Bonafide intent must be proved when property is purchased from GST defaulters

[Bimal jain]

The Hon’ble Madras High Court in the case S. GEETHA VERSUS THE STATE TAX OFFICER, M/S. OM NAMASHIVAYA PAPER AND BOARDS - 2024 (8) TMI 383 - MADRAS HIGH COURT held that a Bonafide purchaser of property bought without knowledge of tax arrears can challenge an order under section 81. However, the bonafide nature must be proved.

Facts:

Ms. S. Geeta (“the Petitioner”) purchased two parcels of lands through two different sale deeds, both dated August 3, 2022, for consideration of Rs.2,41,600/- and Rs. 1,55,000/- each, measuring a total extent of 1.25 acres. The properties were bought from a partnership firm. At the time of the purchase of the land the encumbrance certificate of the land was verified by the Petitioner, which did not have any prior claims or liabilities on the said property.

It was later revealed that the partnership firm and its partners were in arrears of Rs. 9,81,867 under the CGST Act. A demand Order dated August 23, 2021 was served and a subsequent recovery notice dated December 3, 2021 for the arrears of tax for the period immediately after the implementation of the CGST Act was served on them.

Lastly, communication letter dated May 27, 2024 (“the Impugned Letter”) issued under Section 81 of the CGST Act, which prevents the disposal of properties of a defaulting assesses to protect the government’s revenue, the said properties were attached.

The Impugned Order of attachment and notices are in gross violation of principles of natural justice, as no notice was issued to the Petitioner before the attachment was made. It is further submitted that the Petitioner is a bona fide purchaser, as there was no encumbrance reflected at the time of purchase on August 03, 2022.

Hence, the Petitioner filed the present writ petition.

Issue:

Whether Bonafide intent must be proved when property is purchased from GST defaulters?

Held:

The Hon’ble Madras High Court in S. GEETHA VERSUS THE STATE TAX OFFICER, M/S. OM NAMASHIVAYA PAPER AND BOARDS - 2024 (8) TMI 383 - MADRAS HIGH COURT held as under:

• Observed that, under Section 81 of the CGST Act, there is an embargo on the Assessee, who is in default from transferring or alienating the assets with a view to defeat the interest of the Government Revenue. The proviso carves out an exception. It is similar to the provisions that prevailed under the erstwhile provisions under the Tamil Nadu Value Added Tax Act, 2006 (“the TNVAT Act”) as also Tamil Nadu Goods and Services Tax Act, 1959 (“the TNGST Act”). The Petitioner has to establish the bona fide in the manner known to law. Mere reliance to encumbrance certificate is not sufficient.
• Held that, the price of Rs. 3,96,600 for 1.25 acres of land is too low which creates doubts about the bona fide nature of the transaction. Hence, the Petitioner was directed to appear before a competent court to prove the nature was bona fide. However, the Respondents shall not escalate the issue by bringing the property to the sale provided, the Petitioner files a suit for a declaration before the competent Court to establish that the Petitioner is a bona fide purchaser of land from the private Respondents and the purchase was not with an intention to defeat the rights of the Government revenue.
• Directed that, the authorities must refrain from corrosive actions like selling the land for three months if the Petitioner brings the necessary suit in 30 days, but refused to interfere with the attachment order.
• Held that, if the Petitioner fails to bring the necessary suit within the given period the authorities will be free to proceed according to law.

Our Comments:

Section 81 of the CGST Act governs “Transfer of property to be void in certain cases”. Where its states that where a person, after any amount has become due from him, creates a charge on or parts with the property belonging to him or in his possession by way of sale, mortgage, exchange, or any other mode of transfer whatsoever of any of his properties in favour of any other person with the intention of defrauding the Government revenue, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the said person. However, such charge or transfer shall not be void if it is made for adequate consideration, in good faith and without notice of the pendency of such proceedings under this Act or without notice of such tax or other sum payable by the said person, or with the previous permission of the proper officer.

The Hon’ble Andhra Pradesh High Court in the case of VELAGALA LAKSHMI AND OTHERS VERSUS STATE OF ANDHRA PRADESH AND OTHERS - 2024 (10) TMI 1033 - ANDHRA PRADESH HIGH COURT observed that on the condition that the assessee refrain from alienating property while the case is pending, the High Court issued a stay on the attachment and auction procedures. In order to collect GST owed from the vendor, tax officials sent attachments and auction letters for properties that assessees had acquired. The Court ruled that without a competent body assessing the nature of the transactions, Section 81 cannot be applied. It was pointed out that there are no mechanical provisions for making such decisions under the CGST Act. With the requirement that the assessees refrain from alienating the property while the matter is pending, an interim stay of the proceedings was granted.

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