2006 (7) TMI 588 - HC - VAT and Sales Tax

Seeking recovery of arrears of tax - Tamil Nadu General Sales Tax Act, 1959 ( TNGST Act ) - Liability of an auction purchaser of a property - HELD THAT - In the instant case, the property was sold by public auction on March 10, 2003. The sale was conducted in execution of the recovery certificates issued by the Debts Recovery Tribunal for recovery of dues to the City Union Bank. The appellants had paid the entire amount due on March 25, 2003 and the sale was confirmed in their favour on April 23, 2003. There is no indication of any sales tax arrears in the advertisement for auction sale and there was no application from any statutory or public authority seeking to set aside the sale. For the first time, by letter dated June 25, 2004 the Commercial Tax Officer required the second respondent to create an encumbrance with regard to the property and consequently an entry was made in the register in respect of encumbrance of the first respondent. Thus, it is evident that the appellants had no actual notice of the charge prior to the transfer. There is also no material to show that the appellants had constructive notice of the charge and no submissions were made by the learned Special Government Pleader on this issue. Hence, we are of the view that the appellants were the purchasers for value without notice for the sales tax arrears of the defaulting company or the consequent charge on the property. Thus, the property in the hands of the appellants was free of the charge and it is not open to the first respondent to enforce the liabilities of the defaulting company in this manner against the appellants. Insofar as the alternative submission of the learned Special Government Pleader that the charge created u/s 23 of the TNGST Act will have priority over the mortgage created in favour of the City Union Bank, it is not necessary for us to express any opinion thereon in the present case, since the bank is not a party to the present proceedings. The first respondent is entitled to adopt such proceedings as permissible in law to establish its rights against the bank. Thus, the appellants herein, as transferees of the property for valuable consideration without notice of the charge, are entitled for protection and consequently, the proceedings of the first respondent are liable to be set aside and are accordingly set aside. The writ appeal is accordingly allowed. Consequently, W. A. M. P. is closed.

Issues Involved:
1. Liability of an auction purchaser towards arrears of sales tax under the TNGST Act.
2. Enforcement of a statutory charge against a transferee without notice.
3. Priority of statutory charges over other charges, such as mortgages.

Detailed Analysis:

1. Liability of an auction purchaser towards arrears of sales tax under the TNGST Act:
The primary issue in this case is whether an auction purchaser of a property at a public auction is liable for the arrears of sales tax due under the Tamil Nadu General Sales Tax Act, 1959 (TNGST Act), which are a statutory charge on the property sold, even if the purchaser had no actual notice of such arrears. The learned single Judge had previously held that this issue is covered by the judgment in N. Padma Coffee Works v. Commercial Tax Officer, Rock Fort Assessment Circle, Trichy, and that the appellants must establish their status as bona fide purchasers in a civil court.

2. Enforcement of a statutory charge against a transferee without notice:
The appellants purchased the property through a public auction conducted by the Debts Recovery Tribunal to recover debts owed to the City Union Bank. The sale was confirmed, and the appellants were issued a sale certificate, making them the absolute owners of the property. However, the Commercial Tax Officer later created an encumbrance on the property for arrears of sales tax, despite the appellants having no actual notice of such arrears. The appellants contended that under Section 100 of the Transfer of Property Act, 1882, a charge cannot bind a bona fide purchaser for valuable consideration without notice, and there is no provision under the TNGST Act requiring the waiver of such notice.

3. Priority of statutory charges over other charges, such as mortgages:
The Special Government Pleader argued that the TNGST Act creates a first charge on the property of the dealer for any amount of tax, penalty, interest, or other sums payable, giving priority to the statutory charge over all other charges, including mortgages. Consequently, the Sales Tax Department's claim for dues should take precedence over the bank's mortgage claim.

Judgment Analysis:

Enforceability of the Charge:
The court examined whether the charge created under the TNGST Act is enforceable against a transferee without notice. The concept of "charge" is defined under Section 100 of the Transfer of Property Act, which states that a charge may not be enforced against a transferee for consideration without notice unless the law expressly provides otherwise. The Supreme Court's decision in Ahmedabad Municipal Corporation v. Haji Abdul Gafur Haji Hussenbhai established that constructive notice must be determined based on the facts and circumstances of each case, and no fixed presumption of constructive notice exists.

Application of Precedents:
The Supreme Court's ruling in State of Karnataka v. Shreyas Papers P. Ltd. reiterated that a purchaser for value without notice of sales tax arrears or consequent charge on the property is protected under Section 100 of the Transfer of Property Act. The Madras High Court in Deputy Commercial Tax Officer v. R. K. Steels also held that a bona fide purchaser without notice is protected under the TNGST Act.

Conclusion:
The court concluded that the appellants, having purchased the property through a public auction without notice of the sales tax arrears, are bona fide purchasers for value without notice. Therefore, the property in their hands is free of the charge, and the Sales Tax Department cannot enforce the liabilities of the defaulting company against the appellants. The court set aside the proceedings of the Commercial Tax Officer and allowed the writ appeal.

Alternative Submission:
Regarding the priority of the statutory charge over the mortgage, the court did not express an opinion since the bank was not a party to the proceedings. The Sales Tax Department is entitled to pursue legal proceedings to establish its rights against the bank.

Final Order:
The court allowed the writ appeal, set aside the proceedings of the Commercial Tax Officer, and closed the related miscellaneous petition without costs.

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