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The Income- Tax Act, 1995
The Code Of Civil Procedure (Amendment) Act, 2002
The Transfer of Property Act, 1882
Section 54 in The Income- Tax Act, 1995
Janak Raj vs Gurdial Singh And Anr on 8 November, 1966

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Karnataka High Court
D.V. Sathyanarayana And Ors. vs Tax Recovery Officer And Ors. on 16 April, 1991
Equivalent citations: 1992 194 ITR 409 KAR, 1992 194 ITR 409 Karn
Author: S R Murthy
Bench: S R Murthy

JUDGMENT

S.R. Rajasekhara Murthy, J.

1. Three petitioners entered into an agreement to purchase a house property, No. 57, Manager Ranganna Lane, Bangalore City, from the third respondent. The agreement of sale was entered into on February 23, 1984 and, as against the total consideration of Rs. 2,80,000, the petitioners paid Rs. 1,30,000 as advance.

2. The third respondent was a defaulter to the Income-tax Department and the property which the petitioners intended to purchase under the agreement was brought to sale by the Income-tax Department. Auction was held on August 19, 1987, pursuant to the proclamation of sale dated July 8, 1987. The sale was confirmed on September 21, 1987, in favour of respondents Nos. 6, 7 and 8, who were the highest bidders.

3. After the sale was confirmed the petitioners made an application under Rule 61 of the Second Schedule to the Income-tax Act ("the Act"), seeking cancellation of the sale. A copy of the said application made on September 9, 1987 is produced as annexure 'C' to the writ petition,

4. The Tax Recovery Officer, the first respondent, by his order dated September 17, 1987 (annexure-D), rejected the said application. Against the said order, the petitioners filed an appeal to the Tax Recovery Commissioner, respondent No. 2, under Rule 86 of the Second Schedule. The second respondent, by his order dated February 15, 1988 (annexure-G), dismissed the appeal. Being aggrieved by these orders, the petitioners have challenged the same in these writ petitions.

5. The contention of the petitioners is that both the Tax Recovery Officer and the Commissioner erred in dismissing the application on the ground that the petitioners are not "persons interested" to maintain an application under Rule 61. Their argument is that, by virtue of the agreement of sale between them and the defaulter, they are to be treated as persons whose interests are affected and thus they have locus standi to file an application under Rule 01 of the Act for setting aside the sale for the reasons stated in the application. They have challenged the orders made by the Tax Recovery Officer as well as the Commissioner on various grounds referred to in the writ petitions. They have urged and highlighted the several material irregularities in the conduct of the sale. It is unnecessary to enumerate in detail the said irregularities urged before the Tax Recovery Officer. However, the Tax Recovery Officer rejected the application holding that the petitioners "did not sustain any substantial injury" within the meaning of proviso (a), Rule 61, of the Second Schedule to the Act. The request to set aside the sale in favour of respondents Nos. 6, 7 and 8 was, therefore, rejected by his order dated September 17, 1987 (annexure-D). The sale was also confirmed on September 21, 1987, pursuant to the rejection.

6. Before the Commissioner, the very same contentions were urged. The Commissioner, by his order dated February 15, 1988 (annexure-G), held that the agreement dated February 23, 1984, entered into by the petitioners with the defaulter was void and also that the permission of the Tax Recovery Officer had not been taken to enter into such agreement. The Commissioner, therefore, held that the petitioners had contravened Rule 48 and were, therefore, not entitled to any relief under Rule 61 of the Second Schedule to the Act.

7. In the statement of objections filed on behalf of respondents Nos. 1 to 3, it is contended that the petitioners had no locus standi and that the petitioners were not persons whose interests are affected by the sale of the property in question and were, therefore, rightly held by the Commissioner as persons whose interests were not affected within the meaning of that expression occurring in Rule 61 of the Second Schedule to the Act. It is pointed out, in support of the said contention, that the notice of demand under Rule 2 of the Second Schedule was served on the defaulter as early as September 3, 1973, and that the agreement of sale entered into on February 23, 1984, is void in law. Reliance is placed on Rule 16 of the Second Schedule to the Act, which prohibits private alienation, such as, mortgage, charge, lease of any property belonging to him, except with the permission of the Tax Recovery Officer. The said rule also prohibits the defaulter from otherwise dealing with the property.

