Transfer of Property to be Void in Certain Cases – Section 81 of GST

The GST regime in India has laid down stringent measures to ensure tax compliance and safeguard the interests of the Government. One such critical provision is Section 81 of the CGST Act, which deals with the transfer of property made with the intention of defrauding the Government revenue. This section is particularly important in situations where a taxpayer attempts to avoid paying due taxes by transferring or charging their assets fraudulently.

In this blog, we will explore the scope, implications, exceptions, and judicial interpretations of Section 81 of the CGST Act.

Understanding Section 81 of the CGST Act

Legal Text of Section 81:

“Where a person, after any amount has become due from him, creates a charge on or parts with the property belonging to him or in his possession by way of sale, mortgage, exchange, or any other mode of transfer whatsoever of any of his properties in favour of any other person with the intention of defrauding the Government revenue, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the said person.”

In simple terms, if a taxpayer transfers property to another person after tax dues arise and with an intent to avoid payment of those dues, such a transfer is considered null and void in the eyes of the law, as far as the government’s claim is concerned.

Key Elements of Section 81

To understand this provision clearly, it is important to break down the critical elements:

1. Existence of Tax Dues

The transfer must occur after any amount has become due under the CGST Act. The liability could be in the form of GST, interest, penalty, or any other statutory dues.

2. Mode of Transfer

The provision covers all modes of transferring property, including:

• Sale

• Mortgage

• Exchange

• Any other form of transfer (gift, lease, etc.)

3. Intention to Defraud

The key element is the intention to defraud the government revenue. If the intent is to avoid or delay the payment of taxes, then the transfer is deemed fraudulent.

4. Effect of the Provision

If the above elements are present, the law considers such transfer or charge on the property to be void in respect of any claim made by the tax authorities.

Exceptions to Section 81

Section 81 provides a proviso that safeguards genuine transactions. A transfer shall not be considered void if:

1. Made for Adequate Consideration
   The transfer was made for a fair and just price.

2. In Good Faith
   There was no intention to defraud, and the transaction was genuine.

3. Without Knowledge of Tax Dues or Proceedings
   The transferee had no notice of:

   • Any pending proceedings under the CGST Act

   • Any tax or sum payable by the transferor

4. With Permission of the Proper Officer
   If the transfer was made with prior approval from the proper GST officer, it will not be void.

Practical Implications of Section 81

1. Protection of Government Revenue

This section acts as a safeguard against fraudulent disposals of property by delinquent taxpayers. It ensures that tax dues are not escaped by transferring assets to third parties.

2. Clarity for Transferees

Buyers, lenders, and others acquiring property from taxpayers must exercise due diligence before entering into a transaction. This includes verifying:

• The seller’s tax history

• Any pending GST proceedings

• Encumbrances on the property

3. Legal Consequences

If a transaction is declared void under Section 81:

• The government can proceed to recover tax dues from the transferred asset.

• The transferee may lose the title or right over the property acquired.

Comparison with Similar Provisions

Section 81 is conceptually similar to provisions in other laws such as:

• Section 53 of the Transfer of Property Act, 1882, which deals with fraudulent transfers.

• Section 281 of the Income Tax Act, which addresses transfers made to evade tax dues under the Income Tax law.

These cross-references reinforce the principle that property transfers made to defeat revenue claims are not legally valid.

Judicial Precedents

Indian courts have consistently held that intention to defraud must be proved by the department. If a transfer is made in ordinary business dealings and meets the criteria of adequate consideration and good faith, it is protected.

The burden of proof lies on the tax authorities to establish that:

• The transferor had outstanding tax liabilities.

• The transfer was intended to defraud.

• The transferee had knowledge or should have had knowledge of the pending dues.

Conclusion

Section 81 of the CGST Act serves as a powerful deterrent against the misuse of asset transfers to escape tax obligations. It reflects the government’s commitment to securing tax revenue and maintaining accountability among taxpayers.

However, this provision also balances the interests of bona fide purchasers by protecting genuine transactions made in good faith and without knowledge of the seller’s tax dues.

Taxpayers and professionals must stay vigilant and ensure compliance to avoid adverse consequences under this provision.

Frequently Asked Questions (FAQs)

Q1. What types of property transfers are covered under Section 81?

All types, including sale, mortgage, exchange, gift, or any other form of transfer.

Q2. When is a transfer not considered void under Section 81?

When the transfer is made in good faith, for adequate consideration, without notice of tax dues or with prior permission from the GST officer.

Q3. Who bears the burden of proof to show the transfer was fraudulent?

The burden lies on the GST department to prove the intent to defraud the revenue.