ABDUL JAMIL and Others vs SECRETARY, INCOME TAX DEPARTMENT and Others

Jagadeesan, J.

The unsuccessful plaintiffs are the appellants herein. They filed the suit OS 226/75 on the file of the sub-court, Dindigul for declaration that the

purchase made by one Haft Mohammed Rahamathulla Rowther on 27-6-1968 from one Krishnasamy Maniagarar is not void and for injunction

restraining the defendants, the Income Tax Authorities, from proceeding against the property and for declaration that the order of the third

defendant dated 1-6-1974 holding the said sale is void and illegal.

The plaintiffs are the legal representatives of the said Haft Mohammed Rahamathulla Rowther. The plaintiffs case is that the purchaser purchased

the property after verifying the encumbrance certificate and satisfying that there is no encumbrance over the property and the vendor having a valid

transfer of title. Pursuant to the purchase, the plaintiffs got possession of the property and the patta had also been transferred in the name of the

first plaintiff. The first plaintiff was never informed about the pendency of the proceedings before the Income Tax Authorities against his vendor

Krishnasamy Maniagarar. One year subsequent to the purchase, the plaintiff also raised a loan from the Land Mortgage Bank and further he

incurred expenses to improve the land. The vendor represented to the plaintiffs that he wants to alienate the property, since he could not visit the

village in order to manage the same and further he need cash for his lorry business. If the first plaintiff had known about the pendency of the

Income Tax proceeding, he would not have purchased the property. Equally if the bank authorities had any notice about the pendency of the

Income Tax proceedings against the vendor, they would not have granted the loan. There was no publication in accordance with section 287 of the

Income Tax Act (hereinafter referred to as `the Act) about the proceedings against the vendor. The first plaintiff, being a bona fide purchaser for

valuable consideration, without any notice about the pendency of the Income Tax proceeding against his vendor and as such the plaintiffs title

cannot be questioned. The sale in favour of the first plaintiff cannot be considered as void in view of section 281 of the Act, since he has paid the

sale consideration. When the Tahsildar made enquiries in respect of the sale in favour of the first plaintiff on 13-3-1970, he came to know about

the proceedings against the vendor. The Income Tax Officer, Circle-I, Salem sent a notice on 8-1-1971 stating that he proposed to treat the sale

as void u/s 281 of the said Act and proceed against the properties and called for the objections if any. The first plaintiff accordingly submitted the

reply on 15-11-1971 and inspite of the objections of the plaintiff, the properties were attached by the Revenue Recovery Officer on 10-1-1972

stating that the vendor of the first plaintiff failed to pay a sum of Rs. 3,27,742 payable under certificate dated 14-3-1967, as Income Tax arrears.

The Revenue Recovery Officer has also passed an order under rule 16(2) of the 2nd Schedule of the Act on 1-6-1974 declaring the sale in favour

of the first plaintiff as void. Since the said order is void, the suit has been filed, after issue of necessary notice u/s 80 of the Civil Procedure Code.

The third defendant filed the written statement which was adopted by the defendants 1 and 2 wherein it is stated that the first plaintiff has

purchased the property of a defaulter and as such he is not the bona fide purchaser. The sale in favour of the first plaintiff is void and cannot be

prevailed over the claims of revenue. Since vendor was in arrears of the Income Tax, the Tax Recovery Officer, Madurai was requested to collect

the arrears of tax pursuant to the certificate issued by the Income Tax Officer, Salem u/s 222 of the Income Tax Act. The first certificate was

issued to the Collector of Salem for recovery on 17-2-1965 and subsequent three more certificates were issued on 20-1-1966, 16-3-1967 and

18-7-1968 respectively. The plaintiff had purchased the property only on 27-6-1968, long after the issue of certificate to the defaulter. The

conduct of the vendor in disposing of the property after the receipt of the certificate for payment of the Income Tax arrears would prove his mala

fide intention to evade the liability. The plaintiffs also colluded with the defaulter. The Tax Recovery Officer in his letter dated 28-12-1971

intimated the vendor of the plaintiff about the illegal transfer of the properties by him. Thereafter the properties were attached by order dated 10-1-

1972. The plaintiff has no right to question the order of attachment. The sale in favour of the first plaintiff is hit by section 281 of the Act. Even in

accordance with rule 16(2) of the Schedule II of the Income Tax Act, any private transfer by the defaulter after the attachment has been made is

void. Hence the suit is liable to be dismissed.

