2023 (7) TMI 535 - HC - VAT and Sales Tax

Recovery of sales tax dues - encumbered property or not - liability of auction purchasers - liability of petitioners nos. 1 and 2 who are auction purchasers in a securitization auction held by petitioner no. 3, to discharge the sales tax dues, for the recovery of which, the property as purchased by them, was attached by the Sales Tax Department prior to the auction. Whether the Sales Tax Department is correct in asserting that it has a charge on the property in question as purchased by petitioner Nos. 1 and 2 from petitioner No. 3? - HELD THAT - Section 37 of the MVAT Act clearly provides that for the liability under the MVAT Act, to be the first charge, is itself, subject to any provision regarding creation of first charge in any Central Act for the time being in force. This pre-supposes that when under a Central enactment there is a provision creating first charge, then in such case, the Sales Tax Department for the purpose of Section 37 shall not have the first charge - Rule 11 of the Maharashtra Realisation of Land Revenue Rules, 1967 provides for the manner of attachment of immovable property which provides that the order shall take effect as against purchasers for value in good faith and against all other transferees from the defaulter from the date the said order is made as provided in sub-rule (3). On a perusal of the order of attachment of the said property dated 11 August, 2017, it is seen that the attachment is made in pursuance of the demand notice issued under Section 178 read with Section 267 of the Maharashtra Land Revenue Code, 1966 read with Section 34 of the MVAT Act and referring to Rule 11 of the Maharashtra Realisation of Land Revenue Rules, 1967. The attachment is for recovery of an amount of Rs. 10,31,38,003/- being the sales tax dues payable by the dealers/borrowers M/s. Taurus Autodeal Pvt. Ltd.. The attachment notice was never challenged by the said dealers and its directors. For such reason in the hands of petitioner no. 3, the property stood as a property as attached by the Sales tax department, however, subject to the first charge of petitioner no. 3 to realise its dues as a secured creditor - The grievance of petitioner no. 3 in the said writ petition was to the effect that the Deputy Commissioner was legally not correct to assert that petitioner no. 3 did not have the first charge on the property, while claiming unpaid sales tax dues of the dealer, in asserting that there was a charge on the said property. It is crystal clear that there is nothing in the sale certificate to indicate that petitioner Nos. 1 and 2 have purchased the said property from petitioner No. 3 free from encumbrances, which is a specific requirement of Appendix V as extracted above. In fact, it is definite from what has been observed by us above that petitioner No. 3 had taken all the precautions to secure its own interest, to recover the amounts payable by the borrowers, by sale / auction of the said property, hence, certainly petitioner Nos. 1 and 2 have not purchased the said property free from any charge or encumbrance of the Sales tax department. Thus, it is more than clear that at all material times, that is with effect from 11 August, 2017, there was a charge and/or an encumbrance on the property of the Sales Tax Department and further petitioner nos. 1 and 2 had purchased the property along with such charge/ encumbrance. The word encumbrance would mean a burden or charge upon property or a claim or lien upon an estate or on the land. It also means a burden of legal liability on property. When there is an encumbrance on a land, it constitutes burden on the title which diminishes the value of the land. It may be observed that once the question arises as to whether there is a charge on a property and in the present case a charge which has arisen by operation of law, Section 100 of the Transfer of Property Act, 1882 would become relevant in the context of the legal status of such property - Applying Section 100 of the TP Act to the facts of the present case, legal consequences emanate, firstly that by operation of the provisions of Section 37 of the MVAT Act there was undoubtedly a charge on the said property, when the property stood in the hands of petitioner No. 3 being the secured creditor. The charge of petitioner no. 3 as the secured creditor was the first charge and not that of the Sales Tax Department, as held by the Division Bench, interpreting Section 37 of the MVAT Act, in the order dated 10 January 2020 passed on the writ petition filed by respondent no. 3. The Full Bench considering the provisions of Rule 8 of the Security Interest (Enforcement) Rules, 2002 read with the provisions of Section 13(4) of the SARFAESI Act and the decision of the Supreme Court in AI CHAMPDANY INDUSTRIES LIMITED VERSUS THE OFFICIAL LIQUIDATOR ANR. 2009 (2) TMI 921 - SUPREME COURT , held that in terms of the provisions of the SARFAESI Act read with 2011 Rules, the secured creditor is expected to know the encumbrances. It was observed that once a statutory mechanism noting the encumbrances in respect of the immovable property being put up for sale by auction not being available before 24 January 2020, the authorized officers were found to play it safe by inserting the as is where is, whatever there is basis clause in the sale advertisement. The Court observed that once such clause is inserted in the advertisement and the prospective purchaser, upon bidding in the auction emerges as the highest bidder, normally such purchaser cannot insist upon issuance of sale certificate without clearing the liability of meeting other dues in relation to such property, and this is because he participates in the auction and bids, with his eyes open, that the sale would be on as is where is, whatever there is basis , and that the prospective purchaser cannot wriggle out of the consequences and claim that the other dues are not payable by him, if he cannot disprove constructive notice of the charge created on the property put up for auction sale. Analyzing the provisions of the SARFAESI Act as also the MVAT Act, the Full Bench has held that the attachment orders issued post 24 January 2020 if not filed with the Central Registry, any department of the Government to whom a person owes money on account of unpaid tax has to wait till the secured creditor by sale of the immovable property being the secured asset mops up its secured dues. Insofar as the attachment orders which were issued prior to coming into force the 2011 Rules as amended, the Court observed that insofar as recovery as initiated under the MLRC is concerned, not only the provisions contained therein but also the provisions contained in the 1967 Rules were required to be complied with, and the proclamation has to be made in the required form and must be as specified in the 1967 Rules. Thus, this is a clear case in which the Sales Tax Department had a charge on the said property as purchased by petitioner Nos. 1 and 2, in view of attachment order dated 11 August 2017, which has remained to be valid and subsisting. Further the position in law is also clear that after the recognition of the first charge of petitioner No. 3 as a secured creditor, the charge of the Sales Tax Department to recover the sales tax dues would be valid and subsisting, which would empower the Sales Tax Department to enforce the same. Petition dismissed.

