Inayat Hussain Fakhruddin And Another v. Union Of India And Another

1. These two appeals against an order of the Civil Judge, Senior Division, Nagpur, raise common questions of law and facts. They are, therefore, being heard and decided together.

2. Special Civil Suit No. 237 of 1977 was filed by Inayat Hussain, appellant in A.O No. 31 of 1977 while Special Civil Suit No. 236 of 1977 was filed by Smt. Sugarabi, the appellant in A.O No. 32 of 1977. Both the suits were filed against Union of India praying for a declaration that the property in suit belongs to them and was not liable to be taken for the satisfaction of dues against an assessee Fakruddin. In both these suits, which were filed on 3rd March, 1977, an application for interim injunction was filed on 15th March, 1977. The defendant, Union of India, appeared and filed their reply to the application for interim injunction and by the order passed by the learned trial Judge on 10th October, 1977, both the applications came to be rejected with costs. It is against this order of the trial Court that the present appeals are filed.

3. In order to understand the controversy, which is raised before me, the facts giving rise to these applications may be stated. Fakruddin was an assessee liable to pay income-tax on account of income from his dealings. Fakruddin was admittedly an assessee who was liable to pay income-tax dues to the Union of India, which came to the tune of about Rs. 3,00,000. Recovery proceedings, therefore, were commenced against Fakruddin and a notice under Rule 2 of Schedule II of the Income Tax Act was issued to him on 17th December, 1971. Fakruddin was possessed of certain immoveable properties situated within the city of Nagpur, namely, House Nos. 8 and 47 and a godown No. 36 in Gandhibag and another property House No. 481 in Circle No. 13/19 Boharipura. On 1st March, 1973 Fakruddin sold his house Nos. 8 and 47 and a godown in Gandhibag to Inayat Hussain. This Inayat Hussain happens to be a nephew of Fakruddin. On 27th October, 1972 similarly he sold his property house No. 481 situated in Boharipura to Smt. Sugarabi, who was his mother-in-law.

4. In the recovery proceedings which were started against Fakruddin, the Income-tax Officer (Recovery) on 27th November, 1973 attached both the properties of Fakruddin, one sold to Inayat Hussain and the other sold to Sugarabi, who are the respective appellants before me in A.O No. 31 of 1977 and A.O No. 32 of 1977. It appears and I am informed, that both Inayat Hussain and Sugarabi took out proceedings after attachment under rule 11 of the Schedule to the Income Tax Act and took objections to the proposed sale of the properties which were purchased by them in 1972 and 1973. Their objections failed and the property was directed to be put up for sale and was actually sold on 11th March, 1977.

5. On 3rd March, 1977, as stated above, the present suits were commenced by Inayat Hussain and Sugarabi, in which, as stated earlier, they filed an application for interim injunction.

6. The principal ground, on which it was contended on behalf of the appellants-plaintiffs in the Court below that interim injunction should be granted in their favour, was firstly that when the properties were purchased by them they were not under attachment. The attachment was subsequent. The second ground which was urged was that upon a true and correct interpretation of section 281 of the Income-tax Act, as it stood prior to its amendment in October 1975, it was for the Revenue to show that the transfer by the assessee, Fakruddin in this case, was with an intention to defraud the department and it is only then that the property can become available upon being so proved, for being taken for satisfaction of the dues from Fakruddin. It was, therefore, urged that the plaintiffs had proved a prima facie case that there was an issue which was triable, as to whether section 281 applied and whether the transfer was with an intention to defraud and if, it was urged, there was a triable issue to go to trial before the Court, then the plaintiffs were entitled to an interim injunction.

7. In the view of the learned trial Judge, who decided the applications, section 281 of the Income-tax Act applies only to cases where assessment proceedings were pending. In the view which he took, therefore, he held that section 281 has no application. Considering the effect of Rules 2, 16, 45 and 51 of the Second Schedule attached to the Income-tax Act he came to the conclusion that here there was no question of an intention to defraud and therefore, the plaintiffs, in his opinion, had not made out a prima facie case. In that view of the matter the learned trial Judge rejected the application.

