Immovable Properties - Void Transactions

Hon’ble High Court Madras in Janata Sahakari Bank Ltd. vs Tax Recovery Officer VII, Income Tax Department (W.P.No.15437 of 2014 and M.P.No.1 of 2014) observed as under;

• It is necessary to consider the conflicting provisions of the Income Tax Act, SARFAESI Act and Recovery of Debts and Bankruptcy Act, 1993.

• Therefore, it is unambiguous that, during pendency of the proceedings (section 281 of Income Tax Act) if any charge is created, then such charge created by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever shall be void.

• In such cases, the Income tax proceedings are known only to the tax defaulter and not to the third party purchaser or the mortgagee Bank or otherwise. 

• Thus, the void transfers or transactions made during the pendency of the Income tax proceedings cannot be the subject matter for any mortgage or further transfers or transactions etc., This being the possible perceptions, the Courts are bound to consider, which transaction will prevail over and which Act would be applicable with reference to the facts and circumstances.

• Admittedly, the SARFAESI Act and Recovery of Debts and Bankruptcy Act, 1993 provides priority to the secured creditors and the Income Tax Act provides priority to the tax arrears to be recovered. Under these circumstances, this Court is inclined to consider the common law "Doctrine of priority of crown debts"

As far as the matter of priority of charge with the financial institution or its validity (void) is concerned or the matter is limited between the financial institutions &  the Govt. Authorities, the borrower(s), have little or no concern. 

The Income tax proceedings are known only to the tax defaulter. Provisions of  “The Income Tax Act”, renders any charge created by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever as ab initio void, during the pendency of Income Tax proceedings, though without any public notice of such proceedings. 

These provisions (Section 281 of Income Tax Act) thus have significant implications for the members of the general public, who enter into some transaction (sale, mortgage, gift, exchange or any other mode of transfer whatsoever) in respect of these properties, in absence of any public notice of such proceedings. 

Propriety & natural justice demands that the information of initiation of Income Tax proceedings should be placed in public domain (preferably on CERSAI) so that public at large may be able to take informed decisions before entering into any transaction with owners of such immovable properties.

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision. A reader must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.