2009 (4) TMI 869 - HC - VAT and Sales Tax

Properties put to auction sale for non-payment of loan borrowed - Held that - Petitioner, is justified in contending that bona fide auction purchaser like the petitioner who has purchased the property sold by the first respondent-Karnataka State Financial Corporation is not a person who is taking over a running concern or who is taking over the business of an assessee in default which alone can attract the provisions of section 15 of the KST Act; that, the petitioner having merely purchased the property does not step into the shoes of the assessee in default and even on the findings by this court earlier if at all the property can be charged with the liability notwithstanding the purchase and therefore the other actions of respondents Nos. 3 and 4, particularly, for attaching the bank account exercising the powers under section 14 of the KST Act which is available only against the assessee in default and not against others is still bad in law is an argument which merits acceptance. The present is clearly a case to which section 15 of the KST Act is not attracted and if at all it can be said the provisions of section 13 of the KST Act are attracted. In this view of the matter, annexure B garnishee notice is definitely not supported by law. Respondents Nos. 3 and 4 are not entitled to attach the bank accounts of the petitioner which has nothing to do with the property in question and cannot enforce the notices to compel respondents Nos. 8 to 11 to make over the amount at the credit of the petitioner to the State Government, thus annexure B notice dated March 4, 2009 is quashed by issue of a writ of certiorari.

Issues Involved:
1. Liability of the auction purchaser for the tax arrears of the erstwhile owners.
2. Validity of the garnishee notices and attachment of bank accounts.
3. Applicability of sections 55(1)(g) and 69(4) of the Transfer of Property Act, 1882.
4. Applicability of sections 13 and 15 of the Karnataka Sales Tax Act, 1957.
5. Interpretation of statutory provisions under the SFC Act and KST Act.

Detailed Analysis:

1. Liability of the Auction Purchaser for the Tax Arrears of the Erstwhile Owners:
The petitioner, an auction purchaser of immovable property sold by the Karnataka State Financial Corporation (KSFC) due to loan default by the previous owners, faced coercive actions from the Commercial Taxes Department for the recovery of outstanding sales tax dues. The petitioner argued that as a bona fide purchaser in a public auction, they should not be liable for the tax arrears of the previous owners. The court acknowledged that the property was sold by KSFC free from encumbrances under section 29 of the SFC Act. However, it was noted that the petitioner had notice of the sales tax liability as a condition of sale and should have taken steps to ascertain the exact amount before finalizing the purchase.

2. Validity of the Garnishee Notices and Attachment of Bank Accounts:
The petitioner challenged the garnishee notice issued under section 14 of the KST Act, which led to the attachment of their bank accounts. The court found that while the property purchased could be subject to the sales tax liability, the attachment of the petitioner's bank accounts, which had no direct connection to the property, was beyond the legal scope. The court quashed the garnishee notice, stating that such actions were not supported by law.

3. Applicability of Sections 55(1)(g) and 69(4) of the Transfer of Property Act, 1882:
The petitioner relied on sections 55(1)(g) and 69(4) of the Transfer of Property Act, arguing that the seller (KSFC) was responsible for clearing all public charges and encumbrances before the sale. The court noted that these provisions protect bona fide purchasers, but since the petitioner had notice of the tax liability, these sections did not absolve the petitioner from the responsibility of paying the arrears.

4. Applicability of Sections 13 and 15 of the Karnataka Sales Tax Act, 1957:
The court examined whether the petitioner could be considered an "assessee in default" under sections 13 and 15 of the KST Act. It concluded that the petitioner, as an auction purchaser, did not step into the shoes of the defaulting assessee. Therefore, section 15, which applies to those taking over a defaulting business, was not applicable. However, the property itself could still be subject to the tax arrears under section 13, but this did not extend to the petitioner's other assets like bank accounts.

5. Interpretation of Statutory Provisions under the SFC Act and KST Act:
The court interpreted the statutory provisions of the SFC Act to mean that the property sold by KSFC should be free from encumbrances, benefiting the auction purchaser. However, due to the notice of tax liability, the petitioner could not completely escape this responsibility. The court balanced the interests by limiting the enforcement of the sales tax arrears to the property purchased and not extending it to the petitioner's other assets.

Conclusion:
The court allowed the notice for attachment of the property to operate but limited it to the property purchased in the auction. The garnishee notice attaching the petitioner's bank accounts was quashed. The writ petitions were disposed of with these directions, making the rule absolute to the extent indicated.

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