Holding

In a third‑party auction the purchaser’s title as a bona‑fide purchaser for value is protected notwithstanding any subsequent setting aside of the decree, and the High Court’s dismissal of the challenge to the tax‑department’s auction is affirmed.

Summary

Janatha Textiles, a partnership firm with four partners, was in arrears of income‑tax for several assessment years. The tax department attached agricultural land owned by the partners and sold it by public auction on 5 August 1996 under the procedures of the Second Schedule of the Income Tax Act, 1961. The sale was confirmed in favour of L. Krishna Prasad, the highest bidder. The firm challenged the auction on grounds of unconsidered objections, pending stay and waiver applications, misdescription of the land, and lack of notice to the partners about their shares. The High Court dismissed the petition and the firm appealed to the Supreme Court. The Court held that a purchaser at a third‑party auction is a bona‑fide purchaser for value whose interest is protected even if the underlying decree is later set aside, and that the tax department’s auction was lawful. Consequently, the appeal was dismissed.

Issues considered

Whether the Income Tax Department was justified in attaching and auctioning the partners' agricultural land for recovery of tax dues under the Income Tax Act, 1961.
Whether procedural defects alleged by the appellants (unconsidered objections, pending stay, misdescription of land, lack of notice to partners) invalidate the auction sale.
Whether a purchaser at a third‑party auction is a protected bona‑fide purchaser for value despite any subsequent setting aside of the decree.

Legislation cited

Income Tax Act, 1961s. 220(2), s. 271(1)(c), s. 60, s. 61, s. Second Schedule

Subjects

Income TaxAuction of attached propertyBona fide purchaserThird‑party auctionTax recoveryPartnership firmDecreeProcedural irregularities

Judgment

{2008) 8 S.C.R. 1148

A JANATHA TEXTILES & ORS. +
v.
TAX RECOVERY OFFICER & ANR.
(Civil Appeal No.6539 of 2003)
MAY 16, 2008
B
[ASHOK BHAN AND DALVEER BHANDARI, JJ.]

Income Tax:

Auction sale of attached property for recovery of debt -
c Registered partnership firm - In arrears of tax - For recovery
of outstanding dues, agricultural land owned by partners at-
tached and sold in public auction - Sale challenged on vari-
ous grounds - Rights of bona fide purchaser for value - Held:
In a third party auction, purchaser's interest in the auctioned
D property continues to be protected notwithstanding that the +
underlying decree is subsequently set aside or otherwise -
Clear distinction between a stranger who is a bona fide pur-
chaser of the property at an auction sale and a decree holder
purchaser at a Court auction - Strangers to the decree are
E afforded protection by Court because they are not connected
with the decree.
Appellant No.1 is a registered firm with four partners.
The firm and its partners were in arrears of tax. For recov- '(
ery of the outstanding dues, agricultural land owned by
F the partners of Appellant No.1 firm were attached and sold
in public auction. The sale was confirmed in favour of
Respondent No.2 who offered the highest price. Appel-
lant challenged the sale by filing writ petition before the
High Court. The judgment passed by the High Court is
G challenged in the present appeal.
The Appellants contended that even though they had
*
filed objections at various stages of the notice issued for
th~ auction sale, but Respondent-department without dis-

H 1148
JANATHA TEXTILES & ORS. v. TAX RECOVERY 1149
OFFICER

,,_ posing of the said objections proceeded with the sale and, A
therefore, on that ground the sale conducted by Respon-
dent-department was illegal and unsustainable. The Ap-
pellants further contended that with reference to the rel-
evant assessment year, the application for waiver of in-
terest was pending before the authorities and the stay ap- B
plication filed before the Commissioner was also not dis-
posed of, and, hence on that count also, the sale con-
ducted by Respondent-department was illegal and unsus-
tainable. The Appellants contended that the High Court
had failed to notice that the nature of the land in the auc- c
tion notice was wrongly mentioned as dry lands when in
fact the said lands were mango orchards and hence the
auction ought to be vitiated on this ground. The Appel-
lants challenged the sale also on the ground that though
they received the notice of demand as defaulters in their
D
individual capacity and also as partners of the firm, but
Respondent-department had failed to give notice of de-
mand to them qua their share in the partnership firm.
Respondent No.2, on the other hand, contended that
the said lands were agricultural dry lands and there were E
no mango gardens as alleged by the appellants though
there were few mango trees scattered all over the land.
He 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 further contended that he was F
a bona fide purchaser of the property for value and he
had purchased the said property in a valid auction and
he could not be disturbed according to the settled legal
position.
Dismissing the appeal, the Court G
HELD:1.1. In a third party auction, purchaser's inter-
est in the auctioned property continues to be protected
notwithstanding that the underlying decree is subse-
quently set aside or otherwise. [Para 18] [1155-C]
H
1150 SUPREME COURT REPORTS [2008] 8 S.C.R.

