2016 (11) TMI 1132 - HC - VAT and Sales Tax

Public auction - property on equity mortgage - sales tax arrears - Held that - as per section 42 2 of the Tamil Nadu Value Added Tax Act, 2002, any tax assessed or amount due under the Act from a dealer or a person, have priority over all other claims against the property of the said dealer or person and the analogous provision under the Tamil Nadu General Sales Tax Act, vis-a-vis, the SARFAESI Act - the State has got priority over the Bank dues. Whether the petitioner claims to be the bona fide purchaser? - Held that - The Bank, after receipt of the communication of the Sales Tax Authorities, calling upon them to pay the sales tax arrears, also took a stand that their dues will prevail over the sales tax arrears and even in the Auction-Sale proceedings the contents of which have been extracted in paragraph 4 of this order , the Bank had clearly given assurance that they will take care of the sales tax issue and in the light of the said assurance only, the petitioner has paid the entire bid amount and requested the respondents 3 and 4 to execute the Sale Deed free of all encumbrances which include the sales tax arrears. However, the Bank, in their impugned communications dated 25.10.2010 and 24.11.2010, had made a turn around stating that the request/demand made by the petitioner cannot be acted upon as he has purchased the properties knowing pretty well about the attachment from the Sales Tax Department and they are prepared to execute the Sale Deed, subject to the incorporation of the clause regarding sales tax arrears. In the considered opinion of the Court, the stand taken by the respondents 3 and 4 is wholly untenable as the borrower submitted his bid subject to the clearance of the sales tax arrears/dues by them and the communication and the reply dated 10.03.2010 and 15.04.2010 sent by the Axis Bank to the Commercial Tax Authority would also indicate that they have taken a consistent stand that their claim will have priority over the sales tax arrears and even in the Auction Sale proceedings also, a positive assurance has been given to the borrower that the said issue will be taken care of by the Bank. Therefore, the respondents 3 and 4 cannot resile from that promise or undertaking. The respondents 3 and 4 - M/s.Axis Bank, is at liberty to execute the Sale Deed in favour of the petitioner in respect of the auction property free of all encumbrances which include the sales tax arrears claimed by the respondents 1 and 2 ; or in the alternative, refund the sale consideration with or without interest to the petitioner and in the event of the amount being refunded without interest, the petitioner / auction purchaser is at liberty to invoke the common law remedy and recover the same - petition disposed off - decided in favor of petitioner.

Summary

Issues Involved:
1. Validity of the Axis Bank's assurance to clear sales tax arrears.
2. Priority of claims between the Bank's dues and the Sales Tax Department's dues.
3. The petitioner's entitlement to a sale deed free of encumbrances or refund of the sale consideration.

Issue-wise Detailed Analysis:

1. Validity of the Axis Bank's assurance to clear sales tax arrears:
The petitioner, an Educational and Charitable Trust, participated in an auction held by Axis Bank for properties previously owned by M/s. Swastika Agro Foods Private Limited. The petitioner submitted a bid with the condition that the Bank should pay the sales tax dues from the sale proceeds. Axis Bank assured the petitioner that they would handle the sales tax issue. This assurance led the petitioner to pay 25% of the bid amount and subsequently the full amount. However, Axis Bank later refused to clear the sales tax arrears, stating that the property was sold with existing encumbrances.

2. Priority of claims between the Bank's dues and the Sales Tax Department's dues:
The Sales Tax Department claimed priority over the sales tax arrears due from M/s. Swastika Agro Foods Private Limited, citing sections 21 and 42 of the Tamil Nadu Value Added Tax Act, 2002. The Bank, on the other hand, invoked section 35 of the SARFAESI Act, asserting that their dues were paramount. The court referred to the judgment in Central Bank of India Vs. State of Kerala and others, which held that statutory first charges created in favor of the State have primacy over the Bank's right to recover its dues. The court also cited the Division Bench's decision in A. Senthil Kumar and another Vs. Assistant Commissioner (CT), which upheld the priority of sales tax arrears over bank dues.

3. The petitioner's entitlement to a sale deed free of encumbrances or refund of the sale consideration:
The court noted that the Auction-Sale notice indicated the property was sold with existing encumbrances. Despite this, Axis Bank's assurance to the petitioner about handling the sales tax issue was a significant factor. The court held that Axis Bank's conduct was unreasonable and unsustainable, as they had assured the petitioner that the sales tax issue would be resolved. Consequently, the court provided two options to Axis Bank: either execute the Sale Deed free of all encumbrances, including the sales tax arrears, or refund the entire sale consideration to the petitioner, with or without interest.

Conclusion:
The court disposed of the writ petition, directing Axis Bank to either execute the Sale Deed in favor of the petitioner free of all encumbrances or refund the sale consideration. The petitioner was given the liberty to approach a competent Civil Forum to claim interest if the refund was made without interest. There was no order as to costs, and the connected miscellaneous petition was closed.