Protection of Bona Fide Purchasers of Property in Court Auction without notice of the prior tax proceedings

Summary in Key Points:

Issue: Whether the Income Tax Department can proceed against a bona fide purchaser of property in a court auction when the property was subject to prior tax proceedings against the original owner.
Facts: The assessees purchased a property in a court auction. Later, they discovered that the property was subject to proceedings initiated by the Income Tax Department against the previous owner. The assessees’ claim petition was rejected.
Decision: The High Court held that the assessees, being bona fide purchasers for adequate consideration and without notice of the prior tax proceedings, were protected under the proviso to Section 281(1) of the Income-tax Act, 1961.

Decision:

The High Court ruled in favor of the assessees, emphasizing the following:

Bona Fide Purchaser: The assessees purchased the property in a court auction for adequate consideration and without any knowledge of the pending tax proceedings against the original owner.
Proviso to Section 281(1): The proviso to Section 281(1) protects bona fide purchasers for valuable consideration and without notice of the pendency of any proceedings under the Act.
Protection from Tax Department Action: The court held that the Income Tax Department could not proceed against the assessees, as they were bona fide purchasers protected under the proviso.

Important Note: This case clarifies the protection afforded to bona fide purchasers of property in court auctions. It highlights that even if the property was subject to prior tax proceedings against the original owner, a bona fide purchaser without notice of such proceedings is protected from any action by the Income Tax Department. This decision ensures that innocent purchasers are not penalized for the tax liabilities of previous owners and promotes confidence in court auction proceedings.

HIGH COURT OF KERALA

Gopinatha Pillai

Tax Recovery Officer

Bechu Kurian Thomas, J.

WP(C) NO. 7953 OF 2023

DECEMBER 7, 2024

S. Sachithananda Pai, Adv. for the Petitioner. Jose Joseph, Sr. Standing Counsel and Cyriac Tom, Jr. Standing Counsel for the Respondent.

JUDGMENT

1. Petitioners challenge interalia Ext.P8 order dated 14.03.2023, rejecting the claim petition put forth by them in respect of a property purchased by the petitioners in a court auction covered by Ext.P2 sale certificate. Petitioners also seek a direction for release of the aforesaid property from an attachment issued by the 1^st respondent.

2. Petitioners are the decree holders in O.S No.185/2006 on the files of the Sub Court, Alappuzha. The said suit was filed claiming amounts due from the 2^nd respondent. On the date of filing of the suit, an attachment before judgment was obtained under Order 38 Rule 5 of the Civil Procedure Code, 1908 [for short “C.P.C], in respect of 6 cents of property. Subsequently, pursuant to mediation, an award was passed as Ext.P1 on 03.04.2007, allowing the petitioners to recover an amount of Rs.2,15,000/- with 6% interest, from the date of suit from the 1^st defendant and the property scheduled therein. Subsequently, execution proceedings were initiated and the property was brought for sale. After obtaining permission from the court, petitioners bid at the auction and purchased the property. Since the property was bid for a higher amount than the decretal amount, petitioners deposited the excess amount also in court. A sale certificate was thereafter issued to the petitioners on 08.10.2010 and the property was delivered to the petitioners on 20.03.2015.

3. In the meantime, though there were petitions filed under Order 21 Rule 90 for C.P.C for setting aside the sale at the behest of the judgment debtor and another petition under Section 47 C.P.C, both those petitions were dismissed. Even the challenge against the said orders preferred before this Court in O.P(C) No.1267/2015 was also dismissed. Thus the petitioners became the absolute owners of the said property.

4. However, to the surprise of the petitioners, it was learnt through an auction notice published on 17.2.2023 that the property purchased by them in the court auction was the subject matter of proceedings initiated by the Income Tax Department. Immediately, on coming to know about the said proclamation, petitioners preferred this writ petition challenging the proposed auction. Initially this Court directed the income tax officer to consider the claim petition preferred by the petitioners. By Ext.P8 order, the said petition was dismissed resulting in an amendment of this writ petition. Petitioners have thus challenged the said order as well.

5. The contention raised by the petitioners are based upon the alleged bonafide purchase of a part of the property, now under attachment, initiated by the Income Tax Department. Petitioners contend that the property purchased by them cannot be proceeded against by the Income Tax Department for alleged dues of the 2^nd respondent.

