2025 (8) TMI 1136 - HC - VAT / Sales Tax

Purchasers for value without notice protected under proviso to Section 24-A/43; Revenue must plead collusion or fraud

HC held that purchasers who bought property for valuable consideration without notice of pending tax proceedings are protected by the proviso to Section ... Recovery of Tax Dues and attachment of property - Rights of the purchaser of the property, if purchased before completion of tax proceedings - Seeking lifting of attachment created on the petitioners’ property - challenge to encumbrances on various properties owned by the respondents (referred to as purchasers) on the file of the various Sub Registrars within whose jurisdiction the properties are located - case of the Revenue is that the sales to these purchasers are compromised as void in view of Section 24- A/43 of the sales tax enactments, whereas the purchasers would argue that they are bonafide purchasers who have purchased the properties for valuable consideration. HELD THAT:- The proviso to Section 24-A thus protects cases of bonafide purchasers where the transfers had been made for adequate consideration and without notice to the purchaser, of either the pendency of the tax proceedings or raising of the tax demand on the defaulting assessee, that is, the vendor. Clause (ii) protects those transactions made with the previous permission of the assessing authority which does not apply in the present case. A careful perusal of the pleadings does not reflect allegations of connivance or collusion inter se the purchasers and their vendors, and no material has been brought on record by the Department to incriminate the transfer in any way. Such a pleading/incriminating material, is necessary to enable the Department to take the argument that the protection under the proviso does not apply to a transfer - The existence of collusion/fraud/intent to defraud the revenue, is the very foundation/premise, upon which Sections 24-A/43 stand. Hence, to have the benefit of, or obtain jurisdiction under the aforesaid provisions, it is mandatory for the Revenue to establish the jurisdictional fact of ‘intent to defraud’ on the part of the purchaser. In the present cases, the Revenue has not demonstrated, or even averred for that matter, that notice of the pending arrears had been given to the Respondents. The ratio was applied yet again in State of Karnataka V. Shreyas Papers P. Ltd. [2006 (1) TMI 243 - SUPREME COURT], which refers to an earlier order of the Division Bench of this Court in Deputy Commercial Tax Officer V. R.K.Steels [1997 (9) TMI 582 - MADRAS HIGH COURT]. In the case of RK Steels, where an identical question had been considered by the Court, it was seen that the purchaser of the properties from the default firm had had no notice of the charge over the property, exonerating the purchaser from such a liability - In the facts of the case in Senthil Kumar too, the Court noted that no notice of the sale tax arrears of the defaulting assessee had been given to the purchasing company and hence, the liabilities of the defaulting assessee could not be enforced as against such purchasers. In fact, the encumbrance certificates applied for, and obtained by the Respondents at the relevant point in time, have been placed before us and serve to establish in those cases that there were no encumbrances created at the instance of the Revenue. In some cases, there has been no charge registered at all by the Revenue, and in those few cases where the Revenue has created/registered the charge, it has only been post the dates of sale by the present purchasers/respondents. There is no merit in these Writ Appeals filed by the State and the same are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether vendors (defaulting assessees) are necessary parties to writ petitions filed by purchasers challenging statutory encumbrances created under sales tax enactments. 2. Whether transfers of immovable property effected by a dealer during pendency or after completion of proceedings under the sales tax enactments are void as against statutory claims under Sections 24-A (TNGST Act) / 43 (TNVAT Act), and if protection of the proviso (bonafide purchaser for adequate consideration without notice / previous permission of assessing authority) applies to purchasers. 3. Whether purchasers can be imputed with constructive notice of a charge under Section 3 of the Transfer of Property Act or otherwise, such that protection under Section 24-A / 43 is unavailable. 4. Whether the existence of 'intent to defraud the revenue' is a jurisdictional fact which the Revenue must establish before invoking Sections 24-A / 43, and the scope of judicial review in respect of that fact. 5. Whether, on the material and timing of assessments, encumbrance certificates and registrations, purchasers before the Court are entitled to relief (release of property / setting aside attachments). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Necessity of impleading vendors as parties Legal framework: Writ jurisdiction to test encumbrances on property; principle of necessary parties in adjudicatory proceedings. Precedent treatment: The Court relied on authority holding vendor not a necessary party where relief is sought by purchaser against encumbrance and there is no pleaded fraud or collusion. Interpretation and reasoning: The purchasers challenged encumbrances created on the properties; the Revenue produced no material alleging collusion or fraud between vendors and purchasers. The Court held that where the challenge is confined to the existence/enforceability of a statutory charge against purchasers who deny collusion, the vendor is not a proper or necessary party; impleading is required only if Revenue pleads fraud/connivance. Ratio vs. Obiter: Ratio - vendor not necessary party absent pleaded/alleged fraud/collusion; obiter - none. Conclusions: Writ petitions were maintainable without impleading vendors where Revenue