Taxpayer Must Be Heard Before 'Draconian' Step Of Provisional Attachment: Rajasthan High Court

The Rajasthan High Court on 6 March observed that the minimum requirement before invoking provisional attachment under Section 281B of the Income Tax Act, 1961, is to grant the taxpayer an opportunity of hearing to make the payment, or part of it, given the “draconian” nature of the provision.

The Division Bench of Acting Chief Justice Sanjeev Prakash Sharma and Justice Sangeeta Sharma was hearing a petition by ARL Infratech Limited challenging an order of the Deputy Commissioner of Income Tax directing provisional attachment of the petitioner's property on the apprehension that a tax demand of around Rs. 1.3 crores might be created. The Court held:

“A presumption cannot be drawn that the assessee would not make the payment. Principles of natural justice to that extent would be inherent as the civil rights are likely to be harmed, if action is taken under Section 281B of the Act of 1961.”

The petitioner-company was engaged in the business of manufacturing building materials and had obtained a credit facility from HDFC Bank, for which a property along with plant and machinery was mortgaged.

A search was conducted at the petitioner's premises and, based on the appraisal report, an addition of Rs. 4.4 lakh was made. A demand of around Rs. 1.3 crores was stated to be likely for assessment years 2022–23 and 2024–25. However, no demand was actually created, and a provisional attachment of the property—valued at a much higher amount—was ordered.

The petitioner contended that it could have deposited around 15–20% of the amount for which a demand might have been created, in line with the guidelines issued by the Central Board of Direct Taxes (CBDT). It argued that attaching property worth several crores was unfair, arbitrary, illegal, and an abuse of jurisdiction.

After hearing the contentions, the High Court noted that the petitioner was a regular taxpayer that had already paid taxes for the relevant assessment years. It further observed that only a small addition of Rs. 4.4 lakh related to assessment year 2023–24, while no demand had been created for assessment years 2022–23 and 2024–25.

The Court found that the provisional attachment order had been passed merely on the apprehension that a demand of Rs. 1.3 crores might be created. It stated:

“…before invoking power under Section 281B of the Act of 1961, the authorities must examine whether the assessee before it is a person who has been a regular tax payer. Merely because he may have taken loan from the Bank for his business, may not be the only sufficient ground to attach the properties. Such attachment, even if provisional, creates a sense of apprehension and fear in the minds of bankers who are giving loans to the concerned units for their businesses. Their public reputation is seriously hampered.”

The Bench also observed that the Supreme Court of India had repeatedly held that the power to attach properties must be exercised only after taking into account all relevant aspects, and that no presumption could be made that the assessee would fail to make the payment.

Accordingly, the High Court set aside the provisional attachment order.

For Petitioners: Mr. Siddharth Ranka

For Respondents: Mr. Siddharth Bapna with Ms. Tanushka Saxena