A 1.2. There is a clear distinction between a stranger
who is a bona fide purchaser of the property at an auc-
tion sale and a decree holder purchaser at a Court auc-
tion. The strangers to the decree are afforded protection
by the Court because they are not connected with the
B decree. Unless the protection is extended to them, the
Court sales would not fetch market value or fair price of
the property. [Para 26] [1158-E-F]
Janak Raj v. Gurdial Singh & Anr (1967) 2 SCR 77;
Gurjoginder Singh v. Jaswant Kaur (Smt.) & Another (1994) 2
C SCC 368; Padanathil Ruqmini Amma v. P K. Abdu!la (1996)
7 SCC 668 and Ashwin S. Mehta & Anr v. Custodian & Oth-
ers (2006) 2 sec 385 - relied on.
Nawab Zain-U/-Abdin Khan v. Muhammad Asghar Ali
Khan & Ors. (1887) 15 I.A. 12 - referred to.
D
2. In the present case, the view taken by the High
Court in the impugned judgment is eminently just and fair.
No interference is therefore called for. [Para 27] [1158 G]
E CIVILAPPELLATE JURISDICTION: Civil Appeal No. 6539
of2003
From the final Judgment and Order dated 6.9.2001 of the
High Court of Judicature of Andhra pradesh at Hyderabad in
Writ Petition No. 22038 of 1996
F Ramji Srinivasan, Lalit Chauhan, Sumi! Goel and
Somanadri Goud (for Mis. Parekh & Co.) for the Appellants.
8. Datta, ASG., Rajiv Dutta, Shabu Sreedharan (for 8.V.
Bala ram Das) Misha and Niha Bhasin (for M/s. Suresl1 A. Shroff
G & Co.) for the Respondents.
The Judgment of the Court was delivered by
DALVEER BHANDARI, J. 1. This appeal is directed
against the judgment of the Division Bench of the High Court of
H Andhra Pradesh at Hyderabad passed in writ petition No.22038
JANATHA TEXTILES & ORS. v. TAX RECOVERY 1151
OFFICER [DALVEER BHANDARI, J.]
j

+ of 1996 on 6.9.2001. A
2. The short question which arises for consideration in this
appeal is whether the Income Tax Department is justified in auc-
tioning the attached property for recovery of debt?
3. Brief facts which are necessary to dispose of this ap- B

--r
• •
peal 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- c
87, 1987-88, 1989-90. All the demands pertaining to assess-
" ment 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 enforced. D
4. The agricultural lands owned by the partners of the ap-
pellant 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 partici- E
pated in the public auction held on 5.8.1996. The sale was con-
firmed in favour of L. Krishna Prasad who offered the highest
price. No procedural irregularity or illegality in public auction
Jr
process was even alleged by the appellants.
F
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/-.
,. G
. 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 con-
firmed in appeal by the Commissioner of Income Tax (Appeals).
Further demands were also raised for a sum of Rs.2,82, 160/-,
H
1152 SUPREME COURT REPORTS [2008] 8 S. C.R.

