2018 (3) TMI 1327 - HC - VAT and Sales Tax

Auction purchaser not liable for tax arrears, court protects secured creditor's priority

M/s. Gupta & Company Versus The Commercial Tax Officer, The Official Liquidator, The Recovery Officer, State Bank of India

The court held that the auction purchaser, a bona fide purchaser without notice of tax arrears, was not liable for the sales tax arrears of the defaulter ... Recovery of arrears - Auction purchaser - Section 24 of the TNGST Act, 1959 - Held that: - the issue as to whether the right of the secured creditor over the subject property mortgaged will prevail over crown debt is no longer res integra - reliance placed in the case of Union of India and others vs. SICOM Limited and another [2008 (12) TMI 53 - SUPREME COURT], where the issue before the Hon'ble Supreme Court was whether the State Financial Corporation from whom money was borrowed, by executing a mortgage to the corporation, would have priority over Central Government, which intended to realise the central excise dues, by attachment and seizure of the mortgaged properties. It was held in the case that secured debts have priority over the excise dues. The petitioner is bonafide purchaser and that he should not be imposed with any liability to pay arrears of tax, payable by M/s. Moolchand Exports Limited, (In Liquidation) - petition allowed - decided in favor of petitioner. Issues Involved:1. Validity of the recovery proceedings initiated by the Commercial Tax Officer against the auction purchaser for the arrears of sales tax.2. Determination of whether the auction purchaser is liable for the sales tax arrears of the defaulter company.3. Priority of claims between secured creditors and government dues.4. Protection of bona fide purchasers without notice of tax arrears.Detailed Analysis:1. Validity of the Recovery Proceedings Initiated by the Commercial Tax Officer:The auction purchaser challenged the Form No.5 issued by the Commercial Tax Officer for the recovery of arrears amounting to Rs. 6,94,09,527/- for the years 1995-96 and 1996-97. The petitioner had purchased the immovable property through a public auction conducted by the Recovery Officer of the Debt Recovery Tribunal (DRT) and obtained a sale certificate. The Commercial Tax Officer, however, initiated recovery proceedings under the Revenue Recovery Act, issuing notices in Form 4 and Form 5, demanding payment of the arrears and attaching the property.2. Determination of Whether the Auction Purchaser is Liable for the Sales Tax Arrears of the Defaulter Company:The petitioner contended that they were not liable for the sales tax arrears of M/s. Moolchand Exports Limited, as they were bona fide purchasers for valuable consideration without notice of the tax arrears. The petitioner relied on various judicial precedents, including the Division Bench decision in M/s. R.K. Steels and the Supreme Court decision in Shreyas Papers (P) Ltd., asserting that a bona fide purchaser without notice of the charge cannot be held liable for the arrears.3. Priority of Claims Between Secured Creditors and Government Dues:The Full Bench of the High Court, in a related reference, held that the rights of a secured creditor to realize secured debts would have priority over all debts and government dues, including taxes. This was based on Section 31B of the Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Act, 2016, which came into force on 01.09.2016. Consequently, the claim of the secured creditor, in this case, the State Bank of India, would prevail over the sales tax dues.4. Protection of Bona Fide Purchasers Without Notice of Tax Arrears:The court examined whether the petitioner, as a bona fide purchaser without notice, was protected from the recovery proceedings. The Full Bench in B. Suresh Chand vs. State of Tamil Nadu held that a property purchased by a bona fide purchaser without notice of a charge under Section 24(1) of the Tamil Nadu General Sales Tax Act, 1959, cannot be proceeded against for the recovery of sales tax arrears. The court also referred to the Supreme Court's decision in Union of India vs. SICOM Limited, which emphasized that secured debts have priority over government dues.The court concluded that the petitioner was a bona fide purchaser without notice of the sales tax arrears and was therefore protected. The sale notices issued by the Recovery Officer and the Official Liquidator did not indicate any tax arrears to be paid by the bidder. The petitioner was not put on notice of the arrears, and no encumbrance was registered in the Sub-Registrar's office.Conclusion:The court held that the petitioner, being a bona fide purchaser without notice, should not be imposed with the liability to pay the arrears of tax payable by M/s. Moolchand Exports Limited. The recovery proceedings initiated by the Commercial Tax Officer were set aside, and the writ petition was allowed.