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TMI Blog2022 (5) TMI 84X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriate writ, order or direction directing the Surat Municipal Corporation to lodge a claim with respondent No.2 for the property tax dues with respect to the subject property for the period prior to 26.02.2021 in accordance with law, if at all the said tax dues are to be recovered; (c) That the Hon'ble Court may be pleased to issue a writ of mandamus and/or a writ in the nature of mandamus and/or any other appropriate writ, order or direction directing the Surat Municipal Corporation to issue bills for recovery of property tax with respect to the subject property for the period after 26.02.2021, if at all the said tax is to be levied; (d) Pending the hearing and final disposal of this petition, the Hon'ble Court may be pleased to restrain the Surat Municipal Corporation from taking any coercive measures against the petitioner and/or the subject property with respect to the property tax dues aggregating to Rs.19,87,171/- for the period prior to 26.02.2021; (e) Ad-interim relief in terms of prayer clause (c) hereinabove; (f) Such other and further reliefs that the Hon'ble Court deems fit in the interest of justice." 2. The facts giving rise to this writ application may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings. Prima facie, it appears that the writ applicant has an apprehension that since the Surat Municipal Corporation has thought fit not to issue the property tax bills in the name of the writ applicant, it has declined to recognize the writ applicant as the lawful owner of the subject property. The writ applicant clarified with the Surat Municipal Corporation that it is liable to pay property tax for the period after the auction proceedings and not for the liability which Kohinoor Diamonds incurred in the past i.e. before the liquidation proceedings. 9. We have heard Mr. Aadit R. Sanjanwala, the learned counsel appearing for the writ applicant, Mr. Chandresh Vin, the learned counsel appearing for the Surat Municipal Corporation and Mr. Vishal Dave, the learned counsel appearing for the respondent N o.2 (Official Liquidator). 10. The short point that falls for our consideration is whether the Surat Municipal Corporation can claim any first charge or precedence over the subject property for the purpose of recovering the arrears towards the liability of property tax incurred by the Kohinoor Diamonds by virtue of Section 141 of the Gujarat Provincial Municipal Corporations A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ust be capable of being found out either on inspection of the land or the office of Registrar or a statutory authority. A charge, burden or any other thing which impairs the use of the land or depreciates in its value may be a mortgage or a deed of trust or a lien or an easement. Encumbrance thus must be a charge on the property. It must run with the property. If by a reason of the statute no such burden on the title which diminishes the value of the land is created, it shall not constitute any encumbrance. 14. If the property tax was merely a statutory dues without creating any encumbrance on the property which had cast a duty upon all the auction purchasers to make an investigation, it would mean that he must try to find out all the liabilities of the company in liquidation in their entirety. 15. Respondent-Municipality was an unsecured creditor. In that capacity it cannot stand on a higher footing than an ordinary unsecured creditor who is required to stand in queue with all others similarly situated for the purpose of realization of their dues from the sale proceeds. 16. Companies Act or any other law does not impose any additional obligation upon the purchaser to make an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... There cannot, thus, be any doubt or dispute that a provision of law must expressly provide for an enforcement of a charge against the property in the hands of the transferee for value without notice to the charge and not merely create a charge. 19. In Ahmedabad Municipality itself it was held : "4. .... According to the submission it is not necessary for the saving provision to expressly provide for the enforceability of the charge against the property in the hands of a transferee for consideration without notice of the charge. This submission is unacceptable because, as already observed, what is enacted in the second half of Section 100 of Transfer of Property Act is the general prohibition that no charge shall be enforced against any property in the hands of a transferee for consideration without notice of the charge and the exception to this general rule must be expressly provided by law. The real core of the saving provision of law must be not mere enforceability of the charge against the property charged but enforceability of the charge against the said property in the hands of a transferee for consideration without notice of the charge. Section 141 of the Bombay Municipa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be express and not implied, as a result whereof the meaning of term encumbrance would be expanded. 23. The advertisement did not specify that all public charges have to be paid. 24. The Municipal Corporation indisputably is not a preferential creditor. 