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2016 (11) TMI 1080 - BOMBAY HIGH COURT

2016 (11) TMI 1080 - BOMBAY HIGH COURT - TMI - Recovery of any alleged Sales Tax dues - discharge certificate - sale of property - The SARFAESI Act - The SARFAESI Act is an Act which enables regulation of securitisation and reconstruction of financial assets and enforcement of security interest or matters incidental thereto - Held that: - the Petitioners, having no knowledge (either actual or constructive) of the dues of the Sales Tax Authorities before they purchased the said property, the Sale .....

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Equally, we must clarify that we have not entered into any controversy regarding the priority the Sales Tax Authorities may have on the sale proceeds received from the sale of the said property to the Petitioners. The priority, if any, of the Sales Tax Authorities is not in issue before us, and therefore, we should not be understood to have rendered any finding in that regard. The issue of priorities between the Sales Tax Authorities and Respondent Nos.1 and 2 shall be decided in appropriate pr .....

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Respondent Nos.1 and 2. Ms Sushma Bhende AGP for Respondent No.3. Mr Ashok Kotangle, Spl. Counsel for Respondent No.4. JUDGMENT [ PER B. P. COLABAWALLA J ]: 1. Rule. Respondents waive service. By consent of parties, rule is made returnable forthwith and heard finally. 2. By this Writ Petition under Article 226 of the Constitution of India, the Petitioners have sought a writ of mandamus or any other appropriate order or direction against Respondent Nos.1 and 2 to pay over to Respondent No.3 or Re .....

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respect of said property for recovery of any Sales Tax dues of one M/s Weiler International Electronics Pvt. Ltd. (for short the Defaulter Company ). At the very outset, we must mention that though these directions have been sought in the Petition, Mr Dada, learned Sr. Counsel appearing on behalf of the Petitioners, pressed only prayer clause (b) of the Petition, namely, that Respondent Nos.3 and 4 be directed to refrain from asserting any charge on the property more particularly described in Ex .....

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rules framed thereunder. In a nutshell, it is the case of the Petitioners that the alleged Sales Tax dues of the Defaulter Company were never disclosed to the Petitioners by Respondent Nos.1 and 2 whilst conducting the sale and in fact even the 7/12 extract relating to the said property, only reflected the dues of the sales tax to the extent of ₹ 18,38,709/-. This amount, without prejudice to its rights and contentions, the Petitioners are willing to pay. It is the case of the Petitioners .....

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overed from the sale proceeds which lie in the hands of Respondent Nos.1 and 2. It is in this backdrop, that the present Writ Petition has been filed. 4. The brief facts giving rise to the present controversy are as under:- (a) Petitioner No.1 is a Private Limited Company incorporated under the provisions of the Companies Act, 1956 and has purchased the said property. Petitioner No.2 is the CEO and Managing Director of Petitioner No.1. For the sake of convenience, they are collectively referred .....

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r Company had taken financial assistance from Respondent Nos.1 and 2. Since the Defaulter Company could not repay the financial assistance taken, the authorized officer of Respondent No.1 (leader of the consortium along with Respondent No.2) issued a Public Notice dated 14 December, 2009 declaring that Respondent Nos.1 and 2 had taken physical possession of the said property, belonging to the Defaulter Company, in exercise of powers under Section 13(4) of the SARFAESI Act. Thereafter, Respondent .....

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eceived even with reference to this Public Notice. (c) It is thereafter averred in the Petition that in the third week of August 2010, the Petitioners learnt that the said property of the Defaulter Company was in the process of being sold by Respondent Nos.1 and 2 under the provisions of SARFAESI Act. Accordingly, on or about 26 August, 2010, the representatives of the Petitioners met with the Authorized Officer of Respondent No.1 to conduct an inquiry and ascertain the facts with regard to sale .....

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and 2, whether there was any encumbrance on the said property. It is stated in the Petition that the Authorized Officer categorically informed the Petitioners' representative that only the secured assets of the Defaulter Company were to be sold and not the Defaulter Company's dues. It was further assured to the Petitioners that except the mortgage in favour of Respondent Nos.1 and 2, there were no liabilities or other encumbrance on the said property whatsoever. The Petitioners were also .....

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; 11,00,29,000/- and submitted their EMD of ₹ 1.10 Lacs. Since, the Petitioners were the highest bidders, they were declared as the successful bidder and a formal 'letter of acceptance' was also issued by Respondent No.1. This acceptance letter called upon the Petitioners to make a further payment of 25% of the said price (Rs.2,75,07,250/-) immediately. Further, the EMD was to be adjusted against this amount of ₹ 2,75,07,250/-. It is not in dispute that the Petitioners have d .....

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ons contained in this letter, the Petitioners, on 22 September, 2010, made the balance payment of the purchase price. On receiving the the full consideration, Respondent No.1 (on behalf of itself and Respondent No.2) also executed a Sale Certificate on as is where is basis and what is where is basis in favour of the Petitioners. (g) The Petitioners thereafter requested Respondent Nos.1 and 2 to execute the conveyance in their favour. The draft conveyance was deliberated upon and finally the conv .....