Summary

Issues Involved:
1. Whether auction purchasers are liable to discharge the sales tax dues attached to the purchased property.
2. Whether the property purchased by auction purchasers was encumbered.
3. Validity of the attachment order by the Sales Tax Department.
4. Priority of charges between secured creditors and the Sales Tax Department.

Summary:

1. Whether auction purchasers are liable to discharge the sales tax dues attached to the purchased property:

The court examined whether the auction purchasers (Petitioner Nos. 1 and 2) are liable for the sales tax dues attached to the property they purchased from Petitioner No. 3, a non-banking financial institution. It was determined that the auction purchasers are liable to discharge the sales tax dues because the property was sold on "as is where is basis," which includes all encumbrances.

2. Whether the property purchased by auction purchasers was encumbered:

The court found that the property was indeed encumbered. The Sales Tax Department had issued an "Attachment Order" dated 11 August 2017, attaching the property to recover sales tax dues of Rs. 10,31,38,003/-. This attachment was valid and subsisting at the time of the auction. The auction notice and sale certificate explicitly mentioned the encumbrances, including the sales tax dues.

3. Validity of the attachment order by the Sales Tax Department:

The attachment order dated 11 August 2017, issued by the Sales Tax Department, was found to be valid and in accordance with the law. The attachment was made under the provisions of Sections 178 and 267 of the Maharashtra Land Revenue Code, 1966, read with Section 34 of the MVAT Act and Rule 11 of the Maharashtra Realisation of Land Revenue Rules, 1967. The attachment was not challenged by the borrowers or Petitioner No. 3.

4. Priority of charges between secured creditors and the Sales Tax Department:

The court recognized that Petitioner No. 3, as a secured creditor, had the first charge on the property under Section 31B of the Recovery of Debt and Bankruptcy Act, 1993, and Section 26E of the SARFAESI Act. However, the attachment by the Sales Tax Department continued to subsist. The Full Bench of the Bombay High Court in Jalgaon Janta Sahakari Bank Ltd. held that if a property is sold on "as is where is basis," the auction purchaser is liable to pay the dues of the State Government.

Conclusion:

The court concluded that the Sales Tax Department's charge on the property was valid and subsisting. Petitioner Nos. 1 and 2, having purchased the property with knowledge of the encumbrances, are liable to discharge the sales tax dues. The petition was rejected, and the auction purchasers were directed to pay the outstanding sales tax dues.