The Madras High Court has ruled that the Income Tax Department is not required to separately serve recovery notices on every partner of a defaulting partnership firm when the property proposed to be auctioned belongs to the firm itself.
The bench of Justice Senthilkumar Ramamoorthy held that service of the notices prescribed under the Second Schedule to the Income Tax Act, 1961, on the partnership firm is sufficient when recovery proceedings are directed against the firm’s assets.
The Court, however, drew an important distinction where the department seeks to recover the firm’s tax dues by selling the personal property of an individual partner. In such circumstances, notice must be served on the concerned partner because that partner would be directly affected by the proposed sale.
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The Court also directed the Tax Recovery Officer to issue the sale certificate to the successful auction purchaser for the land measuring 26 cents at Pudupakkam Village.
Assessment orders were passed against the assessee for assessment years 2007-08 to 2011-12. According to the Court, the firm challenged only the assessment order for assessment year 2009-10, and that appeal was disposed of on August 23, 2016.
Following the assessment orders, the Income Tax Department issued demand notices under Section 156 of the Income Tax Act. When the firm failed to discharge the demands, the Tax Recovery Officer drew up recovery certificates under Section 222.
Notices under Rule 2 of the Second Schedule were subsequently issued to the defaulting assessee. As the dues remained unpaid, the department initiated proceedings for the attachment and sale of immovable properties belonging to the partnership firm.
Partner sought consideration of his objections and challenged the sale notice dated December 18, 2025. Another partner sought directions for the sale of identified properties to discharge the firm’s tax liability. The successful bidder for one of the properties sought confirmation of the January 28, 2026 auction and execution of a sale certificate.
The partner contended that he was merely a working partner and was not a signatory to the firm’s income tax returns. According to him, the managing partners were T.A.S.C. Jawahar Ayya and Kamalesh Kumar Sheth.
He argued that notices relating to the recovery proceedings were not properly served on him and that the requirements of Rules 49 and 53 of the Second Schedule had been violated. He also claimed that the order disposing of his objections dated February 12, 2025, had been sent to the firm’s address instead of his individual address.
The partner further questioned the valuation of the auctioned properties. He pointed out that the reserve price of the 33-cent property was reduced from ₹1.36 crore in a January 15, 2025 sale notice to ₹74.10 lakh in the December 18, 2025 notice.
By contrast, the reserve price for the 26-cent property increased from ₹33.18 lakh to ₹58.20 lakh during the same period. It was argued that these substantial variations demonstrated an improper valuation process.
Allegations of collusion between the Tax Recovery Officer and the auction purchasers were also raised. The partner alleged that the properties were sold below their fair market value and that the department had failed to disclose the number of bidders and individual bid amounts.
He additionally questioned payments made for the successful bid because the demand drafts had been purchased from the bank account of the successful bidder’s father.
The Income Tax Department submitted that the partner’s objections had already been considered and disposed of through an order dated February 28, 2025.
It argued that separate notices to individual partners were unnecessary because the assessee mentioned in the recovery certificates was the partnership firm. The department nevertheless maintained that communications sent to Partner in February and March 2025 were returned unclaimed.
The sale proclamation dated December 18, 2025, was also sent to the firm and copies were marked to all three partners. Postal records indicated that Partner refused to receive that notice.
The department stated that the auction had been preceded by a valuation report dated October 10, 2024. It further submitted that the properties fetched prices substantially higher than their guideline value.
Counsel for the successful auction purchaser informed the Court that the 26-cent land, against a guideline value of ₹35.70 lakh, was purchased for ₹2.36 crore. It was also clarified that the payments were made through demand drafts purchased from the account of the successful bidder’s father.
Examining the statutory scheme, the High Court observed that Section 188A of the Income Tax Act imposes joint and several liability on partners for the tax dues of a firm.
The rules in the Second Schedule governing notices for the attachment and sale of property, including Rules 49 and 53, require notice to the “defaulter”. Rule 1 defines the defaulter as the assessee named in the recovery certificate.