A Rs.3,42,518/- and Rs.2,86,075/- at the hands of individual as-
sessment of appellant nos.2, 3, and 4 respectively. In the as-
+ I

sessment year 1985-86, partial relief was granted and ultimately
quantified the amount due from the appellant firm and its part-
ners. After adjusting the amounts paid, the amount due as on
B the date of auction for the assessment year 1985-86 stood at
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

c
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 relat-
able to assessment years 1986-87 to 1989-90 have never been
" '•

,,
enforced because of the various stay orders by the different
Income Tax authorities.
7. Even after issuance of sale proclamation, the respon-
D
dent-department issued communication in SR No.2/94 dated
15. 7.1996 informing ti1e 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 in-
terest payable under section 220(2) of the 1961 Act. The ap-
E pellant firm acknowledged receipt of the letter on 17.7.1996 and
had not contradicted the quantum of tax and interest as men-
tioned in the said letter. It was made clear that the demand for
the assessment year 1985-86 alone was being enforced. There-
fore, it was absolutely no warrant for the appellant to mix up the '( •
F said demands relatable to the assessment year 1985-86 in this
appeal. According to the records of the Income Tax Depart-
ment, 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
G 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 with-
H
JANATHA TEXTILES & ORS. v. TAX RECOVERY 1153
OFFICER [DALVEER BHANDARI, J.]
..... out disposing of the said objections proceeded with the sale A
I\ and, therefore, even on that ground the sale conducted by the
respondent-department was illegal and unsustainable. The ap-
pellants further submitted that with reference to the assessment
year 1985-86, the application for waiver of interest was pend-
ing before the authorities and further the stay application filed 8
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 respon-
dent-department that the sale proceedings were initiated con- c
tinued 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
D
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 default- E
ers 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 part-
nership firm. They did not receive the notices indicating their
respective shares. The appellants have raised hyper technical F
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 ap-
pellants is devoid of any merit and is accordingly rejected.
G
-' ... 12. Learned counsel for the respondent-department sub-
mitted that it is not the case of the assessee appellants that
they do not owe the amount to the respondent-department to-
wards tax for the assessment year 1985-86. The appellants also
failed to make out the case that the proper procedure which H
1154 SUPREME COURT REPORTS [2008] 8 S.C.R.

A 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 auc-
B tion are mentioned hereunder:

Name Reserve price fixed Sale Value
by the assessing of-
ficer (with the prior
c approval of Dy. Com-
missioner)
Pawan Kumar 89,800 1,67,800
Radheshyam Modi 96,000 1,84,400

D Padmadevi Modi 40,000 76,600

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.
E
15. In pursuance to the notice issued by this court, respon-
dent-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 prop-
F erty. 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 how-
. ever few mango trees scattered all over the land.
G 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 Sched-
ule to the 1961 Act. The appellant ought to have availed of the
statutory remedy for ventilating its grievances instead of filing a
H petition before the High Court.
JANATHA TEXTILES & ORS. v. TAX RECOVERY 1155
OFFICER [DALVEER BHANDARI, J.]

., 17. There is another very significant aspect of this case, A
-t 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 pur-
chased the said property in a valid auction and he cannot be
disturbed according to the settled legal position. B
18. It is an established principle of law that in a third party
auction purchaser's interest in the auctioned property contin-
ues 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 c
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
D
-+ first time crystallized the law on this point, wherein a three Judge
•• Beilch 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 E
themselves. In Bacon's Abridgment, it is laid down, citing
old authorities, 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
y
is reversed, the party shall be restored only to the money F
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
G
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 confir- H
1156 SUPREME COURT REPORTS [2008] 8 S.C.R.

A mation 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
B 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."

c 21. In the case of Gurjoginder Singh v. Jaswant Kaur (Smt.)
& Another (1994) 2 sec 368, this court relying on the judgment
rendered by the Privy Council held that the status of 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-
D
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
E 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 sec 668, this court in para 11 observed as under:
F y
"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
G
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
H
JANATHA TEXTILES & ORS. v. TAX RECOVERY 1157
OFFICER [DALVEER BHANDARI, J]

execution of a decree, the properties are purchased by a 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 B
)' a stranger is that the court, as a matter of policy, will 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 c
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
0
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 E
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 F
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- G
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 H
1158 SUPREME COURT REPORTS [2008] 8 S.C.R.

A aware of the 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
B 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 &Anotherv. Custo-
dian & Others (2006) 2 sec 385, this court whilst relying upon
C 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 +
D
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.
E
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 y
are not connected with the decree. Unless the protection is ex-
F tended 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
G is therefore called for.
28. The appeal being devoid of any merit is accordingly
dismissed. In the facts and circumstances of the case, we di-
rect the parties to bear their own costs.

H B.B.B. Appeal dismissed