M/S. Janatha Textiles & Ors. Vs. Tax Recovery Officer & ANR. 
INSC 970 (16
IN THE SUPREME COURT OF INDIA
CIVIL APPEALLTE JURISDICTION CIVIL APPEAL NO.6539 OF 2003 Janatha Textiles
& Others ..
Appellants Versus Tax Recovery
Officer & Another .. Respondents
Dalveer Bhandari, J.
1. This appeal is directed against
the judgment of the Division Bench of the High Court of Andhra Pradesh at
Hyderabad passed in writ petition No.22038 of 1996 on 6.9.2001.
2. The short question which arises
for consideration in this appeal is whether the Income Tax Department is
justified in auctioning the attached property for recovery of debt?
3. Brief facts which are necessary
to dispose of this appeal are as under:
The appellant M/s Janatha Textiles
is 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 assessment years 1985- 86, 1986-87, 1987-88, 1989-90.
All the demands pertaining to assessment years 1986-87 to 1989-90 have been
stayed by various Income Tax Authorities and these demands were never enforced
for collection. The demand pertaining to assessment year 1985-86 was alone
4. The agricultural lands owned by
the partners of the appellant firm at Bodametlapalem had been attached and sold
in public auction on 5.8.1996 after following the entire procedure laid down
under second schedule to the Income Tax Act, 1961 (hereinafter referred to as
"the 1961 Act"). Nine people participated in the public auction held
3 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 even alleged by the appellants.
5. A demand of Rs.7,84,072/- for
the assessment year 1985-86 was initially raised against the appellant firm. By
virtue of grant of partial relief in the appeal, the demand was reduced to
Rs.4,65,174/- and as against the said amount, the appellant firm paid only
Rs.4,34,927/- leaving a balance of Rs.30,247/-. In addition to this, there was
demand of Rs.5,65,538/- raised by virtue of levy of penalty imposed under
section 271(1)(c) of the 1961 Act for the said assessment year. The levy was
confirmed in appeal by the Commissioner of Income Tax (Appeals). Further
demands were also raised for a sum of Rs.2,82,160/-, Rs.3,42,518/- and
Rs.2,86,075/- at the hands of individual assessment of appellant nos.2, 3, and
4 respectively. In the assessment year 1985-86, partial relief was granted and
ultimately quantified the amount due from the appellant firm and its partners.
After adjusting the amounts paid,
the amount due as on the date of auction for the assessment year 1985-86 stood
at 4 Rs.4,99,133/-. In addition to these arrears, an amount of Rs.7,56,017 fell
due by way of interest. Thus, a total amount of Rs.12,55,150/- was due from the
appellants for the assessment year 1985-86 towards tax, interest and penalty.
6. It may be pertinent to mention
that the demands relatable to assessment years 1986-87 to 1989-90 have never
been enforced because of the various stay orders by the different Income Tax
7. Even after issuance of sale
proclamation, the respondent-department issued communication in SR No.2/94
dated 15.7.1996 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 under section 220(2) of the
1961 Act. The appellant firm acknowledged receipt of the letter on 17.7.1996
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 assessment year 1985-86
alone was being enforced. Therefore, it was absolutely no warrant for the
appellant to mix up the said demands relatable to the assessment year 1985-86
in this appeal. According to the 5 records of the Income Tax Department, the
net amount of tax, interest and penalty due for the assessment year 1985-86 as
on the date of auction stood at Rs.12,55,150/- and hence the
respondent-department was fully justified in auctioning the property of the
appellants to recover its outstanding dues.
8. Learned counsel for the
appellants contended that even though they had filed objections at various
stages of the notice issued for the auction sale, but the respondent-department
without disposing of the said objections proceeded with the sale and,
therefore, even on that ground the sale conducted by the respondent-department
was illegal and unsustainable.
The appellants further submitted
that with reference to the assessment year 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 5.8.1996 was illegal and
9. It was categorically mentioned
on behalf of the respondent-department that the sale proceedings were 6
initiated continued only with reference to arrears relating to the assessment
10. The appellants contended that
the High Court has 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.
