SECTION 281 OF THE INCOME-TAX ACT 1961
Certain Transfers to be Void
Guidelines for Prior Permission Under Section 281 to Create a Charge
Section 281 of the Income-tax Act, 1961 empowers the Assessing Officer to declare certain transfers of assets void if such transfers are made with the intent to defraud creditors or avoid tax liabilities. However, the Act also provides for an exception to this rule, allowing taxpayers to obtain prior permission from the Assessing Officer to create a charge on their assets before such a transfer is made.
This article discusses the provisions of Section 281 of the Income-tax Act, 1961 and provides guidelines for obtaining prior permission under this section to create a charge on assets.
Scope of Section 281
Section 281 applies to any transfer of assets, whether movable or immovable, made by a person who is:
- Assessed or assessable for any tax;
- In the process of being assessed for any tax;
- Likely to be assessed for any tax;
- Indebted to the Central Government for any tax, penalty or interest.
Any such transfer made with the intent to defraud creditors or avoid tax liabilities can be declared void by the Assessing Officer.
Exceptions to Section 281
Despite the general prohibition against transfers of assets, Section 281 provides for certain exceptions, including:
- Transfers made for adequate consideration;
- Transfers made in the ordinary course of business or profession;
- Transfers made to a spouse or minor child;
- Transfers made with the prior permission of the Assessing Officer.
Guidelines for Obtaining Prior Permission
To obtain prior permission from the Assessing Officer to create a charge on assets, the taxpayer must make an application in the prescribed form, along with the following documents:
- A copy of the proposed charge document;
- A statement of the reasons for creating the charge;
- A statement of the amount of tax or other sum payable or likely to be payable;
- A statement of the assets on which the charge is to be created;
- A statement of the value of the assets on which the charge is to be created.
The Assessing Officer will consider the application and the accompanying documents and grant permission if satisfied that the proposed charge is not intended to defraud creditors or avoid tax liabilities.
Consequences of Void Transfers
Any transfer of assets declared void under Section 281 will be deemed to be null and void, and the assets will be deemed to be the property of the transferor. The transferor may also be liable for prosecution under the Income-tax Act, 1961.
Conclusion
Section 281 of the Income-tax Act, 1961 is a powerful tool that can be used by the Assessing Officer to prevent taxpayers from defrauding creditors or avoiding tax liabilities. However, the Act also provides for an exception to this rule, allowing taxpayers to obtain prior permission from the Assessing Officer to create a charge on their assets before such a transfer is made.
Taxpayers who are considering transferring assets should carefully consider the provisions of Section 281 and seek professional advice if necessary to ensure that such transfers do not run afoul of the law.
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