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that keeping in mind the magnitude of the investment already made, they would accept the conveyance with the encumbrance of the Sales Tax to the extent of ₹ 18,38,709/-. (h) After execution of the conveyance, the Petitioners legitimately expected their names to be mutated in the property and revenue records. It is at this time the Petitioners learnt of certain property tax dues amounting to ₹ 10.05 Lacs. To avoid further complications the Petitioners also cleared these property tax d .....

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oners addressed a letter dated 26 August, 2011 to Respondent No.4 setting out the material facts and seeking a no claim certificate . It is, at this stage, that the Petitioners were shocked to learn about the claim of Respondent No.4 amounting to ₹ 28 Crores. Thereafter, the Petitioners made several applications under the Right to Information Act, 2005 without any success. (i) In these circumstances, the Petitioners initiated appropriate proceedings before the Revenue Authorities for recor .....

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ctor, Satara. In the aforesaid appellate proceedings, that the Sales Tax Department submitted a list of documents including the correspondence addressed by Respondent No.4 to Respondent No.1. This entire list of documents was furnished to the Petitioners only on 5 June, 2013 and which is set out by the Petitioners in paragraph 4 (xvi) of the Petition. (k) Faced with this situation, the Petitioners were forced with no option but to run from pillar to post and try and sort out the issue with Respo .....

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yment, appropriate steps under the Maharashtra Land Revenue Code, 1966 would be initiated against the Defaulter Company. 5. In this factual background, Mr Dada, learned Sr. Counsel appearing on behalf of the Petitioners submitted that the chronology of the aforesaid facts clearly disclose that the Petitioners had no notice or knowledge of the alleged sales tax dues to the extent of ₹ 28 Crores. He submitted that the alleged dues of the sales tax were never disclosed to the Petitioners eith .....

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iable for the sales tax dues to the extent of ₹ 18,38,709/- and which was reflected in the 7/12 extract annexed to the conveyance. Admittedly, the dues of the sales tax to the extent of ₹ 28 Crores was disclosed for the first time to the Petitioners much after they had already purchased the property and the conveyance had been executed in their favour. This being the factual position, Mr Dada submitted that the Sales Tax Authorities cannot enforce their alleged charge against the sai .....

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nr. Vs The State of Maharashtra. Writ Petition No.2086 of 2015 decided on 16 October, 2015. 6. For all the aforesaid reasons, Mr Dada submitted that the Sales Tax Department (Respondent No.4) be directed to refrain from recovering its dues by enforcing its alleged charge on the said property legitimately purchased by the Petitioners and without any notice of the dues of Sales Tax Department. 7. On the other hand, Mr Kotangle, Special Counsel appointed for Respondent No.4, submitted that Responde .....

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on the said property. Mr Kotangle invited our attention to Sections 38(4), 38(5), 38C of the BST Act. Relying upon the aforesaid provisions, Mr Kotangle submitted that once the sales tax dues were in arrears and they were always payable, then it is a charge on the properties of the dealer or any other person within the meaning of Section 38C of BST Act. This would enable the Sales Tax Department to go after the properties of the Defaulter Company and recover the sales tax dues. 8. In addition to .....

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a decision of the Supreme Court in the case of Central Bank of India Vs. State of Kerala and Ors. (2009) 21 VST 505 (SC) 9. Mr Shroff, learned Counsel appearing on behalf of Respondent Nos.1 and 2 (the Nationalized Banks) submitted that the banks have sold the said property to the Petitioners on as is where is and whatever is basis . He submitted that this being the position, the Petitioners ought to have made their own inquiry to ascertain whether there were any encumbrances on the said propert .....

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curity interest or matters incidental thereto. The term 'debt' is defined in section 2(ha) and the term security interest is defined under Section 2(zf) to mean right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes a mortgage, charge, hypothecation, assignment other than those specified in Section 31. The term secured asset is also defined in Section 2(zc) to mean the property on which the security interest is created. In t .....

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f the secured creditor within the period specified under Section 13(2) by taking possession of the secured assets and transferring the same either by way of lease, assignment and/or sale. Section 13(6) stipulates that any transfer of secured assets (after taking over the possession) by the secured creditor shall vest in the transferee all rights in, or in relation to the secured asset transferred as if the transfer had been made by the owner of such secured asset. Looking to all these provisions .....

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s sale notice that the Petitioners have purchased the said property from Respondent Nos.1 and 2. 11. What is important to note is that this entire purchase was done by the Petitioners before the alleged dues of the Sales Tax Authorities was brought to their notice. The chronology of events set out above clearly indicates that the Petitioners placed their bid for purchasing the said property on 1 September, 2010 along with their earnest money deposit. Thereafter, the sale was confirmed in favour .....

