Business transfer and sales tax arrears: recovery must first proceed against the transferor, with transferee liability as a fallback.

On transfer of a business, Rule 21-A of the Madras General Sales Tax Rules made both the transferor and transferee liable for sales tax dues arising from the transferred business. The recovery mechanism was applied to prevent evasion of revenue by shifting liability between them. On the facts, the Madras HC directed that recovery proceedings by distress warrant should begin against the transferor first, and recourse against the transferee should be taken only if the amount could not be realised from the transferor.

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Issues: Whether, on transfer of a business, the distress warrant for recovery of sales tax arrears should be issued in the first instance against the transferor or the transferee.

Analysis: Rule 21-A of the Madras General Sales Tax Rules makes both the transferor and the transferee liable for the tax dues arising from the transferred business. The recovery mechanism, however, was applied so as to prevent the revenue from being defeated by shifting liability between the two. On the facts placed before the Court, the appropriate course was to proceed first against the transferor and to resort to the transferee only if the amount could not be realised from the transferor.

Conclusion: The distress warrant was directed to be issued first against the transferor, with recourse against the transferee only if recovery from the transferor failed.

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