IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 16433 of 2010 For Approval and Signature:
HONOURABLE MR.JUSTICE AKIL KURESHI HONOURABLE MS JUSTICE SONIA GOKANI ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the judgment ?
4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ?
5 Whether it is to be circulated to the civil judge ?
========================================================= SHUBHA INDUSTRY - A PROPRIETORY - SHUBHA ARVINDKUMAR -
Petitioner(s) Versus STATE OF GUJARAT & 2 - Respondent(s) ========================================================= Appearance :
MR DEVAN PARIKH for Petitioner(s) : 1 GOVERNMENT PLEADER for Respondent(s) : 1 NOTICE SERVED BY DS for Respondent(s) : 1 - 3 ========================================================= CORAM : HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MS JUSTICE SONIA GOKANI Date : 31/08/2012 CAV JUDGMENT (Per : HONOURABLE MS JUSTICE SONIA GOKANI)
1. The petitioners challenge an action of the sales tax department of attaching the land, building, plant and machinery of the petitioners, raising various grounds one of which is of jurisdiction. The present petitioners are the second purchasers who have purchased the properties through Banks to whom these properties were mortgaged for value consideration claiming to be bona fide purchaser without any notice of any dues. In brief, the case is that the unit by name of Kumkum Industries was a partnership firm consisting of four partners. The unit was started sometime in 1996 itself. It was in the business of cotton, ginning and pressing. The unit was regularly paying sales tax. Subsequently, a scheme of deferment of sales tax was promulgated under notification no. (GHN-20) GST-1096(S.49)(295)TH.
2. It is averred in the petition that, prior to obtaining certificate of deferment, the unit had obtained substantial finance from Muli Agriculturist Co-operative Cotton Sales Purchase Ginning Pressing Society in the year 1996. To the said society, the unit mortgaged/hypothecated the land, building, machinery and plant against these dues. These dues, on 31st March, 2004, were to the extent of Rs.9.74 crores. In the year 2001, the partners had given an undertaking to the sales tax department that they would pay the amount due to the unit and they will not sell and/or transfer the land, building, plant and machinery till then.
3. In accordance with the scheme of the deferment of sales tax, the party is required to submit its returns and is assessed to sale tax. Such dues became payable after the year 2006. The provisions of the scheme also contains that if the deferred tax is not paid when the same becomes due, the entire amount shall become payable forthwith and if the land, building, plant and machinery as per the scheme are transferred, the exemption shall come to an end and the entire amount shall immediately become due.
4. It appears that Kumkum Industries continued to file its returns and there was a change in the constitution of partnership firm where two partners continued the business of Kumkum Industries namely Chinubhai Dalsukhhai Sanghvi and Arvind Chimanlal Sanghvi as it was not profitable to continue such business. The Cooperative Bank was also enforcing their dues and the Bank sought to enforce its claim and in the course of this transaction, two buyers viz. Siraj Salemohamad and Salim Wadhwania chose to buy the assets of the unit. They had no connection with the partners of Kumkum industries and Bank agreed to this agreement and accordingly, a tripartite agreement was executed on 14th March, 2005 whereby land, building, plant and machinery were sold by the partners of Kumkum Industries to new partnership firm purchased by above mentioned partners viz. Siraj Salemohamad and Salim Wadhwania and a registered sale deed was also executed at the office of Sub Registrar on 14th March, 2005. The name of Kumkum Industries continued to avoid complications as averred in the petition and the new purchasers handed over the entire purchase price of the assets to the bank. The new unit also had taken finance from the Bank of India and loans of Bank of India were subsequently transferred to Syndicate Bank. Since the new Kumkum Industries could not run the unit for any substantial time, it ceased to operate from 2006 and was a non operational factory at that stage. The dues of Syndicate Bank were also around Rs.3 crores which also sought to sell off the unit and it was in the course of transactions, the present petitioners agreed to purchase the assets of the said unit in the sum of Rs.1.75 crores. The sale deed was executed on 31st January, 2007 and the total amount was paid directly to the Syndicate Bank and the Syndicate Bank lifted all its charges by lifting the mortgages over the properties.