8. It was urged by Sri Chanderkumar, learned standing counsel for the Department, that no interest in the property accrued to the agreement-holders, the petitioners, by virtue of the embargo placed on the defaulter under Rule 16 to enter into any such agreement to alienate the property in any manner referred to therein. It was, therefore, argued that the petitioners were rightly considered as persons whose interests were not affected and that the application was rightly dismissed. Reliance was also placed on a similar expression used in Rule 11. It was further submitted by learned counsel that the said expression must receive the same meaning both for the purpose of Rule 11 and Rules 60 and 61. Reliance was also placed on Section 54 of the Transfer of Property Act in support of the proposition that the contract for the sale of immovable property does not, by itself, create any interest in or charge on such property and hence, the application by the agreement-holder was not maintainable. Learned counsel also relied upon the decision of the Supreme Court in Satyabrata Ghose v. Mugneeram Bangur and Co., , in support of this proposition.

9. Alternatively, it was contended by learned counsel that the sale, even if it is held a nullity, should not be set aside so as to affect the rights of the auction-purchasers since, on the facts of the case, the sale has been confirmed. Learned counsel relied upon the decision of the Supreme Court in Surinder Nath Kapoor v. Union of India [1988] 173 ITR 469. Reliance was also placed on the decision in Janak Raj v. Gurdial Singh, , for the proposition that the title of the purchaser should not be disturbed, notwithstanding the reversal of the decree after sale.

10. Sri Manjunath, learned counsel appearing for the auction-purchasers, adopted the arguments of learned counsel for the Department and supplemented the same by demonstrating with reference to the chronology of events that the petitioners cannot maintain a writ petition and the confirmation of sale in their favour should be upheld.

11. On these arguments, the questions that arise for decision are :

(i) whether the petitioners are 'persons interested' within the meaning of the expression used in Rule 61 ?;

(ii) whether the application made by the petitioners for setting aside the sale was maintainable ? and,

(iii) whether the writ petitions filed by the petitioners for the same relief can be entertained ?

12. The main argument of the petitioners is that they should be recognised as persons whose interests are affected by the sale for the mere reason that they had entered into an agreement to purchase the very property and had also paid an advance of Rs. 1,30,000, and, hence their pecuniary interest in the property is involved.

13. In support of this contention, Sri Sarangan has relied upon a number of decisions :

(i) Jose (K.M.) v. Anantha Bhat (D.) , under the Land Reforms Act, in which it was held that the civil court is not competent to determine the legality of a transaction under section 132 of the Land Reforms Act.

(ii) Jasbhai Motibhai Desai v. Roshan Kumar Haji Bashir Ahmed, AIR 1976 SC 578.

Reliance was placed on paragraphs 9, 10 and 11 dealing with "aggrieved person". The Supreme Court explained the meaning of the expression "aggrieved person" under the Bombay Cinema Rules. It was observed in that context that the scope and meaning of that expression under the Bombay Cinema Rules should be interpreted having regard to the prejudice and injury suffered by such person by the grant of licence.

(iii) Shantki Institute of Commerce v. State of Karnataka, .

14. Learned counsel referred to Rule 61 which provides that any person whose interests are affected by the sale can maintain an application. According to the argument of learned counsel, persons interested includes any other person who has suffered substantial injury. Learned counsel also referred to the decision of the Supreme Court in CWT v. Arvind Narot-tam [1988] 173 ITR 479, and also the decision of the Gujarat High Court in M.H. Pandya v. TRO [ 1989] 178 ITR 538.

15. It must be noted, at the outset, that the rules in the Second Schedule to the Income-tax Act are framed more or less on the pattern of rules framed under Order 21, C. P. C. For a comparative study of the two rules, they have to be placed in juxtaposition. The relevant portion of Rule 11 of the Income-tax Act, Schedule II, reads thus : "HYDERABAD AREA

(i)

Rajpramukh Rajpramukh of Hyderabad

Governor

(ii)

Government of Hyderabad Sarkar-i-Ali Hyderabad Government;

State Government

(iii)

H.E.H. the Nizam'sDominions;

 

H.H. the Nizam'sDominions; Mumalik-i-Mahroosa-i-Sarkar-i-Ali; Mumalik-i-Mahroosa; State of Hyderabad; Hyderabad State; Hyderabad where it refers to the territories of the State of Hyderabad.

Hyderabad Area

(iv)

Jarida Jarida Alamia Jarida Alamia Sarkar-i-Ali

Mysore Gazette"

" Law

Functions

Authority, officer or

(1)

(2)

(3)

The Endowment Regulation, 1349 Fasli.

