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Jaymac Lasetron (P.) Ltd. and anr. Vs. Commissioner of Income-tax and ors. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtKolkata High Court
Decided On
Case NumberW.P. No. 977 of 2000
Judge
Reported in(2000)164CTR(Cal)366,[2000]245ITR734(Cal)
ActsIncome Tax Act, 1961 - Section 281 - Schedule - Rules 2 and 11; ;Tansfer of Property Act, 1882 - Section 53
AppellantJaymac Lasetron (P.) Ltd. and anr.
RespondentCommissioner of Income-tax and ors.
Appellant AdvocateJ.P. Khaitan, Adv.
Respondent AdvocateD. Shome, Adv.
Excerpt:
- .....the ratio of the judgment to the extent that the income-tax authority could not declare the transfer void until the transfer was declared void in properly constituted proceedings. from the observations in such judgment it appears that theentire process for recovery under the second schedule to the income-tax act commences with service of notice under rule 2 and all the rules in the second schedule relate to the protection of the revenue's right subsequent to the issue of notice under rule 2. section 281, in turn, relates to the right of the revenue prior to the issuance of notice under rule 2. the procedure under the second schedule is for enforcement of the rights of the revenue vis-a-vis the assessee when would not be available for enforcement of a right under section 281 of the.....
Judgment:

Amitava Lala, J.

1. By this writ petition, the petitioner, virtually, wanted withdrawal, recalling, cancellation, etc., of the orders passed by the authority dated February 13, 1996, August 3, 1999, September 7, 1999, anda communication dated November 9, 1999. In addition thereto further other order of refund collected by the appropriate respondents and not to give effect and/or further effect of the orders or communications as aforesaid. In all, the other prayers are incidental to the main relief as prayed for as above.

2. Firstly, it is to be remembered that the instant application was taken out on April 6, 2000, long after the aforesaid happenings.

3. According to the petitioner, on January 31, 1983, an agreement was entered into between Orient Beverages Ltd. (the lessor) and one Jaymac India (P.) Ltd., the original defaulter in the proceedings, in terms whereof the lessor let out such company 11th floor of premises No. 50, Chowring-hee Road, Calcutta, covering an area of 5,386 sq. ft. (the said premises) for a period of 34 years up to February 28, 2015, against payment of Rs. 9,49,680 as premium.

4. The agreement provided that the lessor shall execute and register the lease deed in favour of the company, as aforesaid. As per the Clause of the agreement, the second party could transfer, sublet or assign its rights in the said premises.

5. On November 21, 1983, a notice was issued by the appropriate income-tax authority under Section 143(2) of the Income-tax Act, 1961, in respect of the assessment year 1982-83.

6. On September 20, 1984, the second party, as aforesaid, entered into an agreement with petitioner No. 1-company, i.e., Jaymac Lasetron (P.) Ltd., assigning its interest under the said agreement dated January 31, 1983, and the right to obtain lease deed in the consideration of a sum of Rs. 9,49,680 paid by the petitioner-company to the second party as above. The second party delivered the possession of the said premises to petitioner No. 1-company. Immediately thereafter the petitioner-company licensed out the said premises and the license fee was assessed as its income.

7. On March 29, 1990, reassessment proceedings for the assessment years 1983-84 and 1984-85 in the case of the second party was completed.

8. On April 17, 1990, the lessor executed a formal lease deed(s) in respect of the said premises in favour of the petitioner-company to which the second party was a confirming party.

9. On August 25, 1994, the concerned income-tax authority required from the petitioner-company furnishing of the evidence of its ownership of the leasehold interest in the said premises. The petitioner-company duly produced the material documents before the authority.

10. On September 30, 1994, the income-tax authority assessed the petitioner-company for the assessment year 1993-94 on the same basis as in the past accepting that it was the owner of the leasehold interest in the said premises.

11. On February 13, 1996, the concerned Tax Recovery Officer issued prohibitory orders under Rule 26(1)(i) of the Second Schedule to the Act on respondents Nos. 5 and 6 prohibiting them from making' payment of the licence fee and service charges to the petitioner-company. The said prohibitory orders were issued in the certificate cases instituted against the defaulter, i.e., the second party, as aforesaid, for the assessment years 1983-84 and 1984-85.

