2018 (2) TMI 1865 - HC - VAT and Sales Tax

Recovery of tax arrears - creation of charge over the property - encumbrance on the property or not - bonafide purchaser - constructive notice - specific contention of the appellant / writ petitioner is that since he is a bona fide purchaser for value, there is no justification for the first respondent in making a claim against him - TNGST Act. Whether the writ petitioner is a bona fide purchaser of the property and would be protected from the proceedings under the Revenue Recovery Act, and under Section 24 (A) of the Tamil Nadu General Sales Tax Act, 1959? Held that - In the present case, the encumbrance certificate does not reveal the charge created over the property and there is nothing to infer that the appellant / writ petitioner and his vendor with an intention to defraud the tax payable to the first respondent colluded with each other and effected transfer of the property. The business conducted by the vendor of the writ petitioner was actually closed on 01.04.2002 and the property had been purchased by the writ petitioner only in the year 2004 - it cannot be said that he had actual or constructive notice of the charge created over the property for payment of arrears of sales tax in respect of the business conducted by his vendor. A bona fide purchaser takes the property he buys free of all charges of which he has no notice either actual or constructive - In the instant case, the encumbrance certificate did not disclose any charge created over the property. A reading of Section 3 of the Transfer of Property Act, 1882, shows that a person is said to have notice of a fact when he actually knows that fact or when, but for willful abstention from an enquiry or search which he ought to have made or gross negligence, he would have known it. This presumption is known as constructive notice. The correctness of a notice of recovery issued to a specific purchaser came up for consideration before the Division Bench of this Court in K. SENTHIL KUMAR AND OTHERS VERSUS COMMERCIAL TAX OFFICER, ERODE AND ANOTHER 2006 (7) TMI 588 - MADRAS HIGH COURT , in which it has been held that the appellant therein was a bona fide purchaser for valuable consideration and therefore, he would be covered within the exempted category, as provided under Section 24 (A) of the Act. It is further held in the said judgment that under Section 100 of the Transfer of Property Act, 1882, a charge may not be enforced against a transferee, if he had notice there of, unless by law, the requirement of such notice had been waived. Thus, even though a charge is created on the properties on the finalisation of the assessment of tax and a demand is raised, the same would not preclude the bona fide purchaser from seeking protection under Section 24 (A) of the Act. The specific contention of the appellant / writ petitioner is that prior to the purchase of the property in the year 2004, he had verified the encumbrance details in the Registration Department and finding that there was no encumbrance over the property, he had purchased the same. This would show that the appellant / writ petitioner had made sincere efforts to find out whether there was an encumbrance over the property - The first respondent did not also file any materials before this Court to show that steps have been taken by them under the Provisions of the Revenue Recovery Act, against the defaulter from whom the appellant / writ petitioner had purchased the property in the year 2004. It cannot be said that there was willful abstention or gross negligence in making any enquiry that would tantamount to a notice under Section 3 of the Transfer of Property Act, and the appellant / writ petitioner is a bona fide purchaser for value - petition allowed - decided in favor of appellant/petitioner.

Issues Involved:
1. Validity of the charge created over the property for tax arrears.
2. Bona fide purchaser status of the appellant.
3. Applicability of Section 24 (A) of the Tamil Nadu General Sales Tax Act, 1959.
4. Legality of the distraint order under Section 8 of the Revenue Recovery Act.

Issue-wise Detailed Analysis:

1. Validity of the charge created over the property for tax arrears:
The appellant purchased the property in 2004 and was later served with notices demanding payment of tax arrears owed by the previous owner. The appellant contended that he had verified the encumbrance certificate before purchasing the property and found no encumbrance. The court noted that the encumbrance certificate did not reveal any charge over the property, and there was no evidence to suggest that the appellant had actual or constructive notice of the tax arrears.

2. Bona fide purchaser status of the appellant:
The appellant argued that he was a bona fide purchaser for value, having purchased the property after due verification of the encumbrance certificate. The court emphasized that a bona fide purchaser takes the property free of all charges of which he has no notice, either actual or constructive. The court found that the appellant had made sincere efforts to verify the encumbrance details and had no notice of the charge created over the property. Therefore, the appellant was considered a bona fide purchaser for value.

3. Applicability of Section 24 (A) of the Tamil Nadu General Sales Tax Act, 1959:
Section 24 (A) of the Act states that any transfer of property by a dealer to defraud the revenue is void against any tax claim. However, the proviso protects transfers made for adequate consideration and without notice of pending proceedings or tax liabilities. The court held that the appellant, having no notice of the tax arrears and having purchased the property for adequate consideration, was protected under this proviso. The court also referred to previous judgments, including D.Senthilkumar's case, which supported the appellant's position as a bona fide purchaser.

4. Legality of the distraint order under Section 8 of the Revenue Recovery Act:
The appellant challenged the distraint order issued by the first respondent under Section 8 of the Revenue Recovery Act. The court found that the appellant, being a bona fide purchaser, was protected from such proceedings. The court noted that the first respondent had not provided any evidence of malafides on the part of the appellant or any steps taken against the defaulter (the previous owner) under the Revenue Recovery Act.

Conclusion:
The court concluded that the appellant was a bona fide purchaser for value and was protected under the proviso to Section 24 (A) of the Tamil Nadu General Sales Tax Act, 1959. The proceedings and orders against the appellant were set aside, and both the writ appeal and the writ petition were allowed. The court emphasized that the appellant had made sincere efforts to verify the encumbrance details and had no notice of the charge created over the property. Consequently, the connected miscellaneous petitions were closed, and no costs were awarded.

← Previous Next →