2020 (4) TMI 337 - HC - VAT and Sales Tax

Court protects bona fide purchasers from statutory charge under Transfer of Property Act

Tvl. K. Senthamil Selvan Versus The Deputy Commercial Tax Officer, Tiruchengode (Town) Assessment Circle, Tiruchengode,

The court concluded that the petitioners, as bona fide purchasers without notice of the statutory charge, are entitled to protection under the Transfer of ... Recovery of tax dues from the buyer of property as land revenue - bonafide purchasers or not - Presumption of knowledge of statutory charge created, either under Section 24 of the Tamil Nadu General Sales Tax Act, 1959 or under Section 42 of the Tamil Nadu Value Added Tax Act, 2006 - enforceability of charge - Section 100 of the Transfer of Property Act, 1882 - HELD THAT:- A charge created by operation of law will not automatically infer a presumption of knowledge on the intending purchasers about the tax arrears, as well as the consequent charge on the property, which they intend to purchase. Consequently, the question of “Wilful Abstention” or “Gross Negligence”, would generally be a question of fact or law or a mixed question of fact and law and the exception to such a finding would be the three explanations given under Section 3 of the Transfer of Property Act, 1882 as well as to cases wherein the purchaser has failed to make enquiries on the arrears of municipal taxes with the authorities. If and when this proposition is applied to the issue involved in the present case, the objections raised by the respondents that the intending purchasers had constructive notice of the charge on the property would be contrary to this decided ratio. While that being so, when the prospective purchasers are not expected to have constructive knowledge of the charge and when the property is purchased for a valid consideration and without notice of the charge, they would be entitled to the saving clause provided under Section 100 of the TP Act. While holding that the purchasers cannot be imputed with constructive knowledge of the existence of municipal taxes or tax arrears and on the facts of the case, the Hon’ble Apex Court held in AHMEDABAD MUNICIPAL CORPORATION OF THE CITY OF AHMEDABAD VERSUS HAJI ABDULGAFUR HAJI HUSSENBHAI [1971 (3) TMI 89 - SUPREME COURT] that an enquiry with the vendors was sufficient to hold that the purchasers had not indulged in willful abstention or gross negligence. Petition allowed. Issues Involved:1. Whether the petitioners are bona fide purchasers without notice of the statutory charge under Section 24 of the TNGST Act or Section 42 of the TNVAT Act.2. Whether the petitioners had constructive notice of the statutory charge.3. Whether the statutory charge can be enforced against the properties in the hands of the petitioners.4. The duty of the Tax Department to inform registering officers about the statutory charge.5. The implications of the failure to register the statutory charge.Detailed Analysis:1. Bona Fide Purchasers Without Notice:The petitioners argued that they were bona fide purchasers of the properties for valid consideration and without notice of the statutory charge created under Section 24 of the TNGST Act or Section 42 of the TNVAT Act, and thus, they are entitled to protection under Section 100 of the Transfer of Property Act (TP Act). The court referred to the decision in Ahmedabad Municipal Corporation v. Haji Abdulgafur Haji Hussenbhai, which held that a charge created by law must be expressly provided to be enforceable against a transferee for consideration without notice. The court concluded that the petitioners, having purchased the properties without notice of the charge and for valid consideration, are entitled to the protection under Section 100 of the TP Act.2. Constructive Notice:The Special Government Pleader argued that the petitioners had constructive notice of the charge as per Section 3 of the TP Act. The court, however, emphasized that constructive notice, which involves wilful abstention or gross negligence, is a question of fact or mixed question of fact and law, depending on the circumstances of each case. The court held that the petitioners were not expected to have constructive knowledge of the tax arrears or the statutory charge, as established in Ahmedabad Municipal Corporation’s case. Therefore, the petitioners did not have constructive notice of the charge.3. Enforceability of Statutory Charge:The court noted that the statutory charge under Section 24 of the TNGST Act or Section 42 of the TNVAT Act cannot be enforced against the properties in the hands of bona fide purchasers without notice. The court reiterated that the prospective purchasers are not expected to have constructive knowledge of the charge and that it suffices if they make due inquiries with their vendors. Consequently, the statutory charge cannot be enforced against the properties purchased by the petitioners.4. Duty to Inform Registering Officers:The court observed that the Tax Department has an inherent duty to inform the registering officers about the statutory charge created on the properties. The court noted that had the Tax Department informed the registering officers in time, the situation could have been avoided. The court recommended that the Government of Tamil Nadu take necessary measures to ensure that statutory charges under the TNGST Act or TNVAT Act are mandated for compulsory registration before the registering officers.5. Failure to Register the Statutory Charge:The court highlighted the importance of registering the statutory charge to ensure that it is reflected in the encumbrance certificates. The court held that in the absence of such registration, the charge cannot be enforced against bona fide purchasers without notice. The court emphasized that the Tax Department's failure to register the charge in time led to the current situation and that the purchasers cannot be imputed with constructive notice of the charge.Conclusion:The court allowed the writ petitions, setting aside the auction sale notices and other impugned notices. The matters were remanded back to the concerned authorities for the limited consideration of whether there was any encumbrance of the charge reflected in the subject properties before the registering officers. The court directed the authorities to release the properties free from the statutory charge if no such encumbrance is found. The petitioners were also given the liberty to produce relevant encumbrance certificates. The Tax Department was given the liberty to approach the civil courts if they believe the transfer was fraudulent to defraud revenue, but this does not entitle them to refuse to release the properties from the statutory charges.