Functions of the Director of Ecclesiastic Affairs of the Government of Hyderabad.

Commissioner for Settlement and Charitable Endowments for the State of Mysore."

Rule 60 of the I. T. Rules

Order 21, rule 89

60. (1) Where immovable property has been sold in execution of a certificate, the defaulter, or any person whose interests are affected by the sale, may, at any time within thirty days from the date of the sale, apply to the Tax Recovery Officer to set aside the sale, on his depositing, -

89. Application

to set aside sale on deposit. - (1) Where

immovable property has been sold in execution of a decree, any person claiming an interest in the property sold at the time of the sale or at the time of making the application, or acting for or in the interest of such person, may apply to have the sale set aside on his depositing in court,-

(a) the amount specified in the proclamation of sale as that for the recovery of which the sale was ordered with interest thereon at the rate of fifteen per cent per annum, calculated from the date of the proclamation of sale to the date when the deposit is made ; and

(a) for the payment to the purchaser, a sum equal to five per cent. of the purchase money, and

(b) for payment to the decree-holder, the amount specified in the proclamation of sale as that for the recovery of which the sale was ordered, less any amount which may, since the date of such proclamation of sale, have been received by the decree-holder.

(b) for payment to the purchaser, as penalty, a sum equal to five per cent. of the purchase money, but not less than one rupee.

(2) Where a person makes an application

under rule 61 for setting aside the sale of his

immovable property, he shall not, unless he withdraws that application, be entitled to make or prosecute an application under this rule.

(2) Where a person applies under rule 90 to set aside the sale of his immovable property, he shall not, unless he withdraws his application, be entitled to make or prosecute an application under this rule.

(3) Nothing in this rule shall relieve the

judgment-debtor from any liability he may be under in respect of costs and interest not covered by the proclamation of sale.

Rule 61 of the I. T. Rules

Order 21, rule 90

61. Where

immovable property has been sold in execution of a certificate, such Income-tax Officer as may be authorised by the Chief Commissioner or Commissioner in this behalf, the defaulter, or any person whose interests are affected by the sale, may, at any time within thirty days from the date of the sale, apply to the Tax Recovery Officer to set aside the sale of the immovable property on the ground that notice was not served on the defaulter to pay the arrears as required by this Schedule or on the ground of a material irregularity in publishing or conducting the sale :

90. Application

to set aside sale on ground of irregularity or fraud. - (1) Where any immovable property has been sold in execution of a decree, the decree-holder, or the purchaser, or any other person entitled to share in a rateable distribution of assets, or whose interests are affected by the sale, may apply to the court to set aside the sale on the ground of a material irregularity or fraud in publishing or conducting it.

(2) No sale shall be set aside on the

ground of irregularity or fraud in publishing or conducting it unless, upon the facts proved, the court is satisfied that the applicant has sustained substantial injury by reason of such irregularity or fraud.

Provided that -

(a) no sale shall be set aside on any such ground unless the Tax Recovery Officer is satisfied that the applicant has sustained substantial injury by reason of the non-service or irregularity ; and

(3) No application to set aside a sale

under this rule shall be entertained upon any ground which the applicant could have taken on or before the date on which the proclamation of sale was drawn up.

(b) an application made by a defaulter under this rule shall be disallowed unless the applicant deposits the amount recoverable from him in the execution of the certificate.

Explanation. - The mere absence of, or defect in, attachment of the property sold shall not, by itself, be a ground for setting aside a sale under this rule."

16. As can be seen from the rules reproduced above, the adjudication of claims made before the property is brought to sale and after the attachment is effected is provided for under Rule 11 of Schedule II to the Income-tax Act, 1961, which corresponds to Order 21, Rule 58, Civil Procedure Code. It is understood in the Civil Procedure Code that the persons who are entitled to claim or object to the attachment of a property attached in execution of a decree are persons who have an interest in the property. Such persons may be those who have some interest in the property or persons who are possessed of the property in question. A claim can be made by such persons under the Income-tax Act, Second Schedule, as provided under Rule 11. Same is the nature of claim that can be made by any person who is entitled to object to the attachment of any property under the Civil Procedure Code, on the ground that such property is not liable to attachment.