did not allege fraud/connivance. Issue 2 - Applicability of Sections 24-A / 43 and protection under proviso for bonafide purchasers Legal framework: Sections 24-A (TNGST) and 43 (TNVAT) make transfers by a dealer to defraud revenue void as against claims; proviso preserves transfers made for adequate consideration and without notice of proceedings/claims, or with previous permission. Precedent treatment: The Court examined authorities interpreting charges created by operation of law, protection of bonafide purchasers and limits of enforcement of such charges against transferees. Interpretation and reasoning: The statutory scheme makes the existence of an intention to defraud the revenue the foundational jurisdictional fact for invoking voidness. The proviso protects bonafide purchasers where adequate consideration and absence of notice are established. The Court emphasised that mere creation of a statutory charge is not ipso facto determinative against transferees who acquired for value without notice. Ratio vs. Obiter: Ratio - protection of proviso applies where purchaser establishes adequate consideration and absence of notice; the Revenue must establish intent to defraud to deny proviso protection. Conclusions: Where sales preceded assessment/registration of charge, or where encumbrance certificates obtained by purchasers did not disclose any charge, purchasers fall within the proviso and are protected against enforcement of the statutory charge. Issue 3 - Constructive notice under Section 3 TP Act and imputability of knowledge Legal framework: Section 3 of the Transfer of Property Act and Section 100 discussion - concept of constructive notice; role of encumbrance certificates and facts & circumstances test from precedent. Precedent treatment: Court relied on decisions holding that constructive notice may suffice if established on facts and circumstances, but no fixed presumption of constructive notice exists; each case turns on evidence of notice. Interpretation and reasoning: The Revenue failed to aver or prove any notice to the purchasers of pending arrears or proceedings. Encumbrance certificates procured by purchasers before sale, and absence of registered charge as on dates of sale, rebut a presumption of constructive notice. Where the statutory charge was registered only after sale, the purchaser cannot be imputed with constructive knowledge. Ratio vs. Obiter: Ratio - constructive notice is a question of fact; absence of evidence of notice disentitles Revenue from relying on constructive notice to defeat proviso protection. Conclusions: Constructive notice was not established on the material; purchasers were not chargeable with notice under Section 3 TP Act and related principles. Issue 4 - 'Intent to defraud' as jurisdictional fact and scope of review Legal framework: Concept of jurisdictional fact; administrative action dependent on preliminary fact; principles from authorities on jurisdictional facts and judicial review. Precedent treatment: The Court applied established jurisprudence that existence of jurisdictional fact is sine qua non for exercise of statutory power and is open to judicial review; distinguished between jurisdictional fact and adjudicatory fact. Interpretation and reasoning: The Court held that existence of 'intent to defraud the revenue' is a jurisdictional fact under Sections 24-A/43. The Revenue must establish this foundational fact before the statutory voidness can be invoked against third-party purchasers. Absent such a finding or material, the statutory charge cannot be enforced against transferees who acquired without notice and for value. Ratio vs. Obiter: Ratio - intent to defraud is a jurisdictional fact which the Revenue must prove; the Court may review whether that fact exists. Conclusions: Without positive material or pleading to establish intent to defraud, the Revenue cannot invoke Sections 24-A/43 to defeat purchasers' protections. Issue 5 - Application of law to facts: timing of assessment/registration and entitlement to relief Legal framework: Interaction of timing of sale, date of assessment order, date of registration of charge/encumbrance certificate and proviso protection; demonstrable absence of charge on encumbrance search. Precedent treatment: Applied earlier decisions holding purchasers exonerated where no notice/encumbrance existed at time of sale; compared to decisions where both parties had knowledge leading to denial of proviso. Interpretation and reasoning: The Court examined particulars of each matter (assessment dates, sale deed dates, dates of encumbrance registration, Form 1/Form 4/recovery steps). In multiple matters the sale predated assessment or registration of charge; in several cases encumbrance certificates obtained by purchasers did not disclose any charge; in some matters the department registered charge only after sale. The Court treated one earlier factual finding (no registration by Department) as final where unappealed. Where assessment was quashed, attachment nullified. Ratio vs. Obiter: Ratio - where sale predates assessment/registration and there is no notice, purchaser entitled to protection and release of property; obiter - reference to contrasting factual situations where both buyer and seller had knowledge (no relief). Conclusions: On the facts, purchasers were bonafide, had exercised due diligence (encumbrance searches), and no material proved notice or intent to defraud; attachments and auction notices were set aside/remedies granted - sales preceding assessment/registration entitled purchasers to protection under proviso; where assessment quashed, attachment vacated. Overall Disposition The Court dismissed the State's writ appeals and allowed the purchasers' challenges where factual matrix established absence of registered charge or notice at time of sale, and where Revenue failed to establish the jurisdictional fact of intent to defraud. No costs awarded; connected petitions closed.