2011 (8) TMI 1383 - HC - VAT and Sales Tax

Summary

Issues Involved:
1. Legality of the Sales Tax Department's charge on the auctioned property.
2. Priority of state tax dues versus secured debts under the SARFAESI Act.
3. Responsibility of the auctioning authority to disclose encumbrances.
4. Mutation of the petitioner's name in the revenue records.

Issue-wise Detailed Analysis:

1. Legality of the Sales Tax Department's Charge on the Auctioned Property:
The petitioner argued that the Sales Tax Department's charge on the property was illegal and contrary to settled law, asserting that the sale was confirmed free from all encumbrances. The respondent countered that the sale certificate issued by the seller did not disclose the existing charge of the Sales Tax Department, which had attached the property due to M/s. Aditi Exports Pvt. Ltd.'s default in tax payments amounting to Rs.136.64 Lacs. The court noted that the Sales Tax Department had attached the property before the auction, and the auctioning authority failed to disclose this encumbrance.

2. Priority of State Tax Dues versus Secured Debts under the SARFAESI Act:
The court emphasized that the doctrine of first charge/priority of the State over properties typically prevails over unsecured debts but not over secured debts, unless explicitly provided by statute. The court referenced the Full Bench decision of the Madras High Court in UTI Bank Ltd. vs. Dy. Commissioner of Central Excise and the Supreme Court's rulings in Dena Bank vs. Bhikhabhai Prabhudas Parekh & Co. and Union of India vs. Sicom Ltd., which established that state tax dues do not have priority over secured debts unless the statute specifically creates a first charge.

3. Responsibility of the Auctioning Authority to Disclose Encumbrances:
The court found that the auctioning authority, M/s. J.M. Financial Assets Reconstruction Company Private Limited, failed to comply with Rule 9 of the SARFAESI Act, which mandates due diligence in identifying encumbrances before issuing a sale certificate. The Sales Tax Department's attachment was recorded in the revenue records well before the auction, and the auctioning authority's negligence in not disclosing this encumbrance rendered the sale certificate incorrect.

4. Mutation of the Petitioner's Name in the Revenue Records:
The court noted that the entry showing the Sales Tax Department's charge had already been deleted following a Division Bench judgment. Consequently, the court directed the respondents to mutate the petitioner's name in the revenue records as the owner of the properties, recognizing the petitioner's purchase through auction proceedings conducted under the SARFAESI Act.

Conclusion:
The court allowed the petition, directing the respondents to mutate the petitioner's name in the revenue records as the owner of the properties, thereby resolving the dispute in favor of the petitioner. The judgment underscored the precedence of secured debts over state tax dues in the absence of a statutory provision creating a first charge and highlighted the auctioning authority's duty to disclose existing encumbrances.