11. Learned counsel for the
appellants also submitted that the appellants have received the notice of
demand as defaulters in their individual capacity and also as the partners of
the firm, however, the respondent-department has failed to give notice of
demand to the appellants qua their share in the partnership firm. They did not
receive the notices indicating their respective shares. The appellants have
raised hyper technical ground. Admittedly, no prejudice of any kind has been
caused to the appellants when notices were received individually by each
partner of the firm both in their individual capacity and in the capacity as a
partner of the firm. This argument of the appellants is devoid of any merit and
is accordingly rejected.
12. Learned counsel for the
respondent-department submitted that it is not the case of the assessee
appellants that they do not owe the amount to the respondent- department
towards tax for the assessment year 1985-86.
The appellants also failed to make
out the case that the proper procedure which has been laid down has not been
followed by the respondent-department in recovering its outstanding amount. It
was asserted on behalf of the respondent- department that the amount fetched in
the public auction was more than reasonable.
13. The reserve price and the
amounts fetched in the auction are mentioned hereunder:
Name Reserve price fixed Sale
Value by the assessing officer (with the prior approval of Dy.
Commissioner) Pawan Kumar 89,800
1,67,800 Radheshyam Modi 96,000 1,84,400 Padmadevi Modi 40,000 76,600 8
14. The appellants had never
complained about fixing of the reserve price before holding of auction, though
they were intimated of the same through sale proclamation.
15. In pursuance to the notice
issued by this court, respondent-department filed the counter affidavit.
Respondent no. 2 also filed a
separate counter affidavit.
Respondent no. 2 in the counter
affidavit stated that it is 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 are agricultural dry
lands and there are no mango gardens as alleged by the appellants. There are
however few mango trees scattered all over the land.
16. Respondent-department in the
counter affidavit stated that the appellant firm had alternate 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
17. There is another very
significant aspect of this case, which pertains to the rights of the bona fide
purchaser for value. It was asserted that respondent no. 2 is a bona fide
purchaser of the property for value. It was further stated that he had
purchased the said property in a valid auction and he cannot be disturbed
according to the settled legal position.
18. It is an established principle
of law that in a third party auction purchaser's interest in the auctioned
property continues to be protected notwithstanding that the underlying decree
is subsequently set aside or otherwise. This principle has been stated and
re-affirmed in a number of judicial pronouncements by the Privy Council and
Reliance has been placed on the
19. The Privy Council in Nawab
Zain-Ul-Abdin Khan v.
Muhammad Asghar Ali Khan &
others (1887) 15 I.A. 12 for the first time crystallized the law on this point,
wherein a three Judge Bench held as follows:
"A great distinction has been
made between the case of bona fide purchasers who are not parties to a decree
at a sale under execution and the decree-holders themselves. In Bacon's
Abridgment, it is laid down, citing old authorities, 10 that "If a man
recovers damages, and hath execution by fieri facias, and upon the fieri facias
the sheriff sells to a stranger a term for years, and after the judgment is
reversed, the party shall be restored only to the money for which the term was
sold, and not to the term itself, because the sheriff had sold it by the
command of the writ of fieri facias.". So in this case, those bona fide
purchasers who were no parties to the decree which was then valid and in force,
had nothing to do further than to look to the decree and to the order of
20. In the case of Janak Raj vs.
Gurdial Singh & Another (1967) 2 SCR 77, the Division Bench comprising
Justice Wanchoo and Justice Mitter held that in the facts of the said case the
appellant auction-purchaser was entitled to a confirmation of the sale
notwithstanding the fact that after the holding of the sale, the decree was set
aside. It was observed:
"The policy of the
Legislature seems to be that unless a stranger auction-purchaser is protected
against the vicissitudes of the fortunes of the suit, sales in execution would
not attract customers and it would be to the detriment of the interest of the
borrower and the creditor alike if sales were allowed to be impugned merely
because the decree was ultimately set aside or modified."
