1976 (2) TMI 146 - SC - VAT and Sales Tax

Whether the trust deed was void and fraudulent? Held that - Appeal allowed. It cannot be said in the present case that the trust deed executed by the settlors is prima facie fraudulent or a colourable transaction. It will however be open to the sales tax authorities to avoid the document by bringing a properly constituted suit if so advised. We would also like to make it clear that any observation regarding the validity of the document that has been made in this case by us will be confined only to the materials that have been placed before us and will not prejudice the merits of either party in a suitable action which may be brought.

Issues Involved:
1. Validity of the Trust Deed
2. Applicability of Section 53 of the Transfer of Property Act, 1882
3. Applicability of Section 17(1) of the Andhra Pradesh General Sales Tax Act
4. Timing and Knowledge of Tax Liability

Issue-wise Detailed Analysis:

1. Validity of the Trust Deed:
The Supreme Court examined whether the trust deed executed by the settlors was fraudulent and intended to defeat the creditors, including the sales tax department. The trust deed was executed on September 16, 1968, three years before any assessments were made against the joint Hindu family. The Court noted that the trust deed was a registered instrument and its object was to discharge the debts of the previous creditors, who had obtained decrees from the courts. The names of these creditors were listed in Schedule A of the trust deed. The Court found no material to show that the creditors mentioned were fictitious. The Court concluded that the trust deed was neither forbidden by law nor fraudulent on its face and thus could not be considered unlawful.

2. Applicability of Section 53 of the Transfer of Property Act, 1882:
The Court addressed whether the trust deed was voidable under Section 53 of the Transfer of Property Act, which states that any transfer made with intent to defeat or delay creditors is voidable at the option of any creditor so defeated or delayed. The Court found that at the time the trust was executed, no assessment order against the joint Hindu family had been passed, and thus there was no real debt due from the executants of the trust. The Court emphasized that the trust did not have an unlawful purpose, and the executants did not reserve any benefit for themselves. The Court concluded that the trust deed was not executed to defraud the creditors, including the sales tax department. The Court also noted that a transfer under Section 53 is not void but only voidable, requiring a properly constituted suit to set it aside.

3. Applicability of Section 17(1) of the Andhra Pradesh General Sales Tax Act:
The respondent argued that under Section 17(1) of the Andhra Pradesh General Sales Tax Act, the sales tax authorities could realize the sales tax dues even from the trustees. The Court, however, found that Section 17(1) allows the sales tax department to follow up the money due to it in the hands of either the assessee or any person holding the money on behalf of the assessee. The Court held that this section does not empower the sales tax department to follow the money in the hands of a bona fide transferee from the assessee before the dues have accrued. The Court concluded that the trustees could not be deemed to hold the money for or on account of the dealer under Section 17(1).

4. Timing and Knowledge of Tax Liability:
The respondent contended that the liability of the appellant arose as early as 1966-67 and that the trust deed was executed on September 16, 1968, implying that the executants were aware of the tax liability. The Court found this contention devoid of force, noting that when the impugned notice was issued, the tax had not been quantified, and the assessments were made subsequently. The Court held that as long as the tax had not been assessed and quantified, no specific debt due to the revenue from the assessee had come into existence. Therefore, the trust deed could not be considered a device to evade the payment of arrears of sales tax.

Conclusion:
The Supreme Court allowed the appeal, setting aside the judgment of the High Court and quashing the notices issued by the respondent against the appellants. The Court directed that the sum of Rs. 31,100 deposited by the appellants would not be refunded before the expiry of three months from the date of the judgment. The Court made no order as to costs. The Court also clarified that the sales tax authorities could bring a properly constituted suit to avoid the trust deed if so advised.

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