Court clarifies notice requirements to individual partners, affirms limitation period applicability, and confirms sale despite valuation and payment contentions
In a significant ruling dated August 24, 2026, the Madras High Court, presided over by Justice Senthilkumar Ramamoorthy, dismissed writ petitions challenging the auction sale of immovable properties belonging to the partnership firm M/s RJK Investments under the Income-Tax Act, 1961. The case involved complex issues regarding the limitation period for recovery proceedings, service of notices to individual partners, property valuation, and legitimacy of payments made through third parties.
The partnership firm had outstanding income tax dues for assessment years 2007-08 to 2011-12, resulting in demand notices and certificates of recovery under Section 222 of the Income-Tax Act. Following default in payment, the Tax Recovery Officer (TRO) initiated attachment and auction sale proceedings for the firm’s immovable assets and also for properties owned by one of the partners, Jawahar Ayya.
One of the partners, Mr. S. Venkataramanan, who was not a signatory to the income-tax returns but a working partner, contested the process on multiple grounds. He argued that notices under the II Schedule of the Income-Tax Act were not served on him individually, valuation of properties was inconsistent and unfair, and payments made via demand drafts by a third party vitiated the auction sale. Additionally, he contended that the amendment to Rule 68B of the II Schedule should not apply retrospectively and hence the proceedings were barred by limitation.
The Court addressed these contentions meticulously:
1. Limitation Period: The Court referred to its earlier order in TASC Jawaahar Ayya v. Principal Commissioner of Income Tax and held that the recovery proceedings concerning assessment years 2009-10 to 2011-12 were within the limitation period. The retrospective application of the amendment to Rule 68B was allowed only where the original limitation period was alive at the time of amendment.
2. Service of Notice to Partners: The Court emphasized that notices under Rule 2 of the II Schedule must be served on the defaulter named in the recovery certificate, which in this case was the partnership firm. Citing the Supreme Court precedent in Vanguard Fire and General Insurance Co. Ltd. v. Fraser and Ross, the Court clarified that for actions against the partnership firm’s assets, notice to the firm suffices. However, if recovery proceedings target an individual partner’s property, notices must be served on that partner. Here, all notices were served on the firm, and copies sent to the partners; Mr. Venkataramanan had refused to receive some notices but was aware of the proceedings.
3. Valuation of Properties: The Court found that the auction sale prices were significantly higher than the government guideline value and the market value declared in an affidavit signed by all partners. The Court rejected the objection of undervaluation due to lack of evidence that the sale was below fair market value. Changes in reserve prices between sale notices were explained by the non-contiguous nature of the properties and did not invalidate the auction process.
4. Payments by Third Parties: The Court held that payments made through demand drafts purchased by Mr. Sivakumar, the father of the successful bidder Mr. S. Sajin Kumar, did not vitiate the auction sale. Payments made as per auction terms, regardless of the source of funds, were valid.
5. Confirmation of Auction Sale: Consequently, the Court confirmed the auction sale conducted on January 28, 2026, and directed the TRO to execute the sale certificate in favor of the successful bidder.
The writ petitions filed by the partners challenging the auction sale were dismissed, and the Court directed the Income-Tax Department to provide a signed copy of the order disposing of objections for appropriate follow-up. The judgment serves as an important clarification on the procedural and substantive aspects of income-tax recovery by auction of partnership properties.
Bottom Line:
Auction sale of immovable properties under the Income-Tax Act, 1961 - Issues related to limitation, service of notice to individual partners, valuation of properties, and payments by third parties raised and adjudicated.
Statutory provision(s):
Income-Tax Act, 1961 - Sections 156, 188A, 222; II Schedule Rules 2, 3, 11, 49, 53, 60, 61, 68B
S. Venkataramanan v. Principal Commissioner of Income Tax-4, (Madras) : Law Finder Doc Id # 2975984
