The Court highlighted that a civil suit needs to be filed as per Rule 11(6) of 2nd Schedule of Income Tax Act, by the party against whom the attachment order has been issued, to establish their rights over the disputed property.
In a recent ruling, the Madras High Court emphasized that a tax recovery officer does not have the authority to declare void a property sale made by a taxpayer to a third party, even if it was done to defraud revenue. Here’s a breakdown of the key points:
Background:
The HC, led by Justice C. Saravanan, highlighted that for the Income Tax Department to take action, a suit needs to be filed as per Rule 11(6) of the 2nd Schedule of the Income Tax Act, 1961. Under this rule, the party against whom an attachment order is issued must initiate a civil court suit to establish their rights over the disputed property. Pending the outcome of such a suit, the Tax Recovery Officer’s order remains conclusive.
Case Overview:
The case involved a dispute between the applicant and the respondent, who had defaulted on tax payments to the Income Tax Department for Assessment Years 2008-09 and 2009-10. This led to demands for tax arrears, including interest.
Attachment of Property:
Following the respondent’s inability to pay the taxes, the Income Tax Department attached the respondent’s property. However, prior to this, the applicant and the respondent had entered into a sale agreement for one of the properties in Coimbatore District.
Legal Argument:
The applicant contended that the respondent had the option to file a civil suit but had not done so. Therefore, the sale to the applicant should stand as valid and binding. The department, argued that the sale was void under Rule 16(1) of the II Schedule of the Income Tax Act, 1961.
Court’s Decision:
The court clarified that the sale made on February 24, 2012, as per the sale agreement from February 19, 2009, was not void. It emphasized that the department lacked the jurisdiction to declare the sale void under the Income Tax Act, 1961.
Supreme Court Precedent:
Referring to a Supreme Court case regarding Section 281 of the Income Tax Act, 1961, the court highlighted that the expression “to defraud the Revenue” had been removed. It ruled that the Tax Recovery Officer must determine the possession of the property and in what capacity it is held.
Conclusion:
In summary, the Madras High Court’s ruling asserts that a Tax Recovery Officer cannot invalidate a property sale made by an individual to a third party, even if the intention was to defraud revenue. The court emphasized the need for due legal process and the establishment of rights through civil suits.
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