2023 (10) TMI 867 - HC - VAT and Sales Tax

Recovery of tax dues - priority of charges - Right of auction purchase of property - Auction by the Secured Creditors - Requirement to deposit an additional sum on account of the unearned premium i.e. the differential amount of Industrial Plot which existed at the time of execution of initial lease deed vis- -vis the market value existing on the date of auction/ sale - HELD THAT - The issue as to whether the dues of secured creditor under SARFAESI Act shall have priority over the dues of Central Excise Department has been answered by the Hon ble Apex Court, in PUNJAB NATIONAL BANK VERSUS UNION OF INDIA ORS. 2022 (2) TMI 1171 - SUPREME COURT by recording a finding that secured creditor will have a first charge on secured assets and the provisions of SARFAESI Act shall have overriding effect on the provisions of Central Excise Act 1944 or on all other laws, in view of Section 35 of the SARFAESI Act. The issue of sanctity of public auctions and the rights of an auction purchaser which had fructified on issuance of the sale certificate cannot be nullified, defeated, obstructed, frustrated, restricted nor curtailed, whittled down or extinguished in any manner has been approved by the Hon ble Apex Court in the case of K. Kumara Gupta v. Sri Markendaya and Sri Omkareswara Swamy Temple Ors 2022 (2) TMI 1388 - SUPREME COURT . The Hon ble Apex Court in Shakena Anr versus Bank of India Ors, 2019 (8) TMI 904 - SUPREME COURT , has been held that after incorporation of amended Section 13(8) of the SARFAESI Act, 2002 w.e.f. 1.9.2016 that the rights of an auction purchaser crystallize on issuance of sale certificate and registration of such certificate is not essential and the borrower can only redeem its mortgaged property before the date of the publication of sale notice by depositing amount and such right was not available thereafter when the rights title and interest of the auction purchaser-subsequent purchaser have matured. Whether the petitioner-auction purchaser of the secured assets-industrial plots under SARFAESI Act could be fastened with the liability of State taxes which had accrued and were connected with and were solely attributed to the business of the original lessee? - HELD THAT - Once the petitioner has only purchased the Industrial Plots-Immovable Properties, which had been leased out to the Original Lessee by department of industries and the petitioner has never purchased the past or ongoing business of the original lessee therefore, the petitioner-auction purchaser cannot be fastened with the liability of State taxes, which had accrued and were connected with and were solely attributable to the business of the original lessee only. Whether Business liability (past or ongoing) of original lessee (erstwhile owner of business) could be fastened on an Auction purchaser? - HELD THAT - While discussing the ambit of recovery of dues of the original lessee from the transferee dealer under the Karnataka Sales Tax Act, which is akin to Section 39 of the Himachal Pradesh Value Added Act, 2005, it has been held by Hon ble Apex Court that the subsequent purchaser can be held liable if the ownership of business is transferred to such auction purchaser and not otherwise, in view of the mandate laid down by the Hon ble Apex Court in the case of STATE OF KARNATAKA AND ANOTHER VERSUS SHREYAS PAPERS P. LTD. AND OTHERS 2006 (1) TMI 243 - SUPREME COURT . Enforcement of charge, dues, taxes etc if preconditions in section 26-B (4) w.e.f 24.01.2020 complied - HELD THAT - A perusal of Section 26-B (2) provides that from the date of issuance of the notification dated 24.01.2020 the transactions pertaining to the creation, modification and satisfaction of any security interest over properties was to be registered with the Central Registry i.e. CERSAI. It is mandatory that under Section 26-B(4) that every authority or officer of the Central Government or any other State Government or local authority entrusted with the function of recovery of taxes or other Government dues against any person shall have to file an attachment order with the Central Registry - once the State authorities were negligent and had slept over their claims, interests or rights in neither registering its recoverable claim with CERSAI nor have they obtained and registered the attachment orders with CERSAI in accordance with the mandate of Section 26B of the SARFAESI Act read with Enforcement Rules 2002 then, Respondents-State Authority cannot fasten the business liability of the original lessee on the petitioner. Moreover, the respondents cannot be permitted to penalize and prejudice the petitioner for inaction of the respondents in not resorting to the remedy available under Section 26B of SARFAESI w.e.f. 24.1.2020 and therefore, the condition so inserted to the disadvantage of petitioner is arbitrary and illegal. Legal position Section 26-E of SARFAESI Act and section 26 of HP VAT Act - HELD THAT - Reference to Section 26E of SARFAESI Act and Section 26 of HPVAT Act, reveals that the words priority in Section 26E of the SARFAESI Act and first charge in Section 26 of the VAT Act are of utmost significance. As per the Black s Dictionary, the word priority in Section 26E of SARFAESI Act means precedence or going before meaning thereby, that the word priority would mean right to enforce the claim in preference to