Case Law Details
Job G.Oommen Vs Union of India (Kerala High Court)
Kerala High Court held that recovery of tax arrears by income tax department from property that was already auctioned by Kerala General Sales Tax Act, 1963 [KGST] to realize tax payable under KGST is untenable in the eye of law.
Facts- One late P.N.Madhavan Pillai was the proprietor of M/s.Mohandas Cashew Factory, Arakkal, Kollam District. He was an assessee under the provisions of the KGST Act and had arrears in excess of Rs.58 lakhs for the period from 1995 onwards. He was also in arrears with respect to Cashew Workers Welfare Fund dues for the period from 1997 to 2000.
For the realization amounts, revenue recovery proceedings were initiated under the provisions of the Revenue Recovery Act, 1968, and an extent of 78.30 Ares of his property was attached.
Out of the afore property, an extent of 28.32 Ares of land were auctioned on 30.08.2006 in favour of one Smt.Sushamakumari and the sale was confirmed on 09.02.2007. The afore Smt.Sushamakumari assigned the said property to one Sri.Kishore, as per a sale deed dated 04.11.2009. The afore extent of the property and the factory building therein were purchased by the petitioner from Sri.Kishore, as per the sale deed dated 13.10.2011. He is stated to be conducting the Cashew Factory in the afore property in the factory building thereafter.
In the meantime, communication dated 11.03.2015 was issued by the Regional Provident Fund Commissioner, directing payment of certain arrears payable by M/s.Mohandas Cashew Factory. The 2nd respondent herein, in the meantime, had filed O.S.No.6 of 2007 before the Sub-Court, Kottarakkara against the deceased Madhavan Pillai and the Kerala State Financial Corporation alleging that the deceased availed financial assistance from the Corporation after mortgaging the immovable properties which are being independently proceeded against by the Income Tax Department for realization of income tax arrears payable by the deceased for the assessment year 1995-96. During the pendency of the suit, the assessee (Madhavan Pillai) passed away, and therefore, his wife and children were brought on record as additional defendants. The legal heirs who were brought on record filed a written statement pointing out that the property had already been sold in a public auction in 2006, and at present, the properties are in possession of third parties like the petitioners in these writ petitions.
2nd respondent issued notice to the petitioners in these writ petitions, who are in possession of the properties at present, informing them that the properties concerned are proposed to be sold in public auction for realization of the arrears payable under the I.T. Act.
Conclusion- Held that with respect to the year 1995 onwards, there was a first charge with reference to the tax payable under the KGST Act. It is to be noticed that there is no corresponding provision creating the first charge under the I.T. Act. At the maximum, the provisions of Section 281 of the I.T. Act referred to above provide that certain transfers during the pendency of proceedings be void. Here, no such transfer has taken place, and instead, a charge is created on the properties of the deceased, with respect to the arrears/tax payable under the KGST Act. It is for the realization of such tax payable that the properties of the deceased are proceeded against after attaching them. Such properties are placed for public auction, and the properties are purchased by various individuals who, in turn, later sold those properties in favour of the petitioners herein. Therefore, in my opinion, the Income Tax Department may not be justified in contending that they can proceed against the properties in possession of the petitioners herein for realizing the arrears payable by the deceased Madhavan Pillai.
FULL TEXT OF THE JUDGMENT/ORDER OF KERALA HIGH COURT
These connected writ petitions are pertaining to certain properties of an assessee under the provisions of the Income Tax Act, 1961 (for short, the ‘I.T. Act’), presently in the ownership and possession of the petitioners herein, pursuant to an auction sale of those properties for realization of some arrears payable by the original owner (assessee) under the provisions of the Kerala General Sales Tax Act, 1963 (for short, the ‘KGST Act’) and the Cashew Workers Welfare Fund dues.
