2020 (2) TMI 601 - HC - VAT and Sales Tax

Recovery of arrear of tax - charge was created in respect of the property - HELD THAT - The facts are not in dispute that the registered dealer was in arrears of tax and therefore by virtue of section 24 of the Tamil Nadu General Sales Tax Act, 1959 and Section 42 of the TNVAT Act, 2006, a charge over the property of such defaulting dealer stood created in favour of the 1st respondent Commercial Tax Department Further as per Section 100 of the Transfer of Property Act, 1882 also a charge is said to have been created in favour of the 1st respondent as if the dealer had created simple mortgage in favour of the 1st respondent. It was held that section 24 (2) of the Tamil Nadu General Sales Tax Act, 1959 does not provide anything contrary to section 100 of the Transfer of Property Act, 1882 and unless a provision is made in any statute contrary to the rule in Section 100 of the aforesaid Act, a bona fide purchaser for consideration without notice of charge is protected - On facts it was concluded that the appellant had no notice prior to the transfer. It also held that there was no material to show that the appellants had constructive notice of the charge and no submissions were made by the respondent on this issue. Under those circumstances, the Division Bench of this Court took a view that the property in the hands of the appellants for a value above consideration without notice of the sales tax arrears of the defaulting company or the subsequent charge created over the property was free in the hands of the appellant therein. Coming to the facts of the present case, it is noticed that the vendor of the property from whom the petitioner s vendor purchased the property was in arrears of sales tax to the 1st respondent. Though the property had been subject matter of encumbrance as early as 2011, at the behest of the 1st respondent Commercial Tax Department, it was not reflected in the encumbrance certificate obtained by the petitioner s vendor on 19.4.2012 or by the petitioner himself on 12.10.2012 and on 6.12.2012. Only in the encumbrance certificate issued by the second respondent through online portal dated 24.6.2016 the charge has been reflected in favour of the 1st respondent - it is incumbent on the petitioner as purchaser to have also made a physical search in the records before taking a final decision as to whether the property was free from any encumbrance or not. The present writ petition is liable to be dismissed - decided against petitioner.

Issues Involved:
1. Validity of the impugned notice dated 29.04.2016.
2. Bona fide nature of the petitioner’s purchase of the property.
3. Applicability of Section 42 of the TNVAT Act, 2006 and Section 100 of the Transfer of Property Act, 1882.
4. Requirement of physical search of records by the petitioner before purchasing the property.
5. Pre-existing charge/encumbrance on the property.

Issue-wise Detailed Analysis:

1. Validity of the Impugned Notice:
The petitioner challenged the notice dated 29.04.2016 issued by the first respondent under Form-4 r/w Section 25 of the Tamil Nadu Revenue Recovery Act, 1881. The notice sought to recover tax arrears from the property originally owned by a defaulting dealer, M. Latha. The court upheld the validity of the notice, stating that the charge over the property was created as early as July 2011, making the notice enforceable.

2. Bona Fide Nature of the Petitioner’s Purchase:
The petitioner claimed to be a bona fide purchaser without notice of the charge. However, the court noted that the petitioner’s vendor had purchased the property on 04.08.2011, after the charge was created in July 2011. The court emphasized that the petitioner’s reliance on encumbrance certificates alone was insufficient to establish bona fide purchase. The court concluded that the bona fide nature of the purchase required a proper trial in a civil court.

3. Applicability of Section 42 of the TNVAT Act, 2006 and Section 100 of the Transfer of Property Act, 1882:
The court discussed the provisions of Section 42 of the TNVAT Act, 2006, which creates a charge over the property of a defaulting dealer. It also referred to Section 100 of the Transfer of Property Act, 1882, which protects a transferee for value without notice of the charge. The court cited various judgments, including the Supreme Court’s decision in Ahmedabad Municipal Corporation vs. Haji AbdulGafurHusseinbhai, to highlight that a charge is not enforceable against a bona fide purchaser without notice unless expressly provided by law.

4. Requirement of Physical Search of Records:
The court emphasized that obtaining an encumbrance certificate alone was not sufficient. It stated that the petitioner should have conducted a physical search of records at the Sub Registrar’s Office to verify the absence of any encumbrance. The court held that mere reliance on the encumbrance certificate did not absolve the petitioner of the responsibility to ensure the property was free from encumbrance.

5. Pre-existing Charge/Encumbrance on the Property:
The court noted that a charge was registered in favor of the first respondent as early as July 2011. This charge was not reflected in the encumbrance certificates obtained by the petitioner and his vendor in 2012. The court concluded that the pre-existing charge distinguished this case from others cited by the petitioner. The court dismissed the writ petition, granting the petitioner liberty to initiate appropriate civil proceedings to establish the bona fide nature of his purchase.

Conclusion:
The court dismissed the writ petition, emphasizing the need for a civil court trial to determine the bona fide nature of the petitioner’s purchase. The petitioner was granted limited protection to initiate proceedings within three months and seek interim relief from the jurisdictional court. The court highlighted the importance of conducting a physical search of records and noted the pre-existing charge on the property as a distinguishing factor.

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