8. Mr. Potey, who appeared for the appellants before me, in support of the appeals placed considerable reliance upon a decision from Kerala High Court reported in V. Radhakrishna v. Tax Recovery Officer, Kalicut . 1976 105 ITR 30.. Mr. Potey contended firstly that section 281 is a section of general application. That the principle enacted in that section being of general application, the Rules which are to be found in the Schedule must be deemed to be subordinate to that principle. If the section has application to all kinds of proceedings contemplated under the Income-tax Act and Mr. Potey urged that recovery proceeding is equally a proceeding under the Act, then the provisions and principles of section 281 must be read into the Rules. If that is done, according to Mr. Potey, then Rules 16 and 48 upon which reliance has been placed in the Court below must be read subject to section 281. In other words, it was Mr. Potey's contention that it was for the Revenue to establish in every case where a property is transferred as contemplated by section 281 that it was so transferred or parted with possession with an intention to defraud and unless the Revenue or the Department so establishes that the transfer was with an intention to defraud, the property could not be got for the purpose of recovery of tax. As I pointed out, Mr. Potey heavily relied upon a decision of Kerala High Court. Unfortunately for the reasons, which I shall presently give, I am unable to agree.

9. The relevant provisions which fall for determination and consideration are section 281 of the Income-tax Act and Rules 2, 16, 48 and 51 of the Second Schedule. The question, however, which is raised is a very narrow question and that is whether section 281 and rule 16 operate on and cover the same field and area or otherwise. If section 281 is of general application and if Rule 16 is of special application there cannot be any quarrel that the Rule which provides for specific contingencies and circumstances, will apply to those specific cases and not section 281. It is only in cases where there is no specific provision either in the section or in the Rule that section 281 will have application. There can be no quarrel and the argument of Mr. Potey can be easily accepted that where there is a conflict between a Rule and a section, then it will be the section which will have precedence. It is true that both section as well as the Rules in this case have been enancted by the Parliament and are parts of the same enactment, but if there is a conflict in the two provisions in the same enactment, it has to be considered whether the section has a position of pre-eminence over that of a Rule and there can be no dispute that the section will prevail over the Rule. Mr. Potey contended that in the present case section 281 is a section of general application and Rule 16 also provides for situation in the case of recovery proceeding and therefore, the principle laid down in section 281 would apply and if there is any conflict, the conflict or inconsistency must be resolved in favour of the section than the Rule. section 281 of the Income-tax Act reads as follows:

“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) with the previous permission of the Income-tax Officer.

(2) This section applies to cases where the amount of tax or other sum payable or likely to be payable exceeds five thousand rupees and the assets charged or transferred exceed ten thousand rupees in value.

Explanation—In this section, “assets” means land, building, machinery, plant, shares, securities and fixed deposits in banks, to the extent to which any of the assets aforesaid does not form part of the stock-in-trade of the business of the assessee.”

10. Now upon a plain construction of that section and considering the first clause which lays down that the section applies “during the pendency of any proceeding” it is clear that it will apply to any proceeding which is contemplated under the Act. The limited construction which was sought to be placed upon section 281 as being applicable only where proceedings for assessment are pending, for the reasons which I shall presently give while considering the argument advanced on behalf of the respondent in support of this proposition, appears to me to be unsound and artificial. Now the proceeding under the Act can be three fold broadly, (1) for the finalisation of tax liability of an assessee, (2) for finalisation of default proceeding for failure on the part of the assessee and (3) finally for recovery on his failure to pay the demanded tax by him. All these must be properly construed as proceedings under the Act and unless there are words in section 281 which limit the operation of that section to any one or more of the proceedings referred to above, the operation of the first clause in section 281 cannot be restricted.

