TaxTMI 
TaxTMI 
2020 (4) TMI 337
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....e purchasers of the subject properties for a valid consideration and without notice of the statutory charge created, either under Section 24 of the 'Tamil Nadu General Sales Tax Act, 1959' [hereinafter referred to as 'TNGST Act' for the sake of brevity] or under Section 42 of the 'Tamil Nadu Value Added Tax Act, 2006' [hereinafter referred to as 'TNVAT Act' for the sake of brevity] and since they are entitled for the protection under Section 100 of the 'Transfer of Property Act, 1882' [hereinafter referred to as 'TP Act' for the sake of brevity], the charge cannot be enforced against their properties. 2. The aforesaid Sections are extracted for a ready reference:- 'Section 24 of the TNGST Act: Section 24.-Payment and recovery of tax.- (1) Save as otherwise provided for in sub-section (2) of Section 13, the tax assessed or has become payable under this Act from a dealer or person and any other amount due from him under this Act shall be paid in such manner and in such instalments, if any and within such time as may be specified in the notice of assessment, not being less than twenty one days from the date of service of the notice. The tax under sub-section (2) o....
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.... respect of land revenue and the claim of the Agriculture and Rural Development Bank in regard to the property mortgaged to it under sub-section (2) of Section 28 of the Tamil Nadu Co-operative Societies Act, 1983 (Tamil Nadu Act 30 of 1983), have priority over all other claims against the property of the said dealer or person and the same may, without prejudice to any other mode of collection be recovered, (a) as land revenue, or (b) on application to any Magistrate, by such Magistrate as if it were a fine imposed by him: Provided that no proceedings for such recovery shall be taken or continued as long as he has, in regard to the payment of such tax, other amount or fee, as the case may be, complied with an order by any of the authorities to whom the dealer or person has appealed or applied for revision, under Sections 51, 52, 54, 57, 58, 59 or 60. (3) On any amount remaining unpaid after the date specified for its payment as referred to in subsection (1) or in the order permitting payment in instalments, the dealer or person shall pay, in addition to the amount due, [interest at the rate of two percent] per month of such amount for the entire ....
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....does not amount to a mortgage, the latter person is said to have a charge on the property; and all the provisions hereinbefore contained [which apply to a simple mortgage shall, so far as may be, apply to such charge.] Nothing in this section applies to the charge of a trustee on the trust property for expenses properly incurred in the execution of his trust, [and, save as otherwise expressly provided by any law for the time being in force, no charge shall be enforced against any property in the hands of a person to whom such property has been transferred for consideration and without notice of the charge.]' 3. Much reliance was placed on the decision of The Ahmedabad Municipal Corporation of the city of Ahmedabad versus Haji Abdulgafur Haji Hussenbhai reported in 1971 (1) Supreme Court Cases 757 by the learned counsel for the petitioners, for the proposition that, since the property has been transferred to them for adequate consideration and without there being a notice of the charge, they are protected under the proviso to Section 100 of the TP Act. 4. The learned Special Government Pleader on the other hand would submit that, as Section 24 of the TNGST Act or Sect....
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.... in banks to the extent to which any of the assets aforesaid does not form part of the stock-in-trade of the business of the dealer. Section 43 of the TNVAT Act: Section 43.-Transfers to defraud revenue void.- Where, during the pendency of any proceedings under this Act or after the completion thereof, any dealer creates a charge on, or parts with the possession by way of sale, mortgage, gift, exchange or any other mode of transfer whatsoever of any of his assets in favour of any other person, with the intention to defraud the revenue, such charge or transfer shall be void as against any claim in respect of any tax, or any other sum payable by the dealer as a result of the completion of the said proceeding or otherwise: Provided that such charge or transfer shall not be void, if it is made,- (a) for adequate consideration and without notice of the pendency of such proceeding under this Act or, as the case may be, without notice of such tax or other sum payable by the dealer; or (b) with the previous permission of the assessing authority. Section 3 of the Transfer of Property Act: Section 3.-Interpretation Clause.- In th....
