M/S. Janatha Textiles & Ors vs Tax Recovery Officer & Anr

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

unsustainable.

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 year 1985-86.

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.

7

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 Court.

9

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 this court.

Reliance has been placed on the following decisions.

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 sale."

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. The decree-holder 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 protection."

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 is saved."

25. We have heard the learned counsel for the parties at

length and have perused the material documents on record.

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.

......................................J. (Ashok Bhan)

.....................................J. New Delhi; (Dalveer Bhandari) May 16, 2008