Section 281 of Income-tax Act: Certain Transfers to Be Void
Section 281 of the Income-tax Act, 1961 protects income-tax recovery against certain transfers of assets made while tax proceedings are pending or after they conclude but before the prescribed recovery notice. A sale, mortgage, gift or other transfer may be ineffective against the tax department's claim, subject to important safeguards for bona fide transferees and transactions approved by the Assessing Officer.
What does Section 281 mean?
Section 281(1) provides that when an assessee creates a charge over specified assets or transfers possession of them during the pendency of proceedings under the Act, or after those proceedings are completed but before service of notice under Rule 2 of the Second Schedule, the transaction is void as against a claim for tax or another sum payable by that assessee, unless a statutory exception applies.
Importantly, the phrase void as against a claim is not the same as saying every such conveyance is automatically invalid for every purpose or against every person. It addresses the enforceability of the transaction against the specified tax-recovery claim. The circumstances and competing legal rights must be assessed on the facts.
Section 281(1): When can a transfer be affected?
- Relevant period: Income-tax proceedings are pending, or have ended but the specified Rule 2 recovery notice has not yet been served.
- Action by the assessee: The assessee creates a charge or parts with possession of an asset, including through a sale, mortgage, gift, exchange or another mode of transfer.
- Tax claim: Tax or another amount is payable as a result of the proceedings or otherwise.
- Monetary conditions: Both statutory thresholds in Section 281(2) are met.
- No protection: Neither of the exceptions in the proviso applies.
A charge generally means a security interest or encumbrance over an asset. Assessee refers to a person within the statutory definition in Section 2(7) of the 1961 Act, including a person liable for tax or another sum under that Act in relevant circumstances.
Proviso to Section 281(1): Two statutory protections
1. Adequate consideration and absence of notice
The transfer is protected when it is made for adequate consideration and without notice of the pending income-tax proceeding or, as applicable, without notice of the tax or other sum payable. These requirements operate together: payment of consideration alone does not establish the exception if the transferee had the relevant notice.
2. Previous permission of the Assessing Officer
A charge or transfer is also protected if made with the previous permission of the Assessing Officer (AO). The word previous matters: parties should seek and document permission before completing the relevant transaction. An AO permission request should accurately disclose the asset, proposed consideration, outstanding or potential demand, and the status of tax proceedings.
Section 281(2): Thresholds and definition of assets
| Requirement | 1961 Act position |
|---|---|
| Tax or other sum payable or likely to be payable | Must exceed Rs. 5,000 |
| Value of assets charged or transferred | Must exceed Rs. 10,000 |
| Assets under the Explanation | Land, buildings, machinery, plant, shares, securities and bank fixed deposits, excluding such assets to the extent forming part of the assessee's business stock-in-trade |
Both amounts must exceed their respective thresholds. The statutory definition of assets is specific; the treatment of an asset should not be assumed merely from its economic value.
Section 499 of the Income-tax Act, 2025: Updated law
Section 499 of the 2025 Act broadly retains the protection of tax claims against certain transfers, but restructures the rule into four subsections. It refers to service of notice by the Tax Recovery Officer under Section 413 rather than Rule 2 of the Second Schedule under the 1961 Act.
| Issue | Section 281, 1961 Act | Section 499, 2025 Act |
|---|---|---|
| Relevant recovery notice | Rule 2, Second Schedule | Notice under the procedure in Section 413 |
| Exceptions | Proviso to subsection (1) | Subsection (2) |
| Monetary thresholds | Rs. 5,000 and Rs. 10,000, respectively | Same thresholds in subsection (3) |
| Specified assets | Land, buildings, machinery, plant, shares, securities, bank fixed deposits (subject to stock-in-trade exclusion) | Includes those categories and virtual digital assets, subject to the stock-in-trade exclusion |
| Transfer modes | Listed in subsection (1) | Expressly addressed in subsection (4)(b) |
For the complete enacted wording, consult the official Income-tax Act, 2025 (PDF). Do not assume that the commencement of the 2025 Act extinguishes liabilities, proceedings or recovery rights under the earlier legislation; the applicable repeal and savings provisions must be considered.
Buying property from a person with income-tax proceedings: Practical checks
- Identify the actual owner and review the title chain, registered encumbrances and relevant property records.
- Ask the seller for accurate disclosures of pending assessments, reassessments, appeals, demands, recovery notices and attachments.
- Assess whether the transaction falls within the relevant statutory period and the defined categories of assets.
- Document market valuation and the actual consideration paid through traceable banking channels.
- Where risk is identified, consider seeking the AO's prior written permission before transfer.
- Keep copies of the sale agreement, registered deed, due-diligence documents, correspondence and proof of payment.
- Obtain independent legal advice on secured-creditor rights, attachment, registration and other applicable laws; Section 281 is not the only possible restriction on transfer.
Section 281 and Section 281B: What is the difference?
Section 281B concerns provisional attachment to protect revenue in specified circumstances. Section 281, by contrast, addresses the effect of certain charges and transfers on the tax department's claim. The provisions serve related but distinct functions and may need to be considered together.
Frequently asked questions
Does Section 281 make every property sale by a taxpayer void?
No. The statutory period, type of asset, monetary thresholds and exceptions must be evaluated. Its stated consequence is voidness as against the relevant tax claim.
Can a buyer be protected if full market price was paid?
Potentially, but adequate consideration alone is insufficient: the exception also requires absence of the specified notice. Prior AO permission is a separate statutory protection.
Is a no-objection certificate compulsory for every sale?
Section 281 does not impose a universal requirement for every property sale to obtain a certificate. Prior AO permission is one express route to protection, and the facts, other laws and transaction documents may make additional checks advisable.
What is the new corresponding provision after 1 April 2026?
Section 499 of the Income-tax Act, 2025. It expressly includes virtual digital assets among specified assets, subject to the statutory exclusion.
Does the law apply to business inventory?
The statutory definition excludes the listed assets to the extent they form part of the assessee's stock-in-trade. Classification depends on the facts.
Official legislation and references
- Income-tax Act, 1961, as amended by Finance Act, 2025 (Income Tax Department PDF)
- Section 281 - Income Tax Department statutory text
- Income-tax Act, 2025 - Section 499 (Income Tax Department PDF)
- India Code - Central legislation database
Historical legislative notes: Section 281 was substituted by the Taxation Laws (Amendment) Act, 1975, effective 1 October 1975. The reference to the Assessing Officer replaced the earlier Income-tax Officer terminology under the Direct Tax Laws (Amendment) Act, 1987, effective 1 April 1988. This article provides general legal information, not an opinion on a particular transaction.