25. The Companies Act in relation to winding up of proceeding is otherwise a special law. While distributing the assets between the creditors and unsecured creditors, the provisions of Sections 529 and 530 must be complied with. 26. All claims against the companies were required to be filed before the liquidator until the property was sold as provided for under Section 457 of the Companies Act. In terms of Section 456 thereof once an order for winding up is made the liquidator has to take into custody the properties, effects and actionable claims to which the company is or appears to be entitled. Section 528 provides that all debts payable on a contingency and all claims against the company, present or future are admissible to proof against the company. Section 529 provides for the same rule as in force for the time being under the law of insolvency with respect to the estates of persons adjudged insolvent. Section 530 provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l other creditors. [See Advanced Law Lexicon by P. Ramanatha Aiyear (3rd Edn.) p. 1147]. Such creditors, however, must be held to mean unsecured creditors. Principle of Crown debt as such pertains to the common law principle. A common law which is a law within the meaning of Article 13 of the Constitution is saved in terms of Article 372 thereof. Those principles of common law, thus, which were existing at the time of coming into force of the Constitution of India are saved by reason of the aforementioned provision. A debt which is secured or which by reason of the provisions of a statute becomes the first charge over the property having regard to the plain meaning of Article 372 of the Constitution of India must be held to prevail over the Crown debt which is an unsecured one. 10. It is trite that when a Parliament or State Legislature makes an enactment, the same would prevail over the common law. Thus, the common law principle which was existing on the date of coming into force of the Constitution of India must yield to a statutory provision. To achieve the same purpose, the Parliament as also the State Legislatures inserted provisions in various statutes, some of which have b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... press provision regarding its enforceability against transferee for value without notice of charge, the purchaser is not liable to pay the pre-sale tax dues and /or property tax. [7.3] Identical question came to be considered by the Bombay High Court and the recent decision in the case of M/s. Sonoma Management Partners (Supra). In the case before the Bombay High Court petitioners purchased the property pursuant to the sale conducted by the Banks under the provisions of the Securitization Act and the Rules framed thereunder. The sales tax department sought to recover the sales tax dues of the defaulter Company from the subsequent purchaser who purchased the property pursuant to the sale conducted by the Banks under the provisions of the Securitization Act and Rules. The aforesaid came to be challenged by the subsequent purchasers and after considering the law on the point and other decisions the Division Bench of the Bombay High Court has held that the sales tax dues of the owner / Company cannot be recovered from the subsequent purchaser who have purchased the property in the Bank auction. While holding so the Division Bench of the Bombay High Court has observed in paragraph nos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 of the Petitioners on 15 September, 2010, once the sale was confirmed the Petitioners on 22 September, 2010 paid the balance purchase price and thereafter a Sale Certificate was also issued in favour of the Petitioners on 23 September, 2010. Thereafter, a Deed of Conveyance was executed by Respondent No.1 in favour of the Petitioners in respect of the suit property and which was registered with the Registrar of Assurances on 10 March, 2011. It is, at the time of execution and registration of this 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 Rs.18,38,709/-. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Authorities to recover their dues from the Petitioners by enforcing their alleged charge against the said property purchased by the Petitioners under the provisions of the SARFAESI Act. 13. In the view that we have taken, we are supported by a decision of the Supreme Court in the case of State of Karnataka & Anr Vs. Shreyas Papers Pvt. Ltd. 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 Section13(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 defined by Section 100 of the Transfer of Property Act, 1882 (hereinafter "the TP Act"). Here "charge" is defined as: "100. Where immovable property of one person is by act of parties or operation of law made security for the payment of money to another, and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property, and all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt 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. 