Recovery of Tax

The appellant M/s. Janatha Textiles was a registered firm with four partners, viz., Radhey Shyam Modi, Pawan Kumar Modi, Padmadevi Modi and Indira Chirmar. The firm and its partners were in arrears of tax for the A.Ys. 1985-86, 1986-87, 1987-88, 1989-90. All the demands pertaining to the A.Ys. 1986-87 to 1989-90 had been stayed by various income-tax authorities and these demands were never enforced for collection. The demand pertaining to the A.Y. 1985-86 was alone enforced. The agricultural lands owned by the partners of the appellant-firm at Bodametlapalem had been attached and sold in public auction on August 5, 1996, after following the entire procedure laid down under the Second Schedule to the Income-tax Act, 1961. Nine people participated in the public auction held on August 5, 1996. The sale was confirmed in favour of L. Krishna Prasad who offered the highest price. No procedural irregularity or illegality in public auction process was alleged by the appellant. Even after issuance of sale proclamation, the respondent-Department issued communication in SR No. 2/94 dated July 15, 1996, informing the appellants that a sum of Rs.5,68,913 was due as on that date towards tax, interest and penalty under the 1961 Act. The said amount, however, does not include interest payable u/s.220(2) of the 1961 Act. The appellant-firm acknowledged receipt of the letter on July 17, 1996, and had not contradicted the quantum of tax and interest as mentioned in the said letter. It was made clear that the demand for the A.Y. 1985-86 alone was being enforced. In an SLP, learned counsel for the appellants contended that even though they had filed objections at various stages of the notice issued for the auction sale, the respondent-Department without disposing of the said objections proceeded with the sale and, therefore, on that ground the sale conducted by the respondent-Department was illegal and unsustainable. The appellants further submitted that with reference to the A.Y. 1985-86, the application for waiver of interest was pending before the authorities and further the stay application filed before the Commissioner was not disposed of. Even on that count also the sale conducted by the respondent-Department on August 5, 1996, was illegal and unsustainable. The appellant contended that the High Court had failed to notice that the nature of the lands in the auction notice was wrongly mentioned as dry lands. In fact the said lands were a mango orchard and building structure and of much higher value. The auction ought to be vitiated on this ground alone. The appellant also submitted that the appellants had received the notice of demand as defaulters in their individual capacity and also as the partners of the firm. However, the respondent-Department had failed to give notice of demand to the appellants qua their shares. They did not receive notices indicating their respective shares. It was asserted on behalf of the respondent-Department that the amount fetched in the public auction was more than reasonable. The Supreme Court observed that the appellant had never complained about fixing of the reserve price before holding of auction, though they were intimated of the same through sale proclamation. In pursuance of the notice issued by the Supreme Court, the respondent-Department had filed the counter-affidavit. Respondent No. 2 (auction purchaser) also had filed a separate counter-affidavit. Respondent No. 2 in the counter-affidavit stated that it was totally incorrect to suggest that the auction sale did not fetch the actual market value of the property. Respondent No. 2 also mentioned in the counter-affidavit that the said lands were agricultural dry lands and there were no mango gardens as alleged by the appellant. There were, however, a few mango trees scattered all over the land. The respondent-Department in the counter-affidavit stated that the appellant-firm had alternative efficacious remedy by way of filing a petition under Rules 60 and 61 of the Second Schedule to the 1961 Act. The appellant ought to have availed of the statutory remedy for ventilating its grievances instead of filing a petition before the High Court. The Supreme Court further observed that there was another very significant aspect of this case, which pertained to the rights of the bona fide purchaser for value. The Supreme Court held that the law makes a clear distinction between a stranger who is a bona fide purchaser of the property at an auction sale and a decree-holder purchaser at a court auction. Strangers to the decree are afforded protection by the Court, because they are not connected with the decree. Unless the protection is extended to them court sales would not fetch the market value or fair price of the property. The Supreme Court held that the appeal was devoid of any merit and was accordingly dismissed.