12. In between February and June, 1996, objections were given by the petitioner to the appropriate taxing authorities. Since the Tax Recovery Officer did not withdraw the prohibitory orders, the petitioner-company filed a revision application under Section 264 before the Commissioner of Income-tax on April 30, 1997, but during' the pendency, the Tax Recovery Officer proceeded to realise the licence fees and service charges from respondents Nos. 5 and 6.

13. On August 10, 1998, the petitioner-company supplemented the said revisional application by filing another application before the Commissioner of Income-tax. On September 7, 1998, the Commissioner of Income-tax granted hearing to the petitioner-company when it was directed to file a comprehensive petition before the Tax Recovery Officer which it did but the Tax Recovery Officer did not communicate any order thereon. Ultimately, the Commissioner of Income-tax rejected the said revisional application on the ground that there was no order of the Assessing' Officer against which the revisional application under Section 264 could lie.

14. On February 2, 1999, the petitioner-company filed an appeal against the said prohibitory orders before the Commissioner of Income-tax but on September 7, 1999, the Commissioner dismissed the appeal.

15. On November 4, 1999, the petitioner-company received a letter dated November 1, 1999, from the Assessing' Officer, informing it that the Tax Recovery Officer had issued a prohibitory order dated August 3, 1999, restraining the petitioner-company from receiving any refund from its Assessing Officer as such the refund of the assessment year 1998-99 could not be granted. The petitioner-company has not received any copy of the said prohibitory order dated August 3, 1999.

16. From the factual background of the aforesaid case, this court has come to a conclusion that the petitioner, in fact, on interpretation of Section 281 of the Income-tax Act could not get appropriate relief in this respect. Therefore, it is necessary to understand the scope and ambit of Section 281 of the Income-tax Act which is as follows ;

'(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 ; or

(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.

Explanation.--In this Section, 'assets' means land, building, machinery, plant, shares, securities and fixed deposits in banks, to the extent to which any of the assets aforesaid does not form part of the stock-in-trade of the business of the assessee.'

17. From the plain reading of the Act, it is crystal clear that the Section applies during the pendency of the proceeding under this Act or even after the completion but before the service of notice under Rule 2 of the Second Schedule.

18. Therefore, it is also necessary to understand the scope and ambit of Rule 2 of the Second Schedule which is as follows :

'When a certificate has been drawn up by the Tax Recovery Officer for the recovery of arrears under this Schedule, the Tax Recovery Officer shall cause to be served upon the defaulter a notice requiring the defaulter to pay the amount specified in the certificate within fifteen days from the date of service of the notice and intimating that in default steps would be taken to realise the amount under this Schedule.'

19. It is needless to mention from the factual description of the petitioner-company itself that the proceeding was pending before the Tax Recovery Officer, therefore, prima facie, the petitioner cannot get the benefit of Section 281 of the Act of 1961.

20. Mr. J. P. Khaitan, learned counsel appearing on behalf of the petitioners, contended before this court that the only remedy open for the authority concerned is to institute a suit as against the transferee-company of the defaulter. There is no other proceeding available to the authority concerned because petitioner No. 1-company is not the defaulter to the authority.

21. Learned counsel cited various decisions in this respect.

22. Firstly, he cited a single Bench judgment of this court reported in Srimati Preeti Rungta v. ITO : [1995]214ITR594(Cal) to establish the ratio of the judgment to the extent that the income-tax authority could not declare the transfer void until the transfer was declared void in properly constituted proceedings. From the observations in such judgment it appears that theentire process for recovery under the Second Schedule to the Income-tax Act commences with service of notice under Rule 2 and all the rules in the Second Schedule relate to the protection of the Revenue's right subsequent to the issue of notice under Rule 2. Section 281, in turn, relates to the right of the Revenue prior to the issuance of notice under Rule 2. The procedure under the Second Schedule is for enforcement of the rights of the Revenue vis-a-vis the assessee when would not be available for enforcement of a right under Section 281 of the Act. The Second Schedule to the Act does not apply at a stage when Section 281 operates. At the time of delivering the judgment, the well-known decision of the Supreme Court of India in McDowell and Co. Ltd. v. CTO : [1985]154ITR148(SC) was considered but it was observed by the single Bench of this court that the observation of the Supreme Court, as above, do not amount to a direction on the court to ignore the provisions of law and to embark upon an enquiry without the regulating framework of the statute and to decide an issue of tax evasion according to the court's personal ideas of right and wrong.