5. It is urged by the petitioners that, at no point of time, the sales tax department objected to nor informed the bank or the purchaser regarding any amount of dues. No notice of demand has been issued by the sales tax department either on the old Kumkum Industries or to the new Kumkum Industries or even to the present petitioners at any stage. In the village forms 6 or 7/12, there is no entry of any dues or any charge of the sales tax department with regard to transaction in question. In such circumstances, it is averred that the petitioners purchased the land, building, plant and machinery in good faith without any notice of any other charge, giving full market value consideration of the property as the mortgage/hypothecation of the bank was recorded before the sub Registrar as well as in the revenue record. It is noted that this was only purchase of the assets and not purchase of a ongoing business concern and the earlier unit had shut almost for one year prior to the purchase of the assets by the present petitioners.
6. The petitioners applied for registration with the sale tax department on 14th February, 2007 and also sold their products i.e. cotton ginned bales. On 10th May, 2007, the Assistant Commissioner of Sales Tax rejected the request for registration on the ground that there cannot be two registrations on the same plot as the erstwhile owners (New Kumkum Industries) was holding registration on the same plot and the old dues were still outstanding.
7. Being aggrieved by the same, the petitioners preferred an appeal before the Deputy Commissioner (Appeals) and vide order dated 12th September, 2007, the Deputy Commissioner passed an order that old dues of Kumkum Industries can not be enforced against the present petitioners as the purchase is not of the unit as ongoing concern but is a purchase of the assets of the old unit. He held that it cannot be said that there are two sales tax registrations on the same plot and therefore, registration is required to be granted to the petitioners. He remanded the matter for grant of registration. However, no registration was granted although no appeal was filed against such an order.
8. In the month of October, 2007, the Assistant Commissioner got the charge of sales tax registered in village form 6 with regard to the property in question . For the first time, a show cause notice was issued to the present petitioners on 13th November, 2007 demanding dues of Rs.99.65 Lacs along with interest on the old unit on the basis of village form entry 7/12. There is a reference that the old unit had given a security bond by way of personal guarantee to pay the amount when that fell due and accordingly, registration was sought to be denied.
9. It is urged that when the petitioners succeeded before the Deputy Commissioner, another notice could not have been issued initiating another proceeding on the very same ground. Moreover, personal guarantee was already given by old partners of old Kumkum Industries. In light of this undertaking, the Assistant Commissioner decided to take a view that the sales made are ineffective and inoperative.
10. It appears that, on 16th January, 2008, an order of demand in the sum of Rs.89.15 lacs was sought to be made on Shri Arvind Kumar Sanghvi, the original partner of old Kumkum Industries, however, to the present petitioner, there is no such demand and as the old Kumkum Industries was sold to the new Kumkum Industries on 14th March, 2005, the same is alleged to be in breach of the condition of deferment certificate. It is further averred by the present petitioners that, before the Deputy Commissioner, they preferred an appeal and the Deputy Commissioner passed an order dated 30th April, 2009 holding that the registration cannot be granted. Thereafter, the petitioners preferred an appeal before the VAT Tribunal and the said appeal is still pending. Since the attachment order has been issued in the meantime against the old Kumkum Industries being order dated 5th April, 2010, the petitioners made representations to the Assistant Commissioner and thereafter, to the Commissioner respectively on 12th April, 2010 and 21st October, 2010. Syndicate Bank had also addressed a letter to the sale tax department on 6th May, 2010, stating that these properties are duly mortgaged to them and they are entitled to take independent action under the SARFAESI Act and the department has no power to attach the properties.
11. On issuance of notice, reply has been filed inter alia, contending that the attachment order has been passed by the sales tax department as M/s. Kumkum Industries has not paid the deferred tax under incentive Scheme under Sub Section 2 of Section 49 of Sales Tax Act and Entry No. 69 and that the deferment certificate bearing no.80 to the tune of Rs.1,06,27,727/- was effective from 18th January, 1997 to 17th January, 2006 issued by the Assistant Commissioner, Surendranagar vide letter dated 11th April, 2001. It is further averred that the partners of the Kumkum Industries had also executed a form of security bond and thus, created pari pasu charge for availment of Deferment Tax Scheme. Since the assessee breached the conditions of the aforesaid certificate, the exemption ceased to operate. If eligible unit transfers, sells or otherwise disposes off in any manner any of its assets without written permission of appropriate authority during the period of exemption then the entire amount of tax would become payable on the sales and purchases effected by the unit & the exemptions given under entry, would be liable to be paid by the eligible unit into Government treasury within 60(sixty) days from the date of such sale, transfer or otherwise disposal of the assets, along with interest at the rate of 24% per annum. And, on failure of the unit to pay the said dues, the entire amount along with interest shall be recovered as arrears of land revenue.
