The Institute of Chartered Accountants of India (ICAI) has published “Treatise on Report on Income Tax Dues,” which aims to educate members about direct taxes, including issues and legislative amendments. The publication also discusses Section 281 of the Income Tax Act, which imposes an overriding charge on an assessee’s assets for all pending income tax dues, whether crystalised or not.
Introduction to Section 281 of the Income Tax Act of 1961
When transferring or creating a charge on business assets, an assessee must obtain prior permission from an Assessing Officer under Section 281 of the Income Tax Act. This provision is critical because if an assessee fails to seek such permission, the Income Tax Department may declare any sale, gift, exchange, or mortgage void. This could have serious ramifications for the assessee, including the possibility of recovery proceedings.
Asset Transfer/Charge Creation Requires Prior Permission from AO
Section 281 imposes an overriding charge on the assessee’s assets for all pending income tax liabilities, whether crystallised or not. Any assessee wishing to transfer any assets covered by Section 281 must first obtain permission from the Income Tax Department (Assessing Officer) to do so (creation of a charge/mortgage is also considered a transfer for the purposes of this Section).
Consequences of Failure to Obtain Prior Consent from AO
According to Section 281 of the Income Tax Act, the Income Tax Department can recover dues from assessees by attaching their assets without their consent or permission. This includes situations in which the assets are owned or charged to someone else, as well as situations in which the transferee has paid adequate consideration for the transfer. The provision applies to demands or dues of a company or partnership firm where the assessee is a director or partner, and recovery can also be in the capacity of a representative assessee.
Failure to obtain prior consent from the assessing officer can result in severe consequences, such as the Income Tax Department declaring any transfer or mortgage of an asset covered by Section 281 void. Even a genuine transferee who has paid adequate consideration will not be recognised as the asset’s owner. This can result in substantial losses for the buyer or mortgagee.
Which income tax dues have a prior charge?
An overriding charge applies to all dues, whether they have already crystallised or may crystallise during the course of the proceedings. For example, if A sells a building to B for Rs 8 crores and its fair market value is Rs 10 crores, and there are outstanding tax dues of Rs 5 crores (Rs 2 crores on the date of the loan and Rs 3 crores from proceedings in appeal), the buyer will be liable to pay the entire Rs 5 crores if the seller fails to pay.
The Importance of a Chartered Accountant’s Certificate: The ICAI’s Treatise on Reporting Income Tax Dues
As previously stated, obtaining a certificate from the assessing officer regarding income tax dues may take a significant amount of time, which can be a hindrance in completing urgent transactions. In such cases, the purchaser can request a certificate from a chartered accountant to expedite the process. This certificate will inform the purchaser about the seller’s income tax obligations, allowing them to make an informed decision.
Chartered accountants are knowledgeable about tax laws and have experience preparing and certifying such reports. As a result, the ICAI’s Direct Taxes Committee has issued the “Treatise on Report on Income Tax Dues” to assist members in preparing such reports. The treatise is a valuable resource that can assist members in understanding the law and procedure and preparing them to perform their duties effectively.
Before transferring or creating a charge on an asset covered by Section 281 of the Income Tax Act, it is critical to obtain prior consent from the assessing officer. Failure to obtain prior consent can result in severe consequences, such as the transaction being declared void and assets being attached to recover income tax debts. Purchasers can request a certificate from a chartered accountant to expedite the process of obtaining information about income tax dues. The “Treatise on Report on Income Tax Dues” published by the ICAI’s Direct Taxes Committee can help members prepare such reports and understand the law and procedure.
The ICAI’s “Treatise on Report on Income Tax Dues” aims to provide valuable guidance to members on direct taxation law and procedure. It is a necessary tool for comprehending Section 281 of the Income Tax Act, which imposes an overriding charge on the assessee’s assets for all pending income tax liabilities. Understanding this provision is critical for the assessee to avoid serious consequences, including the possibility of recovery proceedings.
ICAI’s Treatise on Report on Income Tax Dues (February 2023)