CORAMTHE HON’BLE MR. A.P.SHAH v. The Commercial Tax Officer, Brough Road, Erode, Erode District.2. The Sub Registrar

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 20..07..2006CORAMTHE HON’BLE MR. A.P.SHAH, CHIEF JUSTICEandTHE HON’BLE MR. JUSTICE D.MURUGESANWrit Appeal No.881 of 20061. D.Senthil Kumar2. C.P.Senthil3. C.P.Sakthivel ..Appellants. Vs.1. The Commercial Tax Officer, Brough Road, Erode, Erode District.2. The Sub Registrar, No.1, Karungalpalayam, Erode. ..Respondents.PRAYER: Writ Appeal under Clause 15 of the Letters Patentagainst the order of a learned single Judge of this Courtdated 17.06.2006 passed in W.P.No.11900 of 2006. For Appellants :: Mr.M.M.SundareshFor Respondents :: Mr.Haja Nazirudeen, Spl. Govt. Pleader (Taxes)J U D G M E N T (Judgment of the Court was delivered by The Hon’ble The ChiefJustice)Admit. The learned Special Government Pleader appearing forthe respondents waives service. By consent, the appeal is taken upfor hearing. 2. In this appeal filed against the order of a learned singleJudge passed in a writ petition under Article 226 of theConstitution of India, the question relates to the liability of an https://hcservices.ecourts.gov.in/hcservices/ auction purchaser of a property at a public auction towards thearrears of sales tax due under the Tamil Nadu General Sales TaxAct, 1959 (hereinafter referred to as the ‘TNGST Act’), which duesare a statutory charge on the property sold, and of which thepurchaser had no actual notice. By the order under appeal, thelearned single Judge held that the issue is covered by the judgmentof a Division Bench of this Court in the case of N.Padma CoffeeWorks & Others Vs. Commercial Tax Officer, Rock Fort AssessmentCircle, Trichy reported in (1999) 114 S.T.C. 494 and thecontention that the appellants are bona fide purchasers has to beestablished only before a civil court by adducing proper evidenceand not in a writ petition filed under Article 226 of theConstitution. 3. The property, which is the subject matter of controversy,has been purchased by the appellants, for a sum of Rs.23,50,000/-pursuant to the sale held by public auction conducted on10.03.2003. The sale under auction had been conducted in executionof Recovery Certificate Nos.47 of 2001 and 93 of 2001 dated05.02.2001 and 30.04.2001 respectively in terms of the order passedby the Debts Recovery Tribunal in O.A.Nos.356 of 2000 and 848 of2000 respectively dated 06.12.2000 for the purpose of recovery ofthe debts due to the City Union Bank, Erode from M/s.New FashionParks and two others.4. The entire amount had been paid by the appellants on25.03.2003 and the sale was confirmed on 23.04.2003, as there wasno application from any statutory or public authority seeking toset aside the sale. A Sale Certificate has also been issued on08.07.2003, followed by a letter from the Recovery Officeraddressed to the Sub Registrar, Erode, the second respondentherein, requesting him to make the necessary entries in theregister maintained by the second respondent. On payment ofadequate stamp duty, the entry of the Sale Certificate has beenregistered by the second respondent and the Encumbrance Certificatehas been issued, showing the appellant as the absolute owners ofthe property.5. It appears that the property belonged to one S.K.VeerappaChettiar & Company and others and since the said Company was inarrears of sales tax under the TNGST Act, by letter dated25.06.2004, the Commercial Tax Officer, Erode, the first respondentherein, required the second respondent herein to create anencumbrance with regard to the property and an entry was made inthe register in respect of the encumbrance of the first respondent.Immediately on coming to know about the encumbrance created, alegal notice had been sent on 04.04.2006 by the appellants to thefirst respondent, but however, no action was taken to rectify themistake. Since the respondents were not willing to relent, theappellants moved Writ Petition No.11900 of 2006 seeking to issue awrit of certiorarified mandamus to quash the proceedings of thefirst respondent in Na.Ka.No.1707/2000/A3 dated 25.06.2004 and todirect the respondents to remove the encumbrance of sales tax dues https://hcservices.ecourts.gov.in/hcservices/ entered in respect of the appellants’ property. The writ petitionwas dismissed in limine by the learned single Judge holding thatthe appellants will have to prove that they were bona fidepurchasers of the property in a civil suit. 6. Mr.M.M.Sundaresh, learned counsel appearing for theappellants strenuously contended that the appellants are bona fidepurchasers of the property for valuable consideration withoutnotice and hence, their property cannot be encumbered. He submittedthat no encumbrance could be created in view of the fact that theproperty has already been transferred in favour of the appellantsand hence, the question of creating any encumbrance in respect ofthe same does not arise. Learned counsel further submitted thatunder Section 100 of the Transfer of Property Act, 1882, a chargecannot bind a bona fide purchaser for valuable considerationwithout notice and in the absence of any provision requiring todispense with such notice under the TNGST Act, it would not bepermissible for the Sales Tax authorities to proceed against thetransferee who has purchased the property for valuableconsideration without notice. 