23. Secondly, learned counsel for the petitioner cited a judgment reported in TRO v. Gangadhar Viswanath Ranade : [1998]234ITR188(SC) , wherein it was held that the right of the authority to have the transfer declared as void under Section 281 of the Act, as it stood at the relevant time was not thereby taken away. The property in question continued to be under attachment by virtue of the order or orders passed. The Department may, if it so desired, take appropriate proceedings in accordance with law for having the transfer declared void under Section 281 of the Act.

24. Thirdly, learned counsel for the petitioner cited a judgment reported in Murthy Associates v. TRO : [1998]234ITR30(KAR) which is a single Bench of the Karnataka High Court to get an appreciation from the court in respect of his stand that the dispute could be agitated by the Tax Recovery Officer under Rule 11 of the Second Schedule to the Income-tax Act and the finality is given to the order passed by the civil court under Rule 11(6). It was held therein that there was no necessity to declare the order passed under Section 281 by the Income-tax Officer as without jurisdiction, more particularly, when a civil suit had been filed and was pending, which would finally determine the rights of the parties.

25. The judgments as cited by Mr. Khaitan, learned counsel appearing for the petitioners, are applicable in the facts situation. Therefore, a uniform stand in respect of taking steps by the authority or initiations of the proceeding before the civil court cannot be said to be conclusive.

26. Mr. Dipak Shome, learned senior counsel appearing on behalf of the income-tax authority, contested the application without filing an affidavit since it is a question of law but with a reservation that allegations as made in the petition are not admitted by them. However, he contended that the transfer of the property by way of lease is a sham transaction since thedirectors or parties are closely related in respect of the two companies which can be understood from a nomenclature of the defaulting company and the petitioner-company.

27. According to Mr. Shome, the rules prescribed under the Second Schedule are more or less identical with the rules as prescribed under Order 21 of the Code of Civil Procedure, i.e., in respect of execution.

28. He has given more emphasis in respect of the scope and ambit of Rule 2, i.e., issue of notice, Rule 4, i.e., mode of recovery, Rule 6, i.e., purchasers' title, Rule 11, i.e., investigation, Rule 16(2), i.e., in respect of private alienation to be 'void' in certain circumstances and Rule 26(l)(i), i.e., in respect of order of attachment.

29. I have compared these rules with the scope and ambit of Order 21 of the Civil Procedure Code and I found that the statement as made by Mr. Shome to the extent of execution is correct.

30. Mr. Shome, apart from giving details of distinguishing features of the judgments, made a very solid statement that the word 'void' created a confusion in the mind of the people but if the court goes deep into it, it will be available that such declaration of 'void' cannot be construed as 'void ab initio' but 'void' against the claim of the income-tax authority. Therefore, there cannot be any embargo upon the authority concerned to proceed in accordance with law specially when the notice under Rule 2 of the Second Schedule was given or the proceedings initiated.

31. In reply Mr. Khaitan stated that unless the title is proved, no proceeding can be initiated as against the purchaser who is not the defaulter.

32. To that extent, he wants to take support of the single Bench judgment of this court in Smt. Preeti Rungta v. ITO : [1995]214ITR594(Cal) .

33. It is true that according to the observation of the erstwhile single Bench, the language of Section 281 corresponds to Section 53 of the Transfer of Property Act, 1882.

34. I am not agreeable with such observation. According' to the scope and ambit of Section 281 of the Income-tax Act, 1961, it is much more rigorous than the scope and ambit of Section 53 of the Transfer of Property Act. This has been made by the Legislature with an obvious intention so that one cannot defraud the Revenue exchequer of the country. When the word 'voidable' in a particular Section of the Act is available it is the duty of the court to decide in a civil suit or proceedings as to whether such act is voidable or not. But when the statute prescribes that the transaction as 'void' there is no scope of ascertainment by way of suit to be instituted by the authority concerned to prove such a transaction is 'void'. The word 'void' itself gives power to the authority to declare a transaction 'void'. Therefore, it is needless to come to a conclusion that the authority concerned will go before a regular civil court to get a declaration that such transaction is 'void'.

