(a) Income-tax---

----Recovery of tax---Transfer to defraud Revenue---Gift of immovable property while donor was a defaulter of income-tax dues---Gift declared void by High Court---Attachment and sale of immovable property was valid-- Indian Income Tax Act, 1961, S.281.

Section 281 of the Income Tax Act, 1961, can be invoked either during the pendency of any proceeding under the Act or after the completion of such proceeding but before the service of a notice issued under Rule 2 of, the Second Schedule to the Act. The second condition required to be fulfilled is that there is either creation of a charge on a property or a transfer of any asset by any assessee in favour of any other person. If these two conditions are fulfilled, the transfer of property by way of sale, mortgage, gift, exchange or any other mode shall be void as against any claim in respect of any tax.

Rule 68-B was inserted in the Second Schedule to the Act by the Finance Act, 1992, with effect from June 1, 1992. Since it is a new provision laying down a period of limitation for the sale of the attach-1 property, it is laid down in sub-rule (3) thereof that, in a case where property had been attached before June 1, 1992, the date of final order giving rise to a tax demanded shall be deemed to be June 1, 1992. It is also further prescribed in clause (i) of sub-rule (2) that, while computing the period of limitation the period during which the levy of tax, interest of fine is stayed by the order or injunction of any Court shall be excluded.

The charge of mala fides must be established with sufficient material and no presumption can be drawn only on a bare plea.

T was a partner with 30 per cent share in a firm, alongwith her two sons. T had some income in her individual capacity as well as in the status of a partner of the said firm. A sum of Rs.12,661 was payable by her as arrears of income-tax relating to the assessment year 1967-68 in her individual capacity. Certain arrears of tax were also recoverable from the partnership firm. T owned a house at Chandigarh and also a house at Gurgaon. A gift deed was executed by T in favour of her two grandchildren on April 17, 1971. The petitioner received half, portion of the Chandigarh house by way of the abovementioned gift from T, her grandmother. Since tax was found to be payable by T in her individual capacity as also in the capacity of a partner of the partnership firm, the gift deed executed by the assessee T on April 17, 1971, was declared to be void. Thereafter, the house was attached. Initially there were tax liabilities amounting to Rs.11,305 and Rs.11,782 outstanding against and payable by T, but, thereafter, the assessment of the firm for the assessment year 1969-70 was finalised and a tax demand of Rs.94,530 was further created against the firm. Since the Income-tax Department found it difficult to recover the arrears of tax from the other two partners, the Department proceeded against the properties of T for recovery of the tax. The levy of tax against the firm was confirmed in appeal. The order passed under section 281 was challenged by T by filing two successive writ petitions. In the first petition the High Court gave a direction to the Income tax Officer that the question about the validity of the gift under section 281 of the Act may be decided afresh after taking into consideration the reply filed by T. In pursuance of. the order of the High Court, the Income-tax Officer again passed an order on December 15, 1978, and again reached the conclusion that the gift was made in order to defraud the Revenue and, therefore, it was void under section 281(1) of the Act. The second order, dated December 15, 1978, was challenged by T in a writ petition but this time she did not succeed. On a writ petition to quash the order of attachment:

Held, dismissing the petition, that an amount of Rs. 1/2,661 was payable by T in her individual capacity. There were also certain arrears payable by the firm in which T was a partner. Assessment for the assessment year 1969-70 against the partnership firm was pending. Since the outstanding demand of tax was not cleared and the partnership firm did not have sufficient assets to discharge the tax liability, the Income-tax Officer found it appropriate to proceed under section 281 of the Act. The gift had been made by T in favour of her two grandchildren. She had, in the gift deed, reserved her right to realise income from the house during her lifetime. The order under section 281 of the Act had already been examined by the Court and it had been upheld. That order had become final. The argument that the house at Gurgaon belonging to T should be first sold for recovering the arrears of tax, had no legal force because there is no provision in law which would debar the Department from proceeding against a house which was attached much earlier. It is for the Department to see as to how to proceed for the recovery of tax. The house at Chandigrah was attached in the year 1978. Once the gift deed had been declared to be void, there was no legal bar against proceeding to auction the house at Chandigrah. Recovery of tax had been stayed by the Court in the present writ petition by order, dated November 16, 1993. In view of the stay order, the period of limitation stood further extended. In this light; the plea raised with respect to the expiry of the period of limitation had no force. The plea of mala fides had to be rejected because no such plea had- been raised in the writ Petition and there was also no material on record to show that the proceedings were started by the Income-tax Officer or the Tax Recovery Officer on the basis of m4la fides. The order of attachment was valid.