6. I have heard Sri. Sachithananda Pai, the learned counsel for the petitioners as well Sri. Cyriac Tom, the learned Standing counsel appearing on behalf of Sri. Jose Joseph, the learned Senior Standing Counsel for the 1^st respondent.

7. The scheme of the Income Tax Act enables the department to proceed against the property of an assesse for recovery of amounts due. In order to enable the Income Tax Department to proceed with recovery of tax fallen due, certain transfers are deemed to be void. However, the statutory scheme protects bonafide transfers or transactions, so as to prevent prejudice to such purchasers. This is evident from Section 281 of the Income Tax Act, 1961. For a better understanding, Section 281 is extracted below:

Certain transfers to be void.

281. (1) Where, during the pendency of any proceeding under this 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 whatsoever) 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 the completion of the said proceeding or otherwise :

Provided that such charge or transfer shall not be void if it is made—

(i) for adequate consideration and without notice of the pendency of such proceeding or, as the case may be, without notice of such tax or other sum payable by the assessee ;

(ii) with the previous permission of the Assessing Officer.

(2) This section applies to cases where the amount of tax or other sum payable or likely to be payable exceeds five thousand rupees and the assets charged or transferred exceed ten thousand rupees in value.

8. On a reading of the above proviso to Section 281 it is evident that, if the transfer is made for an adequate consideration and without notice of the pendency of the proceedings by the Income Tax Department or without notice of such tax due from the assessee, the transfer cannot be deemed to be void.

9. A glance at the dates involved in the present case is relevant. On 29.11.2006, O.S. No.185/2006 was instituted and an attachment before judgment was obtained. On 03.04.2007, Ext.P1 award was passed creating a charge on the property scheduled in the plaint. Till then, the Income Tax Department had not attached any part of the property of the 2^nd respondent. Subsequently, an execution petition was filed and the property was brought for sale on 14.01.2009. By then the Income Tax Department had provisionally attached the property on 19.12.2007, and the attachment as per notice under Rule 2 of II Schedule of the Income Tax Act was issued on 27.02.2008 and thereafter, on 22.04.2009 the provisional attachment was confirmed.

10. However, there is nothing to indicate that the proceedings initiated by the Income Tax Department was known to the petitioners-the purchasers in the court auction. It is also relevant to mention at this juncture that, pursuant to the auction held on 14.01.2009, petitioners had deposited an amount far in excess of the decree amount. They had to deposit Rs.59,000/- over and above the decree amount with the court to be appropriated to the judgment debtor. Thus, it is evident that the petitioners had purchased the property in the court auction for adequate consideration and that too, without notice of the pendency of the proceedings initiated by the Income Tax Department. Since, the purchase of the property in a court auction was a bonafide transaction as evident from the sequence of events mentioned above, it is explicit that the proviso to Section 281(1) will apply in respect of the property purchased by the petitioners.

11. In this context, it is also apposite to bear in mind that the attachment effected by the Income Tax Department is in respect of 51 cents of property, while the petitioners had purchased only 6 cents out of the said extent. It is submitted across the Bar that a multi-storied building is even existing on the remaining extent of property and therefore, no prejudice would befall the Income Tax Department, if they proceed against the remaining extent.

12. In the decision in S.Mathews v. The Secretary Ambalappuzha North Grama Panchayath and others [W.P.(C) No.21769/2017], a learned Single Judge of this Court, had, in a similar situation, observed that, in the facts of the said case, since the sale was without notice of the proceedings initiated by the Income Tax Department, the benefit of proviso to Section 281 of the Income Tax Act, 1961 ought to be accorded to the petitioner therein. I am in respectful agreement with the said preposition and the petitioners are also entitled to be given the same benefit.

13. Having regard to the above circumstances, the claim petition put forth by the petitioners ought to have been allowed and the Income Tax Department could not have proceeded against the bonafide purchaser of the property covered by Ext.P2 sale certificate issued in favour of the petitioners.

14. Hence Ext.P8 order is quashed and the 1^st respondent is directed to release the attachment or charge over the property of the petitioners, covered by Ext.P2 sale certificate from Ext.P5 sale proclamation.

This writ petition is allowed as above.