2. One late P.N.Madhavan Pillai was the proprietor of M/s.Mohandas Cashew Factory, Arakkal, Kollam District. He was an assessee under the provisions of the KGST Act and had arrears in excess of Rs.58 lakhs for the period from 1995 onwards. He was also in arrears with respect to Cashew Workers Welfare Fund dues for the period from 1997 to 2000. For the realization of the afore amounts, revenue recovery proceedings were initiated under the provisions of the Revenue Recovery Act, 1968 (for short, ‘RR Act’), and an extent of 78.30 Ares of his property was attached. Out of the afore property, an extent of 28.32 Ares of land were auctioned on 30.08.2006 in favour of one Smt.Sushamakumari and the sale was confirmed on 09.02.2007. The afore Smt.Sushamakumari assigned the said property to one Sri.Kishore, as per a sale deed dated 04.11.2009. The afore extent of the property and the factory building therein were purchased by the petitioner in W.P(C) No.50 of 2017 from Sri.Kishore, as per the sale deed dated 13.10.2011. He is stated to be conducting the Cashew Factory in the afore property in the factory building thereafter.
3. In the meantime, Ext.P10 communication dated 11.03.2015 was issued by the Regional Provident Fund Commissioner, directing payment of certain arrears payable by M/s.Mohandas Cashew Factory, referred to above. The 2nd respondent herein, in the meantime, had filed O.S.No.6 of 2007 before the Sub-Court, Kottarakkara against the deceased Madhavan Pillai and the Kerala State Financial Corporation alleging that the deceased availed financial assistance from the Corporation after mortgaging the immovable properties which are being independently proceeded against by the Income Tax Department for realization of income tax arrears payable by the deceased for the assessment year 1995-96. During the pendency of the suit, the assessee (Madhavan Pillai) passed away, and therefore, his wife and children were brought on record as additional defendants. The legal heirs who were brought on record filed a written statement pointing out that the property had already been sold in a public auction in 2006, and at present, the properties are in possession of third parties like the petitioners in these writ petitions. The suit instituted as above was disposed of by Ext.P11 judgment dated 31.07.2013 holding as under:
“15. Thus from the discussions made above, it can be concluded that the mortgage/charge created by first defendant in favour of 2nd defendant on 04.05.1998 with respect to the plaint schedule properties is void under Sec.281 of I.T. Act as against Ext.A6 assessment order dated 04.03.1999 with regard to the claim of the plaintiff to realise the amount covered under Ext.A6 from the plaint schedule property.”
On the basis of the afore judgment, the 2nd respondent herein issued Ext.P12 notice to the petitioners in these writ petitions, who are in possession of the properties at present, informing them that the properties concerned are proposed to be sold in public auction for realization of the arrears payable under the I.T. Act. The petitioner in W.P.(C) No.50 of 2017 submitted Ext.P13 objection essentially pointing out that Ext.P11 judgment and decree are not binding on him since he was not made a party in the civil suit, that he came into possession of the property subsequent to the auction sale under the RR Act on account of which his title is not to be disturbed etc. The 2nd respondent, in turn, issued Ext.P14 informing the petitioner that the Income Tax Department is entitled to proceed against the properties concerned by virtue of Ext.P11 judgment and decree and the provisions of Section 281 of the I.T. Act.
4. It is challenging the proceedings at Exts.P12 and P14 issued by the 2nd respondent as also for a declaration with respect to the property in possession of the petitioner as not liable to be proceeded against for realization of the income tax arrears of the original assessee (late Madhavan Pillai) that the captioned writ petition is filed by the petitioner. The facts and circumstances in the connected writ petitions are also the same except as regards the extent of the property involved in possession of the respective petitioners.
5. I have heard Sri. Anchal C. Vijayan, the learned counsel for the petitioners in W.P(C) Nos.50 and 2357 of 2017 and Smt.G.Vidya, the learned counsel for the petitioner in W.P(C) Nos.8769 and 9143 of 2017, Sri.Ajith Kumar the learned Standing Counsel for the Income Tax Deprtment and Sri.Sayed M. Thangal, the learned Government Pleader for the State of Kerala.