21. In the case of Gurjoginder
Singh v. Jaswant Kaur (Smt.) & Another (1994) 2 SCC 368, this court relying
on the judgment rendered by the Privy Council held that the status of 11 a bona
fide purchaser in an auction sale in execution of a decree to which he was not
a party stood on a distinct and different footing from that of a person who was
inducted as a tenant by a decree-holder-landlord. It was held as follows:
"A stranger auction purchaser
does not derive his title from either the decree-holder or the judgment-debtor
and therefore restitution may not be granted against him but a tenant who
obtains possession from the decree-holder landlord cannot avail of the same
right as his possession as a tenant is derived from the landlord."
22. In the case of Padanathil
Ruqmini Amma v. P. K.
Abdulla (1996) 7 SCC 668, this
court in para 11 observed as under:
"11. In the present case, as
the ex parte decree was set aside, the judgment-debtor was entitled to seek
restitution of the property which had been sold in court auction in execution
of the ex parte decree.
There is no doubt that when the
decree-holder himself is the auction-purchaser in a court auction sale held in
execution of a decree which is subsequently set aside, restitution of the
property can be ordered in favour of the judgment-debtor.
auction-purchaser is bound to return the property. It is equally well settled
that if at a court auction sale in execution of a decree, the properties are
purchased by a bona fide purchaser who is a stranger to the court proceedings,
the sale in his favour is protected and he cannot be asked to restitute the
property to the judgment-debtor if the decree is set aside. The ratio behind
this distinction between a sale to a decree-holder and a sale to a stranger is
that the court, as a matter of policy, will 12 protect honest outsider purchasers
at sales held in the execution of its decrees, although the sales may be
subsequently set aside, when such purchasers are not parties to the suit. But
for such protection, the properties which are sold in court auctions would not
fetch a proper price and the decree- holder himself would suffer. The same
consideration does not apply when the decree- holder is himself the purchaser
and the decree in his favour is set aside. He is a party to the litigation and
is very much aware of the vicissitudes of litigation and needs no
23. In Para 16, the court further
elaborated the distinction between the decree-holder auction purchaser and a
stranger who is a bona fide purchaser in auction. Para 16 reads as under:
"16. The distinction between
a stranger who purchases at an auction sale and an assignee from a
decree-holder purchaser at an auction sale is quite clear. Persons who purchase
at a court auction who are strangers to the decree are afforded protection by
the court because they are not in any way connected with the decree. Unless
they are assured of title; the court auction would not fetch a good price and
would be detrimental to the decree- holder. The policy, therefore, is to
protect such purchasers. This policy cannot extend to those outsiders who do
not purchase at a court auction.
When outsiders purchase from a
decree-holder who is an auction-purchaser clearly their title is dependent upon
the title of decree-holder auction- purchaser. It is a defeasible title liable
to be defeated if the decree is set aside. A person who takes an assignment of
the property from such a purchaser is expected to be aware of the 13
defeasibility of the title of his assignor. He has not purchased the property
through the court at all.
There is, therefore, no question
of the court extending any protection to him. The doctrine of a bona fide
purchaser for value also cannot extend to such an outsider who derives his
title through a decree-holder auction-purchaser. He is aware or is expected to
be aware of the nature of the title derived by his seller who is a
decree-holder auction- purchaser."
24. In the case of Ashwin S. Mehta
& Another v.
Custodian & Others (2006) 2
SCC 385, this court whilst relying upon the aforementioned two judgments stated
the principle in the following words:
"In any event, ordinarily, a
bona fide purchaser for value in an auction sale is treated differently than a
decree holder purchasing such properties. In the former event, even if such a
decree is set aside, the interest of the bona fide purchaser in an auction sale
25. We have heard the learned
counsel for the parties at length and have perused the material documents on
26. 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. The strangers to the
decree are afforded protection by the court because they 14 are not connected
with the decree. Unless the protection is extended to them the court sales
would not fetch market value or fair price of the property.
27. In our opinion, the view taken
by the High Court in the impugned judgment is eminently just and fair. No
interference is therefore called for.
28. The appeal being devoid of any
merit is accordingly dismissed. In the facts and circumstances of the case, we
direct the parties to bear their own costs.