Tax recovery sale of leasehold property: contractual covenant to pay unearned increase continues to bind the transfer and purchaser.

A tax recovery sale of leasehold property passes only the defaulter's existing right, title and interest, so contractual covenants attached to the lease, including payment of unearned increase on transfer, continue to bind the transaction. The court held that the recovery process could not convey a better title than the defaulter held, and the auction purchaser could not ignore the lessor's entitlement under the perpetual sub-lease. The locus standi objection also did not survive after impleadment of the relevant persons. The demand for unearned increase was therefore upheld for completion of transfer, while the quantification dispute was left open.

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Issues: (i) Whether the objection to locus standi of the writ petitioner survived after impleadment of the relevant persons; (ii) Whether unearned increase was payable on transfer of the leasehold property sold in tax recovery proceedings, and if so, who was liable to pay it.

Issue (i): Whether the objection to locus standi of the writ petitioner survived after impleadment of the relevant persons

Analysis: The objection was examined in light of the subsequent affidavit and impleadment of the concerned persons. The inter se arrangements between the auction purchasers and the company were not decided, but the presence of the relevant parties removed the procedural objection to the writ petition. The Court expressly left untouched the question whether the sale certificate stood transferred to the company or the validity of any alleged inter se transfer.

Conclusion: The locus standi objection did not survive.

Issue (ii): Whether unearned increase was payable on transfer of the leasehold property sold in tax recovery proceedings, and if so, who was liable to pay it

Analysis: The perpetual sub-lease contained a covenant requiring payment of fifty per cent of the unearned increase on transfer, including involuntary sale, and made the lessor's entitlement binding. Under section 108(j) of the Transfer of Property Act, 1882, a lessee may transfer leasehold rights only subject to a contract to the contrary, and the contractual fetter remained attached to the defaulter's interest. The Second Schedule to the Income-tax Act, 1961 permits sale only of the defaulter's right, title and interest, so the Tax Recovery Officer could not convey a better or freer title than that held by the defaulter. The auction terms did not shift the burden of unearned increase to the purchaser, and effective transfer through the sale certificate could not occur unless the pre-condition was satisfied. The demand between the appellant and the lessor was left open for separate resolution.

Conclusion: Unearned increase was payable, and the appellant was liable to make payment for effecting transfer.

Final Conclusion: The appeal failed on the substantive tax-recovery issue, and the order directing payment of unearned increase for completion of transfer was sustained with liberty regarding the quantification dispute.

Ratio Decidendi: In a tax recovery sale, the purchaser acquires only the defaulter's existing right, title and interest, and any contractual covenant attached to the leasehold interest, including a covenant to pay unearned increase, continues to bind the transfer and cannot be ignored by the recovery process.

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