2007 (9) TMI 573 - HC - VAT and Sales Tax

Whether the order under challenge passed by the courts below is incorrect and illegal? Whether it calls for interference? Held that - Considering the relationship of the director of the petitioner-company as well as the managing director of respondent No. 2-company and also that he had given a consent letter to the ICICI bank to purchase the assets, i.e., land and machinery, then he is equally liable. That apart, he being one of the directors of the said firm-respondent No. 2, he is liable along with the transferor. Therefore, in view of the admitted fact that he is in charge of land, plant and machinery of respondent No. 2 and he becomes one of the assessee, respondent No. 1-State is entitled to recover from the petitioner the security deposit due by respondent No. 2. Therefore, the initiation of proceedings by respondent No. 1 for recovery of ₹ 20 lakhs from respondent No. 2 is maintainable as there is no incorrect or illegal findings to upset the order under challenge. Accordingly, the revision petition is dismissed. The authorities can recover the amount due under the KST Act either from the transferor or from the transferee and the recovery of the sales tax dues shall have priority over the right of the ICICI bank to proceed against the property of the borrowers which has been mortgaged in favour of the bank. The dues of the Government, if any, has a prerogative over any other dues and charges.

Summary

Issues:
1. Recovery of security deposit from a transferee under the Karnataka Sales Tax Act, 1957.
2. Liability of a petitioner who leased assets from a company in arrears.
3. Interpretation of Section 15 of the KST Act regarding tax liability on transfer of business.

Analysis:
1. The petitioner, M/s. Arjun Motors Pvt. Ltd., sought to set aside an order for recovery of Rs. 20 lakhs from respondent No. 2 under the Karnataka Sales Tax Act. The petitioner objected, claiming that the arrears were linked to a loan from ICICI bank, and the bank had taken possession of the property. The petitioner argued that as a lessee in possession of the assets, they were not liable for the tax dues of the assessee. However, the court held that the petitioner, being related to the company and involved in a lease agreement, was jointly liable for the security deposit due by the assessee.

2. The court considered the relationship between the petitioner and the managing director of respondent No. 2, noting that the petitioner had consented to the bank's purchase of assets. The court emphasized that under Section 15 of the KST Act, both transferor and transferee are jointly and severally liable for unpaid taxes during a business transfer. As the petitioner was in possession of the assets and involved in the company, the court concluded that the recovery proceedings against the petitioner for the security deposit were maintainable.

3. Regarding the interpretation of Section 15 of the KST Act, the court emphasized that the government's dues, including sales tax, hold priority over other debts or charges. The court upheld the authorities' right to recover the tax dues from either the transferor or the transferee, with the recovery of sales tax taking precedence over the bank's rights to the mortgaged property. Ultimately, the court dismissed the revision petition, affirming the legality of the order for recovery of the security deposit from the petitioner.

In conclusion, the judgment highlights the joint liability of a transferee for tax dues under the KST Act, emphasizing the priority of government dues in recovery proceedings. The court's decision underscores the legal obligations of individuals related to a company in arrears and clarifies the interpretation of Section 15 regarding tax liabilities during business transfers.