120708(para 8)] In other words, this Court held that there could be no fixed presumption as to the transferee having constructive notice of the charge against the property. In fact, the principle laid down in Ahmedabad Municipal Corpn. [(1971) 1 SCC 757, 759-61 (paras 3 & 4) : AIR 1971 SC 1201, 1202-04(para 3)] has been correctly applied in a sales tax case similar to the present case. [CTO v. R.K. Steels, (1998) 108 STC 161 (Mad)] (emphasis supplied) 14. In the facts of the present case and considering 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. [7.4] Applying the aforesaid decisions to the facts of the case on hand and considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Haji Abdul Gafuf Haji Hussenbhai vs. The Ahmedabad Municipal Corporation reported in (1967) 8 GLR page 65 accepted the case of the purchaser, and decreed the suit, holding that the charge created in favour of the municipal corporation was not enforceable against the property. Before the Supreme Court it was contended that there was an express provision in Section 141(1) of the Bombay Provincial Municipal Corporation Act, 1949 for holding the present property to be liable for the recovery of municipal taxes, and, though the property was subject only to a charge not amounting to mortgage and did not involve transfer of interest in the property, the same could nevertheless be sold, for realizing the amount charged, even in the hands of a transferee for consideration without notice; Section 141 was an express saving provision as contemplated by Section 100 of the Transfer of Property Act; the saving provision, contemplated by Section 100 of the Transfer of Property Act, without using express words, could, in effect, provide that the property was liable to sale in enforcement of the charge; if this liability was fixed by a provision expressly dealing with the subject, then the char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce is commonly known as constructive notice; though originating in equity, this presumption of notice is now a part of the statute and has to be interpreted as such; wilful abstention suggests conscious or deliberate abstention and gross negligence, and is indicative of a higher degree of neglect; negligence is, ordinarily, understood as an omission to take such reasonable care as, under the circumstances, is the duty of a person of ordinary prudence to take; in other words, it is an omission to do something which a reasonable man, guided by consideration which normally regulate the conduct of human affairs, would do or doing something which a normally prudent and reasonable man would not do; the question of wilful abstention or gross negligence and, therefore, of constructive notice considered from this point of view is generally a question of fact or at best a mixed question of fact and law depending primarily on the facts and circumstances of each case; except for cases directly falling within the three explanations, no inflexible rule can be laid down to serve as a straight- jacket covering all possible contingencies; the question is not whether the purchaser had the means of o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y refer to the latter judgment, which is particularly relevant for the present case In these circumstances, we are of the view that the First Respondent was a purchaser for value without notice of the sales tax arrears of the Defaulting Company or the consequent charge on the property. This would, therefore, attract the principle laid down by this Court in Ahmedabad Municipal Corporation, which is also embodied in the proviso to Section 100 of the TP Act. Thus, the property in the hands of the First Respondent was free of the charge and it is not open to the appellants to enforce the liabilities of the Defaulting Company in this manner against the First Respondent. The High Court, rightly in our view, held that the First Respondent before us was not liable for the tax arrears of the Defaulting Company. No issue as to the liability of the Corporation was raised or argued before, or decided by the High Court. In the present case, firstly, no provision of law has been cited before us that exempts the requirement of notice of the charge for its enforcement against a transferee who had no notice of the same. It remains to be seen, therefore, if in the facts of the present case, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the defaulter or the subsequent first purchaser from whom the petitioner had purchased the property six years after the date of finalisation of the assessment; there was no material to indicate that the petitioner had any constructive notice of the charge; there was no pleading to that effect and, rightly, no arguments had been advanced; and, therefore, the Court was of the view that the case on hand would squarely fall within the ambit of the judgment of the Apex Court in Ahmedabad Municipal Corporation (supra). 22. At this stage, we may also refer to few provisions of the Insolvency and Bankruptcy Code, 2016 (for short, "the Code, 2016"). Section 14 prov ides for Moratorium. Section 14 reads thus: "14. Moratorium.- (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:- (a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority; (b) transferring, encumbering, alien ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lvency resolution process: Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be." 23. We are concerned with sub-clause (b) of sub-section (1) of Section 14 of the Code, 2016. Thus, on the insolvency commencement date, the Adjudicating Authority would have to declare moratorium by an order prohibiting transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or interest therein. 24. Section 38 of the Code, 2016 provides for consolidation of claims. Section 38 of the Code, 2016 reads thus: "38. Consolidation of claims.- (1) The liquidator shall receive or collect the claims of creditors within a period of thirty days from the date of the commencement of the liquidation process. (2) A financial creditor may submit a claim to the liquidator by providing a record of such claim with an information utility: ..... X X X X Extracts X X X X X X X X Extracts X X X X
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