Section 281 empowers the Income Tax Department to declare certain asset transfers as void if made during pending tax proceedings or before tax recovery notices are served, unless specific exceptions apply. Below is a detailed breakdown:
1. When is a Transfer Void?
A transfer of assets (sale, mortgage, gift, etc.) is void against tax claims if:
- Made during pending proceedingsunder the Income Tax Act or
- After proceedings conclude but before a tax recovery notice(under Rule 2, Second Schedule) is served .
Example: If an assessee sells property while an income tax assessment is ongoing, the sale can be declared void to recover unpaid taxes.
2. Exceptions (When Transfer is Valid)
The transfer is not void if:
- Adequate Consideration: The transfer is made for fair value and
- No Notice: The transferee had no knowledgeof:
-
- Pending proceedings or
- Tax dues of the transferor .
- Prior Permission: The Assessing Officer (AO) approves the transfer .
Example: A property sold for market price to a buyer unaware of the seller’s tax dues remains valid.
3. Applicability Threshold
- Tax Dues: Must exceed ₹5,000.
- Asset Value: Transferred assets must exceed ₹10,000.
4. Key Judicial Interpretations
- No Automatic Voidness: The tax department must provethe transfer was to evade taxes. A civil court decree is required to declare a transfer void .
- Bona Fide Purchasers Protected: If the transferee acted in good faith(e.g., conducted due diligence), the transfer stands .
- Secured Creditors Prevail: Mortgages created beforetax recovery notices take priority over tax claims .
5. Practical Implications
- For Buyers/Lenders:
- Verify if the seller/borrower has pending tax proceedings.
- Obtain an NOC (No Objection Certificate)from the tax department .
- For Tax Authorities:
- Cannot unilaterally cancel transfers; must approach a civil court .
6. Comparison with GST Law (Section 81, CGST Act)
| ASPECT | INCOME TAX (SECTION 281) | GST (SECTION 81, CGST ACT) |
| Trigger | Pending proceedings or pre-recovery notice | After tax dues crystallize |
| Intent Requirement | Not required (post-1975 amendment) | Must prove intent to defraud revenue |
| Transferee Defense | Adequate consideration + no notice | Good faith + no notice + AO permission |
7. Examples
| CASE | TRANSACTION | IS PERMISSION NEEDED? | VOID TRANSFER RISK? | EXPLANATION |
| Mr. A sells a property (worth ₹25 lakh) while facing a pending tax assessment; no AO permission taken | Property worth ₹25 lakh sold | Yes | Yes | The sale may be declared void. The tax department can recover taxes from the buyer’s property. |
| Ms. B mortgages her plant to a bank during pending reassessment; pays disputed tax due; takes AO permission | Plant mortgaged, AO permission obtained | No | No | No risk, as prior permission was given. |
| Mr. C gifts shares (worth ₹1.5 lakh) to his sister, knowing tax dues are above ₹5,000, but with AO’s No-objection | Gift of ₹1.5 lakh, AO certificate received | No | No | Compliant due to certificate from AO. |
| Builder sells flats (stock-in-trade) with proceedings pending; value ₹2 crore | Stock-in-trade asset sold | No | No | Not covered, as stock-in-trade is exempt from Section 281. |
| Mrs. D transfers fixed deposit of ₹50,000 with ₹6,000 tax pending; no AO certificate | FD transferred, tax dues >₹5,000, asset >₹10,000 | Yes | Yes | Transfer can be declared void for tax recovery |
