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This article is written by Deeksha Singh, pursuing a Certificate Course in Advanced Corporate Taxation from LawSikho.com. Here she discusses “Modes of Recovery of Income Tax under the Second Schedule of Income Tax rules and How they are different from Order 21 of the Civil Procedure Code”. 

Need for Recovery & What Schedule Two says About it?

The word has its many meaning but the one we’re looking for is [1] .i.e. recovery of income tax. In history, these conditions did not exist as money was taxed on other factors. More property a person owns, more tax they paid. The tax rates tend to incline during wars.

Schedule two[2] is all about the modes through which recovery of tax can be done from defaulters. It tells about the procedure to be followed when recovering tax from the defaulter and it is to be read with section 222 and 276, which is further divided into four parts: –

  1. Part I – General Provisions
  2. Part II -Attachment and Sale of Movable Property
  3. Part III -Attachment and Sale of Immovable Property
  4. Part IV – Appointment of Receiver
  5. Part V – Arrest and Detention of the Defaulter
  6. Part VI – Miscellaneous

Under section 222 of the Income Tax Act states that in the situation of a defaulter, TRO (tax Recovery Officer) will make a statement with his signature stating all amount of arrears in due. Such a statement is to be called ‘Certificate’ in schedule two. This certificate will be used to recover tax from the defaulter.  Section 222 also talks about the modes of recovery from the assessee that are very well elaborated in Schedule two of income Tax Act as procedure as in when to act further in recovering the income tax. 

Rule 4 says about ‘Modes of Recovery’ of Income-tax, it specifies if the amount mentioned in the notice is not paid within the specified time or whatever time TRO may grant under his discretion. Then the Tax Recovery Officer shall proceed to recover the amount by any of the methods mentioned below: –

  • By attachment & sale of the defaulter’s movable/ immovable property;
  • By arrest or detention of defaulter;
  • By appointing a receiver for the management.

Attachment & sale of the defaulter’s movable/immovable property

Once the certificate is passed under section 222 of Income Tax Act anyone who tries to conceal, remove, deliver or transfer to prevent recovery of tax will be punishable with a term which might extend to 2-year punishment and fine provided under section 276. Any movable or immovable property transferred to his minor child or to his son’s minor child even after attainment will be adequate for consideration as assessee’s property. Within 15 days (under pa period defaulter has to pay the amount in the certificate and if the Tax Recovery Officer believes that defaulter is likely to conceal, dispose or remove his property. Action can be taken even before the expiry of 15 days. 

In D.V Sathyanaeayana & others vs. Tax Recovery officer & others ILR 1992 KAR 1224 [3].  In the case, writ petition was filed after the petitioner already gave an application to TRO under Rule but the request was rejected for setting aside of sale. Then he appealed to The Commissioner under Rule 86 later it was held by the commissioner that petitioners contravened with the Rule 48 and hence were not eligible for any relief under Rule 61 of the Second Schedule to the Act. Both time requests was denied on the basis that the petitioner is not ‘the person whose interest is affected by the sale’. Relying on the following:

  • Chronology of the issuance of notices to the defaulter before the agreement of sale between petitioner and defaulter as a speculative remedy to set the sale aside u/Rule 61. 
  • Under Rule 2 agreement of sale between defaulter and petitioner was void and had no locus standi for filing of any application under Rule 61.
  • Rule 16 petitioner from entering in an agreement for sale of property with the defaulter.
  • Rule 16 also prohibit defaulter to create any kind of claim such as lease, charge, etc. Further sub-rule (2) of Rule 16 says that any transfer of property which is attached shall be void for all claims under the attachment.
  • Rule 48 prohibits defaulter from transferring/charging the property and to receive benefit from such transfer/charge.
  • Rule 16 r/w s. 54 TP Act states only contract by itself doesn’t create any interest in the property. 