12. It is contended that the Kumkum Industries had sold the assets without written permission of the Industries Commissioner/Sales Tax Commissioner and therefore, there is a clear breach of condition and the department is liable to recover the deferred tax enjoyed by Kumkum Industries which comes to huge sum of Rs.2,90,58,705/-.
13. It is further contended that the erstwhile partners of Kumkum Industries, for the first time, informed on 21st December, 2006 that they sold the land, plant and machinery as well as building to Siraj Ali Salem Mohmmad Huda and Salimbhai Wadhwania and as per Section 25 of the Gujarat Sales Tax Act, the partner retiring from the firm shall intimate within 45 (Forty Five) days from the date of retirement to the Commissioner about his retirement, however, these partners of old Kumkum Industries intimated after delay of nearly 21 months. Thus, according to the respondent, the Kumkum Industries has not only breached the aforesaid conditions of certificate as well as circular but, also has acted contrary to law and therefore, according to the respondents, the entire amount of tax along with interest became due & was payable by the unit.
14. It is the say of the respondent that the first installment of deferred tax was due on 1st April, 2006 which was to the tune of Rs.17,91,288/- and the identical amount was due on 1st April, 2007 for which recovery proceedings were initiated and notice dated 30th June, 2007 under Section 44 was issued to the Bank as well as to the erstwhile partners and also to the subsequent purchasers of Kumkum Industries namely Shri Salimbhai Wadhwania and Shri Sirajbhai Huda.
15. It is further contended that, on 27th July, 2007, a notice under Sections 152 and 200 of the Bombay Land Revenue Code was issued to which reply was also filed by Kumkum Industries vide letter dated 3rd August, 2007 and since the dues remained unpaid, the attachment order was passed on 1st October, 2007 as it was admitted by them that the property has been sold on 14th March, 2005. Thus, they admitted the breach of condition and the property of the Industries was attached and necessary entries were made in the village form no.6. It was intimated to the Mamlatdar, Muli on 24th October, 2007 and necessary entry no.2669 was made on 30th October, 2007 in the village form no.6. It is admitted that, on 14th March, 2005, the Kumkum Industries executed a sale deed and the new unit had accordingly taken finance from Bank of India for running its unit but the said aspect and facts were never communicated either by the bank or by the new unit to the sales tax department.
16. The present petitioners subsequently purchased the said assets vide sale deed dated 31st January, 2007 but, these two transactions of purchase or sale of assets were never intimated to the sale tax department. Thus, there was no question or occasion for the sales tax department raising any objection with regard to the aforesaid transactions. The buyer of Kumkum Industries had never applied for “No Due Certificate” nor was the same was issued and it was after 5th April, 2010, when the attachment order was issued, the respondent no.1 came to know that the new purchaser i.e. the present petitioners has availed various credit facilities from the Bank against the security of said assets. It is denied that, prior to the purchase of the assets by the petitioners, earlier unit was closed for a period of one year on the ground that the deferment certificate since was issued in favour of the Kumkum Industries and it filed returns in the years 2006-2007, 2009-2010 as well as year 2010-2011 and that the registration of M/s. Kumkum Industries is in existence even as on today and for the very same place of business & hence, no new registration could be granted to the present petitioners. It is urged that the petitioners had purchased the assets of the said unit on 31st January, 2007 but as the said transaction was void and the same was with a view to defraud the revenue, such transaction was declared as void under Section 73 of the Gujarat Sales Tax Act, 1969 vide order dated 16th January, 2008 by the Commercial Tax Officer.