17. Under both the rules, it calls for investigation of the claims and objections. The remedy of the person objecting to such attachment is provided by way of a suit under Rule 11 of Schedule II to the Income-tax Act, Same is the position under Order 21, Rule 58, Civil Procedure Code. These are the two corresponding rules so far as claims made before the sale are concerned.

18. Under the Second Schedule to the Income-tax Act, an application can be made by a defaulter or any person whose interests are affected by the sale. Under the Civil Procedure Code also, same is the position as is found in Order 21, Rule 89, after amendment in the year 1976.

19. Under Order 21, Rule 90, which provides for an application to set aside the sale on the ground of Irregularity or fraud, such an application can be made by a decree-holder or the purchaser or any other person entitled to share in the apportionment or whose interests are affected by the sale.

20. But, in the Second Schedule to the Income-tax Act under both Rules 60 and 61, it is only the defaulter or any person whose interests are affected by the sale that can make an application to set aside the sale. Under Rule 60 of the Second Schedule to the Income-tax Act, no application can be made unless the amount specified in the proclamation of sale is deposited along with solatium and interest. A person who makes an application under Rule 60 is not permitted to challenge the sale on the ground of non-service of notice or irregularity under Rule 61. Same is the position in the Civil Procedure Code (vide Order 21, Rule 89(2) of the Civil Procedure Code).

21. Therefore, both under Rules 60 and 61, it is the same person, viz., the defaulter or any person whose interests are affected by the sale that can file an application to set aside the sale before confirmation, subject to conditions specified. But the choice is left to such person or persons either to have the sale set aside by depositing the entire amount or to challenge the sale on the ground of material irregularity in publishing or conducting the sale or for non-service of notice on the defaulter.

22. Order 21, Rule 89, provides the only means by which a judgment-debtor can get rid of a sale which has been duly carried out. But, once the sale to the auction-purchaser is confirmed, the judgment-debtor ceases to be entitled to get back the property under Order 21, Rule 89, even if he succeeds in having the decree against him reversed. Janak Raj v. Gurdial Singh, .

23. After the rule was amended in 1976, it is now understood to include, besides the judgment-debtor whose property has been sold, a person having a lesser interest, such as a lessee, a mortgagee or any other person who has an inchoate title to the property or any person who is interested in protecting the property on account of his being in possession or otherwise in pursuance of an incomplete transfer of property. Some illustrations of such persons are :

24. A co-sharer who is entitled to apply ; so also a coparcener of a joint Hindu family ; a person who had obtained a mortgage of the property before the sale ; a usufructuary mortgagee of the property in possession ; an attaching creditor and the like.

25. "Person" whose interests are affected by the sale is an expression of wider import than the expression "persons holding an interest in the property sold" used in Rule 89. But, Rule 89 was amended by an amendment Act of 1976, by substituting "any person claiming an interest in the property sold at the time of the sale or at the time of making the application". But, such person must be one whose interests are affected by the sale, Some illustrations are :

A person who claims to be a purchaser of an immovable property from the judgment-debtor prior to the attachment; a reversioner, a son who has a right in the property sold in execution of a decree against the father ; an interim-receiver appointed by the court to take charge of the estate of the debtor ; and a person who is entitled to rateable distribution, etc.

26. The argument of the petitioner is that, by virtue of the pecuniary interest that the petitioners have in the capacity of agreement-holders having paid advance of the sale consideration, they are "persons whose interests are affected", which expression is used in Rule 61.

27. Where an application, therefore, is made by a person other than a decree-holder or an auction-purchaser, or one entitled to share in rateable distribution of assets, such person must be one whose interests are affected by the sale.

28. From the scheme of these rules read together, it has to be construed that an application under either of the rules, viz., Rules 60 and 61, has to be made by the same person. In the present case, it is the three petitioners who entered into agreement to purchase the property who made the application under Rule 61 before the Tax Recovery Officer. The Tax Recovery Officer, by his order dated September 17, 1987 (annexure-B), rejected the application on two grounds :

(i) that there was no irregularity in the auction sale proceedings held on August 19, 1987, and,

(ii) that the petitioners have not sustained "substantial injury".

29. The appeal filed by the petitioners before the Tax Recovery Commissioner under Rule 86 was also dismissed, by his order dated February 15, 1988 (annexure-G). The Commissioner held that the petitioners had no locus standi to file the application under Rule 61 on the ground that the agreement entered into by them with the defaulter was void by virtue of Rule 16. It is this view taken by the Commissioner that is challenged in these writ petitions.

