2001 (4) TMI 889 - AT - VAT and Sales Tax

Sales Tax Arrears Trump Mortgage Claims in Court Decision

The Federal Bank Ltd. Versus Deputy Commercial Tax Officer, Gudiyatham East, Gudiyatham

The court held that sales tax arrears take precedence over mortgagee claims, rejecting the petitioner-bank's challenge to a tax payment demand. The bank's ... - Issues Involved:1. Validity of the respondent's order demanding payment of sales tax arrears from the petitioner-bank.2. Priority of sales tax arrears over the claims of the mortgagee.3. Bona fide purchase and notice of arrears.4. Liability of individual partner's property for firm's tax arrears.5. Procedural requirements for declaring a transfer void under Section 24-A of the TNGST Act, 1959.Detailed Analysis:1. Validity of the Respondent's Order:The petitioner sought to quash the order dated March 5, 2001, by the Deputy Commercial Tax Officer demanding payment of sales tax arrears amounting to Rs. 45,10,000 from the petitioner-bank. The bank had purchased the property in an auction conducted by the Debt Recovery Tribunal (DRT) to recover dues from M/s. Classic Motor Sales, which had mortgaged the property to the bank.2. Priority of Sales Tax Arrears:The court emphasized that according to Section 24(2) of the TNGST Act, 1959, the claim of the Sales Tax Department takes precedence over all other claims, including those of a mortgagee. This was supported by the Supreme Court ruling in the case of State Bank of Bikaner Jaipur v. National Iron & Steel Rolling Corporation, which established that the sales tax arrears have priority over the claims of a mortgagee.3. Bona Fide Purchase and Notice of Arrears:The petitioner-bank argued that it was a bona fide purchaser without notice of the tax arrears, invoking Section 24-A of the TNGST Act, 1959. However, the court noted that the bank had received notices regarding arrears as early as 1996 and thus could not claim to be without notice. The court referred to the principle that gross negligence in making inquiries amounts to notice of a fact, as established in the case of N. Padma Coffee Works v. Commercial Tax Officer.4. Liability of Individual Partner's Property:The petitioner contended that the tax demand was against the firm and not the individual partner who owned the property. The court clarified that under Section 19(1) of the TNGST Act, 1959, both the firm and its partners are jointly and severally liable for tax dues. Therefore, the individual property of a partner is liable for the firm's tax arrears without requiring a separate demand notice to the partner.5. Procedural Requirements for Declaring a Transfer Void:The petitioner cited the Supreme Court decision in Tax Recovery Officer v. Gangadhar Viswanath Ranade, which held that a transfer can only be declared void through a civil suit. However, the court distinguished this case, noting that the TNGST Act provides the Sales Tax Department with a first charge over the property, which does not require a civil suit to enforce.Conclusion:The court concluded that the sales tax arrears have priority over the claims of the mortgagee bank. The petitioner-bank was found to have notice of the arrears and thus could not claim to be a bona fide purchaser without notice. The individual partner's property is liable for the firm's tax arrears. The procedural argument regarding the need for a civil suit to declare the transfer void was dismissed as inapplicable in this context. Consequently, the petition to quash the respondent's order was dismissed, and the petitioner was advised to pursue any further claims through appropriate legal channels, such as filing a revision petition or a civil suit.