11. Mr. Shelat, who appeared for the respondent, contended that the words in the concluding part of section 281 indicate that the section operates and relates only to proceeding for finalisation of assessment. Those words, according to him, are that “the 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”. Mr. Shelat emphasised the words “as a result of the completion of the said proceeding”. Mr. Shelat contended that the clause “as a result of the completion of the said proceeding” qualifies the word “proceeding” appearing in the first part of the section. Therefore, according to him, the pendency must be of such proceeding as is to be completed and by reason of completion, or as a result of the completion of such proceeding, the tax or any other sum must become payable by the assessee. This in his opinion indicates that this was only during the course of assessment proceeding. I do not think that this limited construction sought to be put by Mr. Shelat is either in consonance with the intention of the section, or even for the benefit of the Revenue for which the section is enacted. Besides, the normal and plain grammatical meaning of these words does not restrict such a meaning. It cannot be doubted that penalty proceeding would be also completed and upon completion of the penalty proceeding, a tax or some such sum would be payable by the assessee. It follows, therefore, that apart from the assessment proceeding penalty proceedings are equally covered by the words in the clause upon which Mr. Shelat placed reliance. It seems to me that they are equally capable of covering the case of recovery. A case may arise where recovery proceeding against an assessee may be partly completed and as a result of the partial completion of the proceeding the remaining amount would still be payable by the assessee. Where the assessee is still liable to pay and his property which can be still proceeded against, then the proceeding for recovery of that remaining sum payable by the assessee is still a proceeding for recovery “of any other sum” pending under the Act. I do not see why such a contingency can be and ought to be excluded which it would be necessary to do so if the interpretation of Mr. Shelat were to be accepted.

12. Mr. Shelat contended that in cases where recovery proceedings are commenced the liability of the assessee is determined. The word “payable”, however, in my opinion, not merely relates to fixation of the liability but also the liability to pay that amount and a transfer has been made void in that section as against any claim in respect of the sum payable by the assessee. As I pointed out where part of the recovery proceeding has been completed, leaving still a claim due from the assessee or an amount payable from the assessee, it is still a claim or amount which is payable by the assessee. If that is so, I do not see why section 281 should be limited so as to apply only to finalisation of assessment and penalty proceedings. The construction which I am inclined to put upon section 281, as it stood prior to its amendment, is also in consonance with the amended section 281, which now finds place on the Statute book. In that amended section now the relevant additional words which are used are thus:

“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.”

That would indicate that section 281 will continue to govern recovery proceedings which are started as soon as a certificate is issued under section 222 of the Income-tax Act against the assessee, but until any notice is issued under rule 2 calling upon the assessee to make payment. Obviously though the recovery proceedings are started there may be some time gap between the time when the certificate is issued and a notice under Rule 2 is served upon the assessee. Section 281, as amended, now takes care of such stage prior to the issuance and service of a notice under Rule 2. As I shall point out, when I deal with the Rule that subsequent to the issuing and service of notice under Rule 2, the following rules take care of any mischief or any transfer of property by the assessee or defaulter in any manner. Presumably, therefore, the amended section is not intended to provide for cases after service of notice under Rule 2 and properly so, since the Rules under the Schedule have teeth enough to take care of all such situations.

13. It is now necessary to analyse the judgment of Kerala High Court reported in V. Radhakrishna Eradi v. Tax Recovery Officer, Calicut (cit. supra). The argument which was advanced before me by Mr. Potey was also advanced there on behalf of the appellant, while on behalf of the department it was principally contended that section 281 and the rules are meant “to meet two different situations or circumstances.” It seems to have been also represented before the Kerla High Court on behalf of the Revenue that section 281 has application to transfers during pre-recovery proceedings and where penalty proceedings were pending and did not apply to recovery proceeding and it was Rule 16 which applies to recovery proceeding. Summarising the argument urged on behalf of both the petitioner and the respondent, it was pointed out that “the controversy is only as regards the respective fields in which section 281 and rule 16 operate. In other words, does section 281 apply to recovery proceedings also, is the sole question urged before me.” His Lordship then held that section 281 applies to recovery proceedings as well and observed “the section has wider application as it covers the entire area in which the Act operates while the rule is limited in its application to the recovery stage”. His Lordship further observed “the question, therefore, is whether the immunity provided under section 281 can be read into rule 16 so as to protect an innocent transferee in recovery proceedings against the assessee.”

14. His Lordship then addressed himself to the crucial question in that case and that was, to put in his words, is as under:

“Bearing these principles in mind, one has to look at the provisions to find out whether there is in fact a conflict between section 281 and rule 16. If the language of section 281 and that of rule 16 suggest that they deal with the same subject-matter and seek to achieve the same results, then both the provisions, as far as possible, must be read in such a way that there is no conflict between the two.

If section 281 was general and rule 16 was particular and they were inconsistent with each other, then according to the principle of interpretation, rule 16, although appearing in the Schedule, would prevail against the former.”

