High Court clarifies priority of State dues vs. property transfer in Sales Tax case

The High Court addressed the issue of recovering Sales Tax arrears from a property transferred to a bona fide purchaser without knowledge of encumbrances. The Court noted conflicting decisions on the priority of State dues and directed the Special Government Pleader to provide details on the tax arrears and property charges. A temporary stay was granted, preventing the recovery of dues from the purchased property, allowing the Department to pursue other properties or take lawful recovery measures. The case was scheduled for a follow-up hearing after three weeks.

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Issues:
1. Recovery of Sales Tax dues from property transferred to a bona fide purchaser without notice of encumbrances.
2. Protection of buyer against recovery of Sales Tax dues.
3. Conflict between Encumbrance Certificate and priority of State dues.

Analysis:
The High Court addressed a crucial legal question regarding the recovery of Sales Tax arrears from a property transferred to a bona fide purchaser without knowledge of encumbrances related to the tax dues. The primary issue was whether such a buyer should be shielded from the recovery of Sales Tax dues, especially when an Encumbrance Certificate issued by the Sub-Registrar states no encumbrance on the property. This raised the dilemma of which should prevail - the Encumbrance Certificate or the priority of State dues.

The Court issued notice to the Respondent-Department and the Advocate General to appear within three weeks due to the potential involvement of State dues governed by different enactments. The Special Government Pleader representing the Revenue acknowledged the existence of conflicting decisions from various High Court Benches, including one rendered by the Court itself. Reference was made to a Supreme Court case emphasizing the duty of the Commercial Taxes Department to inform the Sub Registrar about property charges to safeguard State Revenue's primary charge over the defaulter's property.

Further deliberation was deemed necessary by the Court. The Special Government Pleader was directed to provide details on the tax arrears against the defaulting Assessee, any charges on the property, and any registration related to it. Additionally, information on recovery proceedings against the original defaulter was requested. The Advocate General was tasked with offering insights on coordinating different departments and Sub-Registrar offices for a harmonious interpretation.

A temporary stay of three weeks was granted, preventing the Commercial Taxes Department from recovering dues from the property purchased by the Petitioner. However, the Department retained the right to pursue other properties of the defaulter or take lawful measures for recovery against the Assessee. A follow-up hearing was scheduled after three weeks as requested on 17th December 2020.

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