Section 281 Certificate – High Value Property Purchase

Tax planning consists of making certain adjustments in order to reduce tax liability in a legal and ethical way. Sometimes certain transfers of assets might be made to avoid tax liabilities for protection of revenues in certain cases. Specifically, section 281 of the Income Tax Act provides that if a taxpayer  transfers any assets during the pendency of any proceeding under the Income-tax Act, such a transfer can be declared void if it is made with the intent to defraud revenue authorities.

Section 281:
Section 281 of the Income Tax Act specifies that, in the event any assessee creates a charge or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever) of, any of his assets in favour of any other person, during the pendency of any proceeding under the Act or after the completion thereof, but before the service of notice under Rule 2 of the Second Schedule of the Act, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of the completion of the said proceeding or otherwise. As per the explanation to the section, ‘asset’ includes shares and securities as well.

This section applies to cases where the amount of tax or other sum payable or likely to be payable exceeds five thousand rupees and the assets charged or transferred exceed ten thousand rupees in value.

Asset means any land, building, machinery, plant, shares, securities and fixed deposits in banks. However, assets does not include stock in trade of the business.

The section has the following exceptions in which case, such charge or transfer is not void. Exceptions to the above provision are:

• Transfers made for adequate consideration, and without notice of the pendency of proceedings or of the tax liability.
• Transfers made with the prior permission of the Assessing Officer.

Purpose for obtaining certificate under section 281 of the Income Tax:
This is a No dues certificate or simply an NOC from the Income Tax department. This is because Income Tax Department is allowed to recover pending dues of the seller of the Property from the buyer.

Keeping this in mind Buyers of the properties have started asking a No Dues Certificate from the sellers in order to ensure their safety in such cases. Section 281 of the Income Tax Act states that the assessee(i.e. seller of the Property) seeking permission from the income tax department before selling, transferring assets such as land, building or machinery.

CBDT has issued certain guidelines for obtaining such Section 281 certificate. The application is to be filed at least 30 days prior to the proposed transaction. The Circular contains situations under which Section 281 certificate is granted by the assessing officer, the duration within which the assessing officer has to grant or reject the permission under section 281 and the validity of the certificate granted.

Following is the basic Format of Section 281 Certificate

OFFICE OF THE INCOME-TAX OFFICER 

__________________Address 

Ref. No. Dated : ___________________ 

CERTIFICATE UNDER SECTION 281(1)(ii) OF THE INCOME-TAX ACT, 1961 

Permission is hereby granted to M/s ______________________________________ to obtain term loan of Rs.________________ lakhs from _________________________ on the strength of mortgage of immovable assets and hypothecation of movable assets of the company. This certificate is issued at the express request of the company through its letter dated __________.

Seal:

Signature of the Income Tax Officer

Conclusion:
Section 281 certificate is usually demanded by buyers of the property from the seller’s as a safety measure to ensure that seller has no Dues from income tax authorities. Otherwise, revenue authorities can recover such dues from buyers of such properties. This certificate is granted or rejected by assessing officer based on the circumstances under which it is applied. It depends upon data available with income tax department and overall financial patterns of buyers, sellers and beneficiaries of Section 281 certificate.