In the view which he took and which is expressed in the following paragraph that “section 281 and rule 16 deal with the same subject matter, not generally but specifically”—His Lordship came to the conclusion that “the provisions of section 281 have to be read in rule 16”. I am unable to agree for the reasons which I shall presently point out. To my mind section 281 and rule 16 do not deal with the same subject matter and that rule 16 must prevail over section 281 in the specific case which is covered by rule 16.

15. Before, however, proceeding to deal with the rules and specific area and the subject which they cover, it is necessary to examine section 281 a little more closely again in order to understand in what areas and to what cases section 281 has application. It will be seen from the wording of section 281, which I have adverted to above, that the contingency which is contemplated is apart from the pendency of the proceeding, an assessee creating a charge on, or parting with “the possession by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever of any of his assets.” It will thus be seen that the essential for the attraction of section 281 is that the assessee must either create a charge on, or part with the possession either by way of sale, mortgage, gift, exchange or any other mode of transfer and with regard to any of his assets. Taking the last limb of this part of the section, it will be seen that it applies to moveables as well as immoveable property. Therefore, section 281 has application not merely to assets which are immoveable but also to assets which are moveables. The second is that it also applies where the assessee creates a charge in which case there is no transfer of possession, as in the case of simple charge or a simple mortgage. The third case which this part of the section deals with is a transfer of possession. It will thus be seen that section 281 not merely deals with cases of all kinds of properties, moveable or immoveable, tangible or intangible, but also deals with cases where the assessee does not part with possession, but creates charges or encumbrance on the property. As I shall point out presently, rules 2, 16, 48 and 51 if read together it will be clear that they only apply to immoveable property and do not apply to cases where the property is not specific moveable or intangible and there is no question of transfer of possession or otherwise. It will be seen that if there is no transfer of possession or there is no creation of a charge, section 281 would not be attracted.

16. Even that is not enough for the operation of section 281. The more essential part of section 281 and if I may say so, the heart of section 281 is that the transfer or creation of a charge by the assessee, must be of a particular nature and that is “with the intention to defraud the Revenue”. Therefore, if the assessee creates a charge or parts with possession of any property, moveable or immoveable, tangible or intangible, but without any intention to defraud, which is a fact and has to be proved like any other fact, then also section 281 has no application. As I pointed out, the heart of section 281 is the intention to defraud and if the intention to defraud the Revenue is absent or is not claimed to be present, section 281 cannot be invoked.

17. As distinct from the section and if the rules are considered, rules 2, 16, 48 and 51 operate by their own force and no intention to defraud the Revenue is necessary at all. They also do not have any application to intangible or moveable property which is not in fact attached and the question whether there is transfer of possession or creation of a charge or not is immaterial. The relevant rules read thus:

“2. Issue of notice — When a certificate has been received by the Tax Recovery Officer from the Income-tax 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.”

16. Private alienation to be void in certain cases - (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.

(2) Where an attachment has been made under this Schedule, any private transfer or delivery of the property attached or of any interest therein and any payment to the defaulter of any debt, dividend or other monies contrary to such attachment, shall be void as against all claims enforceable under the attachment.

48. Attachment - Attachment of the immovable property of the defaulter shall be made by an order prohibiting the defaulter from transferring or charging the property in any way and prohibiting all persons from taking any benefit under such transfer or charge.

51. Attachment to relate back from the date of service of notice:— Where any immovable property is attached under this Schedule, the attachment shall relate back to and take effect from, the date on which the notice to pay the arrears, issued under this Schedule, was served upon the defaulter.”

It will thus be seen that upon the issuance of the notice upon a certificate being granted by the Tax Recovery Officer, if followed by an attachment of immoveable property, whether or not in the possession of the assessee, the attachment by virtue of rule 51 relates back to the date of the service of the notice. In the present case the notice admittedly was served on 17th December, 1971. Though the attachment in this case is subsequent to the purchases, which are challenged, namely, of 27th October, 1972 and 1st March, 1973 and prior to 23-11-1973 when the attachment in fact took place, by reason of rule 51 the attachment would be deemed to be effective from 17th December, 1971 itself.

