2005 (1) TMI 420 - HC - Companies Law

Court rules against priority of sales tax arrears over auction-purchased property. Prohibition on state from realization.

The court ruled that the arrears of sales tax dues of M/s. Sree Lekha Industries do not have priority over the property purchased by the petitioners at ... Enforcement of security interest Issues Involved:1. Priority of tax dues versus secured creditor's dues.2. Applicability of Section 18 of the APGST Act to the petitioners.3. Rights of bona fide purchasers at a public auction.4. Enforcement of charge against property in the hands of a transferee without notice.Detailed Analysis:1. Priority of Tax Dues versus Secured Creditor's Dues:The primary issue was whether the tax dues of the State have primacy over the dues of financial institutions, including secured creditors. The respondent-sales tax authorities contended that the sales tax arrears due under the APGST Act have priority by virtue of Section 16C of the APGST Act, which creates a first charge on the property of the dealer. The court noted that Section 16C accords primacy to all moneys due under the APGST Act and, being a first charge created by operation of law, will have priority over all other dues. This was supported by precedents from the Supreme Court, which held that statutory first charges created by provisions similar to Section 16C have precedence over existing mortgages.2. Applicability of Section 18 of the APGST Act to the Petitioners:The court examined whether Section 18 of the APGST Act, which deals with the recovery of tax where a business of a dealer is transferred, applied to the petitioners. It was determined that the petitioners are not transferees of the business of the dealer but are purchasers of the property at a public auction conducted under the SARFAESI Act. Therefore, Section 18 of the APGST Act would not apply to the petitioners.3. Rights of Bona Fide Purchasers at a Public Auction:The petitioners argued that they are bona fide purchasers for value at a public auction and had no notice of the tax dues. The court recognized that the petitioners purchased the property in an auction conducted by the respondent-bank under the SARFAESI Act. The petitioners were considered bona fide purchasers without notice of the prior charge, and therefore, their property could not be sold for the realization of the tax dues of the defaulter.4. Enforcement of Charge Against Property in the Hands of a Transferee Without Notice:The court addressed whether the charge for the arrears of sales tax dues could be enforced against the property in the hands of the transferee. It was found that Section 16C of the APGST Act does not explicitly state that the charge can be enforced against any property in the hands of a transferee for consideration without notice of the charge. The court concluded that the petitioners, being purchasers for value in a public auction and without notice of the charge, are protected by the general prohibition in Section 100 of the Transfer of Property Act, which states that no charge shall be enforced against any property in the hands of a transferee for consideration without notice of the charge.Conclusion:The court declared that the arrears of sales tax dues of M/s. Sree Lekha Industries are not recoverable from the property purchased by the petitioners at the auction conducted by the respondent-bank. The State-respondents were restrained from proceeding to realize the sales tax arrears from the said property. However, the order did not preclude the respondent-sales tax authorities from recovering its dues in accordance with law. There was no order as to costs.