7. In reply, the learned Special Government Pleader appearingfor the Department submitted that since a charge over the propertyof the defaulting firm had been created under the TNGST Act, theappellants, as the transferees of the said property, hold theproperty subject to that charge. In the alternative, the learnedSpecial Government Pleader submitted that the Act creates a firstcharge on the property of the dealer or any other person for anyamount of tax, penalty, interest, or other sum payable by a dealeror the other person under the Act, clearly giving priority to thestatutory charge over all other charges on the property, includinga mortgage and hence, the claim of the Sales Tax Department thattheir dues be paid from out of the proceeds of the sale of theproperty took priority over the claim of the Bank as a mortgagee ofthe property in question and therefore, the Department should beallowed to recover the amount due from the City Union Bank. 8. The short question is whether the charge created on aproperty under the TNGST Act is enforceable against a transferee ofsuch property. The expression ‘charge’ is not defined by the TNGSTAct. However, this concept is well known in law of transfer ofproperty and has been defined by Section 100 of the Transfer ofProperty Act, wherein the word ‘charge’ is defined as follows: “Where immovable property of one person is by act ofparties or operation of law made security for the paymentof money to another, and the transaction does not amountto a mortgage, the latter person is said to have a chargeon the property; and all the provisions hereinbeforecontained which apply to a simply mortgage shall, so faras may be, apply to such charge.Nothing in this section applies to the charge of atrustee on the trust-property for expenses properlyincurred in the execution of his trust, and, save as https://hcservices.ecourts.gov.in/hcservices/ otherwise expressly provided by any law for the timebeing in force, no charge shall be enforced against anyproperty in the hands of a person to whom such propertyhas been transferred for consideration and without noticeof the charge.” (emphasis supplied) As the Section itself indicates, a charge may not be enforcedagainst a transferee if he/she has had notice of the same, unlessby law, the requirement of such notice had been waived. 9. The provisions of Section 100 of the Transfer of PropertyAct fell for consideration of the Supreme Court in AhmedabadMunicipal Corporation of the City of Ahmedabad Vs. Haji Abdul GafurHaji Hussenbhai, (1971) 1 SCC 757. In that case, the respondent wasin arrears of property tax, due under the Bombay ProvincialMunicipal Corporation Act, 1949. Consequently, the MunicipalCorporation created a charge over the property of the defaulter.However, the property was sold in execution of a mortgage decree.When the Municipal Corporation purported to exercise their chargeover the property, the purchaser in court-auction filed a suit fora declaration that he was the owner of the property and that thearrears of municipal taxes due by the transferor were notrecoverable from him by proceeding against the property purchasedin the auction. In the appeal before the Supreme Court, theMunicipal Corporation’s main argument was that where the local lawprovided for the creation of a charge against a property for whichmunicipal taxes were due, transferees of such properties wereimputed with constructive knowledge of any charge created againstthe properties that they had purchased. This argument was, however,rejected. The Court held that while constructive notice wassufficient to satisfy the notice in the proviso to Section 100 ofthe Transfer of Property Act, whether the transferee hadconstructive notice of the charge had to be determined on the factsand circumstances of the case. In other words, the Supreme Courtheld that there could be no fixed presumption as to the transfereehaving constructive notice of the charge against the property. 10. The principle laid down in Ahmedabad MunicipalCorporation’s case has been applied in a sales tax case arisingunder the Karnataka Sales Tax Act, 1957 in State of Karnataka Vs.Shreyas Papers (P) Ltd., (2006) 1 SCC 615. There, following thedecision in Ahmedabad Municipal Corporation’s case, the SupremeCourt held as follows:“22. In the present case, firstly, no provision of lawhas been cited before us that exempts the requirement ofnotice of the charge for its enforcement against a transfereewho had no notice of the same. It remains to be seen,therefore, if in the facts of the present case, the firstrespondent had notice-actual or constructive of the charge. Atthe outset, in the advertisement/notice dated 17.03.1992issued by the Corporation, mention is only made of the sale ofthe defaulting company’s assets and there is no indication,whatsoever, of any sales tax arrears. Further, the bid offer https://hcservices.ecourts.gov.in/hcservices/ made on behalf of the first respondent on 05.06.1992specifically excludes any statutory liabilities, includingsales tax. This offer was accepted by the Corporation on15.07.1992. Even at that stage, there