2005 (12) TMI 80 - HC - Income Tax

Recovery of tax - Petition filed by the applicant/plaintiff (GVFL) challenging the order of the Tax Recovery Officer (TRO) under rule 39 of the Income-tax (Certificate Proceedings) Rules 1962 ( ITCP Rules ) and to issue a writ of prohibition restraining the Income-tax Department from interfering with the possession of GVFL Ltd. - whether the order of the Tax Recovery Officer on the applicability of rule 39 suffers from any fundamental flaws.

Issues Involved:
1. Permanent injunction restraining interference with possession.
2. Temporary injunction on similar grounds.
3. Challenge to the Tax Recovery Officer's order under Rule 39 of the Income-tax (Certificate Proceedings) Rules, 1962.
4. Applicability and validity of Rule 39 and Rule 40 of the ITCP Rules.
5. Jurisdiction of the Tax Recovery Officer to declare lease agreements invalid.
6. Maintainability of the civil suit and writ petition.
7. Lifting of the corporate veil to ascertain the true nature of transactions.
8. Delivery of possession to auction purchasers.

Detailed Analysis:

1. Permanent Injunction:
The plaintiff, GVFL, sought a permanent injunction to restrain the defendants from interfering with its peaceful possession of the property except by due process of law. The court found that GVFL was in possession of the property on behalf of the defaulter, SFL, and thus could not seek such an injunction. The suit was dismissed as it was not maintainable.

2. Temporary Injunction:
GVFL also applied for a temporary injunction on similar grounds. This application was dismissed as the court held that GVFL was not entitled to such relief, given that it was in possession of the property on behalf of the defaulter.

3. Challenge to the Tax Recovery Officer's Order:
GVFL challenged the Tax Recovery Officer's (TRO) order under Rule 39 of the ITCP Rules, which directed the delivery of possession to the auction purchasers. The court upheld the TRO's order, finding no irregularity or illegality in the procedure followed.

4. Applicability and Validity of Rule 39 and Rule 40:
The court analyzed whether Rule 39 or Rule 40 of the ITCP Rules was applicable. Rule 39 deals with the delivery of immovable property in the occupancy of the defaulter or someone on his behalf, while Rule 40 pertains to properties in the occupancy of a tenant. The court found that GVFL was not a bona fide tenant but was in possession on behalf of the defaulter, making Rule 39 applicable.

5. Jurisdiction of the Tax Recovery Officer:
The court addressed the jurisdiction of the TRO to declare lease agreements invalid. It was argued that the TRO could only examine possession and not declare leases void. However, the court found that the TRO had the authority to investigate the bona fides of the lease agreements, especially since the court had directed the TRO to determine the applicability of Rule 39.

6. Maintainability of the Civil Suit and Writ Petition:
The court held that the civil suit and writ petition were not maintainable. Under Rule 86 of the Second Schedule, appeals from TRO orders lie only to the Chief Commissioner or Commissioner. Section 293 of the Income-tax Act bars civil suits against any proceedings or orders made under the Act. The suit filed by GVFL did not fall under Rule 11(6) or Rule 47 of the ITCP Rules.

7. Lifting of the Corporate Veil:
The court lifted the corporate veil to ascertain the true nature of the transactions between GVFL and SFL. It found that both companies were family concerns of G. Venkateswaran, who had control over both entities. The alleged lease agreements were found to be sham transactions created to evade tax obligations.

8. Delivery of Possession to Auction Purchasers:
The court ordered immediate delivery of possession to the auction purchasers, as GVFL was not a bona fide tenant. An advocate commissioner was appointed to effect delivery of possession by a specified date. If GVFL did not cooperate, it would be liable to pay damages for each day's occupation of the property.

Conclusion:
The court dismissed the suit and applications filed by GVFL, upheld the TRO's order, and directed immediate delivery of possession to the auction purchasers. The court found that the lease agreements were sham transactions and that GVFL was in possession of the property on behalf of the defaulter, SFL. The civil suit and writ petition were not maintainable under the relevant provisions of the Income-tax Act and ITCP Rules.

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