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.... side, which I shall deal with later. 8. At the outset, it would suffice if the issue as to whether all the petitioners herein can be considered to be bonafide purchasers in the absence of notice of the statutory charge created under Section 24 of the TNGST Act or Section 42 of the TNVAT Act and whether they could be imputed with constructive notice of such statutory charge and thereby be deprived of the saving clause under Section 100 of the TP Act? 9. Since the aforesaid issue has been predominantly dealt with in Ahmedabad Municipal Corporation's Case by the Hon'ble Apex Court, it would be appropriate to consider this decision first, before referring to the other judgments relied upon by the counsels. 10. The facts of Ahmedabad Municipal Corporation's Case before the Hon'ble Supreme Court was that the plaintiff was in arrears of property tax dues under the 'Bombay Provincial Municipal Corporation Act' (hereinafter referred to as the 'Bombay Act'). Section 141 of the Bombay Act creates a statutory charge over the property of the Assessee, who had defaulted in paying the municipal taxes. The defaulter had sold the property to the plaintiff while the charge was in force. Li....
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....sion of the Allahabad High Court in the case of Nawal Kishore vs. The Municipal Board, Agra (ILR 1943 ALL 453), which held that the question of constructive notice is a question of fact, which requires to be determined on the evidences and circumstances of each case. Nevertheless the Full Bench was also of the view that the intending purchasers of the property in a municipal area, where municipal taxes are a charge on the property, are deemed to have constructive knowledge of the existence of such municipal taxes and possible arrears, and hence there is a duty cast on such intending purchasers to make enquiries in this regard, failure of which would amount to willful abstention or gross negligence within the meaning of Section 3 of the TP Act and therefore, notice must be imputed to them. 14. Incidentally, the reference to the Full Bench in Nawal Kishore's case (supra) had necessitated, in view of the conflicting opinions of the two Division Benches of the Allahabad High Court in the cases of The Municipal Board, Cawnpore vs. Roop Chand Jain (ILR 1940 ALL 669) and the Oudh Chief Court in the case of the Municipal Board, Lucknow vs. Ramji Lal (AIR 1941 Oudh 305). The Full Bench h....
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....hose contained in Chapter IV of the Transfer of Property Act must apply to transfer, by operation of law. Section 100, it may be pointed out, falls in Chapter IV. Reliance was next placed on a Full Bench decision of the Allahabad High Court in Nawal Kishore v. The Municipal Board, Agra I.L.R. [1943] All. 453. According to this decision the question of constructive notice is a question of fact which falls to be determined on the evidence and circumstances of each case. But that Court felt that there was a principle on which question of constructive notice could rest, that principle being that all intending purchasers of the property in municipal areas where the property is subject to a municipal tax which has been made a charge on the property by statute have a constructive knowledge of the tax and of the possibility of some arrears being due with the result that it becomes their duty before acquiring the property to make enquiries as to the amount of tax which is due or which may be due and if they fail to make this enquiry such failure amounts to a wilful abstention or gross negligence within the meaning of Section 3 of the Transfer of Property Act and notice must be impu....
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.... purchaser at a private sale. But had he made enquiries from the municipal authorities he could still have ascertained whether any arrears of consolidated rates were due. When he had taken the mortgage he was aware that if the rates were not paid the arrears would be first charge on the property with the result that before becoming full owner by foreclosure he should have ascertained the true state of affairs. On this reasoning he was held to have constructive notice and the purchasers from him could not claim greater protection. These circumstances clearly disclose that the reported case is not similar to the one before us and is of little assistance. 7. Chandu Ram v. Municipal Commissioner of Kurseong Municipality AIR 1951 Cal 398 was the next decision cited. The Bench in that case followed the Full Bench decision of the Allahabad High Court in Nawal Kishore's case (supra). A Division Bench of the Oudh Chief Court in Municipal Board, Lucknow v. Lala Ramji Lal A.I.R. 1941 Oudh 305 disagreeing with the Bench decision of the Allahabad High Court in Roop Chand Jain's case (supra) observed that it must be presumed that a person who buys house property situate in a municipalit....
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....o have notice of a fact when he actually knows that fact or when but for wilful abstention from an enquiry or search which he ought to have made or gross negligence he would have known it. There are three explanations to this definition dealing with three contingencies when a person acquiring immovable property is to be deemed to have notice of certain facts. Those explanations are: Explanation I.-Where any transaction relating to Immovable property is required by law to be and has been affected by a registered instrument, any person acquiring such property or any part of, or share of such instrument as from the date of registration or, where the property is not all situated in one sub-district, or where the registered instrument has been registered under Subsection (2) of Section 30 of the Indian Registration Act, 1908, from the earliest date on which any memorandum of such registered instrument has been filed by any Sub-registrar within whose sub-district any part of the property which is being acquired, or of the property wherein a share or interest is being acquired, is situated: Provided that- (1) the instrument has been registered and its registrati....