30. It is vehemently argued by Sri Sarangan, learned counsel for the petitioners, that the petitioners have to be considered as persons whose interests are affected by the sale since they had entered into an agreement to purchase the property and are, therefore, entitled to maintain the application under Rule 61 and challenge the same.

31. It is argued on behalf of the Department by Sri Chander Kumar, learned counsel, that any agreement entered into by the defaulter after the notice was issued to the defaulter under Rule 2 would be void under Rule 16. Hence, it was argued that the petitioners who are parties to a void agreement had no locus standi to file an application under Rule 61 or even to file the writ petition.

32. Learned counsel for the Revenue has pointed out to the scheme of the rules in the Second Schedule and maintained that the view taken by the Commissioner is perfectly justified, both in law as well as on facts. Learned counsel has also referred to the provisions of section 54 of the Transfer of Property Act, which provides that a contract of sale of immovable property does not, of itself, create any interest in or charge on such property. In support of this proposition, learned counsel relied upon the decision of the Supreme Court in Satyabrata Ghose v. Mugneeram Bangur and Co., AIR 1964 SC 44 (see : para 18). It is also the alternative contention of learned counsel for the Revenue that the sale having been confirmed in favour of the purchasers, it cannot be set aside. The decisions of the Supreme Court in Surinder Nath Kapoor v. Union of India [1988] 173 ITR 469 and Janak Raj v. Gurdial Singh , were relied upon.

33. Mr. Manjunath, learned counsel appearing for the auction-purchasers, adopted the arguments of Sri Chander kumar and relied upon the decision of this court in M. R. Anthony Swamy v. CIT [1982] 135 ITR 424.

34. On the question of locus standi of the petitioners to file the application under Rule 61, learned counsel relied upon the decision in All India Railwaymen's Benefit Fund Ltd. v. Ramchand Hemraj Maheshri, AIR 1939 Nag 179.

35. So far as the facts involved in the present cases are concerned, it is seen from the record of the Tax Recovery Officer that the defaulter was served with notices in Form I. T. C. P.-I on February 22, 1973, September 3, 1973, June 24, 1974, May 7, 1976, and September 28, 1977. The original records produced by learned standing counsel for the Department show that all these notices referred to above were served on the defaulter. This was followed by an order of attachment under ITCP-16 which was served on the defaulter. The further proceedings taken by the Department was to issue a proclamation of sale--ITCP-13--which were also served on the defaulter. It is only thereafter that the property of the defaulter was brought to sale and sold in public auction on August 19, 1987.

36. The chronology of events shows that the petitioners who claimed interest in the property did not make any application under Rule 60 to set aside the sale. The property was brought to sale to recover the income-tax arrears of Rs. 5,99,509 due from the defaulter. The defaulter having lost the opportunity to save the property apart from other technicalities, the petitioners, who are agreement-holders, chose a speculative remedy to get the sale set aside under Rule 61.

37. So far as the legal aspect, namely, whether the petitioners could be considered as persons whose interests are affected by the sale is concerned, Rule 16 disentitles a person or persons like the petitioners from entering into an agreement with the defulter for purchase of the property, on which a statutory charge is created, on the issue of a notice in Form No. ITCP-I under Rule 2.

38. Rule 16 also prohibits the defaulter from creating any kind of encumbrance on his property such as, mortgage, charge, lease, etc. Sub-rule (2) of Rule 16 further declares that any private transfer or delivery of the property attached or of any interest therein, shall be void against all claims enforceable under the attachment.

39. Rule 48 further imposes a prohibition on the defaulter from transferring or charging the property in any way and also prohibits all persons from taking any benefits under such transfer or charge.

40. The argument of the Revenue in this behalf has to be upheld having regard to the specific Rule 16 read with section 54 of the Transfer of Property Act, which says that a mere contract does not by itself create any interest in the property. Therefore, the expression "persons whose interests are affected" which occurs both in Rules 60 and 61 has to be understood in the light of the meaning assigned to it under section 54 of the Transfer of Property Act, as meaning the same person.

41. Without more, it has to be held that the petitioners had no locus standi nor could they challenge the sale on the basis of the agreement of sale under which they have only a pecuniary interest and not any interest in the property as such within the meaning of the expression "persons whose interests are affected" occurring in Rule 61.

42. For the reasons stated above, the writ petitions fail and are, accordingly, dismissed.