others. That being so, the word first charge in Section 26 of the HPVAT Act cannot take precedence over the word priority in Section 26E of SARFAESI Act. Reading these provisions in the context of present case reveals that once the State Authorities have neither created a charge and have not made such charge known to the petitioner -auction purchaser nor have the respondents obtained the attachment orders under Section 26(B)(4) of the Act then, the outstanding tax liability of original lessee cannot be fastened on the petitioner. The petitioner-auction purchaser cannot be fastened with the outstanding liability of dues and taxes, which had accrued and were connected with and were solely attributable to the business of Original Lessee. Moreover, the outstanding liability of an Original Lessee cannot be fastened on the auction purchaser when, the Bank has nowhere stipulated in sale notice that the business liability of Original Lessee was put to sale under Rule 6 of Enforcement Rules. Such liability cannot be fastened when, the auction purchaser has never purchased the business liability of original lessee - once the Bank has failed to disclose the known encumbrances of state taxes/dues of the original lessee in sale notice, despite knowledge, vide Annexure R-5 and R-6 and the Bank had acted contrary to Rule 8(7)(a) of the Security Interest Enforcement Rules which came into force w.e.f. 18.10.2018 and had also not complied with Rule 8(7)(f) of the Security Interest (Enforcement) Rules then, any such undisclosed liability cannot be fastened on an auction purchaser. The Respondents-State Authorities cannot nullify, defeat, obstruct, restrict, frustrate, curtail, take away or extinguish the rights, title and interest acquired by the auction purchaser after issuance of the Sale Certificate in his favour and such an auction purchaser has every right to get the benefit of the auctioned-scheduled immoveable property to be entered in the revenue records as lessee in the present case (or as owner as the case may be) and for all intends and purposes and in such an eventuality, any coercive or red entry, made by the revenue authorities on such auctioned property cannot operate to the disadvantage of the auction purchaser, alike the petitioner, in the instant case. Whether the Condition no 7 in letters dated 11.10.2022 and 13.12.2022 vide Annexure P-7 and Annexure P-9, could be imposed on the petitioner when, the outstanding business liability of the Original Lessee was not disclosed in the Sale Notice dated 10.12.2021, Annexure P-3, as mandated by Rule 8 (7) (a) of the Security Interests (Enforcement) Rules 2002 - HELD THAT - Any adversial condition, imposed, after the date of the issuance of the sale certificate as in the impugned orders, cannot nullify, frustrate or extinguish the rights, title and interest acquired by the auction purchaser except in case of fraud or collusion of an auction purchaser, which are non-existent and not borne out from the facts of the instant case. Accordingly, the impugned order and the adversial condition so imposed against the petitioner-auction purchaser, being illegal and arbitrary is set-aside. Whether adversial condition can be enforced against the petitioner when, Respondents-State Tax Authorities have failed to recover its outstanding encumbrances-tax liability, which was attributable to the business of the Original Lessee or its Directors in-accordance with the Himachal Pradesh Value Added Tax Act, 2005? - HELD THAT - Notably, once the original lessee, being a Company was the dealer, who carried on its business from these industrial plots then, the original lessee was bound in law to pay the taxes relatable to his business. In case the taxes or outstanding dues of taxes were not forthcoming from original lessee then, the State authorities were under an obligation to recover such taxes from the Company and its Directors as the arrears of land revenue under Section 25 and Section 53 of the VAT Act - in the present case, once the original lessee and its Directors had failed to file returns or has failed to pay the taxes, interest and penalty in terms of Section 16 and 19 of the HPVAT Act and had contravened the provision of Section 50 of HPVAT Act then, the State authorities were under an obligation to resort to the criminal prosecution of the Original Lessee-Company and its Directors but the inaction or negligence or non-performance of functions and legal obligations by the Respondents under the Statute cannot be the ground to fasten the liability of the outstanding state taxes, which had accrued, were connected with and solely attributable to the business of the Original Lessee-Company and its Directors under the HP VAT Act on the petitioner-auction purchaser. Once the State Tax Authorities under the HPVAT Act have neither invoked, nor resorted to statutory remedial action for recovery of taxes, interest or penalty and arrears under VAT Act which had accrued and was connected with and was solely attributable to the business of the Original Lessee-Company and its Directors then, the inaction or negligence or non-performance on the part of the State Authorities cannot be the basis for prejudicing or putting the petitioner-auction purchaser to a disadvantage or position, by fastening the business liability of others, on the petitioner-auction purchaser is impermissible. Petition allowed.