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s Deed of Conveyance, that the Petitioners for the first time perused the 7/12 extract relating to the suit property and learnt that there was an encumbrance of the Sales Tax Department to the extent of ₹ 18,38,709/-. As mentioned earlier, these dues of the Sales Tax, the Petitioners would have to pay / liquidate, if not already done so. As far as the dues of the Sales Tax to the extent of ₹ 28 Crores are concerned, the same was brought to the notice of the Petitioners much thereafte .....

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the Petitioners and without having any notice of the alleged dues of the Sales Tax Authorities. 12. What is also important to note is that, it is not even the case of Sales Tax Authorities that the Petitioners are a dealer within the meaning of provisions of the BST Act or that the Petitioners have taken over the business of the dealer who is the defaulter of the Sales Tax Authorities. In fact, on a careful perusal of Section 19(4) of the BST Act, it is clear that where a dealer who is liable t .....

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ny. It has, in fact, merely purchased the said property which originally belonging to the Defaulter Company and which was mortgaged with Respondent Nos. 1 and 2. Since, the Defaulter Company did not pay its dues to Respondent Nos.1 and 2, they, exercising their rights under the provisions of the SARFAESI Act, sought to enforce their security interest and sell the secured asset (the said property) to the Petitioners. It is in these circumstances that the Petitioners have purchased the said proper .....

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: AIR 2006 SC 865 On the issue of enforcement of charge, the Supreme Court at paragraphs 18 to 21 thereof (of the SCC report) opined thus: 18. The next limb of Mr Hegde's arguments was that since Section 13(2)(i) of the KST Act creates a charge on the property of the defaulting company, the charge would continue on the properties, even if it changes hands by transfer. 19. While the expression charge is not defined by the KST Act, this concept is well known in property law and has been define .....

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ction applies to the charge of a trustee on the trust property for expenses properly incurred in the execution of his trust, and, save as otherwise expressly provided by any law for the time being in force, no charge shall be enforced against any property in the hands of a person to whom such property has been transferred for consideration and without notice of the charge. (emphasis supplied) 20. As the section itself unambiguously indicates, a charge may not be enforced against a transferee if .....

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er judgment, which is particularly relevant for the present case. 21. Ahmedabad Municipal Corpn. [(1971) 1 SCC 757, 759-61 (paras 3 & 4) : AIR 1971 SC 1201, 1202-04(para 3)] was a case where a person was in arrears of property tax, due under the Bombay Provincial Municipal Corporation Act, 1949. Consequently, the Municipal Corporation 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 .....

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ransferees of such properties were imputed with constructive knowledge of any charge created against the properties that they had purchased. This argument was, however, rejected. This Court held that while constructive notice was sufficient to satisfy the requirement of notice in the proviso to Section 100 of the TP Act, whether the transferee had constructive notice of the charge had to be determined on the facts and circumstances of the case. [Ibid., at SCC pp. 765-66 (para 12) : AIR pp. 1207- .....

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sidering this authoritative pronouncement of the Supreme Court, we have no hesitation in holding that the Petitioners, having no knowledge (either actual or constructive) of the dues of the Sales Tax Authorities before they purchased the said property, the Sale Tax Authorities cannot recover their dues from the Petitioners by enforcing their charge against the said property. 15. Faced with this situation, Mr Kontagale submitted that the ratio of the aforesaid Supreme Court decision cannot be app .....

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ay Sales Tax Act, 1959. Thus, on the issue of enforcement of the charge, the Supreme Court, while considering the provisions of Section 100 of the Transfer of Property Act, 1882, gave its findings in paragraph Nos.18 to 21 thereof. These findings are binding on us and we cannot distinguish the aforesaid decision on the specious ground that the same is rendered in the context of the provisions of the Karnataka Sales Tax Act, 1957. Secondly, even otherwise we find that this very judgment of the Su .....

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ase of M/s National Steel and Agro. Industries Ltd. Writ Petition No.2608 of 2014 decided on 12 February, 2015 and after relying upon the very same paragraphs of the Supreme Court reproduced by us above, the same was repelled by this Court in paragraphs 35 and 36 of its decision. 16. In fact, the decision of the Supreme Court in the case of Shreyas Papers Pvt. Ltd.2006 (1) SCC 615 : AIR 2006 SC 865 has been followed by another Division Bench judgment of this Court in the case of Sherwood Resorts .....

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itioners by enforcing their charge on the said property. 17. Having held so, we shall now deal with the judgment relied upon by Mr Kontangale in the case of Central Bank of India Vs. State of Kerala and Ors.(2009) 21 VST 505 (SC) On a careful perusal of this decision, we fail to see how the aforesaid decision supports the case of the Sales Tax Department. The issue that was being decided by the Supreme Court in the aforesaid decision was whether Section 38C of the BST Act, Section 26B of the Ker .....

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e being no provision in the SARFAESI Act providing for a first charge in favour of the banks, Section 35 thereof could not be held to override Section 38C of the BST Act, that specifically stipulates that the liability under the BST Act shall have first charge. We find that the reliance placed on the aforesaid decision in the factual matrix before us is wholly inapposite. In any event, this decision of the Supreme Court was rendered prior to the Enforcement of Security Interest and Recovery of D .....

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