Section 281 of the Income Tax Act: Preventing Tax Evasion Through Property Transfers

Understanding Section 281

Section 281 of the Income Tax Act of 1961 aims to prevent taxpayers from evading tax by transferring their assets to avoid paying dues. This section applies when the tax liability or a sum payable exceeds INR 5,000, and the taxpayer creates a charge (a legal claim) in favor of another party.

Guidelines for Prior Permission

To create a valid charge under Section 281, taxpayers must obtain prior permission from the Tax Recovery Officer (TRO). The TRO will grant permission only if it is satisfied that the proposed charge is not a sham transaction aimed at hindering tax recovery.

Failure to obtain prior permission may result in the transfer being declared void, meaning the taxpayer remains liable for the tax dues despite the transfer of assets. Additionally, the transferee (the party receiving the property) may be held liable for abetting tax evasion.

Purpose of Section 281

Section 281 safeguards the government's ability to recover taxes by preventing taxpayers from transferring assets without paying outstanding tax dues. It ensures that taxpayers cannot use property transfers as a means to escape their tax obligations.