers herein is a defaulter-assessee and that he alienated the subject properties only after receipt of notice under Rule 2 of the Second Schedule to the Income Tax Act. Secondly, the orders of attachment were issued by the Respondent only after such purchase by the purchasers herein. There cannot be any doubt that a sale is a contractual transaction. For a contract to be valid, it must be made by the free consent of parties competent to contract. In this case, the property belonged to the defaulter-assessee. He had been served with notice under Rule 2. The moment such a notice was served on the defaulter-assessee, by virtue of Rule 16(1) of the second schedule, he became incompetent to deal with the property. In Rule 16(1), it is expressly stated that the defaulter assessee shall not be competent to deal with the property. If the vendor was not competent to deal with the property, he could not have passed any valid or legal title to the purchaser. Thus, the issue has to be approached through the prism of Section 11 of the Contract Act, 1872;

++ yet the orders challenged in these writ petitions cannot sustained as such. The Supreme Court in (1998) 6 SCC 658 has held that it is the function of the civil Court to declare a transaction to be null and void and that the Tax Recovery Officer cannot exercise the said function. Therefore, the Respondent clearly erred in declaring the transactions to which the petitioners are parties as null and void. Therefore, the orders challenged in these writ petitions stand quashed to that extent. It would certainly be open to the purchasers herein to avail the remedy set out in Rule 11(6) of the second schedule of the Income Tax Act. If the Respondent authority wants to have the transactions nullified, it is the Respondent who must go to the civil Court to seek declaration to that effect. If the purchasers want the attachment to be lifted, it is for them to move the civil Court and obtain relief as provided in Rule 11(6) of the second schedule of the Income Tax Act.

(See 2018-TIOL-747-HC-MAD-IT)