17. It is also held that Sub Section 4 of Section 26 provides for special provisions regarding liability to pay tax in certain cases whereby a dealer, liable to pay tax under this Act, transfers his business in whole or part, by sale, lease, leave or license, hire or in any other manner whatsoever the dealer and the person to whom the business is transferred shall jointly and severally be liable to pay tax due from the dealer under this Act or under any earlier law upto the time of such transfer, whether such tax has been assessed before such transfer, but has remained unpaid or is assessed thereafter. Thus, as per the statutory provisions of Section 26, the present petitioners are liable to pay tax which has been assessed before such transfer.
18. Learned Senior Counsel Mr. Deven Parikh appearing for the petitioners has made submissions on the line of grounds raised in the petition. He urged that the liability is needed to be crystallized, however, since the purchase has been made by the present petitioners in the year 2007 and for the previous dues unless the liability is crystallized, there should not be any question of payment. From the chronology of events, he pointed out that the Deputy Commissioner (Appeals) in its order dated 12th September in terms, held that the petitioners are entitled to the registration & the entire case was remanded to the concerned authority for grant of registration. It was also held therein that as there was no charge before the revenue authority or anywhere pursuant to the undertaking of partners of old Kumkum Industries, the demand of department was unsustainable. However, he lamented that disregarding such vital facts in the challenge by the department, the Commissioner disallowed the plea vide its cryptic order dated 30th April, 2009, however, against such order, the appeal is pending before the VAT Tribunal.
19. It is further urged that the charge is notified much belatedly in the month of October, 2007 whereas purchase of petitioner is of January, 2007. The order of attachment was served upon the old Kumkum Industries and not upon the present petitioners. He also urged that the petitioners had paid the consideration and till date of the purchase, nothing has been done by the sales tax department for securing the dues of the department. In such circumstances, the department is not entitled for recovery of the dues. He further urges that unless there is an order under the deferment scheme, there is no liability and hence, there is no question of defrauding the department. Learned Counsel has also urged that purchase is of the asset and not of on going concern & therefore also, no liability can be thrust on the petitioner.
20. Again pointing out on Section 26 of Sales Tax Act, he submitted that this provision will come into play only when that the sale is of ongoing concern and not of the sale of assets. He heavily relied upon the judgment of the Apex Court reported in 1996 Sale Tax Case 341. There is a distinction made of sale of assets & sale of ongoing concern. He also sought to rely upon the decision of the Apex Court reported in 2009 2 SCC P.122 (Union of India Vs. Sicom Limited & Ors.), wherein it is held that the sale tax dues do not take precedence over the dues of the Banks who have secured interest in the property. It is urged that the Bank, in exercise of powers as a secured creditor has disposed of the assets. This court has also taken view that the crown debts can have preference over the unsecured private debts and if both the debts are equal, State can claim preference. However, if other debts are secured debts then the crown debts do not take priority over such secured debts. Therefore, he urged that the secured debt of the Banks will accord priority.
21. He further urged that the bond executed by the old Kumkum Industries was personal bond and would not create charge over the property. It is also urged that if the regular return is filed under the Scheme, the sales tax is deemed to have been paid under law and no liability can be imposed on the present petitioners.
22. Ms. Maithili Mehta, learned AGP has relied upon clauses 9 and 10 of the Scheme. She emphasized that, with a view to defraud the government dues, such transaction if takes place and when any breach continues or is made to the undertaking given to the government, it would entail the deferment withdrawal. She further emphasized that there is security bond issued by the Kumkum Industries with pari pasu charge and therefore, the transfer from old to new Kumkum industries is a fraudulent transfer. The dues can be recovered as the attachment was already in existence prior to the sale and the sale of the property would be hit by Section 73 of the Gujarat Sales Tax Act. She emphasized that the purchase of the present petitioner was not made for valuable consideration nor without notice of pending liability and therefore, it cannot be held a bona fide purchaser.
23. In light of the above pleadings as also the submissions made by both the sides before adverting the rival claims, it will be necessary to recapitulate herein after the chronology of events:
1) The period of deferment of tax was granted to old Kumkum Industries in the year 2001.
2) The old Kumkum Industries was a partnership firm consisting of four partners who owned the lands, building, plants etc.
3) