2009 (12) TMI 1003 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Validity of the auction sale conducted under the SARFAESI Act.
2. Priority of claims between secured creditors and tax arrears.
3. Bona fide purchaser status of the petitioners.
4. Applicability and interpretation of Section 24 of the TNGST Act.

Detailed Analysis:

1. Validity of the Auction Sale Conducted Under the SARFAESI Act:
The petitioners purchased the property in an auction conducted by the third respondent bank under the SARFAESI Act, 2002. The sale was concluded with the issuance of a sale certificate on 19.5.2008, and possession was handed over to the petitioners. The court confirmed the validity of the auction sale, emphasizing that the SARFAESI Act is a special Act that allows secured creditors to recover dues by selling secured assets without court intervention.

2. Priority of Claims Between Secured Creditors and Tax Arrears:
The primary contention was whether the tax arrears due under the TNGST Act would have priority over the claims of secured creditors under the SARFAESI Act. The court referred to the Supreme Court judgment in Central Bank of India v. State of Kerala, which clarified that neither the DRT Act nor the SARFAESI Act creates a first charge in favor of banks or financial institutions. Section 24 of the TNGST Act, however, explicitly creates a first charge on the property for tax arrears, giving it priority over other claims, including those of secured creditors.

3. Bona Fide Purchaser Status of the Petitioners:
The petitioners argued that they were bona fide purchasers without notice of any tax arrears. The court noted that the encumbrance certificate dated 15.5.2008 did not reflect any tax arrears, and the petitioners had no notice of the charge at the time of purchase. The court held that the petitioners were bona fide purchasers for valuable consideration without notice of the tax arrears, and their rights could not be interfered with.

4. Applicability and Interpretation of Section 24 of the TNGST Act:
Section 24 of the TNGST Act states that tax payable under the Act shall be a charge on the property of the person liable to pay the tax. The court interpreted this provision to mean that tax arrears would have priority over all other claims against the property, including those of secured creditors. The court emphasized that the statutory first charge created by Section 24 of the TNGST Act overrides other claims.

Conclusion:
The court concluded that while the tax arrears under the TNGST Act have priority over the claims of secured creditors, the petitioners, as bona fide purchasers without notice of the tax arrears, could not have their property auctioned for the tax dues of the borrowing company. The auction notice dated 24.4.2009 issued by the first respondent was quashed, and the writ petition was allowed. The court held that the sale in favor of the petitioners was valid and could not be interfered with by the respondents for the recovery of tax arrears.

Final Orders:
1. Sale tax arrears under the TNGST Act prevail over the claims of secured creditors.
2. Petitioners are bona fide purchasers without notice of the tax arrears.
3. Petitioners' property cannot be auctioned for the tax dues of the borrowing company.
4. The auction notice dated 24.4.2009 was quashed, and the writ petition was allowed without any order as to costs.