In the present case, the assessee named in the certificates was M/s RJK Investments. Consequently, Rule 2 notices were issued to the firm and were duly received on its behalf.
The Court observed that a different interpretation would apply when the department seeks to sell the personal property of an individual partner by enforcing that partner’s joint and several liability.
An individual owner is directly affected by the sale of their property, particularly if the reserve price is inadequate or the asset does not fetch its fair market value. Therefore, when the personal asset of a partner is targeted, the statutory expression “defaulter” must be read contextually to include that individual partner.
The Court accordingly held that notice to the individual partner would be mandatory in proceedings seeking the sale of that partner’s personal property.
Where the recovery action is confined to property owned by the partnership firm, however, service of the prescribed notices on the firm is sufficient. Separate service on every partner is not required.
Since the properties auctioned in the present case belonged to the partnership firm, the Court found no illegality in the notices having been addressed principally to the firm.
The Court noted that Rule 2 notices concerning assessment years 2009-10 to 2011-12 were dispatched to the firm in November 2014 and July 2016. The acknowledgements showed receipt on behalf of the partnership firm.
The attachment order dated May 5, 2015, was also addressed to the firm and was received by one of its partners on June 15, 2015. A subsequent attachment was effected in October 2019.
The notice for settling the sale proclamation, issued in July 2025, was addressed to the firm, while copies were sent to all three partners. The partner filed objections after receiving that notice.
Similarly, the December 18, 2025 sale proclamation was addressed to the firm and copies were marked to its partners. The postal tracking report showed that partner refused to accept the communication.
In these circumstances, the High Court concluded that neither the Second Schedule nor the principles of natural justice had been violated, even if it were assumed that copies were required to be sent separately to all the partners.
The Court also rejected the contention that the properties had been auctioned below their fair market value.
It referred to an affidavit executed by the firm’s three partners in September 2024, which stated that the guideline value was ₹1.35 lakh per cent and the market value was ₹2.50 lakh per cent.
Against these figures, the purchase price for the 26-cent property was ₹2.36 crore, while the 33-cent property fetched ₹3.11 crore. The Court observed that these prices were substantially higher than both the guideline value and the market value disclosed in the partners’ affidavit.
No independent valuation report or other evidence was produced by partner to establish that the properties had been sold below their fair market value.
The Court held that the mere variation in reserve prices between the January and December 2025 sale notices was insufficient to invalidate the auction, particularly when the final prices were considerably higher than the disclosed guideline and market values.
The Court described as “completely devoid of merit” the contention that the auction was vitiated because the demand drafts were purchased from the bank account of the successful bidder’s father.
It held that once the earnest money deposit and other payments were made through valid demand drafts in accordance with the auction conditions, the source account used by the bank to issue those drafts was immaterial.
The Court also took note of the fact that the person from whose account the drafts were purchased was the successful bidder’s father.
The partner’s argument that the recovery proceedings were barred under Rule 68B of the Second Schedule was also rejected.
The Court relied on its earlier ruling concerning the properties of another partner of the same firm. In that decision, it had held that recovery proceedings for assessment years 2007-08 and 2008-09 were time-barred, but the proceedings concerning assessment years 2009-10 to 2011-12 remained within limitation.
The Court reiterated that an amendment extending a limitation period cannot revive a proceeding where the original limitation period had already expired. It can, however, apply where the limitation period was still running when the amendment came into force.
Accordingly, the limitation challenge to the recovery proceedings for assessment years 2009-10 to 2011-12 was rejected.
Finding all objections to the auction process untenable, the High Court dismissed partner’s petition challenging the December 18, 2025 sale notice.
His earlier petition seeking disposal of his objections was disposed of after recording that the department had already passed an order on February 28, 2025. The department was directed to provide him with a signed copy of that order. The limitation period for any challenge to the objection order would run from the date on which he receives the signed copy.
The Court allowed the auction purchaser’s writ petition, confirmed the auction sale held on January 28, 2026, and directed the Tax Recovery Officer to execute the sale certificate for the 26-cent land.
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