6. Sri.Anchal C. Vijayan, the learned counsel for the petitioners in W.P(C) Nos.50 and 2357 of 2017 would contend that:
i. The petitioners have come into possession of the property in question not pursuant to a private transfer. He points out that the properties were put in auction to realize the tax payable under the KGST Act, and the arrears payable towards the Cashew Workers Welfare Fund, and hence, they cannot be treated as a voluntary transfer of property.
ii. There is no preferential claim for the Income Tax Department under the provisions of Section 281 of the I.T. Act, whereas such a preferential claim is available under Section 26B of the KGST Act.
iii. Under Section 60 of the RR Act, the auction sale effected is free from all encumbrances, and this is especially so, when no objection is filed by the Income Tax Department.
iv. He relies on the judgment of the Apex Court in Connectwell Industries Private Limited v. Union of India [(2020) 5 SCC 373].
7. Per contra, Sri.Ajith Kumar, the learned Standing Counsel for the Income Tax Department would contend that:
I. The dues under the I.T. Act payable by the deceased Madhavan Pillai were with reference to the assessment year 1995-96 onwards. Return of income was filed by the deceased on 31.10.1995, the notice of the assessment was issued in 1996 and the assessment was completed in 1999. The assessment order, along with the demand notice, was served on the deceased assessee on 13.03.1999. On the face of the above, he points out that the recovery certificate was issued by the Tax Recovery Officer on 04.08.1999 and it was only then that the Income Tax Department came to know about the mortgage created over the plaint schedule property by the deceased assessee with the Kerala State Financial Corporation on account of which the suit was instituted leading to the issue of Ext.P11 judgment.
II. He contends that the details of the transferees were not made available to the Income Tax Department, and that is why the transferees/subsequent purchasers, like the petitioners in these writ petitions, were not impleaded in the suit. However, he contends that the decree at Ext.P11 is binding on the petitioners.
v. He relies on the judgment of this Court in Kurian Jose v. Kerala State Financial Corporation, Trivandrum and Others [2009 (4) KLT 511].
8. I have considered the rival contentions as well as the connected records.
9. The provisions of Section 281(1) of the I.T. Act reads as under:
“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 ; or
(ii) (ii) with the previous permission of the Assessing Officer.”
A reading of the afore provision would show that it is only in a situation where an assessee “creates charge” or parts with the possession of the property during the “pendency of any proceedings under the I.T. Act or after the completion thereof”, the question of the transfer becoming void arises.
10. The afore provision is to be read along with Rule 2 of the Second Schedule of the I.T. Act which reads as under:
“Issue of notice:
2. 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.
Rule 16(1) to the Second Schedule of the I.T. Act reads as under:
“16(1) Where a notice has been served on a defaulter under rule 2, the defaulter or his representative in interest shall not be competent to mortgage, charge, lease or otherwise deal with any property belonging to him except with the permission of the Tax Recovery Officer, nor shall any civil court issue any process against such property in execution of a decree for the payment of money.”
A reading of the afore provisions would show that it is only when transfers are effected/charge created during the pendency of the proceedings under the I.T. Act or after service of notice under the Second Schedule, such transfers become void.
11. Here, the respondent Income Tax Department admits that:
i. The arrears payable by the deceased assessee were with respect to the assessment year 1995-96 onwards.
ii. He filed return of income for the year 1995-96 on 31.10.1995.
iii. Notice of assessment was served on the deceased assessee on 17.10.1996.
vi. Assessment completed on 04.03.1999 and demand notice served on the deceased assessee on 13.03.1999.
vii. Recovery certificate was issued and served on the assessee on 09.08.1999.
As against the afore, the properties of the deceased assessee were sold for the realization of arrears of tax payable under the KGST Act for the period from 1995 onwards. Here, a reference to the provisions of Section 26B of the KGST Act would be relevant, which reads as under:
“26B. Tax payable to be first charge on the property:-
Notwithstanding anything to the contrary contained in any other law for the time being in force, any amount of tax, penalty, interest and any other amount, if any, payable by a dealer or any other person under this Act, shall be the first charge on the property of the dealer, or such person.”
