2007 (9) TMI 563 - HC - VAT and Sales Tax

Auction purchase - petitioners are auction purchasers getting the auctioned property mutated in their name in the Revenue record - entry of demand of arrears of sales tax dues of erstwhile owners has been entered into the Revenue record - Held that - The liability of the borrower and its directors cannot be fastened upon the petitioner, particularly, when the State had, after ascertaining the factual position from its various field agencies accorded permission to transfer the land in favour of the petitioner. If the Revenue record did not reflect the factum of the State s liability then it was not expected for the petitioner to make an inquiry from all the concerned departments of which the petitioner even may not knowing in relation to its debts. The effect of accepting the State s submission to the contrary, would only promote and strengthen dishonest persons, who would be transferring their units from one hand to another from time to time without making the payment of dues. Further, there is nothing on record to show the tax liability pertaining to Regent Rubber. The petitioner had purchased the property to set up an industry which has been delayed for no fault on his part. W.P. allowed. Order rejecting petitioner s application for not mutating the entry in their name is quashed and set aside.

Summary

Issues Involved:
1. Validity of rejection of mutation application by the auction purchasers.
2. Priority of State's tax dues over secured creditors' rights.
3. Conflict between the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the H.P. General Sales Tax Act, 1968.
4. Proper adjudication and determination of tax dues.

Issue-wise Detailed Analysis:

1. Validity of rejection of mutation application by the auction purchasers:
The petitioners, auction purchasers, challenged the order dated December 22, 2006, which rejected their application for mutation of the auctioned property in the Revenue record and recorded arrears of sales tax dues of the erstwhile owners. The court found that the rejection was based on the entry made by respondent No. 5 regarding sales tax liabilities of previous owners, Regent Rubber and Eastman Tread, which was done without proper notice or adjudication as required under the H.P. General Sales Tax Act.

2. Priority of State's tax dues over secured creditors' rights:
The court examined whether the State's claim for tax dues had priority over the secured creditor's rights under the SARFAESI Act. The State relied on section 16B of the H.P. General Sales Tax Act, which gives the State a first charge on the property for tax dues. However, the court found that the SARFAESI Act, being a special and subsequent Central legislation, overrides the inconsistent provisions of the Tax Act due to its non obstante clause in section 35.

3. Conflict between the SARFAESI Act and the H.P. General Sales Tax Act:
The court noted the conflict between the SARFAESI Act, which allows banks to take over and sell secured assets free from encumbrances, and the Tax Act, which gives the State a first charge on the property for tax dues. The court held that the SARFAESI Act would prevail due to its non obstante clause, as it is a special law enacted by the Central Government later in time, intended to expedite the recovery of dues by financial institutions.

4. Proper adjudication and determination of tax dues:
The court emphasized that for the State to claim a first charge on the property, there must be proper adjudication and determination of the tax dues. In this case, no notice of demand was issued to the dealers as required under sections 14 and 16A of the Tax Act. The action of respondent No. 5 in making entries of tax arrears in the Revenue record without proper adjudication was found to be bad in law.

Conclusion:
The court quashed the order rejecting the petitioner's application for mutation and directed respondent Nos. 1 to 5 to delete the adverse entry showing sales tax dues and to mutate the property in the petitioner's name. The court also awarded costs of Rs. 25,000 to the petitioner. The court highlighted the arbitrary and colorable exercise of power by the State and its functionaries and affirmed the priority of the secured creditor's rights under the SARFAESI Act over the State's tax dues.