(b) Income-tax---

----Recovery of tax---Attachment and sale of property---Limitation---Effect of insertion of R. 68-B---Time during which recovery of tax was stayed has to be excluded in computing time---Indian Income Tax Act, 1961, Sched. II, R.68-B.

(c) Income-tax---

----Recovery of tax---Attachment and sale of property---Charge of mala fides has to be established with sufficient material---Indian Income Tax Act, 1961.

Tara Rani v. CIT (1982) 137 ITR 266 (P & H) ref.

Ajay Kumar Mittal for Petitioner.

R, P. Sawhney, Senior Advocate with Rajesh Bindal for Respondent.

JUDGMENT

N.K. AGRAWAL, J.---This is a petition under Article 226/227 of the Constitution, seeking the quashing of the order of attachment, dated December 29, 1978, notice, dated September 3, 1992, issued under Rule 85 of the Second Schedule to the Income Tax Act, 1961 (for short, "the Act"), the show-cause notice, dated April 15, 1993, sent by the Tax Recovery Officer to the petitioner that objections filed by her have been rejected and the sale proclamation issued on October 8, 1993.

The petitioner is the grand-daughter of Smt. Tara Rani who was a partner with 30 percent. share alongwith her two sons, namely, Baldev Raj and Tilak Raj, in a partnership firm. The said partnership firm had been constituted under a partnership deed to carry out certain military contracts. Smt. Tara Rani was having some income in her individual capacity as well as in the status of a partner of the said firm. A sum of Rs.12,661 was payable by her as arrears of income-tax relating to the assessment year 1967-68 in her individual capacity. Certain arrears of tax were also recoverable from the partnership firm, Baldev Raj Tilak Raj, in which Smt. Tara Rani was a partner with her two sons. Smt. Tara Rani owned a House (No.230, Sector 21-A) at Chandigarh and also a house at Gurgaon. A gift deed was executed by Smt. Tara Rani in favour of her two grand-children on April 17, 1971. The petitioner, Smt. Ramana wife of Sunil Kohli and daughter of Baldev Raj, received half portion of the Chandigarh house by way of the above-mentioned gift from her grand-mother. Smt. Tara Ram, and the remaining half portion of the house was given by the donor, Smt. Tara Rani, to Mr. Duke alias Rahul Arora, son of Tilak Raj.

Since certain tax was found to be payable by Snit. Tara Rani in her individual capacity as also in the capacity of a partner of the partnership firm, the gift deed executed by the assessee, Smt. Tara Rani, on April 17,1971, was declared to be void, vide order, dated December 15, 1978, passed under section 281 of the Act. Thereafter, the house, in question, was attached, vide order, dated December 29, 1978. Initially, there were tax liabilities amounting to Rs.11,305 and Rs.11,782 outstanding against and payable by the assessee, Sint. Tara Rani, but, thereafter, assessment on the firm Messrs. Baldev Raj, Tilak Raj for the assessment year 1969-70 was finalised in the status of an unregistered firm, vide order, dated March 24, 1972, and a tax demand of Rs.94,530 was ,further created against the firm. Since the Income-tax Department found it difficult to recover the arrears of tax from the other two partners, namely, Baldev Raj and Tilak Raj, the Department proceeded against the properties of Smt. Tara Rani for the recovery of the tax: The levy of tax against the firm was confirmed in appeal by the Appellate Assistant Commissioner on December 28, 1972. No further appeal was filed. There were no assets of the firm and, therefore, the Department wanted to proceed against the house property of Smt. Tara Rani for the recovery of the tax amount. The total tax liability was Rs.1,17,347. No recovery, despite best efforts, could be made from the partnership firm.

Shri Ajay Kumar Mittal, learned counsel for the assessee, has challenged the various orders, including the order of attachment and proclamation of sale, on various grounds. The first ground relates to the validity of the gift made by Smt. Tara Rani in favour of the petitioner. Shri Mittal has argued that it was a valid gift inasmuch as Smt. Tara Rani filed gift-tax return and thereupon the property was assessed to gift-tax, vide order, dated January 6, 1976. Though Smt. Tara Ram had shown the value of the taxable gift at Rs.40,000, the Gift-tax Officer fixed the value at Rs.80,000 on agreed basis and determined the value of taxable gift, granting exemption of Rs.5,000, at Rs.75,000. The assessee deposited the gift-tax on March 8, 1976. It is argued by Shri Mittal that, after the gift had been accepted under the Gift-tax Act, the petitioner became a valid owner of half portion of the property and the Income-tax Department had no powers nor any jurisdiction to proceed against her- share in the property. He has also challenged the order passed by the Income-tax Officer declaring the gift to be void under section 281 of the Act with the plea that the petitioner, being a lawful donee, was not bound by that order inasmuch as she was a minor at that time and no opportunity of hearing was given to her through her father and legal guardian, Baldev Raj. It may be mentioned here that the order passed under section 281 of the Act had been challenged by Smt. Tara Rani in a writ petition but she did not succeed. The High Court, vide order, dated April 3, 1980 (in Civil Writ Petition No. 361 of 1979-Tara Rani v. CIT (1982) 137 ITR 266 (P & Vii)), upheld the order. passed by the Income-tax Officer declaring the lift to be void. Shri Mittal has also argued that the order of the High Court would also not affect the petitioner's right in the property because she was not impleaded as a party in that writ petition and moreover, the gift was declared to be void only to the extent of the tax liability and the petitioner's rights retrained unaffected.