(underlining supplied)
The afore provision, by virtue of the non-obstante clause, excludes the operation of “any other law in force” and creates a first charge on the property of the dealer. Therefore, with respect to the year 1995 onwards, there was a first charge with reference to the tax payable under the KGST Act. It is to be noticed that there is no corresponding provision creating the first charge under the I.T. Act. At the maximum, the provisions of Section 281 of the I.T. Act referred to above provide that certain transfers during the pendency of proceedings be void. Here, no such transfer has taken place, and instead, a charge is created on the properties of the deceased, with respect to the arrears/tax payable under the KGST Act. It is for the realization of such tax payable that the properties of the deceased are proceeded against after attaching them. Such properties are placed for public auction, and the properties are purchased by various individuals who, in turn, later sold those properties in favour of the petitioners herein.
12. Therefore, in my opinion, the Income Tax Department may not be justified in contending that they can proceed against the properties in possession of the petitioners herein for realizing the arrears payable by the deceased Madhavan Pillai.
13. In this connection, I notice the judgment of the Apex Court in Connectwell Industries Private Limited (supra) relied on by the learned counsel for the petitioners, wherein the Apex Court considering the claim made by the Income Tax Department over a property which was sold for recovery of arrears payable to the Bank by the Debt Recovery Tribunal held as under:
“9. It is trite law that, unless there is preference given to the Crown debt by a statute, the dues of a secured creditor have preference over Crown debts. [See: Dena Bank v. Bhikhabhai Prabhudas Parekh & Co. [Dena Bank v. Bhikhabhai Prabhudas Parekh & Co., [(2000) 5 SCC 694], Union of India v. Sicom Ltd. [(2009) 2 SCC 121], Bombay Stock Exchange v. V.S. Kandalgaonkar [(2015) 2 SCC 1 : (2015) 1 SCC (Civ) 694], CIT v. Monnet Ispat & Energy Ltd. [(2018) 18 SCC 786 : (2019) 3 SCC (Civ) 252]
10. Rule 2 of Schedule II to the Act provides for a notice to be issued to the defaulter requiring him to pay the amount specified in the certificate, in default of which steps would be taken to realise them. The crucial provision for adjudication of the dispute in this case is Rule 16. According to Rule 16(1), a defaulter or his representative cannot mortgage, charge, lease or otherwise deal with any property which is subject-matter of a notice under Rule 2. Rule 16(1) also stipulates that no civil court can issue any process against such property in execution of a decree for the payment of money. However, the property can be transferred with the permission of the Tax Recovery Officer. According to Rule 16(2), if an attachment has been made under Schedule II to the Act, any private transfer or delivery of the property shall be void as against all claims enforceable under the attachment.
11. There is no dispute regarding the facts of this case. The property in dispute was mortgaged by BPIL to Union Bank of India in 2000 and DRT passed an order of recovery against BPIL in 2002. The recovery certificate was issued immediately, pursuant to which an attachment order was passed prior to the date on which notice was issued by the Tax Recovery Officer, Respondent 4 under Rule 2 of Schedule II to the Act. It is true that the sale was conducted after the issuance of the notice as well as the attachment order passed by Respondent 4 in 2003, but the fact remains that a charge over the property was created much prior to the notice issued by Respondent 4 on 16-11-2003. The High Court held that Rule 16(2) is applicable to this case on the ground that the actual sale took place after the order of attachment was passed by Respondent 4. The High Court failed to take into account the fact that the sale of the property was pursuant to the order passed by DRT with regard to the property over which a charge was already created prior to the issuance of notice on 11-2-2003. As the charge over the property was created much prior to the issuance of notice under Rule 2 of Schedule II to the Act by Respondent 4, we find force in the submissions made on behalf of the appellant.”
Thus, the Apex Court has noticed that there is no preference given to the tax payable under the I.T. Act, and hence, the charge created over the property earlier to the service of notice under the Second Schedule of the I.T. Act would dis-entitle the Income Tax Department from proceeding against the property in question.