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....reasons not clear on the record, omitted to pay the arrears of municipal taxes and they were, therefore, reluctant to disclose this lapse on their part. On these facts and circumstances we do not think that the plaintiff could reasonably be fixed with any constructive notice of the arrears of municipal taxes since 1949. So far as the legal position is concerned we are inclined to agree with the reasoning adopted by the Allahabad High Court in Roop Chand Jain's case (supra) in preference to the reasoning of the Full Bench of that Court in Nawal Kishore's case (supra) or of the Division Bench of Oudh Chief Court in Ramji Lal's case (supra). We do not think there is any principle or firm rule of law as suggested in Nawal Kishore's case (supra) imputing to all intending purchasers of property in municipal area where municipal taxes are a charge on the property, constructive knowledge of the existence of such municipal taxes and of the reasonable possibility of those taxes being in arrears. The question of constructive knowledge or notice has to be determined on the facts and circumstances of each case. According to the Full Bench decision in Nawal Kishore's case (supra) also the questi....
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....on case to case basis. 19. In support of his contention, reliance was placed on the following observations made by the Hon'ble Apex Court in the Ahmedabad Municipal Corporation's case: "... Wilful abstention suggests conscious or deliberate abstention and gross negligence is indicative of a higher degree of neglect. Negligence is ordinarily understood as an omission to take such reasonable care as under the circumstances is the duty of a person of ordinary prudence to take. In other words it is an omission to do something which a reasonable man guided by consideration which normally regulate the conduct of human affairs would do or doing something which a normally prudent and reasonable man would not do. The question of wilful abstention or gross negligence and, therefore, of constructive notice considered from this point of view is generally a question of fact or at best mixed question of fact and law depending primarily on the facts and circumstances of each case and except for cases directly falling within the three explanations, no inflexible rule can be laid down to serve as a straight-jacket covering all possible contingencies. The question one has to ans....
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....s 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. 23. 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. 24. This leads to the question that when the Hon'ble Supreme Court had held that there is no constructive knowledge on the arrears....
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.... their part. On these facts and circumstances we do not think that the plaintiff could reasonably be fixed with any constructive notice of the arrears of municipal taxes since 1949.' 26. On a co-joint reading of the law laid down by the Hon'ble Apex Court in the Ahmedabad Municipal Corporation's case, the following propositions of law emerge and which are summarized below: (a) The bona-fide purchaser has no constructive knowledge of the local tax arrears; (b) Wilful Abstention is conscious or deliberate abstention and gross negligence is indicative of a higher degree of a neglect or omission to do something which a reasonable or prudent man would not do; (c) Constructive notice on account of willful abstention or gross negligence construed from the aforesaid point of view, are mixed questions of facts and law. (d) The mixed question of law is not where the purchaser had means of obtaining knowledge of the charge or with prudent caution could have obtained, but whether in not doing so, he acted with willful abstention or gross negligence, which question the Courts should consider in the background of Indian conditions; (e) Failure to e....
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.... abstention. In this case the plaintiffs had the means of obtaining the necessary information and the plaintiffs with prudent caution might have obtained knowledge of the charge and therefore the failure on their part to make necessary enquiries with their vendors will amount to wilful abstention or gross negligence and therefore it could be held that the plaintiffs have constructive notice. [emphasis supplied by me]' 30. In the light of the aforesaid ratio laid down, when the purchasers in the instant cases had failed to make enquiries with the Sales Tax authorities on the antecedents of the subject properties, the same would neither amount to willful abstention nor of gross negligence and therefore, they cannot be termed to be 'persons said to have notice', as interpreted under Section 3 of the TP Act and it would suffice if the purchasers had made enquiries with their vendors with regard to the tax arrears. Accordingly, it can only be held that these purchasers, neither had 'constructive notice' under Section 3 of the TP Act, nor did they have 'notice of the charge' as referred to under Section 100 of the TP Act and therefore, they could be entitled to the benefit of....