Shri R.P. Sawhney, learned senior counsel for the respondents (Commissioner of Income-tax and Tax Recovery Officer), has defended the order passed under section 281 of the Act with the plea that sufficient opportunity of hearing was given by the Income-tax Officer to Smt. Tara Rani, donor of the property in question. The Income-tax Officer had noticed that the gift deed had been executed by Smt. Tara Rani with a -view to defrauding the Revenue and with a purpose to escape from the tax liability. Certain tax demands were already outstanding and due against Smt. Tara Rani and assessment proceedings against the firth, in which she was a partner, were also pending for the assessment year 1969-70. It was, therefore, rightly apprehended by the Income-tax Officer that Smt. Tara Rani had made the gift in order to avoid the payment of tax. It was under these circumstances that the order under section 281 of the Act was passed., This order was challenged by Smt. Tara Rani by filing two successive .writ petitions. Her first writ petition (CWP No.3784 of 1978) succeeded and the High Court, vide order, dated September 29, 1978, gave a direction to the Income-tax Officer that the question about the validity of the gift under section 281 of the Act may be decided afresh after taking into consideration the reply filed by Smt. Tara Rani. In pursuance of the order of the High Court, the Income-tax Officer again passed an order on December 15, 1978. and again reached the conclusion that the gift was made in order to defraud the Revenue and, therefore, it was void under section 281(1) of the Act. The second order, dated December 15, 1978, was again challenged by Smt. Tara Rani in Civil Writ Petition No.361 of 1979 (see (1982) 137 ITR 266 (P&H)) but this time she could not succeed. The High Court went into the question in detail and reached a finding that she had executed the gift deed which could not be sustained. The High Court, therefore, upheld the order passed on December 15, 1978, under section 281 of the Act. Shri Sawhney has vehemently argued that the order of the High Court has now become final and the petitioner cannot challenge this order on any ground whatsoever. Though the petitioner was not a party in the writ petition, her father and legal guardian, Baldev Raj, was very much aware of the decision of the High Court but he never chose to seek a review of the High Court's order by making a request that the minor, Smt. Ramana, may be impleaded as a party in that writ petition. Copies of certain letters have been filed, which formed the correspondence between Hans Raj and his son, Baldev Raj. After the High Court upheld the order passed under section 281 of the Act, Hans Raj, husband of Smt. Tara Rani, wrote a letter on May 13, 1980, to his son, Baldev Raj (father and guardian of the petitioner), informing him that the High Court had decided the matter in favour of the Department. On receiving this letter, Baldev Raj, vide his letter, dated May 25, 1980, asked his father as to how much money he will have to pay as his share to clear the tax liability. Hans Raj, vide letter, dated June 3, 1980, informed his son, Baldev Raj, who was at that time staying in a foreign country, that the tax authorities had to recover the tax money from Smt. Tara Rani after declaring the gift deed as void. The interest amount on the arrears of tax was also mentioned in that letter. Shri Sawhney has contended that, from this correspondence (copies of which have been placed on record as Annexures R-5, R-6 and R-7), it is evident that the petitioner's father, Baldev Raj, was well aware of the order of the High Court and, therefore, no objection can now be raised to the effect that the petitioner's rights do not stand affected by the High Court's order.