On the above pleadings, the parties have led in documentary evidence. The second plaintiff alone had been examined as PW 1. After

elaborately considering the evidence available on record, the trial court had dismissed the suit by judgment and decree dated 1-4-1980, finding

that Krishnasamy Maniagarar, the vendor of the first plaintiff had sold the property to the first plaintiff after the issue of certificate under the Income

Tax Act for recovery of the tax arrears from him. Hence the transaction is hit by the provisions of section 281 as well as rule 16(1), of the Income

Tax Act. Aggrieved by the same, the plaintiffs filed an appeal in AS 358/80 on the file of the District Court, Madurai. The learned Principal District

Judge, also concurred with the trial court and dismissed the appeal. Aggrieved by the same, the present second appeal has been filed.

Though several substantial questions of law had been formulated at the time of admitting the second appeal, the following substantial questions of

law arise for consideration pursuant to the arguments advanced by the counsel for the appellants.

Whether section 281 of the Income Tax Act, 1961 declaring a transfer made by the assessee during the pendency of proceedings is void, offends

article 14 of the Constitution in the absence of any limitation of the word ''pendency of proceedings''?

Whether, u/s 281 of the Act, in considering the validity of a transfer made by the assessee, the knowledge of the pendency of proceedings of the

transferor alone is the criterion and not the knowledge of the pendency of the proceedings on the part of a bona fide transferee for value without

notice?

Whether section 281 of the Act is in pari materia with sections 53 and 100 of the Transfer of Property Act and if it is not so whether section 281

of the Act would infringe the equality clause of the Constitution?

Whether, in considering the validity of a transfer, section 281 of the Act and the rule 2, 16, 48 and 51 of II Schedule should be interpreted

together or whether the scope of section 281 is different from the scope of rule 2, 16, 48 and 51 of Schedule II to the Income Tax Act?

On the basis of the above substantial questions of law, Mr. Swaminathan, the learned counsel for the appellants contended that section 281 of

the Act is in pari materia with section 53 of the Transfer of Property Act and hence the rights of the transferee, who is a bona fide purchaser for

valuable consideration, is safeguarded. In view of the said principle, the properties of the first plaintiff cannot be proceeded with; especially when

the defendants have not established any collusion between the first plaintiff and the defaulter Krishnasamy Maniagarar. He further contended that

rule 16(2) makes the sale void if such alienation is made subsequent to the order of attachment. In this case, the attachment order is subsequent to

the sale and as such rule 16(2) cannot be applied. Rule 16(1) and section 281 of the Act should be read conjointly and if it is established that the

transferee had purchased the property without the knowledge about the tax recovery proceedings and for valuable consideration, such transfers

cannot be challenged by the Income Tax Officer.

On the contrary, Mrs. Kala Ramesh, the learned counsel for the respondent, contended that section 281 of the Act cannot be considered in pari

materia with section 53 of the Transfer of Property Act. The provisions of different enactments has to be considered independently and there

cannot be a conjoint reading of the provisions. In order to interpret a provision in one enactment, the identical provision in another enactment

cannot be of any help because the different statutes are enacted to meet the different requirements. Further rule 16(2) of the Income Tax Act deals

with the alienations made subsequent to the order of attachment. Rule 16(1) deals with the alienations of the transactions entered into by the

defaulter during the pendency of the proceedings under the Act. In this case, from 1965 the recovery proceedings are pending and as such the sale

in favour of the first plaintiff falls u/s 16(1) of the Act. Hence both the courts below have rightly held that the plaintiffs cannot claim title pursuant to

the sale deed in favour of the first plaintiff

In order to appreciate the contentions of the learned counsel for the appellants, it is necessary to note down certain relevant dates. Under Ex.

B2, the certificate has been issued u/s 222 of the Act to the said Krishnasamy Maniagarar, the vendor of the plaintiff, on 17-2-1965. Similar

certificates have also been issued under Exs. B3 and B4 dated 20-1-1966. The assessment years are 1960-61, 1961-62 and 1962-63. Pursuant

to the said certificates, the District Collector took steps to recover the arrears of tax. The defaulter obtained stay and thereafter the stay was

vacated. Once again under Ex. B5 dated 14-3-1967 a notice u/s 222 for recovery of a sum of Rs. 56,838 was served. Rule 2 notice dated 28-3-

1967 with order of attachment and proclamation was served on the assessee on 22-4-1967. Even though the other proceedings have been

initiated to recover the arrears, since the documents having not been marked, it is not necessary to refer the same. But, however, the fact remains

that from February, 1965, the recovery proceedings are pending against the said Krishnasami Maniagarar, the vendor of the first plaintiff and he

had been served with the notice who also initiated various proceedings to delay the payment of tax after issue of notice. Since the sale took place

during the pendency of the recovery proceedings, the authorities have passed the order under Ex. B8 dated 10-1-1972, attaching the suit property

and declared the sale in favour of the plaintiff as void under Ex. 9 dated 1-6-1974. From the above facts, there is no dispute that the first plaintiff

had purchased the property under Ex. A1 on 27-6-1968 when the recovery proceedings are pending against the vendor since 17-2-1965.

