1967 (4) TMI 173 - SC - VAT and Sales Tax

Whether the purchaser of business carried on by a dealer as defined in the Madras General Sales Tax Act, 1939 can be made liable for arrears of sales tax due from the dealer in respect of transactions of sale which took place before the transfer of the business under rule 21-A of the Rules framed in exercise of the powers conferred on the State Government by section 19 of the Act? Held that - Appeal dismissed. Even on the assumption that the respondent undertook to pay the arrears of sales tax due by the transferor, it does not follow that there is a liability created inter se between the State Government on the one hand and the transferee on the other hand. To put it differently, it is not open to the State Government to rely on the instrument inter vivos between the transferor and the transferee and to contend that there is any contractual obligation between the transferee and the State Government who is not a party to the instrument

Issues:
1. Liability of purchaser of business for arrears of sales tax due from the seller.
2. Validity of rule 21-A under the Madras General Sales Tax Act, 1939.
3. Interpretation of section 19(1) and 19(2)(c) of the Act.
4. Effect of the registered instrument on the liability of the purchaser for arrears of sales tax.

Analysis:

1. Liability of purchaser for arrears of sales tax:
The case involved the question of whether a purchaser of a business can be held liable for arrears of sales tax due from the seller before the transfer of the business. The respondent purchased a business and was pursued by Sales Tax Authorities for the arrears of tax owed by the previous owner. The issue was whether the purchaser could be made liable for the tax debts of the seller.

2. Validity of rule 21-A:
Rule 21-A, framed by the State Government, allowed for the recovery of unpaid tax from either the transferor or transferee in case of a complete transfer of business ownership. The court examined the legality of this rule under the Madras General Sales Tax Act, 1939. The rule created a legal fiction making the transferee liable for the tax owed by the transferor.

3. Interpretation of section 19(1) and 19(2)(c) of the Act:
The court analyzed the scope of the State Government's rule-making power under section 19(1) and 19(2)(c) of the Act. It was debated whether these provisions authorized the creation of a rule like 21-A, which imposed tax liability on the transferee for the seller's arrears.

4. Effect of the registered instrument on liability:
The court considered the impact of the registered instrument transferring the business on the liability of the purchaser for the arrears of sales tax. The argument was made that the respondent undertook to pay the tax liabilities, but the court clarified that such an undertaking did not create a direct liability between the State Government and the transferee.

In conclusion, the court held that rule 21-A was ultra vires the rule-making power of the State Government under the Act. The judgment of the Division Bench of the High Court, which ruled in favor of the respondent, was upheld. The court dismissed the appeal with costs, emphasizing that the purchaser of a business could not be held liable for the tax debts of the seller under the circumstances presented in the case.

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