Auction By Based On Non-Existent Order; Punjab & Haryana High Court Imposes Cost On Income Tax Authorities

The Punjab and Haryana High Court has held that the auction proceedings based on a quashed ex-parte income tax appellate tribunal (ITAT) order by the tax recovery officer are void ab initio.

The bench of Justice Sanjeev Prakash Sharma and Justice Sudeepti Sharma has directed the respondent department to restore the properties of the petitioner-HUF from the auction purchasers and subsequent purchasers, assignees, or persons to whom interest has been devolved. The bench held that any transfer of property done after the auction by the auction purchasers shall be treated as void ab initio, and the title and ownership of the properties shall be restored in the name of the petitioner, HUF. No civil court would be empowered to pass any orders in favor of any person who has acquired any right to the properties after the auction conducted on 31.10.1985 and 15.11.1985.

“A person whose property is put to auction by the Income Tax Authorities not only faces financial loss but also suffers from loss of his esteem in the public, but the same cannot be redeemed in spite of a final adjudication in favor of the assessee,” the bench said.

The petitioner/assessee has preferred the writ petition as a member of the Hindu Undivided Family (HUF), assailing the auction of sale conducted by the respondents to recover the tax assessed against the HUF.

The Rattan Trust was a non-charitable trust created by a registered deed executed on March 28, 1942. Besides other donations, a donation for a sum of Rs. 5 lakh was received by the trust in January 1946 from a Gokal Chand individual. The assessment for the years 1946–1947 of the HUF was completed on September 6, 1946, which reflected the receipt of the donation of Rs. 5 lakh. The Income Tax Officer (ITO) had completed the assessment of the trust for the years 1947–48, and exemption certificates were duly granted to the trust on June 14, 1947, January 8, 1952, and September 1, 1959.

The original assessment of the years 1946–47 was completed on September 6, 1946, with a total income of Rs. 97,789. However, the ITO, after seventeen years, reopened the assessment order under Section 147 of the Income Tax Act, 1961, and held that the demand of Rs. 5 lakh had emanated from the petitioner HUF, resulting in a total imposition of tax on income of Rs. 6,01,789 under the order passed by the ITO.

The appeal filed by the petitioner against the order was allowed by the Appellate Assistant Commissioner of Income Tax. The Income Tax Appellate Tribunal dismissed the appeal filed by the department assailing the order and upheld the deletions.

A reference was made under Section 256 (2) to the Delhi High Court. It was answered in favor of the revenue, and the decisions of the AAC and ITAT were set aside, and the matter was remanded back to the ITAT.

The ITAT passed an ex-parte order against the petitioner, upholding the assessment. Based on the ex-parte order, a demand notice was issued to the petitioner, and a recovery certificate was issued. The petitioner filed an application for setting aside the ex-parte order. An ex parte order was set aside, and the case was posted for rehearing for de-novo consideration by the ITAT.

The ITAT, after considering all aspects, again upheld the assessment and action of the ITO under Section 147, and the appeal of the revenue was accepted. The petitioner submitted a reference under Section 256(2) against the order to the Delhi High Court, and it was admitted.

The assessee contended that the demand notice and the tax recovery certificate were defective and had become meaningless after the ex parte order was set aside. Since the basis of the demand notice was the order of the ITAT and the recovery certificate was also based on the same order, which had been set aside, the TRO had no jurisdiction to proceed with the recovery certificate.

The assessee contended that the doctrine of lis pendens in terms of Section 52 of the Transfer of Property Act, 1882, would apply as the auction purchasers who, having full knowledge of the case pending before the Delhi High Court and the property being under litigation, had knowingly purchased the property pendent lite and would not be entitled to claim themselves to be strangers or bona fide purchasers.

The department contended that the auction notice had been issued on 16.10.1985 and the auction was released on 31.10.1985 and 15.11.1985, relating to the properties situated at Link Road and Kwality Restaurant, Lawrence Road, Amritsar, respectively. There was no stay against the auction of properties by the High Court. The department relied on Sanjiv Kumar Singh vs. State of Bihar and other 2023 Live Law (SC) 63 to submit that mere filing of an appeal would not operate as a stay, and as there was no stay in the petition filed by the assessee, therefore, the department has rightly auctioned the properties. The writ petition was filed in the year 1989, and the application filed by the assessee to set aside the sale of the immovable property based on the orders passed by the High Court cannot be said to be in terms of Section 60 (1A) of the Act, 1961, as no payment was made of the amount specified in the proclamation of sale.

The court noted that the ex parte order passed by the ITAT dated July 23, 1979, was set aside by the ITAT. When it recalled the ex parte order, any action based on the order dated July 23, 1979, or the certificate of recovery issued on the said basis dated December 14, 1979, would be thus void ab initio. The subsequent order passed by the ITAT on April 11, 1983, created a fresh liability for the assessee. Hence, a demand notice was required to be issued after the passing of the order by the ITAT on April 11, 1983, and it was only thereafter that a recovery notice and recovery certificate could be issued in terms of Section 222(1) of the Act, 1961.

The court directed the Income Tax Authorities to refund the auction price obtained in auction from the auction purchasers along with 15% interest per annum, as prevalent in the year 1985. The order shall be implemented within one month, failing which the petitioner would be free to initiate contempt proceedings without further notice. The petitioner is also entitled to costs of Rs. 1,00,000 to be paid by the income tax authorities.

Counsel For Petitioner: Radhika Suri

Counsel For Respondent: Pridhi Jaswinder Sandhu

Case Title: M/s Gokal Chand Rattan Chand Versus UOI

2024 LiveLaw (PH) 202

Case No.: CWP-2104-1989 (O&M)

Click Here To Read The Order