2018 (3) TMI 1859 - HC - VAT and Sales Tax

Auction purchaser not liable for tax arrears as a bona fide purchaser without notice

Gupta & Company Versus The Commercial Tax Officer, Alandur Assessment Circle and Ors.

Gupta & Company Versus The Commercial Tax Officer, Alandur Assessment Circle and Ors. - TMI Issues Involved:1. Challenge to the recovery of sales tax arrears from the auction purchaser.2. Bona fide purchaser's liability for the previous owner's tax arrears.3. Priority of secured creditors over government dues.Issue-Wise Detailed Analysis:1. Challenge to the Recovery of Sales Tax Arrears from the Auction Purchaser:The auction purchaser/writ petitioner contested the recovery of arrears of Rs. 6,94,09,527/- for the years 1995-96 and 1996-97 through the issuance of Form No. 5 by the Commercial Tax Officer, Alandur Assessment Circle. The petitioner had purchased the property through a public auction conducted by the Debt Recovery Tribunal (DRT) and claimed that the sale was confirmed by the DRT and the High Court of Madras. The petitioner argued that they were not aware of the statutory liabilities of the defaulter company and that the property was purchased without notice of the sales tax arrears.2. Bona Fide Purchaser's Liability for the Previous Owner's Tax Arrears:The petitioner contended that as a bona fide purchaser, they should not be liable for the tax arrears of M/s. Moolchand Exports Limited. The petitioner relied on various judicial decisions, including the Hon'ble Division Bench of the Madras High Court in the case of M/s. R.K. Steels and the Hon'ble Supreme Court in Shreyas Papers (P) Ltd., which protected bona fide purchasers without notice of the charge over the property under Section 24(1) of the Tamil Nadu General Sales Tax Act, 1959. The petitioner further argued that the right of a secured creditor (State Bank of India) should prevail over the claim of the Sales Tax Authorities for the realization of tax arrears.3. Priority of Secured Creditors Over Government Dues:The Full Bench of the Madras High Court, in a related case, held that the rights of a secured creditor to realize secured debts through the sale of assets would have priority over all debts and government dues, including taxes. This principle was reinforced by the introduction of Section 31B of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, which states that secured creditors' rights have priority over government dues. The court also considered the decision in B. Suresh Chand v. State of Tamil Nadu, which held that a bona fide purchaser without notice of the charge could not be proceeded against for the recovery of sales tax arrears.Judgment:The court concluded that the petitioner, as a bona fide purchaser without notice of the tax arrears, should not be held liable for the arrears of M/s. Moolchand Exports Limited. The court noted that the sale notices did not indicate any tax arrears to be paid by the bidder, and no encumbrance was registered in the Sub-Registrar's office. The court also observed that the Sales Tax Department had not imposed any condition on the bidders to pay the arrears of tax in the sale notice. Consequently, the court held that the petitioner was a bona fide purchaser and set aside the proceedings initiated by the Commercial Tax Officer, Alandur Assessment Circle, for the recovery of sales tax arrears. The writ petition was allowed, and no costs were imposed.