The Hindu Business Line : Assessee in arrears — No attachment without possession

THE TAX authorities have been vested with powers to attach property when tax is in arrears. However, what can be attached is only property that belongs to an assessee in default. An interesting question arises where property is transferred for full consideration to a third party by the assessee in default. Can such property be attached?

This point arose in Electro Zavod (India) Pvt. Ltd. v. C.I.T. (278 I.T.R. 187). The facts in this case were that an agreement for sale of a property had been entered into and the consideration was paid by Electro Zavod (EZ) to the seller. Possession of the property was handed over by the seller to EZ on May 7, 1997. However, the deed of conveyance was not executed between EZ and the seller.

On May 30, 1977, the Income Tax Department issued a provisional order of attachment under Section 281-B of the Income Tax Act, 1961, in respect of the aforesaid property as the seller was an assessee who had tax arrears. On a writ petition filed against the order, the single judge directed the Commissioner to decide the matter in accordance with law, while permitting EZ to file a fresh representation. The Commissioner held that as the ownership of the property had not been transferred by executing a registered deed of conveyance, the seller could not be said to have ceased to be the owner, and EZ had not acquired any title in the property. It was further observed by the Commissioner that EZ had not taken possession of the same and this was found upon inspection by the competent official of the Revenue who submitted a report.

On a writ petition filed by EZ against the order of attachment and the order of the Commissioner, the Calcutta High Court held that the Revenue had admitted that an agreement for sale of the property had been entered into, and payment of consideration had been made.

However, a dispute was raised as to the claim of possession on the strength of the inspection report produced by the Department. The Revenue did not examine or consider the contents of the agreement itself and correspondence between the EZ and the seller.

According to the Court, the adjudication without consideration of these materials and upon exclusive reliance on the Department's documents was not in conformity with recognised judicial principles. It is the basic principle of law that an arbiter must take note of and address the contention, materials and the evidence produced by the contending parties. The issue of possession had been decided without considering the materials placed and produced by the writ petitioner.

The real test of possession is the intention of possessing together with the extent of occupation or control of the property. The following test has been approved and accepted by the Supreme Court in B. Gangadhar v. B. R. Rajalingam ([1995] 5 SCC 238).Applying this, the Calcutta High Court held that EZ had produced before the Tax officer necessary documents evidencing the fact of taking over possession — namely, the agreement and other letters. The veracity of the contents of these documents had not been denied or disputed by the Tax Department. Therefore, the Court concluded that there were unimpeachable documents to prove the fact of possession of the property by EZ.

The Court then examined the findings of the Commissioner. The Commissioner decided that the seller had not ceased to be the owner of the property and, therefore, the order of attachment under Section 281-B was appropriate. The words of Section 281-B are "any property belonging to the assessee." These words are significant and the same cannot be synonymous with ownership. The Commissioner has borrowed the language of the definition having the same wording, mentioned in the Wealth Tax Act. The Commissioner had relied on the decision of the Supreme Court in Nawab Sir Mir Osman Ali Khan v. CWT (162 I.T.R. 888).

The definition in the Wealth Tax Act has to be understood and considered in the context of the legal and actual ownership, meaning thereby, title to the property for the assessment of wealth. This definition, though the words employed therein are similar and identical, cannot be brought in assistance by the Tax Department under the Income Tax Act.

The words "belonging to," mentioned in Section 281-B, have to be read and understood in the context of the definition of "transfer" provided in the Income Tax Act itself. The definition of the word "transfer," as provided in Section 2(47) of the Act provides that:

"(v) any transaction involving the allowing of the possession of any immovable property to be taken or retained in part performance of a contract of the nature referred to in section 53-A of the Transfer of Property Act, 1882 (4 of 1882)... ."

Again under the head "Income from house and property" for the purpose of Sections 22 to 27, ownership means:

"(iiia) a person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53-A of the Transfer of Property Act, 1882 (4 of 1882), shall be deemed to be the owner of that building or part thereof."In view of the aforesaid tax provisions, the ordinary meaning of transfer under the Transfer of Property Act, 1882, read with the Registration Act, 1908, is to be understood in a liberal sense for the purpose of the Income Tax Act. The Calcutta High Court held that if the definition of "owner" mentioned in Section 27(iiia) of the Act is considered, EZ had become the owner of the property.

If for the purpose of Section 281-B of the Act, this transaction is not held to be transfer, then Section 27(iiia) of the Act is rendered nugatory. This absurd situation is never intended by the Legislature. According to the Calcutta High Court, the Commissioner seems to have been guided by, and proceeded with the ordinary laws of transfer, namely, the Transfer of Property Act, 1882, read with the Registration Act, 1908. The Supreme Court had occasion to deal with and discuss the applicability of the definition as given in section 27 of the Income-tax Act in the case of C.I.T. v. Podar Cement Pvt. Ltd. (266 I.T.R. 625). The Court in this judgment dealt with the implication of the judgment of the apex Court rendered under the Wealth Tax Act, Nawab Sir Mir Osman Ali Khan v. CWT (162 I.T.R. 888). Their Lordships observed that the language used in the relevant section of the Wealth Tax Act was different from that of the Income Tax Act. The Calcutta High Court, in the Electro Zavod case held that the dues of the Revenue do not form a charge on the property and these can only be recovered from the seller under the method and mode as provided under the Income-tax Act and the Rules framed thereunder. On the date of passing of the provisional order of attachment, the property in question did not belong to the seller who was the assessee in default. Thus, on that date he had no interest therein because such interest had already passed to EZ.

In conclusion, it needs to be pointed out that an assessee cannot compel an Assessing Officer to attach any particular property because the power conferred under Section 281-B is discretionary in nature. The provisional attachment made under this Section by the Assessing Officer ceases to have effect after six months unless the Commissioner extends the period (Sukhpal v. C.I.T.; 156 I.T.R. 480). The extension should be granted by the Commissioner after properly applying his mind. If a bank guarantee or another unencumbered property along with a valuer's report is offered to the Department, the attached property can be released. A writ, direction or order may be issued in appropriate cases.

(The author, a Mumbai-based advocate specialising in tax laws, can be contacted at ranina@bom2.vsnl.net.in)

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