2024 (12) TMI 939 - HC - VAT / Sales Tax

Realization of arrears of tax payable under the KGST Act - Validity of property transfer under the Income Tax Act, 1961, and the Kerala General Sales Tax Act, 1963 - void transfers or not - Impact of Section 281 of the Income Tax Act on property transfers - HELD THAT - By virtue of the non-obstante clause, excludes the operation of any other law in force and creates a first charge on the property of the dealer. Therefore, with respect to the year 1995 onwards, there was a first charge with reference to the tax payable under the KGST Act. It is to be noticed that there is no corresponding provision creating the first charge under the I.T. Act. At the maximum, the provisions of Section 281 of the I.T. Act referred to above provide that certain transfers during the pendency of proceedings be void. Here, no such transfer has taken place, and instead, a charge is created on the properties of the deceased, with respect to the arrears/tax payable under the KGST Act. It is for the realization of such tax payable that the properties of the deceased are proceeded against after attaching them. Such properties are placed for public auction, and the properties are purchased by various individuals who, in turn, later sold those properties in favour of the petitioners herein. The Income Tax Department may not be justified in contending that they can proceed against the properties in possession of the petitioners herein for realizing the arrears payable by the deceased Madhavan Pillai. The judgment of the Apex Court in Connectwell Industries Private Limited 2020 (3) TMI 362 - SUPREME COURT relied on by the learned counsel for the petitioners, wherein the Apex Court considering the claim made by the Income Tax Department over a property which was sold for recovery of arrears payable to the Bank by the Debt Recovery Tribunal held ' The High Court held that Rule 16(2) is applicable to this case on the ground that the actual sale took place after the order of attachment was passed by Respondent 4. The High Court failed to take into account the fact that the sale of the property was pursuant to the order passed by DRT with regard to the property over which a charge was already created prior to the issuance of notice on 11-2-2003. As the charge over the property was created much prior to the issuance of notice under Rule 2 of Schedule II to the Act by Respondent 4, we find force in the submissions made on behalf of the appellant.' Thus, the Apex Court has noticed that there is no preference given to the tax payable under the I.T. Act, and hence, the charge created over the property earlier to the service of notice under the Second Schedule of the I.T. Act would dis-entitle the Income Tax Department from proceeding against the property in question. Merely on account of the provisions under Section 281 of the Act, the ownership transfer to the petitioners herein cannot be declared as void by the Income Tax Officer or the Department. For that, they may have to institute a suit as was done in the case of mortgage effected in favour of the Kerala State Financial Corporation. Here, that is not done as against the petitioners and on the basis of the findings rendered earlier, the maintainability of such suits itself is doubtful. The petitioners are entitled to succeed - these writ petitions are allowed by setting aside the impugned notices/proceedings and also declaring that the properties in possession of the petitioners cannot be proceeded against for realization of the arrears payable under the I.T. Act by the deceased Madhavan Pillai, proprietor of M/s. Mohandas Cashew Factory, Arakkal, Kollam District.

Summary

Issues Involved:

1. Validity of property transfer under the Income Tax Act, 1961, and the Kerala General Sales Tax Act, 1963.
2. Preferential claims under the Income Tax Act versus the Kerala General Sales Tax Act.
3. Impact of Section 281 of the Income Tax Act on property transfers.
4. Applicability of Section 26B of the Kerala General Sales Tax Act.
5. Legal implications of prior judgments and decrees on property rights.

Detailed Analysis:

1. Validity of Property Transfer:

The primary issue revolves around the validity of the transfer of certain properties, which were originally owned by a deceased assessee, under the provisions of the Income Tax Act, 1961, and the Kerala General Sales Tax Act, 1963. The properties were sold in an auction to realize arrears under the KGST Act and the Cashew Workers Welfare Fund dues. The petitioners, who acquired the properties through subsequent transactions, challenged the notices issued by the Income Tax Department, which sought to auction these properties for realizing income tax arrears of the original owner. The court examined whether the auction sale conducted under the KGST Act could be invalidated by the Income Tax Department's claims.

2. Preferential Claims under the Income Tax Act versus the Kerala General Sales Tax Act:

The petitioners argued that the auction sale under the KGST Act was not a voluntary transfer and thus should not be affected by the Income Tax Department's claims. They contended that there is no preferential claim for the Income Tax Department under Section 281 of the Income Tax Act, whereas such a claim exists under Section 26B of the KGST Act, which creates a first charge on the property for tax dues. The court agreed with the petitioners, emphasizing that the KGST Act's provisions, with its non-obstante clause, take precedence over other laws, including the Income Tax Act, in creating a first charge on the property.

3. Impact of Section 281 of the Income Tax Act on Property Transfers:

Section 281 of the Income Tax Act declares certain transfers void if made during the pendency of proceedings or after completion but before notice under the Second Schedule. The court clarified that Section 281 applies only if the transfer or charge is created during the pendency of proceedings under the Income Tax Act. Since the auction sale was conducted under the KGST Act, and no such transfer was made during the relevant period, the court concluded that the provisions of Section 281 did not apply to the petitioners' acquisition of the property.

4. Applicability of Section 26B of the Kerala General Sales Tax Act:

Section 26B of the KGST Act, introduced with effect from April 1, 1999, establishes that tax dues under the KGST Act are the first charge on the property of the dealer. The court highlighted that this provision excludes the operation of other laws and gives precedence to KGST Act dues over other claims, including those under the Income Tax Act. The court referenced a Division Bench judgment, which held that the state's statutory first charge under Section 26B prevails over existing mortgages and decrees.

5. Legal Implications of Prior Judgments and Decrees on Property Rights:

The Income Tax Department relied on a prior civil court judgment, which declared a mortgage created by the deceased in favor of the Kerala State Financial Corporation as void under Section 281 of the Income Tax Act. However, the court noted that this judgment did not address the rights of the petitioners, who lawfully acquired the property through an auction sale under the KGST Act. The court also pointed out that the legal heirs of the deceased had already indicated that the properties were in possession of third parties, not the original owner, thereby questioning the suit's validity due to non-joinder of necessary parties.

Conclusion:

The court concluded that the petitioners were entitled to retain possession of the properties, as the Income Tax Department's claims were not enforceable against them. The writ petitions were allowed, setting aside the impugned notices and proceedings, and declaring that the properties in possession of the petitioners could not be proceeded against for the realization of income tax arrears of the deceased original owner.