Now the question for consideration is whether section 281 of the Act should be read in conjunction with section 53 of the Transfer of Property

Act to construe that it protects the interest of the bona fide purchasers for valuable consideration without notice about the recovery proceedings

against the defaulter.

1 do not think it is necessary to deal with the same elaborately in view of the earlier judgments reported in Tax Recovery Officer Vs. V.

Radhakrishna Eradi, and Inayat Hussain Vs. Union of India, .

Before referring to those judgments, it may be worth to refer to section 281 of the Act as it stood prior to the amendment introduced by the

Taxation Laws (Amendment) Act, 1975, which is as follows:

Transfers to defraud revenue void. Where during the pendency of any proceeding under this Act, any assessee creates a charge on or parts

with the possession by way of sale, mortgage, exchange or any other mode of transfer, whatsoever, of any of his assets in favour of any other

person with the intention to defraud the revenue 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 the completion of the said proceedings;

Provided that such charge or transfer shall not be void if made for valuable consideration and without notice of the pendency of the proceeding

under this Act.

In considering this provision, it is but necessary to consider the purpose of the enactment because the provisions of the enactment has to be

construed only on the basis of the purpose for which the same was enacted.

It has been held in the case in McDowell and Co. Ltd. Vs. Commercial Tax Officer, as follows :

The proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed

literally or liberally nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax

and whether the transaction is such that the judicial process may accord its approval to it. It is neither fair nor desirable to expect the legislature to

intervene and take care of every device and scheme to avoid taxation. It is upto the court to take stock to determine the nature of the new and

sophisticated legal devices to avoid tax and to expose the devices for what they really are and to refuse to give judicial benediction.

The same principle was followed by S.A. Kader, J. (as he then was) in the judgment in K. R. LOGANATHAN AND OTHERS Vs. UNION OF

INDIA AND OTHERS, . In considering section 281 of the said Act, the said provision is declaratory in nature. It declares that the transfers

effected by any assessee with intent to defraud the revenue during the pendency of any proceedings under the Act shall be void against any claim in

respect of any tax or any sum payable by the assessee ''as a result of the completion of the said proceedings"". Therefore, the three requirements

under the section are:

(i) that there must be a transfer of the property;

(ii) that it should be during the pendency of a proceeding under the Act and

(iii) that the transfer must be with intent to defraud the revenue

and if these conditions are satisfied, then the transfer shall be void in respect of any tax or sum payable by the assessee as a result of the

completion of the proceedings during the pendency of which the transfer was effected. The effect of the section is that, if such transfer with intent to

defraud the revenue has been made and any claim for tax arises after completion of the proceedings during the pendency of which the transfer took

place, such tax or other sum can be recovered by proceeding against the property notwithstanding the said transfer.

In the case of hand, there is no dispute that after the completion of proceedings, the recovery certificate has been issued as early as 17-2-1965

and 20-1-1966 under Exs. B1, B2 and B3. The first plaintiff had purchased the property while, in fact, the recovery proceedings are pending.

The learned counsel further placed reliance on the proviso to section 281 of the said Act and contended that, if the transfer is for valuable

consideration and without notice of the pendency of the proceedings, then such transaction will be valid. The first plaintiff being a purchaser of the

property without notice of the pendency of the proceeding and for valuable consideration, he is a bona fide purchaser and as such the sale in his

favour would fall within the proviso which is almost in pari materia with section 53 of the Transfer of Property Act. I am unable to agree with the

learned counsel for the appellant. Section 53 of the Transfer of Property Act specifically mentions that the rights of the bona fide purchaser is

safeguarded. But in this provision, i.e., section 281 of the Act, the section deals with the transfer made by the assessee. The said section deals with

the transactions made by the assessee during the pendency of the proceedings. Hence the proviso should also only refer to the assessee alone and

not the transferee which means if the assessee had created any charge or transfer the property for valuable consideration without notice of the

pendency of the proceedings, then such transaction would fall under the proviso. But in the case in hand, it is very clear that the assessee had made

the transfer only three years subsequent to the recovery proceedings initiated against him. Hence the assessee cannot claim the benefit u/s 281 and

proviso to section 281 do not refer to the transferor at any rate. So far as the contention of the counsel for the appellant that section 281 must be

read with section 53 of the Transfer of Property Act, as already stated that each provision of different statute should be interpreted with the

context and other provisions of that particular statute. There cannot be a conjoint reading of the two provisions.