It was held that petitioner did not have any locus standi and they can’t challenge the sale on behalf of the agreement of sale with no interest to come under the meaning of ‘person whose interest is affected under Rule 61, the writ petition was dismissed.

Appointing a receiver for the management

Where property of defaulter consists of business TRO appoints a receiver to manage the business under Rule 69. A copy of the order of attachment is to be given to defaulter and another copy to be fixed at premises and on the notice board of TRO. In case of immovable property, TRO shall appoint a receiver to manage the property instead of directing a sale. The management and attachment will be withdrawn at the direction of TRO at any time or when the arrears have been paid out.

Arrest or detention of defaulter

Rule 73 Specifies Tax Recovery officer can issue an arrest warrant for defaulter other than in case of minor, unsound mind or women (under Rule 81), where appearance is not made in obedience to the notice. Such warrant of arrest issued by a TRO may also be executed by any other TRO in whose jurisdiction defaulter is found in. In furtherance of warrant, defaulter should be bought before TRO within 24 hours of his arrest. If defaulter pays the amount described in warrant and cost of arrest, the Tax Recovery Officer should release him at once. 

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Rule 77 says that If a person in civil prison can be detained up to 6 months if the amount in certificate exceeds two hundred and fifty rupees, in other cases 6 weeks. Any person in civil prison detained for a period of six months on his discharge shall not be liable to be rearrested but will not be discharged from his liability. However, an appeal can be filed against the order of TRO before Principal chief commissioner or chief commissioner, Principal commissioner or commissioner within 30 days and if the decision of any appeal is pending then execution of the certificate may be stayed.

What is Order 21 of CPC?

When a court of Law passes a decree in favour of a person, to get the decree satisfied the Code provides a fair procedure to be followed. So, in order to gain something out of litigation decided in favour of litigant due execution of a decree is necessary[4]. There are different modes of Execution provided under section 51 of the CPC provided below:

  1. By delivery of the property;
  2. By attachment and sale or no attachment and sale of property;
  3. By arrest and detention;
  4. By appointing a receiver; or
  5. Any other way as the nature of relief given may require.

Sale of the Property

Any court who is executing a decree will be executed by attachment and sale or sale without attachment of any property. Section 65 to 73 and Rules 64 to 94 of Order 21[5] deals with sale of property movable/immovable.

Attachment of Property

Sections 60 to 64 and Rules 41 to 57 of Order 21 deals with attachment of property. In code u/s 60 it tells about the properties liable and not liable to be attached and sold in execution of a decree. Under section 63 tells the procedure where the property is attached in execution of decrees in different courts. The code u/s 64 says that a private alienation of property is void after attachment.

Arrest and Detention

Under section 55 to 59 of code and rules 37 to 40 deals with the arrest and detention. The judgement debtor can be arrested and as soon as possible should be brought up to court u/s 55.  He shall be detained in the civil prison. Rule 37 of order 21 says firstly an issue of calling upon the judgement-debtor is made to appear if the appearance by judgement debtor is not made obediently after the notice of the court, an issue of an arrest warrant is made.

Conclusion

Schedule two of the Income Tax Act is elaborative provision for the Modes of Recovery of tax. Whenever there is a defaulter found he is sent notice u/s 222 known as a certificate for recovery of tax. In it specifies if the amount mentioned in the notice is not paid within the specified time or whatever time TRO may grant under his discretion. Then Tax Recovery Officer shall proceed to recover the amount by any of the method, by attachment & sale of the defaulter’s movable/ immovable property; By arrest or detention of defaulter; By appointing a receiver for the management. 

Whereas Order 21 of CPC is elaborated provision for the execution of decrees also known as execution proceeding, it gives out effective remedies to the decree-holder and judgment-debtors and to third parties involved in the suit. It is done after getting a decree from the court of Law. Execution of decrees by the orders passed by the court. For enabling decree-holder to gain the benefits from the decree. Execution is complete when the decree-holder receives money or any other thing mentioned in the judgment/order/ decree. 


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