was no mention of anysales tax arrears. The sale of the assets took place pursuantto the agreement dated 12.08.1992 in which a specific clausewas inserted that the first respondent would be liable to payall property taxes, other taxes, electricity bills, watertaxes and rents from the date of the agreement (i.e.,12.08.1992). For the first time, by letter dated 08.01.1993 ofthe second appellant to the Mandal Panchayat, Aloor Taluk, theissue of sales tax dues of the defaulting company was broughtto the surface. This is further borne out by thecorrespondence between the first respondent and theCorporation. Thus, it is evident that the first respondent hadno actual notice of the charge prior to the transfer. As towhether the first respondent had constructive notice of thecharge, no substantive argument on this issue was made, eitherbefore the High Court or at any rate before us. Hence, wecannot hold that the first respondent had constructive noticeof the charge. 23. In these circumstances, we are of the view that thefirst respondent was a purchaser for value without notice ofthe sales tax arrears of the defaulting company or theconsequent charge on the property. This would, therefore,attract the principle laid down by this Court in AhmedabadMunicipal Corporation’s case (supra) which is also embodied inthe proviso to Section 100 of the T.P.Act. Thus, the propertyin the hands of the first respondent was free of the chargeand it is not open to the appellants to enforce theliabilities of the defaulting company in this manner againstthe first respondent.” 11. In Shreyas Paper’s case, the Supreme Court also referredto the decision of a Division Bench of this Court in C.T.O. Vs.R.K. Steels, (1998) 108 S.T.C. 161 (Madras), where this veryquestion arose under Section 24 of the TNGST Act. In that case, theassessee firm was in arrears of tax from the Assessment Years 1976-77 to 1979-80. The assessee firm was closed on 19.10.1979.Thereafter, the land belonging to the firm was sold by one of thepartners of the firm on 30.12.1981. The purchaser had no notice ofthe charge over the property by virtue of sales tax dues. Thepurchaser challenged the Form – 7 notice issued under the TamilNadu Revenue Recovery Tax on the ground that he is a bona fidepurchaser without notice of charge under the TNGST Act. TheDivision Bench held that no provision is made in the TNGST Actcontrary to Section 100 of the Transfer of Property Act andtherefore, a bona fide purchaser for consideration without noticeis protected. 12. In the instant case, the property was sold by publicauction on 10.03.2003. The sale was conducted in execution of the https://hcservices.ecourts.gov.in/hcservices/ Recovery Certificates issued by the Debts Recovery Tribunal forrecovery of dues to the City Union Bank. The appellants had paidthe entire amount due on 25.03.2003 and the sale was confirmed intheir favour on 23.04.2003. There is no indication of any sales taxarrears in the advertisement for auction sale and there was noapplication from any statutory or public authority seeking to setaside the sale. For the first time, by letter dated 25.06.2004 theCommercial Officer required the second respondent to create anencumbrance with regard to the property and consequently an entrywas made in the register in respect of encumbrance of the firstrespondent. Thus, it is evident that the appellants had no actualnotice of the charge prior to the transfer. There is also nomaterial to show that the appellants had constructive notice of thecharge and no submissions were made by the learned SpecialGovernment Pleader on this issue. In the circumstances, we are ofthe view that the appellants were the purchasers for value withoutnotice for the sales tax arrears of the defaulting company or theconsequent charge on the property. Thus, the property in the handsof the appellants was free of the charge and it is not open to thefirst respondent to enforce the liabilities of the defaultingcompany in this manner against the appellants. 13. Insofar as the alternative submission of the learnedSpecial Government Pleader that the charge created under Section 23of the TNGST Act will have priority over the mortgage created infavour of the City Union Bank, it is not necessary for us toexpress any opinion thereon in the present case, since the bank isnot a party to the present proceedings. The first respondent isentitled to adopt such proceedings as permissible in law toestablish its rights against the bank.14. In the circumstances, the appellants herein, astransferees of the property for valuable consideration withoutnotice of the charge, are entitled for protection and consequently,the proceedings of the first respondent in Na.Ka.No.1707/2000/A3dated 25.06.2004 are liable to be set aside and are accordingly setaside. The writ appeal is accordingly allowed. No costs.Consequently, W.A.M.P.No.1 of 2006 is closed. Sd/-Asst. Registrar./true copy/Sub Asst. Registrar.ab/sm https://hcservices.ecourts.gov.in/hcservices/ Copy to:- 1. The Commercial Tax Officer, Brough Road, Erode, Erode District.2. The Sub Registrar, No.1, Karungalpalayam, Erode.1 cc to Special Govt. Pleader, sr. 321831 cc to Mr.M.M.Sundaresh, Advocate, Sr. 32098W.A.No.881 of 2006.AK (CO)kk 27/7