REPORTABLE

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

J U D G M E N T  

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 enforced.

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  on 5.8.1996.

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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

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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 authorities.   

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

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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

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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.

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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 by  the  assessing officer (with the prior approval  of  Dy. Commissioner)

Sale Value

Pawan Kumar 89,800 1,67,800 Radheshyam Modi 96,000 1,84,400 Padmadevi Modi 40,000 76,600

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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.

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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,

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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

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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

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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

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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

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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  

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