35. From the order of the Commissioner of Income-tax, it appears that a formal execution of the lease deed was made on April 17, 1990, when the reassessment proceeding's for the years 1983-84 and 1984-85 were just completed on March 29, 1990, and notice under Rule 2 of the Second Schedule was or were yet to be served. Therefore, the transfer is clearly 'void' under Section 281 of the Act.

36. Section 281 of the Act does not contemplate making of any order by any authority. It is declaratory in nature, the effect of the Section is that if such a charge is created or transfer is effected during the pendency of any proceedings under the Income-tax Act, 1961, or after the completion thereof but before the service of notice under Rule 2 of the Second Schedule, tax can be recovered by proceeding against the property notwithstanding the said charge or transfer. There is no question of adjudication of validity of charge or transfer prior to the stage of actual transfer.

37. According to me, in the instant case, it is more so because the lease has to be registered otherwise there is no existence of the lease.

38. The Commissioner of Income-tax, ultimately, held that the transfer is not only void as per Section 281, but it is also a colourable device with the obvious intention to evade tax. The Commissioner of Income-tax followed the ratio of the judgment reported in McDowell and Co. Ltd, v. CTO : [1985]154ITR148(SC) , in coming to a conclusion by inferring that it is permissible for an assessee to avoid tax by proper planning but it is not permissible to evade tax by resorting to colourable transaction. In the case of the present assessee, the whole transaction is fraudulent with a view to evade tax and such device is not permissible in the light of the Supreme Court case stated above.

39. Of course, such findings are fact oriented and the writ court is not made for the investigation of the facts but only to look into it, as to whether the application of law is prima facie bad or not. If the application is bad, from the face of it, the writ court can interfere with the same, but not otherwise.

40. Last but not the least, a discussion is necessary in respect of the scope and ambit of the Second Schedule under the Income-tax Act, 1961. As I have already stated that the Second Schedule is almost verbatim reproduction of Order 21 of the Code of Civil Procedure, then a question, of course, comes to the mind of the court as to why such execution proceedings can be initiated when there is no finality as to the adjudication of title by a civil suit or proceedings. The answer to the query is very simple. Section 281 is declaring a transaction 'void'. There is no occasion for the authority concerned to go before the civil court for further declaration. It is open for such party to take appropriate proceedings for the purpose of nullifying' such declaration.

41. As we are all concerned, there is a process under Order 21 of the Code of Civil Procedure which is called garnishee proceeding's and it has been inserted by way of amendment of the Code of Civil Procedure in 1976. Such garnishee proceedings are also similar in nature in case of proceeding of the Tax Recovery Officer as against a party who has obtained the property during the course or immediately after the proceeding but before service of notice under Schedule II, Rule 2 to the Income-tax Act, 1961.

42. Garnishee proceedings are a type of proceedings which are important between a creditor and the persons who step in the shoes of the debtor. There is also a scope of decision of the disputed questions about garnishee by way of trial which is as good as suit under Order 21, Rule 46(c), of the Code of Civil Procedure as aforesaid.

43. Nevertheless, there is a provision under Rule 11(6) of the Second Schedule to the Income-tax Act, 1961, which provides as follows :

'Where a claim or an objection is preferred, the party against whom an order is made may institute a suit in a civil court to establish the right which he claims to the property in dispute ; but, subject to the result of such suit (if any), the order of the Tax Recovery Officer shall be conclusive.'

44. Therefore, it is a duty incumbent upon the assessee to institute a suit to nullify the claim of the Revenue authority. Instead of instituting such a suit, the petitioner has wrongly or erroneously invoked the writ jurisdiction of this court virtually challenging the order passed by the Commissioner in the appeal preferred by the petitioners themselves which is not tenable and in accordance with law. Therefore, the same is dismissed.

45. However, no order is passed as to costs.

46. Interim order, if any, stands vacated.

47. Xeroxed certified copy of this judgment will be supplied to the parties within seven days from the date of putting requisition.

48. All parties are to act on a signed copy of the minutes of the operative part of this judgment on the usual undertaking and subject to satisfaction of the officer of the court in respect as above.


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