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....s not attracted and consequently, the transferee would be entitled to the protection under Section 100 of the TP Act. Hence, the decisions relied upon by the learned Special Government Pleader do not require consideration. 35. The learned Special Government Pleader relied upon the decision in the case of Shyam Telelink Ltd., now Sistema Shyam Teleservices Ltd., vs. Union of India in Civil Appeal No.7236 of 2003, dated 05.10.2010 and submitted that the petitioners, who had purchased the property, along with the charges, cannot approbate and reprobate by taking advantage of the purchase and rejecting the liability of arrears on the properties. This is not a case of approbation or reprobation, where the purchase is deemed to be free of encumbrance, in the absence of any notice, either actual or constructive and as such, it can only be deemed that there is no encumbrance at all on the properties, in the hands of the transferee, in view of the discussions made above. Hence, the principle of approbation and reprobation will not apply to the cases on hand. 36. A learned Single Judge of this Court in the case of M/s.Sri Bakgyam Engineering Corporation vs. The Deputy Commissioner Tax ....
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....is in arrears of tax, can be presumed. But, in the case on hand, the sales effected are not in quick succession. The second sale has been made, after six years from the date, on which the assessment has been finalised. The tax officials have not reported the charge over the property, held by the dealer to the Registration Department. Even assuming that there is a charge, by virtue of the statutory provision, the bona fides of the petitioner in purchasing the property, after six years from the date of assessment, cannot be doubted, as it is the case of the petitioner that she had verified the encumbrance. On the contra, the contention of the respondent that the demand notices have been issued to the dealer has not been substantiated. At this juncture, this Court deems it fit to extract a decision of the Apex Court, which has distinguished the pleadings and proof required in a writ proceeding and a civil suit. In Bharat Singh and Others Vs. State of Haryana and Others, reported in 1988 (4) SCC 534, at paragraph 13, the Supreme Court held as follows: ".... In our opinion, when a point which is ostensibly a point of law is required to be substantiated by facts, the party raisi....
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....ler. On the contra, there are clear averments made by the petitioner to the effect that she had verified the encumbrance details from the Registration Department, in the year 2004, when she had purchased the property. When the subsequent sale has been effected after six years from the first sale, it is incumbent on the respondent to prove collusion, with the defaulting dealer. There can be a presumption of collusion with the defaulting dealer, if the transactions are in quick succession. But, if there is a long gap of six years between the first sale and the subsequent sale, without there being any action by the Revenue to realise the arrears of tax from the defaulter or against the immediate subsequent purchaser on the facts of this case, this Court is of the view that even collusion cannot be presumed. In the absence of any rebuttal to the bona fides of the purchase, absentism or negligence, in making due enquiry with the Registration Department, prior to purchase, the conduct of the subsequent purchaser cannot be doubted by making any allegation of fraud, being played on the revenue. 29. Though the respondent has contended that the petitioner ought to have obtained a 'N....
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...., connected Miscellaneous Petition is closed." 11. Here, it is, no doubt, clear that the petitioner had purchased the property in question without notice of the charge over the same from his vendor and the same has also not been reflected in the Encumbrance Certificate issued by the Registration Department. In such circumstances, this Court is of the view that the impugned order passed by the respondent is vitiated in law.' 37. This Court is also conscious of the fact that in the guise of a bona-fide purchase, the tax department should not be put at loss, in what could be termed as 'fraudulent transfer' in order to defraud revenue. In cases of this nature, there requires to be substantial material to establish that the transfer was made fraudulently to evade payment of tax arrears or to wriggle out of the charge created. In none of the cases before this Court, have the Department come out that such materials to show that the transfer was not bona-fide but has been made in order to defraud revenue. In the absence of such material, the appropriate remedy open to the Department is to substantiate the aspect of "fraudulent transfer" before the appropriate civil for....
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....ference that those petitioners had failed to make enquiries with their respective vendors. Nevertheless, if the antecedents of the title of the vendors over the subject properties are verified from the respective encumbrance certificates, during the relevant point of time, a conclusion can be arrived to the effect that the property did not suffer from such an encumbrance, that reveal the statutory charge created therein. Such a task of verifying the encumbrance certificate can be assigned to the concerned tax authorities, with a direction to the petitioners to produce the same before them. 41. Now that, I have held that the charges are not enforceable against these petitioners, an incidental reference could be made on the situation giving rise to all these confusions. Had the Sales Tax authorities intimated to the registering officers about the statutory charge being created on the property of the tax defaulter in time, this situation could have been thwarted. The Department seeks to take protection from such inaction on the ground that there is no law or rules or regulations mandating conveyance of such information to the registering officers. 42. Incidentally, it can also b....
