2014 (9) TMI 176 - HC - VAT and Sales Tax

Property Transfer Void for Tax Fraud under A.P. VAT Act: Transferee Liable for Arrears

The Court held that the transfer of property by the defaulting dealer was void under Section 27(1) of the A.P. VAT Act as it was made to defraud revenue. ... Recovery of dues from the purchaser of property - Obligation of payment of duty on successor of property - purchaser claims that he had no knowledge of dues pending - malafide intention - Attachment of property - Charge on property - Held that:- Section 16-C of the A.P.G.S.T. Act, 1957 stipulated that, notwithstanding anything to the contrary contained in any law for the time being in force, any amount of tax, penalty, interest and any other sum, if any, payable by a dealer or any other person under the Act, shall be the first charge on the property of the dealer or such person. Section 17-A of the A.P.G.S.T. Act, 1957 provided that where, during the pendency of any proceeding under the Act or after completion thereof, any dealer creates a charge on, or parts with possession by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever of, any of his assets in favour of any other person, with the intention to defraud the revenue, such charge or transfer shall be void as against any claim in respect of any tax, or any other sum payable by the dealer as a result of the completion of the said proceeding or otherwise. It is only if the defaulting dealer proves that transfer of the property, which is subject to first charge under Section 26 of the A.P. VAT Act, is not with the intention to defraud revenue, would the transferee be entitled to claim title over the subject property for, otherwise, such transfer of property is void. Where property has been transferred and the defaulting dealer, who has transferred the property which is subject to a statutory charge under Section 26 of the A.P. VAT Act, does not discharge the onus of proving that the transfer was not with the intention to defraud revenue, a person, who has purchased such immovable property from the defaulting dealer, cannot claim protection either of Section 53 of the Transfer of Property Act or of Section 100 thereof, on the ground that he is a bonafide purchaser of the property for valid consideration and without notice of the charge. Even after a notice was issued in Form IV, the 4th respondent did not dispute their liability to pay arrears of VAT for the years 2005-06 and 2006-07 and, instead, made part-payment. Though notice of this Writ Petition was served on the 4th respondent, no counter-affidavit has been filed by them to show that transfer of property, during pendency of proceedings under the A.P. VAT Act for the years 2005-06 and 2006-07, was not with the intention to defraud the revenue. It is made clear that in case the petitioner makes payment of the tax arrears, due from the 4th respondent prior to the date of transfer i.e., 17.03.2007, within four weeks from today the subject property shall not be put to sale. On such payment it is open to the petitioner to institute appropriate legal proceedings to recover the amount, paid by them to the revenue, from the 4th respondent. It is also made clear that, in case the petitioner does not make payment within four weeks from today, it is open to the respondents to bring the charged property to sale for recovery of the tax arrears due from the 4th respondent prior to the date of transfer i.e., 17.03.2007. - Decided against the petitioner. Issues Involved:1. Legality of recovering tax arrears from a purchaser of property from a defaulting dealer under the A.P. VAT Act.2. Validity of the transfer of property by the defaulting dealer under Section 27(1) of the A.P. VAT Act.3. Applicability of Section 100 of the Transfer of Property Act to the transferee.4. Interpretation of Sections 26 and 27 of the A.P. VAT Act in relation to the Transfer of Property Act.5. Recovery of tax arrears due after the transfer of property.Detailed Analysis:1. Legality of Recovering Tax Arrears from a Purchaser of Property from a Defaulting Dealer:The petitioner, a private limited company, questioned the legality of the proceedings initiated by the first respondent to recover tax arrears from them under the Revenue Recovery Act. The petitioner argued that they purchased the property from M/s. Baba Mines and Minerals in good faith, without knowledge of any tax arrears, and after verifying that there were no encumbrances. The respondents contended that the fourth respondent (defaulting dealer) was in arrears of tax and that the transfer of property was void under Section 27(1) of the A.P. VAT Act, making the petitioner liable for the tax arrears.2. Validity of the Transfer of Property by the Defaulting Dealer:The respondents argued that the transfer of property by the fourth respondent was void under Section 27(1) of the A.P. VAT Act, as it was made to defraud the revenue. The Court noted that Section 27(1) places the onus on the defaulting dealer to prove that the transfer was not with the intention to defraud revenue. Since the fourth respondent did not discharge this onus, the transfer was deemed void, and the property continued to belong to the defaulting dealer.3. Applicability of Section 100 of the Transfer of Property Act to the Transferee:The Court examined whether Section 100 of the Transfer of Property Act, which protects a transferee for consideration without notice of the charge, applied in this case. The Court held that Section 27(1) of the A.P. VAT Act exempts the requirement of notice of the charge for its enforcement against the property in the hands of a bonafide transferee. Therefore, the protection under Section 100 was not available to the petitioner.4. Interpretation of Sections 26 and 27 of the A.P. VAT Act in Relation to the Transfer of Property Act:The Court analyzed the legislative intent and history of Sections 26 and 27 of the A.P. VAT Act. It concluded that Section 27(1) of the A.P. VAT Act is an exception to the general rule under Section 100 of the Transfer of Property Act. The statutory presumption under Section 27(1) is that any transfer by a defaulting dealer is void unless proven otherwise. This shifts the initial onus to the defaulting dealer to prove that the transfer was not intended to defraud the revenue.5. Recovery of Tax Arrears Due After the Transfer of Property:The Court clarified that the tax arrears recoverable under Section 26 of the A.P. VAT Act are those due and payable by the defaulting dealer before the transfer of property. Taxes due after the transfer cannot be recovered from the transferee. The Court held that the respondents could proceed against the property for recovery of tax arrears due up to the date of transfer (17.03.2007).Conclusion:The Court concluded that the action of the respondents in seeking to recover arrears of tax due up to 17.03.2007 by putting the charged property to sale was justified. However, if the petitioner pays the tax arrears within four weeks, the property will not be put to sale, and the petitioner can seek legal recourse to recover the amount from the fourth respondent. The Writ Petition was disposed of accordingly, with no order as to costs.