As regards the validity of the order passed by the Income-tax Officer under section 281 of the pet, it has already been examined by this Court in Civil Writ Petition No361 of 1979 (see (1982) 137 ITR 266), and the order of the Income-tax Officer has been upheld. Section 281 can be invoked either during the pendency of any proceeding under the Act or after the completion of such proceeding but before the service of a notice issued under Rule 2 of the Second Schedule to the Act. The second condition required to be fulfilled is that there is either creation of a charge on a property or a transfer of any assets by any assessee in favour of any other person. If these two conditions are fulfilled, the transfer of property by way of sale, mortgage, gift, exchange or any other mode shall be void as against any claim in respect of any tax. As has been seen, there was already outstanding amount of Rs.12,661 payable by Smt. Tara Rani in her individual capacity. There were also certain arrears payable by the firm, Baldev Raj Tilak Raj, in which Smt. Tara Rani was a partner. Assessment for the assessment year 1969-70 against the partnership firm was pending. Since the outstanding demand of tax was not cleared and the partnership firm did not have sufficient assets to discharge the tax liability, the Income-tax Officer found it appropriate to proceed under section 281 of the Act. The gift had been made by Smt. Tara Rani in favour of her two grand-children. She had, in the gift deed, reserved her right to realise income from the house during her lifetime. She alongwith her husband was residing on the ground floor of the house. Rent was recovered by her from the tenant occupying the first floor. These facts further created suspicion on the validity of the gift deed. However, it was primarily the non-payment of the arrears of tax and the pendency of assessment proceedings against the partnership firm which prompted the Income-tax Officer to proceed against the gift under section 281 of the Act.

The order under section 281 of the Act has already been examined by this Court and it has been upheld, That order has become final and we do not find any substance in the pleas now raised by the petitioner against the order passed by the Income-tax Officer under section 281 of the Act.

Shri Ajay Kumar Mittal has raised another plea to the effect that Smt. Tara Rani owned another House (No.204-A, New Colony), at Gurgaon, which also stands attached, vide order of the Income-tax Officer, dated January 15, 1993. It is also pointed out by him that there was an offer from one Gurcharan Singh to purchase the house at. Gurgaon for Rs.5,30,080. It would be, therefore, more appropriate if the Department proceeded against the house at Gurgaon and recovered the tax liability from that house. Since the house at Chandigarh was situated in a prime locality and was a property of very high value, the Department should, in all fairness, recover the arrears of tax out of the sale proceeds of the house at Gurgaon. The argument of Shri Mittal, that the house at Gurgaon belonging to Smt. Tara Rani should be first sold for recovering the arrears of tax, has no legal force because there is no provision in law which would debar the Department from proceeding against the house which was attached much earlier. It is for the Department to see as to how to proceed for the recovery of tax. The house at Chandigarh was attached in the year 1978. Once the gift deed has been declared to be void, there is no legal bar against proceeding to auction the house at Chandigarh.

The next plea raised in the writ petition relates to the period of limitation prescribed in Rule 68-B of the Second Schedule to the Act for the sale of the attached property. It has been stated that, under Rule 68-B, no sale of any immovable property can be made after the expiry of three years from the end of the financial year in which the order giving rise to a demand of tax became final. Part of the demand of tax had arisen in 1970-71 and further demand against the partnership-firm arose from the final order passed by the Appellate Assistant Commissioner on December 28, 1972. The period of three years is said to have expired from the end of the financial year 1972-73.

The plea raised in the writ petition regarding the time-limit for sale of the attached property has no force at all and has to be rejected at the outset in view of the provision contained in sub-rule (3) of Rule 68-B. It has to be noticed that Rule 68-B was inserted in the Second Schedule to the Act by the Finance Act, 1992, with effect from June 1, 1992. Since it was a new provision laying down a period of limitation for the sale of the attached property, it was laid down in sub-rule (3) thereof that, in a case where property had been attached before June 1, 1992, the date of final order giving rise to a tax demand, shall be deemed to be June 1, 1992. It is also further prescribed in clause (i) of sub-rule (2) that, while computing the period of limitation, the period during which the levy of tax, interest or fine is stayed by the order or injunction of any Court shall be excluded. It has to be noticed that recovery of tax had been stayed by this Court in the present writ petition vide order, dated November 16, 1993. This stay order was granted in favour of the petitioner herein with a stipulation that a sum of Rs.50,000 shall be paid on November 17, 1993, and the balance of Rs.51,786 shall be paid within two weeks. In view of the stay order, the period of limitation stands further extended. In this light, the plea raised with respect to the expiry of the period of limitation has no force and is rejected.

The last plea raised by Shri Mittal is that the property at Chandigarh has been attached and is likely to be sold by auction due to mala fides on the part of the officers of the Income-tax Department. This plea is also to be rejected outright because neither any such plea has been raised in the writ petition nor is there any material on record to show that the proceedings were started by the Income-tax Officer or the Tax Recovery Officer on the basis of mala fide. The charge of mala fides must be established with sufficient material and no presumption can be drawn only on a bare plea. Therefore, this plea is also rejected.

In the result, the writ petition is found to be devoid of any force and merit and is dismissed with costs which are quantified at Rs.5,000.

M.B.A./4069/FCPetition dismissed.