Attachment of Property by Income Tax Dept. Cannot be made Indefinitely Without Pursuing Steps to Resolve Matter: Delhi HC [Read Order]

The Delhi High Court has held that the Income Tax Department cannot, suspecting escapement of tax on income by an assessee, indefinitely attach its properties without taking further steps to resolve the matter.

The Court was considering a plea submitted by Fasttrack Tieup Pvt. Ltd., a private business that had won an auction of helicopters held by Summit Aviation Private Limited, which was being sued for tax nonpayment. It is noteworthy that Summit Aviation obtained financial support from Punjab National Bank (PNB/respondent no. 3) through a hypothecation arrangement in order to purchase the helicopters.  The petitioner entered the picture when the bank put the helicopters up for auction since the company had also fallen behind on loan repayment.

Read More: Karnataka HC Quashes Penalty for Non-Deduction of TDS on Professional Advice

The Income Tax Department's (respondent no. 2) prohibition order, which prevented the helicopters from being released, was challenged by the petitioner.  However, the Department asserted that the sale was unlawful because it disregarded tax recovery and broke the prohibitory order.

TDS Mistakes Cost You More Than You Think – Stay Compliant with This Handbook!, Click Here

The petitioner asserted that by paying in full for both helicopters, it had complied with all auction conditions.  PNB backed the petitioner's argument as well, asserting that the Department was fully aware before the sale but did not oppose at the time.

Additionally, PNB said that it had priority over Revenue's debts because it was a secured creditor.  Additionally, the petitioner argued that there is no clause in the Income Tax Act that gives tax obligations precedence over secured creditors.

Read More: Setback to EY: Professional Services for Assistance in Corporate Tax Return Filing not an Exempt Supply, rules AAR

A single bench of Justice Sachin Datta noted that Section 222 of the Income Tax Act, 1961, which gives the Tax Recovery Officer the authority to proceed with "attachment and sale of assessee's movable property" in order to recover the unpaid taxes, specifically refers to "attachment and sale," indicating a step-by-step procedure in which the property must be sold after it has been attached in order to recoup the arrears.

The High Court concurred that a secured creditor's obligations supersede those of the government.  As a secured creditor, respondent number three was found to have precedence over the revenue's claims. As such, it was allowed to exercise its rights over the secured assets and then sell the helicopters in question. The tax authorities were properly informed, but they did not object to the auction or start any legal action to contest it.

While granting the petition, the bench concluded that although respondent no. 2 had started the attachment process by issuing the prohibitory order, respondent no. 2 had not taken any further steps to retrieve the unpaid sum.  Retaining the properties indefinitely without taking further action to address the issue is prohibited.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates