2006 (1) TMI 243 - SC - VAT / Sales Tax

Purchaser of individual assets not liable for vendor's sales tax arrears; Section 15 KST Act inapplicable

SC held purchaser of individual assets from a State Financial Corporation was not liable for the vendor's sales tax arrears. Section 15 of the KST Act did ... Whether the purchaser of assets of a concern sold by a State Financial Corporation, in exercise of its powers under section 29 of the State Financial Corporations Act, 1951 would be liable under the Karnataka Sales Tax Act, 1957 for the arrears of sales tax of the concern whose assets have been transferred? - charge created on a property become unenforceable against a transferee of such a property? Held that:- Since it is not a matter of dispute that there was only the transfer of individual assets of the defaulting company, rather than the defaulting company being sold as a going concern, in the light of our expressed views, section 15 of the KST Act is not attracted. In the present case, firstly, no provision of law has been cited before us that exempts the requirement of notice of the charge for its enforcement against a transferee who had no notice of the same. It remains to be seen, therefore, if in the facts of the present case, the first respondent had notice—actual or constructive—of the charge. At the outset, in the advertisement/notice dated March 17, 1992 issued by the Corporation, mention is only made of the sale of the defaulting company's assets and there is no indication, whatsoever, of any sales tax arrears. Further, the bid offer made on behalf of the first respondent on June 5, 1992 specifically excludes any statutory liabilities, including sales tax. This offer was accepted by the Corporation on July 15, 1992. Even at that stage, there was no mention of any sales tax arrears. The sale of the assets took place pursuant to the agreement dated August 12, 1992 in which a specific clause was inserted that the first respondent would be liable to pay all property taxes, other taxes, electricity bills, water taxes and rents from the date of the agreement (i.e., August 12, 1992). For the first time, by letter dated January 8, 1993 of the second appellant to the Mandal Panchayath, Aloor Taluk, the issue of sales tax dues of the defaulting company was brought to the surface. This is further borne out by the correspondence between the first respondent and the Corporation. Thus, it is evident that the first respondent had no actual notice of the charge prior to the transfer. As to whether the first respondent had constructive notice of the charge, no substantive argument on this issue was made, either before the High Court or at any rate before us. Hence, we cannot hold that the first appellant had constructive notice of the charge. As the first respondent was a purchaser for value without notice of the sales tax arrears of the defaulting company or the consequent charge on the property. Thus, the property in the hands of the first respondent was free of the charge and it is not open to the appellants to enforce the liabilities of the defaulting company in this manner against the first respondent. As we have pointed out at the commencement, only two issues were raised in the writ petition and seem to have been argued before the High Court: First, with regard to the validity of section 15 of the KST Act, the High Court has dealt with it, and in this appeal by the State, this contention could not have been advanced. The second issue urged before us was with regard to the liability of the first respondent for the charge created on the properties of the defaulting company. The High Court, rightly in our view, held that the first respondent before us was not liable for the tax arrears of the defaulting company. No issue as to the liability of the Corporation was raised or argued before, or decided by the High Court. Appeals dismissed. Issues Involved:1. Liability of the purchaser of assets under section 29 of the State Financial Corporations Act, 1951 (SFC Act) for arrears of sales tax under the Karnataka Sales Tax Act, 1957 (KST Act).2. Enforceability of a charge created on a property against a transferee.3. Claiming a novel relief not argued/claimed before the High Court.Detailed Analysis:1. Liability of the purchaser of assets under section 29 of the SFC Act for arrears of sales tax under the KST Act:The primary issue was whether the purchaser of assets from a State Financial Corporation, under section 29 of the SFC Act, is liable for the sales tax arrears of the defaulting company under the KST Act. The court examined sections 2(f-2), 13, and 15 of the KST Act, and section 29 of the SFC Act. Section 15(1) of the KST Act states that the transferee of a business is jointly and severally liable for the tax dues of the transferor. However, the court clarified that this liability arises only if there is a transfer of the 'ownership of the business' as a going concern. The court held that the mere transfer of assets does not constitute a transfer of the business. Therefore, since only the assets (land, building, plant, and machinery) were transferred and not the business as a going concern, section 15(1) of the KST Act was not applicable. Consequently, the purchaser was not liable for the sales tax arrears of the defaulting company.2. Enforceability of a charge created on a property against a transferee:The second issue was whether the charge created on the property for sales tax arrears could be enforced against the transferee. Section 13(2)(i) of the KST Act creates a charge on the property of the defaulter. However, according to section 100 of the Transfer of Property Act, 1882, a charge cannot be enforced against a transferee for consideration and without notice of the charge. The court found that the purchaser had no actual or constructive notice of the sales tax arrears or the charge at the time of the transfer. Therefore, the property in the hands of the purchaser was free of the charge, and the sales tax authorities could not enforce the arrears against the purchaser.3. Claiming a novel relief not argued/claimed before the High Court:The final issue concerned whether a completely novel relief, not argued or claimed before the High Court, could be claimed before the Supreme Court. The court noted that the issue of the liability of the State Financial Corporation for the sales tax arrears was not raised or argued before the High Court. The court reiterated the principle that new reliefs, not argued or claimed before the High Court, cannot be prayed for before the Supreme Court, except in exceptional circumstances. Therefore, the court declined to entertain this issue and left it open to be addressed in appropriate proceedings between the parties.Final Findings:The court dismissed Civil Appeal No. 3170 of 2000, finding no merit in the appeal. Civil Appeal Nos. 3171 to 3173 of 2000 were dismissed as infructuous since the sales tax arrears had already been recovered from the transferee concerned. There was no order as to costs. Appeals dismissed.