It may be worth to refer to the judgment in TRO v. Radhakrishna Eradi (supra) wherein the learned judges have held as follows:

The two operate in different spheres and deal with quite different and distinct matters. The section deals with the subject of fraudulent transfer

provided for, for instance, by section 53 of the Transfer of Property Act. The rule, on the other hand, operates on a different sphere altogether and

deals with private transfers made after an attachment of property has been effected in the course of recovery proceedings for realising the arrears

of tax. The provision corresponds to what is enacted by section 64 of the Civil Procedure Code. It is not possible to equate the one with the other,

or to read the provisions of the one into the other or to draw a similarity between the two. In the circumstances, the learned judge was wrong in

holding that the protection in favour of a bona fide transferee for valuable consideration indicated by the proviso to section 281 of the Act, must get

incorporated, or be implied, into rule 16 of the Second Schedule as well. There is neither reason nor logic in doing so and we are unable to accept

this process of reasoning of the learned judge.

This decision was followed by the Bombay High Court in Inayat Hussain v. Union of India (supra) where it was also held that a transfer

subsequent to the attachment as provided in rule 51 would be of no avail and would be void as against the department and no question of bona

fides of the transfer for value or any other question or an intention to defraud the Revenue would arise at all in considering rule 16. Therefore, I am

of the view that since in this case the transfer in favour of the first plaintiff was subsequent to the pendency of recovery proceeding against the

defaulter- assessee, the question of bona fides or otherwise does not arise.

In a recent judgment in Palani Gounder (Decd.) and others Vs. Income Tax Revenue Department and others, , this court had an occasion to

deal with an identical case. In this case also the learned judge has held that the notice about the recovery proceedings or the knowledge about the

pendency of the proceedings would refer only to defaulter and not the purchaser. Further, it has been held that it would suffice if the defaulter had

notice about the pendency of the proceedings and the non-service of notice on the defaulter under rule 2 will not make any difference. After

referring to rule 51 and rule 48 of the Second Schedule and section 222(1) of the Act, the court has held as follows:

A reading of the above said rule shows that the Tax Recovery Officer has to serve a notice on the defaulter, requiring the defaulter to pay the

amount specified in the certificate within 15 days from the date of the service of the notice and also intimating the defaulter that the steps will be

taken to realise the amount under the Schedule. In other words, the rule mentioned above makes it clear that the notice must contain the details of

the arrears towards the Income Tax and the time within which the amount to be paid. In order to give an opportunity to the defaulter, all necessary

things have to be mentioned in the notice under rule 2. In this respect, it is the contention of learned counsel for the respondents that though the

notice under rule 2 has not been served prior to exhibit A-1, other notices mentioning the tax arrears and the time within which the defaulter has to

settle the amount have been sent and as a matter of fact, the defaulter himself gave an undertaking before the officer that he would pay the tax

amount, if sufficient time is granted. In other words, even though no specific notice under rule 2 was given, the necessary ingredients mentioned in

rule 2 have been fully satisfied by the department by sending various notices prior to exhibit A-1. Hence, the contention of learned counsel for the

appellants that the entire proceedings are vitiated because of non- compliance with rule 2 cannot be accepted.

In view of the well laid principles, I do not think it is necessary to deal with the contention elaborately, since I am entirely in agreement with the

above said principles. In view of this, the contention of the counsel for the appellants cannot be countenanced.

The other contention of the counsel for the appellants that rule 16 of the said Act also be read in harmony with section 281 of the Act.

Section 281 of the Act deals with different circumstances and rule 16 deals with different situations. Rule 16 of the Schedule II declares the sale

made by the defaulter as void after the receipt of the notice under rule 2. Section 281 only to safeguard the interest of the assessee. Hence the

proviso to the said section deals with the alienations made by the assessee without notice of the proceedings against him under the Income Tax

Act. Hence no question of harmonising section 281 with rule 16 arises in the circumstances. Nor can there be any question of any disharmony

between the section and the rule. In fact the case reported in TRO v. Radhakrishna Eradi (supra) referred deals with the same.

From the above discussion, it is clear that section 281 of the Income Tax Act cannot be read conjointly with section 53 of the Transfer of

Property Act and section 281 cannot be read in harmony with rule 16 of Schedule II of the Income Tax Act.

For the above stated reasons, I find that both the courts below have rightly discussed the issues in detail and concurrently held that the plaintiffs

are not entitled for the relief as claimed.

Accordingly the second appeal is dismissed. No costs.