2005 (1) TMI 635 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Legality of the sales tax authorities' action to realize sales tax dues from the petitioners.
2. Priority of tax dues over the mortgage of financial institutions.
3. Applicability of Section 18 of the APGST Act.
4. Overriding effect of the SERFAESI Act.
5. Rights of bona fide purchasers at a public auction.

Detailed Analysis:

1. Legality of the Sales Tax Authorities' Action:
The petitioners challenged the action of the sales tax authorities seeking to realize sales tax dues from them. The tax authorities had issued a notice of demand under the Revenue Recovery Act for arrears of tax for the years 1999-2000 and 2000-2001. The petitioners argued that they were bona fide purchasers for value at a public auction and had no notice of the tax dues. The court held that the petitioners, being purchasers for value without notice of the charge, were protected under the latter part of Section 100 of the Transfer of Property Act.

2. Priority of Tax Dues Over Mortgage of Financial Institutions:
The sales tax authorities contended that the tax dues had priority over the mortgage of financial institutions, including the respondent-Bank, by virtue of Section 16-C of the APGST Act. This section states that tax dues shall be the first charge on the property of the dealer. The court noted that similar provisions in other statutes had been interpreted by the Supreme Court to give priority to statutory charges over existing mortgages.

3. Applicability of Section 18 of the APGST Act:
The court clarified that Section 18 of the APGST Act, which deals with the recovery of tax where a business of a dealer is transferred, was not applicable in this case. The petitioners were not transferees of the business but purchasers of the property at a public auction conducted by the respondent-Bank under the SERFAESI Act.

4. Overriding Effect of the SERFAESI Act:
The respondent-Bank argued that the SERFAESI Act had an overriding effect by virtue of Section 35, which gives the Act precedence over other laws. The court examined Section 13(7) of the SERFAESI Act, which outlines the application of money realized by secured creditors. The court concluded that there was no conflict between the SERFAESI Act and the APGST Act that would give the bank's dues priority over tax arrears.

5. Rights of Bona Fide Purchasers at a Public Auction:
The court recognized the petitioners as bona fide purchasers for value without notice of the charge. The property was sold in a public auction conducted by the respondent-Bank under the SERFAESI Act. The court held that the charge for sales tax arrears could not be enforced against the property in the hands of the petitioners, as they were protected by the general prohibition in Section 100 of the Transfer of Property Act.

Conclusion:
The court allowed the writ application in part, declaring that the arrears of sales tax dues of M/s. Sree Lekha Industries were not recoverable from the property purchased by the petitioners at the auction. The State-respondents were restrained from proceeding to realize the sales tax arrears from the said property. However, the order did not preclude the sales tax authorities from recovering their dues in accordance with the law. There was no order as to costs.