2021 (10) TMI 846 - HC - VAT and Sales Tax

Validity of Sale-Deed Upheld After Lifting Charge by Bank: Priority of Secured Creditors

The court upheld the validity of a sale-deed dated 16.07.2014, finding it legitimate as it was executed after the lifting of a charge by the State Bank of ... Transfer to defraud revenue void - charge in favour of a banking company - non-obstante clause overriding section 34(1) - protection of transfers made for the benefit of a secured bank creditor - voidable versus void transfers and remedy by suit - Crown/state preferential right vis-a -vis secured creditorsCharge in favour of a banking company - non-obstante clause overriding section 34(1) - protection of transfers made for the benefit of a secured bank creditor - Whether the sale-deed executed on 16.07.2014 is insulated from avoidance under Section 34(1) by operation of Section 34(2) because the transaction was for the benefit of a banking company which held a prior charge. - HELD THAT: - Section 34(2) contains a non-obstante provision which excludes the operation of Section 34(1) in respect of a charge or transfer in favour of a banking company as defined under the Banking Regulation Act. Facts show a charge in favour of State Bank of India created in 2005, satisfaction of that charge pursuant to an OTS and payment by the purchaser to the bank immediately prior to and in consequence of the sale-deed. The Court construed the words 'in favour of' purposively and held they include transfers made for the sole benefit of the banking company (i.e., where the charged property is sold to discharge the bank's dues without the bank first taking title). A literal, narrow meaning would produce anomalous results and frustrate the legislative purpose of Section 34(2). Consequently the sale-deed is taken out of the reach of Section 34(1) and is insulated from being set aside by the revenue under that sub-section.The sale-deed dated 16.07.2014 is protected by Section 34(2) and is not liable to be avoided under Section 34(1) on the facts before the Court.Transfer to defraud revenue void - voidable versus void transfers and remedy by suit - Whether, alternatively, the transfer is void or voidable for fraud and whether the revenue could directly set it aside without resort to a suit. - HELD THAT: - Section 34(1) operates to render transfers made with intent to defraud the revenue ineffective against the revenue, but the provision preserves the rights of a transferee in good faith and for consideration. Established authorities recognise that transfers made for adequate consideration and without reservation of benefit to the transferor are not impeachable merely because other creditors remain unpaid; where a transfer is voidable (not void ab initio) the proper remedy is a suit to set it aside after impleading necessary parties. Only where fraud is established on undisputed facts can a transfer be treated as nullity and set aside outside suit proceedings. In the present case no such fraud is made out on the record; the transaction was for the bank's benefit, supported by OTS, payments and bank correspondence, and hence the revenue cannot directly avoid the sale-deed without following appropriate legal process.No prima facie fraud is established; the transfer is not to be treated as void ab initio and the revenue's remedy (if fraud were shown) would be by a suit for setting aside; such a remedy has not been made out here.Crown/state preferential right vis-a -vis secured creditors - protection of transfers made for the benefit of a secured bank creditor - Whether the State's preferential recovery claim defeats the prior secured right of a banking company in the charged property. - HELD THAT: - The common-law principle that Crown/state dues may have preference applies mainly against unsecured creditors; it does not displace a prior perfected right of a secured creditor such as a mortgagee or pledgee. Section 34(1) creates a narrow statutory exception in favour of the Crown against certain transfers made to defraud revenue, but Section 34(2) expressly preserves and renders absolute the priority of charges/transfers in favour of banking companies. On the uncontested facts, the bank's prior charge (and the consequent transaction to satisfy it) prevails over the State's attempt to proceed against the charged property.The State's preferential claim cannot defeat the prior secured right of the banking company in the circumstances; the revenue is restrained from proceeding against the property on that basis.Alternative remedy and procedural objections - Whether the writ petition was premature or defective because alternative remedies before statutory authorities were not exhausted or because technical defects in the prayer existed. - HELD THAT: - The Court found it was too late to insist on alternative remedy objections where the petition was filed in 2015, parties were represented, pleadings filed and the issue was purely legal without disputed facts. Rule 285N (relating to confirmation of sale) was inapplicable because attachment and any auction had not preceded the sale-attachment occurred after the sale. The exact phrasing of the relief was not fatal where the substance of the claim and undisputed facts warranted relief in exercise of writ jurisdiction.Objections based on alternative remedies and technical defects in the prayer were rejected; the writ petition was entertainable and proceedable to final disposal.Final Conclusion: Writ petition allowed: on the undisputed facts a prior charge in favour of a banking company and the consequent transfer for the bank's benefit are protected by Section 34(2) of the U.P. Trade Tax Act so as to preclude avoidance under Section 34(1); no fraud is established to render the sale void, and the revenue is restrained from proceeding against the petitioner's personal assets or the property in dispute while remaining at liberty to recover dues from the transferor and its properties in accordance with law. Issues Involved:1. Validity of the sale-deed dated 16.07.2014.2. Applicability of Section 34 of the U.P Trade Tax Act, 1948.3. Priority of secured creditor (State Bank of India) over state tax dues.4. Requirement of instituting a suit to challenge the sale-deed.5. Alternative remedy and procedural objections.Issue-wise Detailed Analysis:1. Validity of the Sale-Deed Dated 16.07.2014:The petitioner purchased the property-in-dispute from the assessee-in-default through a registered sale-deed dated 16.07.2014. This transaction followed the satisfaction of a charge created in favor of the State Bank of India (SBI) under a One Time Settlement (OTS). The court held that the sale-deed was valid as it was executed after the charge on the property was lifted by SBI upon receiving Rs. 2.61 crores from the petitioner.2. Applicability of Section 34 of the U.P Trade Tax Act, 1948:Section 34(1) of the Act voids transfers made with the intent to defraud revenue. However, Section 34(2) exempts charges or transfers in favor of a banking company. The court found that since the charge was created in favor of SBI, a banking company, Section 34(1) did not apply. The sale-deed was thus insulated from being voided under Section 34(1).3. Priority of Secured Creditor (State Bank of India) Over State Tax Dues:The court reiterated the principle that a secured creditor, such as SBI, has priority over state tax dues. This principle is supported by various precedents, including Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co. and others, which established that Crown debts do not have precedence over secured debts. The court held that the charge created in favor of SBI gave it an indefeasible right to recover its dues from the property-in-dispute, which could not be overridden by state tax dues.4. Requirement of Instituting a Suit to Challenge the Sale-Deed:The court noted that even if Section 34(1) were applicable, the remedy would be to institute a suit to challenge the sale-deed on grounds of fraud. The court referenced Chogmal Bhandari vs Deputy Commissioner Tax Officer, which held that transfers voidable under Section 53 of the Transfer of Property Act require a suit to be set aside. Since no fraud was established, and no suit was instituted, the sale-deed remained valid.5. Alternative Remedy and Procedural Objections:The court dismissed the objection regarding the alternative remedy, noting that the writ petition had been filed in 2015, and the matter was ripe for final hearing. The objection based on Rule 285N of the U.P.Z.A. & L.R. Rules, 1952, was also rejected as it was inapplicable to the facts of the case. The court emphasized that the issue was purely legal and did not arise from disputed facts.Conclusion:The court allowed the writ petition, restraining the respondents from proceeding against the personal assets of the petitioner or the property-in-dispute. The respondents were, however, allowed to recover their dues from the assessee-in-default and its properties in accordance with the law. The court emphasized the importance of upholding the rule of law and providing relief based on clear facts and established legal principles.