1990 (1) TMI 276 - HC - VAT and Sales Tax

Summary

Issues:
Liability of transferee under the Karnataka Sales Tax Act for tax arrears of a defaulter whose assets were sold by a creditor.

Analysis:
The case involved a dealer who fell into arrears of tax and a subsequent auction of the dealer's assets by a creditor, Karnataka State Financial Corporation (KSFC), with the petitioner being the highest bidder. The recovery officer then demanded the arrears of tax from the petitioner as the transferee of the business. The petitioner disputed the liability, arguing no direct transfer of ownership occurred from the defaulter. The respondents contended that under Section 15 of the KST Act, a transferee becomes liable for unpaid tax and penalties of the defaulter at the time of transfer. The court analyzed the provisions of the State Financial Corporations Act, which empowered KSFC to transfer assets and deemed the corporation as the owner for enforcement purposes.

The court addressed the question of whether the intervention of a financial corporation, as a secured creditor, makes the transferee of a business liable for the defaulter's tax. Section 15 of the KST Act imposes liability on the transferee for unpaid tax at the time of transfer, as established in a previous Full Bench decision. The court rejected arguments that tax liability arises only after assessment and quantification, emphasizing the statutory liability imposed on the transferee to prevent tax avoidance by transferors.

The court clarified that the transfer of ownership includes both movable and immovable assets, with liability for unpaid tax transferring to the new owner. The court dismissed the petitioner's argument that KSFC's role as the transferor absolved the petitioner of liability, emphasizing the statutory obligation on transferees to pay outstanding taxes. The court upheld the enforcement of tax recovery against the petitioner, emphasizing that the transferee steps into the shoes of the transferor under Section 15.

In conclusion, the court dismissed the writ petition, affirming the statutory liability of the transferee for unpaid taxes of the defaulter. The court rejected arguments that direct transfer by the dealer was necessary for liability under Section 15, highlighting the special provisions of the State Financial Corporations Act. The judgment underscores the transferee's obligation to pay taxes owed by the transferor, even in cases of indirect transfers facilitated by creditors like KSFC.