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....evailing in our country and which could be considered to be an encumbrance on the said property, which empowers the authorities to invoke the provisions of the Revenue Recovery Act, for the purpose of enforcing the charges. 44. Sections 24 and 28 of the Revenue Recovery Act, 1890 empowers the authorities for recovering tax arrears by enforcing the charges created on the properties under Section 24 of the TNGST Act and Section 42 of the TNVAT Act. Apart from these two provisions, Section 2 of the Tamil Nadu Irrigation Cess Act, 1865, Section 7 of the Tamil Nadu Land Encroachment Act, 1905, Section 64 of the Tamil Nadu Court Fees and Suits Valuation Act, 1955, Section 26(6) of the TNGST Act, Section 28 of the Tamil Nadu Labour Welfare Fund Act, 1972, Section 74 (a) of the Chennai Metropolitian and Water Supply and Sewerage Act, 1978, Section 59 of the Tamil Nadu Agricultural Produce Marketing (Regulation) Act, 1987, Section 7 (b) of the Tamil Nadu Tax on Consumption and Sale of Electricity Act, 2003, Section 45 (6) of the TNVAT Act and Section 37 (1) of the Tamil Nadu Stamp Act, 2013 are some of the Acts, which empower the authorities to recover the arrears of revenue under the Ta....
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....e property to be purchased has any encumbrance. Unless the charge is duly registered in the Registration Department, it would not be possible for any prospecting buyer to know whether there is any charge over the property, for any arrears of tax or any statutory dues to be paid to the Government or statutory body.' The aforesaid decision came to be affirmed by the Division bench of this Court in the case of Gupta & Company vs. the Commercial Tax Officer, Alandur Assessment Circle and Ors, reported in 2018 (3) CTC 740. 50. While highlighting the importance of registration, the Hon'ble Supreme Court in Suraj Lamp and Industries Private Limited vs. State of Haryana and another reported in (2009) 7 SCC 363 had observed as follows: '18.Registration provides safety and security to transactions relating to immovable property, even if the document is lost or destroyed. It gives publicity and public exposure to documents thereby preventing forgeries and frauds in regard to transactions and execution of documents. Registration provides information to people who may deal with a property, as to the nature and extent of the rights which persons may have, affecting that property. ....
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....ted either under Section 24 of TNGST Act or under Section 42 of TNVAT Act. (Eg. W.P.No.25602 of 2015) 54. When the Hon'ble Apex Court had laid down the law in the Ahmedabad Municipal Corporation's Case, way back in the year 1971 that the purchasers need not make enquiries or searches with the Tax Authorities in connection with the sales tax arrears and such a law being laid down by the highest Court of law in the Country, the Tax Department ought to have realised that all prospective purchasers of the property over which the statutory charge has been created, would not approach them for making enquiries regarding the tax arrears and thereby, ought to have been prudent and cautious in informing the registering officers about the creation of the statutory charge, since there was no duty cast on these purchasers to verify with them on the pending charges. Thus, such a duty, is not one of a choice or an option, but an inherent duty cast on the Tax Department to inform the registering officers about the existence of the statutory charge. 55. The learned Special Government Pleader would state that since the statutory charge created under Section 24 of the TNGST Act or Section 42 of....
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....is one. The form of security provided under TNVAT Rules mandates mortgage of the properties offered by the dealer. The mortgage provided under the prescribed form-F therein is in the nature of a simple mortgage. Hence, in the cases where the dealer applies for registration by opting to furnish security bond, a simple mortgage is created on such a security being furnished, which would also be in the nature of a "floating charge" on the property, which mandates registration. 61. Nevertheless, in the light of the observations made in this order, and after the pronouncement of the order in Ahmedabad Municipal Corporation's case, I am constrained to hold that there is an inherent duty on the tax authorities to inform the registering officers of the statutory charge created and therefore, in the absence of such information being made, purchases effected pursuant to the statutory charge created under the tax laws, will not be enforceable against the properties in the hands of the subsequent purchasers. Above all, this Court has also substantiated that there is no constructive notice of the charge created either under Section 24 of the TNGST Act or under Section 42 of the TNVAT Act and ....