In the landscape of onshore or cross-border transactions, the no-objection certificate (NOC) from tax authorities under Section 281 of the Income Tax Act, 1961 (IT Act) plays a critical role. The complexities of negotiating NOCs can often place sellers and buyers at odds, making it imperative to understand the fundamentals and relevance of this certificate, as well as its potential ramifications.
Understanding Section 281: When does it apply?
Section 281 of the IT Act allows tax authorities to declare any transfer of specific assets, such as shares, securities, land, building, plant, machinery, or fixed deposits, by the taxpayer as void against any ongoing tax proceedings or outstanding tax demands on the date of the transfer. This provision becomes especially relevant during situations where proceedings are ongoing or have been concluded but a recovery notice has not yet been issued.
However, certain exceptions exist to this rule. A transfer will not be declared void if it meets at least one of the following criteria:
The transfer is for adequate consideration and the parties were unaware of any pending proceedings or tax liabilities, OR;
The transfer is made after obtaining an NOC from the designated Assessing Officer (AO)
Obtaining an NOC is considered crucial for sellers to reduce the risk associated with title of the asset. Further, the Central Board of Direct Taxes (CBDT) has laid down elaborate guidelines for obtaining NOC from the AO in Circular No. 04 of 2011 dated 19 July 2011 (CBDT Circular), The Circular requires taxpayers to submit their application for NOC at least 30 days prior to the transaction. The NOC, once obtained, is valid for a period of 180 days. The CBDT Circular also lists instances where the AO has to compulsorily issue the NOC. For instance, if there is no outstanding tax and there is no likelihood of any arising in the next six months, the AO is required to grant the NOC within 10 days of receiving the application.
What proceedings trigger the requirement of Section 281?
Section 281 applies when there are pending tax proceedings under the IT Act at the time of transfer of the asset. Thus, it is vital to understand what constitutes a ‘proceeding’ for the purposes of section 281. For example, does a mere intimation issued under Section 143(1) count, or must there be an actual dispute between the taxpayer and the tax authorities?
A ‘proceeding’ refers to formal legal actions regarding a taxpayer. As per Calcutta High Court, a valid legal proceeding against a taxpayer is necessary to declare a transaction void under Section 281. The Supreme Court has also confirmed that a notice under Section 143(1) isn’t considered a full assessment proceeding. Further, the Andhra Pradesh and Telangana High Court clarified that starting an assessment without an actual order does not count as ‘proceedings’ unless there’s a disputed tax demand.
The intent of section 281 has also been explained by CBDT to prevent transactions that are intended to defraud tax authorities. Consequently, genuine transactions that aren’t meant to evade taxes usually do not face strict consequences under this section.
Consequence of not obtaining a NOC
Indian courts have ruled that a sale executed without an NOC during pending proceedings does not automatically render the sale as completely nullified. Such a transfer is rendered void only against claims from tax authorities and the buyers retain ownership rights. Section 281 does not empower tax authorities to pass an order declaring a sale as void; it is a self-declaratory provision against claims of tax authorities. To treat a transfer as void, a declaration must be sought from a competent civil court, contingent upon satisfaction of all conditions of Section 281 required to treat a transaction void.
Specific nature of NOC
Lastly, an NOC under Section 281 of the IT Act is an event specific approval that is obtained so that a specific transaction (i.e. the transfer of an asset) can be undertaken without the risk of it being voided in the future. Thus, an NOC must be obtained on a case-to-case basis and not as a blanket approval.
In summary, navigating the complexities of Section 281 and the NOC requirement is essential for both buyers and sellers engaged in asset transactions. By understanding the legal landscape and the potential consequences of non-compliance, stakeholders can safeguard their interests and ensure smoother transaction processes.