14. In this connection, it is also to be noticed that the respondent Income Tax Department relies on Ext.P11 judgment of the civil court. However, Ext.P11 judgment of the civil court was rendered with reference to a mortgage created by the deceased in favour of the Kerala State Financial Corporation in 1998. It is on that basis, the civil court issued Ext.P11 judgment with reference to the provisions of Section 281 of the I.T. Act. Therefore, the judgment at Ext.P11 did not decide upon the right of the petitioners to be in lawful possession of the property with reference to the provisions of the KGST Act under which the properties were proceeded against and ultimately sold to the assignors of the petitioners herein. It is also to be seen that the legal heirs of the deceased had pointed out in their written statement that the properties are not in their possession at present since those properties have already been sold in auction and in possession of third parties, and hence, the suit is bad for non-joinder of necessary parties. This Court need not decide on the afore contention raised, since this Court is of the opinion that the provisions of the I.T. Act referred to earlier would not entitle the said Department to proceed against the property lawfully held by the petitioners herein on account of the reasons stated earlier.
15. Sri.Ajith Kumar also raised a contention to the effect that Section 26B of the KGST Act would not have any application to the case at hand since the same is introduced only with effect from 01.04.1999. It is true that Section 26B is introduced only with effect from 01.04.1999. However, a Division Bench of this Court had occasion to consider the impact of the introduction of Section 26B on a charge created in favour of a Bank earlier to 1999, in the judgment reported as South Indian Bank Ltd. v. State of Kerala [2006 (1) KLT 65], wherein it is held as under:
“9. We are in this case concerned with a question as to whether S.26B of the K.G.S.T. Act would take away the efficacy of a decree passed by the civil court prior to the introduction of said section. We are of the view till the decree is executed through executing court title of the mortgaged property remains with the mortgagor. Decree passed by the civil court is the formal expression of an adjudication which conclusively determines the rights of parties, but unless and until the decree is executed the Bank would not procure the property and the State’s overriding rights would have precedence over that of the Bank. When a first charge created by the operation of law over any property, that charge will have precedence over an existing mortgage and the decree obtained by the bank against the mortgagor will not affect the state since State was not a party to the suit. Decree has only conclusively determined the rights between the mortgagor and mortgagee which would not affect the statutory rights of the State. The expression “rights of parties” used in S.2(2) means rights of parties to the suit. State which has got a statutory first charge under Section 26B of the K.G.S.T. Act would prevail over the rights created in favour of the Bank by an unexecuted decree. We therefore hold that the decree obtained by the Bank will not have any precedence over the first charge created in favour of the State under S.26B of the K.G.S.T. Act.
10. Counsel appearing for the Bank submitted that S.26B has employed a nonobstante clause, which does not exclude a decree or order of the court and therefore decree obtained by the bank is still enforceable dehors S.26B of the K.G.S.T. Act. Since State is not a party to any decree the contention has no force. Even otherwise in our view by virtue of operation of law State will have prior charge over the properties in question.
In the light of the afore, I am of the opinion that the provisions of Section 26B would have operation in the present case also. The contention raised by the learned Standing Counsel is, therefore, only to be rejected.
16. It is also to be noticed that the Income Tax Department in its communication dated 14.12.2016 (Ext.P14 in W.P(C) No.50 of 2017) has taken the stand that “any transaction as against it is void as against all claims” with reference to the judgment of the civil court referred to above and Section 281 of the I.T. Act. But in my opinion, merely on account of the provisions under Section 281 of the Act, the ownership transfer to the petitioners herein cannot be declared as void by the Income Tax Officer or the Department. For that, they may have to institute a suit as was done in the case of mortgage effected in favour of the Kerala State Financial Corporation. Here, that is not done as against the petitioners and on the basis of the findings rendered earlier, the maintainability of such suits itself is doubtful.
17. On the whole, I am of the opinion that the petitioners are entitled to succeed.
Resultantly, these writ petitions are allowed by setting aside the impugned notices/proceedings and also declaring that the properties in possession of the petitioners cannot be proceeded against for realization of the arrears payable under the I.T. Act by the deceased Madhavan Pillai, proprietor of M/s.Mohandas Cashew Factory, Arakkal, Kollam District.
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