Auction based on quashed Exparte ITAT Order: Punjab & Haryana HC imposes Cost on Income Tax Authorities [Read Order]

The Punjab and Haryana High Court has held that the auction proceedings based on a quashed ex-parte income tax appellate tribunal ( ITAT ) order by the tax recovery officer are void ab initio.

M/s Gokal Chand Rattan Chand, the petitioner/assessee has preferred the writ petition as a member of the Hindu Undivided Family ( HUF ), assailing the auction of sale conducted by the respondents to recover the tax assessed against the HUF.

The assessment for the years 1946–1947 of the HUF was completed on September 6, 1946, which reflected the receipt of the donation of Rs. 5 lakh. The Income Tax Officer ( ITO ) had completed the assessment of the trust for the years 1947–48, and exemption certificates were duly granted to the trust on June 14, 1947, January 8, 1952, and September 1, 1959.

The original assessment of the years 1946–47 was completed on September 6, 1946, with a total income of Rs. 97,789. However, the ITO, after seventeen years, reopened the assessment order under Section 147 of the Income Tax Act, 1961, and held that the demand of Rs. 5 lakh had emanated from the petitioner HUF, resulting in a total imposition of tax on income of Rs. 6,01,789 under the order passed by the ITO.

The appeal filed by the petitioner against the order was allowed by the Appellate Assistant Commissioner of Income Tax. The Income Tax Appellate Tribunal dismissed the appeal filed by the department assailing the order and upheld the deletions.

The ITAT passed an ex-parte order against the petitioner, upholding the assessment. Based on the ex-parte order, a demand notice was issued to the petitioner, and a recovery certificate was issued. The petitioner filed an application for setting aside the ex-parte order. An ex parte order was set aside, and the case was posted for rehearing for de-novo consideration by the ITAT.

The ITAT, after considering all aspects upheld the assessment and action of the ITO under Section 147, and the appeal of the revenue was accepted. The petitioner submitted a reference under Section 256(2) against the order to the Delhi High Court, and it was admitted.

The assessee contended that the demand notice and the tax recovery certificate were defective and had become meaningless after the ex parte order was set aside. Since the basis of the demand notice was the order of the ITAT and the recovery certificate was also based on the same order, which had been set aside, the TRO had no jurisdiction to proceed with the recovery certificate.

It was argued that the doctrine of lis pendens in terms of Section 52 of the Transfer of Property Act, 1882, would apply as the auction purchasers who, having full knowledge of the case pending before the Delhi High Court and the property being under litigation, had knowingly purchased the property pendent lite and would not be entitled to claim themselves to be strangers or bona fide purchasers.

The department contended that the auction notice had been issued on 16.10.1985 and the auction was released on 31.10.1985 and 15.11.1985, relating to the properties situated at Link Road and Kwality Restaurant, Lawrence Road, Amritsar, respectively. There was no stay against the auction of properties by the High Court.

The bench of Justice Sanjeev Prakash Sharma and Justice Sudeepti Sharma noted that the ex parte order passed by the ITAT was set aside by the ITAT. When it recalled the ex parte order, any action based on the order dated July 23, 1979, or the certificate of recovery issued on the said basis dated December 14, 1979, would be thus void ab initio.

The court directed the Income Tax Authorities to refund the auction price obtained in auction from the auction purchasers along with 15% interest per annum, as prevalent in the year 1985. The order shall be implemented within one month, failing which the petitioner would be free to initiate contempt proceedings without further notice. The petitioner is also entitled to costs of Rs. 1,00,000 to be paid by the income tax authorities.

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