2006 (9) TMI 495 - HC - VAT and Sales Tax

Sales tax created u/s 24 - Tamil Nadu General Sales Tax Act, 1959 - charge for payment of arrears - binding on the bona fide purchaser for value or not - whether the appellant is a bona fide purchaser without notice of the charge u/s 24(1) - HELD THAT - In this case there is absolutely no evidence on the side of the plaintiffs to discharge the initial burden. That being so the contention of the learned counsel for the appellant that the plaintiffs have discharged their initial burden cannot be accepted. But on the other hand P.W. 1 in his cross examination has categorically admitted that he did not enquire T. P. Narayanasamy about the sales tax arrears. Therefore, the omission on the part of the plaintiffs to enquire with their vendors regarding their sales tax arrears amounts to negligence on their part and also it will amount to willful 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 willful abstention or gross negligence and therefore it could be held that the plaintiffs have constructive notice. We have to point out that the fact that the plaintiffs marked exhibit A-46 through D.W. 7 will itself show that they had knowledge about the sales tax arrears of their vendors. It is not the case of the plaintiffs anywhere that exhibit A-46 was obtained by them from their vendors or from some other source after filing of the suit. Therefore, we have to hold that the plaintiffs are not bona fide purchasers without notice. The learned single Judge after considering at length the contents of exhibits A-46, B-15, B-24, B-25, B-26, B-27 and B-36 has rightly observed that the conclusion of the Trial Court that S.V. Traders was proprietory concern cannot be sustained and the Trial Court failed to consider the material portions and the documents placed by the defendants in the form of documents. The learned single Judge has also rightly observed that a perusal of the pleadings of both the parties as well as the evidence clearly shows that the plaintiffs were very well aware of the sales tax arrears from 1973-74 and knowing fully well they have purchased the property from T.P. Narayanasamy. The learned Judge on a perusal of the entire oral and documentary evidence has further held that T.P. Narayanasamy and his son T.N. Subash in order to escape from the tax liability after knowing that there was a default committed by them and a charge has been created as per section 24 of the Act, with the fraudulent intention sold the only property in favour of the plaintiffs. Therefore, we see no reason to interfere with the findings recorded by the learned single Judge and we concur with the findings. In the result, the letters patent appeal fails and the same is dismissed. However, there will be no order as to costs. Consequently, the connected CMP is closed.

Issues Involved:
1. Extent of a bona fide purchaser's liability for sales tax arrears under section 24 of the Tamil Nadu General Sales Tax Act, 1959.
2. Determination of whether the appellant is a bona fide purchaser without notice of charge.
3. Validity and binding nature of the sale deed in favor of the plaintiffs.
4. Creation of charge by operation of law over the suit properties prior to the sale.
5. Defendants' entitlement to proceed against the suit properties for recovery of sales tax arrears.
6. Validity of notice under section 80 of the Code of Civil Procedure.
7. Correctness of the valuation of the suit and court fee paid.
8. Estoppel of defendants from claiming charge.
9. Liability of the suit properties for the defendants' claims against M/s. S.V. Traders, Kancheepuram.

Detailed Analysis:

1. Extent of a Bona Fide Purchaser's Liability:
The court examined the conflicting views expressed by different division benches regarding the extent to which a bona fide purchaser for value is bound by the charge for payment of arrears of sales tax created under section 24 of the Tamil Nadu General Sales Tax Act, 1959. The court referred to the Supreme Court's decision in State of Karnataka v. Shreyas Papers P. Ltd. [2006] 144 STC 331 (SC); [2006] 1 SCC 615, which approved the decision in Deputy Commercial Tax Officer v. R.K. Steels [1998] 108 STC 161 (Mad); [1998] 1 CTC 124, holding that a bona fide purchaser without notice of the charge cannot have their property proceeded against for the recovery of sales tax arrears.

2. Determination of Bona Fide Purchaser Status:
The court scrutinized whether the appellant was a bona fide purchaser without notice of the charge. The plaintiffs claimed to have purchased the property without knowledge of the sales tax arrears. However, the court noted that the plaintiffs did not plead necessary material facts to establish they were bona fide purchasers without notice. The court emphasized that the burden of proof lies on the purchaser to show that they had no notice of the vendor's tax liabilities. The plaintiffs failed to make necessary inquiries about the sales tax arrears, which amounted to gross negligence and wilful abstention, thus implying constructive notice.

3. Validity and Binding Nature of the Sale Deed:
The court evaluated whether the sale deed in favor of the plaintiffs was valid and binding on the defendants. The trial court had initially decreed in favor of the plaintiffs, but the learned single judge set aside this decision, concluding that the sale was made with the intention to defraud the defendants and escape tax liabilities. The court upheld the learned single judge's findings, noting that the plaintiffs were aware of the sales tax arrears and had colluded with the vendors.

4. Creation of Charge by Operation of Law:
The court affirmed that under section 24(1) of the Act, a charge was created on the properties of the defaulter for the sales tax arrears. This charge could be enforced against the properties even after they were transferred, unless the transferee was a bona fide purchaser without notice of the charge.

5. Defendants' Entitlement to Proceed Against Suit Properties:
The court held that the defendants were entitled to proceed against the suit properties for recovery of sales tax arrears. Since the plaintiffs were not bona fide purchasers without notice, the properties remained subject to the charge created under section 24(1) of the Act.

6. Validity of Notice Under Section 80 of the C.P.C.:
The court did not find any issue with the notice under section 80 of the Code of Civil Procedure, which was a procedural requirement before instituting a suit against the government or public officers.

7. Correctness of Valuation of Suit and Court Fee Paid:
The court did not specifically address any discrepancies regarding the valuation of the suit and the court fee paid, implying that these aspects were not contentious or pivotal to the judgment.

8. Estoppel of Defendants from Claiming Charge:
The court rejected the plaintiffs' argument that the defendants were estopped from claiming the charge, as the plaintiffs failed to prove they were bona fide purchasers without notice.

9. Liability of Suit Properties for Defendants' Claims:
The court concluded that the suit properties were liable for the defendants' claims against M/s. S.V. Traders, Kancheepuram. The court found overwhelming evidence that S.V. Traders was a partnership firm and not a proprietorship, and the plaintiffs had knowledge of the sales tax arrears.

Conclusion:
The letters patent appeal was dismissed, and the court upheld the learned single judge's decision that the plaintiffs were not bona fide purchasers without notice and that the suit properties were liable for the sales tax arrears. There was no order as to costs, and the connected CMP was closed.

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