Income-tax---

----Recovery of tax ---Writ---Assessee selling property after obtaining no objection certificate from income-tax authorities---Notice to treat sale as void---Purchaser of property submitting explanation though notice was not addressed to it ---IAC treating sale as void without giving an opportunity of hearing to purchaser---I AC's order not valid.

The first proviso to subsection (1) of section l8i of the Income Tax Act, 1961 provides that a transfer for adequate consideration and without notice of the pendency of such proceedings or, as the case may be, without notice of such tax or other sum payable by the assessee shall not be void.

S had purchased a flat in November, 1983. S had loan transactions with a bank. The bank filed a suit against S and a receiver was appointed to take possession of the flat. There was a compromise between S and the bank and it was agreed that would pay a certain amount to the bank and in return S would have liberty to dispose of the flat.5 sold the flat to P after obtaining a no-objection certificate from the income-tax authorities. Almost a year thereafter, the Inspecting Assistant Commissioner issued a show-cause notice to S purporting to treat the sale as void. Even though the notice was not addressed to them, P gave its reply giving reasons for treating the sale as valid. The Inspecting Assistant Commissioner passed an order holding the sale to be void under section 281(1) without giving P an opportunity to be heard. P filed a writ petition against the Inspecting Assistant Commissioner's order:

Held, that the petitioners who had purchased the flat from S were a necessary party to the proceedings under section 281. Prima facie they had taken all precautions expected of them. They had sent a reply to the show cause notice though it was not addressed to them. It was the demand of principles of natural justice that the Inspecting Assistant Commissioner should have not only considered their reply but should also have given them an opportunity of hearing before passing the impugned order which affected them most adversely.

M.M. Jaikar instructed by Gagrat & Co. for Petitioners. .

Dr. V. Balasubramanian and J.P. Devadhar for Respondents.

JUDGMENT

Messrs System Communications had purchased, a flat bearing No.131 on the 13th floor in Maker Tower B, Cuffe Parade, Bombay, on' November 6, 1983. The said concern had loan and/or overdraft transactions with the Bank of Madurai. The bank filed Suit No.2626 of 1983 in this Court against the said concern. On a notice of motion at the instance of the bank, a receiver was appointed to take possession of the flat. On August 29, 1986, there was a compromise between the Bank of Madurai and the said concern. Consent terms were filed on August 29, 1986, in terms of which the said concern was to pay Rs.60,00,000 to the Bank of Madurai with liberty to dispose of the suit flat.

On September 12, 1986, the said concern applied to Maker Tower A and B Flat Owners Association for the transfer of the flat in favour of Messrs Palanpur Traders Ltd., the petitioners herein. A photocopy of this Court's order giving permission to it to sell the aforesaid flat was attached thereto. On September 27, 1986, the petitioners and the said concern entered into an agreement for sale of the flat in question: (Exhibit D, page 47 of the paper book). The agreement, inter alia, refers to the fact that the suit flat was at one stage under a warrant of attachment, dated 13th June, 1986, from the Income -tax Department and that the said warrant of attachment was lifted by a subsequent order passed by the Income-tax Officer, dated 26th September 1980. On the date of the agreement, i.e. on 27th September 1986, the said concern and the petitioners sent a statement in Form No.37-EE (rule 48-DD) to the office of the competent Authority as required under section 269-AB(2) of the Income Tax Act, 1%1. This statement was received in the office of the competent Authority on September 30, 1980. Statement in Form No.37-1 (under rule 48-L) as required under section 209-UC of the Income Tax Act, 1961, was filed with the Income-tax Department on 14th October, 1986. A no objection certificate under section 269-DD of the Income-tax Act, 1961, was issued by the competent Authority to the petitioners on 21st January 1987.

Almost a year thereafter, the Inspecting Assistant Commissioner called upon Messrs. System Communications to show cause by notice, dated 30th September 1987 as to why the sale of the suit flat by them to the x petitioners be not treated as void under section 281(1) of the Income Tax Act, 1901. Copy of the notice was endorsed to the petitioners. Even though a show cause notice was not addressed to them, the petitioners explained their case, vide reply dated 12th November, 1987, giving as many as six reasons as to why the sale of the flat to them could not be treated as void. The Inspecting Assistant Commissioner, however, passed the impugned order on 4th December 1987, without even referring to the petitioners' explanation to the show cause notice addressed to Messrs System Communications. Opportunity of hearing was admittedly not given to the petitioners. Objections taken by Messrs System Communications in their reply dated 10th November 1987, to the show-cause notice arc, of course, quoted and have been dealt with in the impugned order.

Referring inter alia, to the facts such as that the flat was sold by the said concern during the pendency of assessment proceedings for some years and that the demand in respect of some other years was outstanding the Inspecting Assistant Commissioner passed the impugned order, dated 4th December, 1987, holding the sale of the flat to be void under section 281(1) ofthe Income Tax Act, 1961.

The first proviso to subsection (1) of section 281 provides that a transfer for adequate consideration and without notice of the pendency of such proceedings or, as the cast: may be, without notice of such tax or other sum payable by the assessee shall not be void.

The petitioners are, thus, a necessary party to the proceedings under section 218. It is they who have purchased the flat from the said concern on the basis of permission granted by this Court. Prima facie they have taken all precautions expected of them. Moreover, being a party adversely affected, they sent a reply to the show cause notice issued by the Inspecting Assistant Commissioner even though the show cause notice was not addressed to them. No opportunity of hearing was, admittedly, given to them. 1n fact, their explanation does not also appear to have been considered. Under the circumstances, so far as they arc concerned, the impugned order has been\ passed by the Inspecting Assistant Commissioner without giving them any opportunity and, in any event, without even considering their explanation.

Dr. Balasubramaman for the Revenue had contended that, by and large, the objections taken by the petitioners were considered and dealt with by the Inspecting Assistant Commissioner in his impugned order and that the petitioners had not asked for a specific hearing. In my view, the argument is without any merit particularly as the petitioners had sent a reply to the show cause notice even though the notice was not addressed to them. It was the demand of principles of natural justice that the Inspecting Assistant Commissioner should have not only considered their reply but should also have given them an opportunity of hearing before passing the impugned order which A affected them most adversely.

In the circumstances, the impugned order is quashed so far as the petitioners are concerned. Rule is made absolute in terms of prayer clauses (a) and (b).

No order as to costs.

M.BA./1540/TOrder quashed.