2021 (2) TMI 1115 - HC - VAT / Sales Tax

Petition dismissed: Auction buyers must clear undisclosed tax dues; creditors must disclose encumbrances in auction notices.

The court dismissed the petition, ruling that the petitioner must settle the sales tax dues to acquire a clear title to the property. It emphasized that ... Recovery of Tax - Attachment and auction of property - Right of buyer of property in Auction - Validity of action on the part of respondent no.1/ District Industries Centre in refusing to transfer the property - priority of dues - mortgage of property - HELD THAT:- The issue about priority of dues, inter se between the respondent nos.2 and 3, is no longer res integra but is covered by the judgment of the Full bench of the Madras High Court in THE ASSISTANT COMMISSIONER (CT) , ANNA SALAI-III ASSESSMENT CIRCLE VERSUS THE INDIAN OVERSEAS BANK, M/S. SUPER RECORDING CO. LTD. [2016 (12) TMI 373 - MADRAS HIGH COURT] where it was held that the rights of a Secured Creditor to realise secured debts due and payable by sale of assets over which Security Interest is created, would have priority over all debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or Local Authority. This Section introduced in the Central Act is with ''notwithstanding'' clause and has come into force from 01.09.2016. The SARFAESI Act, is obviously a Central Statute, and therefore any priority of claim for debts due to a secured creditor, which is created by any provision, as contained therein (Section 26-E in this case), will prevail over any First Charge, which may have been created by Section 37 (1) of the MVAT Act, 2002, in view of the language used in Section 26-E of the SARFAESI Act which states that such a claim by a secured creditor “shall be paid in priority over all other debts and all revenues, taxes, cesses, and other rates payable to the Central Government or State Government or local authority”. The priority created by virtue of Section 26-E of the SARFAESI Act, also takes precedence over any crown debt, which is due or payable to the Central Government, State Government or local authority. Thus, creation of any priority for any debts due, to the secured creditor, under Section 26-E of SARFAESI Act would prevail over any charge created for payment of a liability, on account of tax etc., which is due or payable to the State Government under the provisions of the MVAT Act, 2002. As Section 37(1) of the MVAT Act, 2002, creates a charge on the property, a successful auction purchaser, thus would hold the property, upon which a statutory charge has been created, subject to such charge and the property would thus continue to be liable for any statutory charges created upon it, even in the hands of such auction purchaser, though for non disclosure of such charge by the secured creditor, the auction purchaser may sue the secured creditor and have such redress, as may be permissible in law. This is moreso for the reason that the priority given in Section 26-E of the SARFAESI Act, to the Banks, which is a secured creditor, would only mean that it is first in que for recovery of its debts by sale of the property, which is a security interest, the other creditors being relegated to second place and so on, in the order of their preference as per law and contract, if any, as the case may be. Thus the dues under Section 37(1) of the MVAT Act, 2002, being a statutory charge on the property, would also be recoverable by sale of the property, and that puts a liability upon the auction purchaser, who, in case he wants an encumbrance free title, will have to clear such dues - The provisions of Section 13(7) of the SARFAESI Act, thus also provide for the manner in which the money received by the secured creditor, by sale of the security interest, is to be applied, the residue after discharge of the debts of the secured creditor, has to be held in trust and paid to the person entitled thereto in accordance with his rights and interests, which in this case, would be the dues under the MVAT Act, 2002. It would thus be proper for the secured creditor, to ensure that all encumbrances, be known before hand; the amount to be received by auction of the property, should be sufficient to cover the costs, charges and expenses and discharge of the dues of the secured creditor and also discharge of the encumbrances upon the property. Thus, the dues as claimed by the respondent no.2, being a charge on the property, under Section 37(1) of MVAT Act, 2002, and the property having stood attached by the respondent no.2, before the auction, the petitioner, would be liable to pay the same to the respondent no.2, in order to obtain a clear and marketable title to the property, having purchased the same on 'As is where is and whatever there is basis'. In case the petitioner discharges the aforesaid dues of the respondent no.2, it would then be entitled to a no dues certificate from the respondent no.2 - the petitioner is not entitled to the reliefs as claimed in the petition. Petition dismissed. Issues Involved:1. Refusal to transfer property by District Industries Center (DIC) without clearing sales tax dues.2. Issuance of No Objection Certificate (NOC) and fresh sale certificate by the bank.3. Priority of secured creditors' rights under Section 26-E of the SARFAESI Act over sales tax dues.4. Obligation of the auction purchaser regarding undisclosed statutory dues.5. Legal implications of purchasing property on 'as is where is' basis.Detailed Analysis:Issue 1: Refusal to Transfer Property by DIC Without Clearing Sales Tax DuesThe petitioner challenged the refusal by the District Industries Center (DIC) to transfer the property in its records without clearing the sales tax dues of M/s. Wood Stock Holdings. The DIC required a No Objection Certificate (NOC) from the Sales Tax Department due to arrears of Rs. 7,17,130/- for the period from 1/4/2010 to 31/3/2011.Issue 2: Issuance of NOC and Fresh Sale Certificate by the BankThe petitioner sought relief against the bank to issue an NOC and a fresh sale certificate free from all encumbrances. The bank had issued a sale certificate on 29/3/2017 but did not disclose any encumbrances. The petitioner contended that the property should be free from any charge due to the provisions of Section 26-E of the SARFAESI Act.Issue 3: Priority of Secured Creditors' Rights Under Section 26-E of the SARFAESI ActThe court examined whether the secured creditors' rights under Section 26-E of the SARFAESI Act had priority over the sales tax dues. The court referred to several judgments, including the Full Bench of the Madras High Court in The Assistant Commissioner (CT) Vs. The Indian Overseas Bank, which held that secured creditors' rights have priority over all other debts, including government dues.Issue 4: Obligation of the Auction Purchaser Regarding Undisclosed Statutory DuesThe petitioner argued that they were not liable for the sales tax dues as they had no notice of any charge. The court noted that under Section 100 of the Transfer of Property Act, a charge must be disclosed to the transferee. The bank contended that it was unaware of the sales tax dues. However, the court held that the statutory charge created by Section 37(1) of the MVAT Act, 2002, is enforceable against the property, and the auction purchaser is presumed to have notice of such statutory charges.Issue 5: Legal Implications of Purchasing Property on 'As Is Where Is' BasisThe court considered the implications of purchasing property on an 'as is where is' basis. The sale certificate issued to the petitioner contained endorsements stating that the property was sold without freeing from encumbrances. The court held that purchasing property on such a basis means acquiring it with all its liabilities. The petitioner could not claim ignorance of statutory dues and was responsible for clearing them to obtain a clear title.Conclusion:The court dismissed the petition, holding that the petitioner must pay the sales tax dues to obtain a clear title to the property. The court emphasized the need for secured creditors to make reasonable inquiries about encumbrances and disclose them in the auction notice. The judgment underscores the priority of secured creditors' rights under Section 26-E of the SARFAESI Act but also highlights the auction purchaser's obligations regarding statutory dues.