18. It is now necessary to look to rule 16. The relevant rule which really has application is not sub-rule (1) of rule 16 but sub-rule (2) of rule 16. That sub-rule really enacts a principle which is to be found in section 64 of the Code of Civil Procedure, which makes all transfers of immovable properties void as against claims enforceable under the attachment. As we have seen the continued operation of rules 2 and 48 and rules 16 and 51 relates to immoveable property. Therefore, where immovable property is attached and the attachment as in this case must be deemed to be effected from 17th December, 1971, a transfer subsequently by Fakruddin in favour of the appellants on 27th October, 1972 and 1st March, 1973 would be of no avail and would be void as against the department which has attached this house property for the recovery of its claims. No question of bona fide transfer with value or any other question as contemplated in section 281, or an intention to defraud the Revenue arises at all. By the force of attachment itself the property becomes open to be taken and sold for satisfaction of the claim of the attaching department. Under the circumstances it seems to me plain and obvious that the two provisions of the Act do not operate on the same field. That rule 16 coupled with rules 48, 51 and 2 specifically provides for recovery proceeding taken against immoveable property. Therefore, though even in regard to the recovery proceeding section 281 will still be available. Where the property is immoveable property, the relevant rules with which we are concerned deal with cases of immoveable property and therefore, specifically of a different subject. That specific subject is to be carved out from the ambit of section 281 and if that is so, then according to rules of interpretation laid down, it is the specific provision which will govern. In the circumstances I am unable to agree with the view taken by Kerala High Court. In that view of the matter, the appeals will have to be dismissed.

19. Mr. Potey, however, lastly urged an argument based upon sub-rule (2) of rule 16 and the circumstances that a different view has been taken as to the operation of section 281 and rule 16 by another High Court, thereby indicating that a triable issue arises between the parties. The first contention which Mr. Potey raised based upon sub-rule (2) of rule 16 was, that the words used in sub-rule (2) are “where an attachment has been made”. Mr. Potey contended that this would refer to the physical date of attachment and not the deemed date. According to Mr. Potey under rule 51 a fiction of relation back is created. There is in Mr. Potey's opinion a conflict between rule 16, sub-rule (2) and rule 51 and if there is a conflict, it was Mr. Potey's submission that it should be resolved in favour of the assessee. The enactment being a fiscal enactment it should be so construed that the benefit should go to the assessee. I do not wish to express any opinion though I am not prepared to be taken in with the argument advanced by Mr. Potey. However, there is some substance in what he says that in view of the possibility of an interpretation of sub-rule (2) as to the fact of attachment and the different interpretation than the one which has been placed by Kerala High Court by me on section 281, a triable issue between the parties arises. It is true that when a Court has to consider whether an injunction should be granted or otherwise it has to consider only a prima facie case. A prima facie case, it is well laid down, does not mean a case which will succeed, but a case which is not such as is apparently barred by any provisions of law and in respect of which something can be said in favour of the plaintiff. In view of what I have said so far, there seems to be some substance in Mr. Potey's contention that the minimum to which he is entitled is to show that he has some sort of a prima facie case, which requires further investigation. It is not without some reluctance that I am inclined to think in the manner in which Mr. Potey wants me to do. But that can only be on terms. A litigation of this kind should not be used for purpose of defeating the provisions of tax laws. They have an impact on the public and involve rights and interest of other persons who are not before the Court apart from having a general effect upon the assessees and defaulters and tax dodgers. Taking, therefore, an overall view of the matter, though with some reluctance, I am inclined to grant an interim injunction in favour of the plaintiffs, provided the plaintiffs deposit a sum of Rs. 10,000 each in both the suits within three weeks from the date of this order. Upon failure of the plaintiff to deposit the amount, the injunction as prayed will stand vacated. Mr. Shelat says that in respect of the property which is the subject matter of A.O No. 31 of 1977 confirmation has already taken place and a sale certificate issued. That the department thereafter is not responsible to do anything with reference to the auction purchaser of the property. If that is so, then it would be obvious that the injunction would be infructuous so far as that property is concerned. Interim injunction be issued on the above terms restraining the defendant from confirming the sale.

20. The amounts if deposited will remain in deposit till the decision of the suits subject to the final decision of the suits and would be payable according to the orders of the Court. The trial Court may consider the advisability of investing the amount in the meantime in fixed deposit for a specified period. Mr. Potey at this stage requested that permission to file Letters Patent Appeal may please be granted. Leave granted.

21. There will be no order as to costs of this appeal.

Order accordingly.