1. Facts of the Case
Mr. X, an assessee under scrutiny, is facing pending income tax proceedings. During the pendency of such proceedings, he transfers certain assets to another person, Mr. Y. The transfer appears to be aimed at reducing or avoiding the recovery of tax dues by diverting ownership of those assets. The Income Tax Department has taken note of this transfer and questions its legality and enforceability. The primary issue is whether this transfer is valid under the provisions of the Income Tax Act, 1961 and other applicable laws.
2. Issues in the Case
- Is a transfer of assets by an assessee during ongoing income tax proceedings legally valid?
- Can the Income Tax Department ignore or nullify such transfers under the Income Tax Act, 1961?
- What are the consequences if a transfer is found to be made with an intent to defraud the revenue?
- What powers does the department have to safeguard revenue interests in such scenarios?
3. Legal Principles Covered
Section 281 of the Income Tax Act, 1961 is directly relevant. It provides that any asset transfer made by an assessee during the pendency of any proceeding under the Act, with the intention to defraud the revenue, shall be void as against any claim in respect of tax or other sums payable by the assessee.
The essential elements under Section 281 are:
- The transfer must occur during the pendency of any income tax proceeding.
- The transfer must be without adequate consideration or made with the intent to defraud the revenue.
- If both conditions are met, the transfer is void against the claims of the Income Tax Department.
However, such a transfer is not void per se—it is void only against the revenue’s claim, meaning the department can still proceed to recover tax dues from such transferred assets.
Judicial Support:
In the case of CIT v. Abdul Rahim & Co. (1995), the court held that fraudulent transfers to evade tax liability can be ignored by the department if made during pending assessments. The onus is on the department to prove the fraudulent intent or absence of consideration.
Further, the Income Tax Department may:
- Initiate provisional attachment of property under Section 281B to protect its interest.
- File a suit under the Transfer of Property Act, 1882, to declare the transaction as fraudulent (under Section 53 of the said Act).
4. Possible Judgement
The transfer of assets by Mr. X to Mr. Y during the pendency of income tax proceedings, if proven to be without adequate consideration or with an intent to defraud the revenue, is not valid against the Income Tax Department. The department can disregard the transfer when pursuing recovery of dues. Therefore, such a transfer is void against tax claims as per Section 281 of the Income Tax Act, 1961.
Mr. X’s action may lead to:
- The transferred assets being attached for tax recovery.
- Additional penalties or prosecution under provisions related to tax evasion.
Accordingly, the Income Tax Department is legally empowered to proceed against the transferred property for recovery, and Mr. X’s transfer to Mr. Y will not shield the asset from tax liability.
