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Section 281 of the Income-tax Act, 1961 [as it stood before 1-10-1975] - Transfer to Be Void - Assessee, Partner in Firm, Owned House - She gifted house to her grandchildren and paid gift-tax due while tax arrears were outstanding against her and firm - whether transfer of house void under section 281 - held, on facts, yes FACTS The assessee, partner in a firm, owned a house which she gifted by a gift deed, dated 17-4-1971, in favour of her grandchildren on account of love and affection. She duly paid the gift-tax amounting to Rs. 7,000 as assessed by the GTO. The assessee received a notice from the ITO under section 281 to show cause as to why the gift deed in question be not treated as void and why the rent of the property be not attached to realise the tax arrears standing against her. She filed a reply to the notice. The ITO, however, passed an order on 30-8-1978 allegedly without applying his mind to the facts, holding the gift deed to be void. The assessee challenged the order by a writ petition which was accepted and the High Court ordered that the matter be decided afresh after taking into consideration the reply filed by the assessee. The ITO again passed an order on 15-12-1978, holding that the gift had been made by the assessee to defraud the department and to escape the liability to pay the outstanding demand of income-tax against HDR and of the firm in which she was a partner. Therefore, the gift of the property by her was held to be void under section 281(1). On writ, the assessee contended, inter alia, (i) that no demand was outstanding against her when the gift was made and the firm, of which the assessee was a partner, was a registered one and it was only on 24-3-1972, i.e., after the said gift had been made by the assessee that the ITO treated it as an unregistered firm and taxed as such. In case the firm had not been treated as unregistered, the liability of the assessee would not have been to the tune of Rs. 1,17,000; (ii) that the gift was admitted by the GTO as a valid one and legal transaction against which the department did not go up in appeal; and (iii) that the department was, therefore, not entitled to reopen the matter. HELD 1.…

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