Summary

Issues Involved:
1. Liability of State taxes on auction purchaser.
2. Imposition of Condition No. 7 in letters dated 11.10.2022 and 13.12.2022.
3. Enforcement of adversarial conditions against the auction purchaser.

Summary:

Issue 1: Liability of State taxes on auction purchaser
The petitioner, Mankind Life Sciences Private Limited, purchased industrial plots through an E-auction conducted by the Bank of Baroda under the SARFAESI Act. The original lessee, M/s Jaimurthy Minerals & Chemicals Pvt. Ltd., had defaulted on loans, and the bank issued a sale notice stating "no encumbrance known to Bank existed." The petitioner, as a bonafide purchaser, acquired the property free from all encumbrances. The court held that the petitioner could not be fastened with the liability of state taxes which had accrued and were solely attributable to the business of the original lessee. The court emphasized that the bank had failed to disclose known encumbrances in the sale notice, contrary to Rule 8(7)(a) of the Security Interest (Enforcement) Rules, 2002. Additionally, the state authorities had not registered their claims with CERSAI as mandated by Section 26B(4) of the SARFAESI Act.

Issue 2: Imposition of Condition No. 7 in letters dated 11.10.2022 and 13.12.2022
Condition No. 7, which imposed the liability of the original lessee's business dues on the petitioner, was challenged. The court found this condition untenable, as it was imposed post-sale certificate issuance and was not disclosed in the sale notice. The court held that the rights acquired by the petitioner as an auction purchaser could not be nullified or restricted by such conditions. The court emphasized that the petitioner had only purchased the industrial plots and not the business of the original lessee. Therefore, the condition was set aside as it was arbitrary and illegal.

Issue 3: Enforcement of adversarial conditions against the auction purchaser
The court analyzed whether the adversarial condition could be enforced against the petitioner when the state tax authorities had remedies to recover outstanding tax liabilities from the original lessee. The court noted that the state authorities had failed to take statutory remedial actions for recovery of taxes under the HP VAT Act. The court held that the inaction or negligence of the state authorities could not be a basis for prejudicing the petitioner by fastening the business liability of the original lessee on the auction purchaser. The condition was deemed arbitrary and illegal, and the court directed the state authorities to transfer the industrial plots to the petitioner as a lessee and reflect the entries in the revenue records.

Conclusion:
The court allowed the writ petition, quashing Condition No. 7 in the impugned letters and directing the state authorities to transfer the industrial plots to the petitioner as a lessee. The state authorities were also directed to recover the outstanding dues from the original lessee in accordance with the law.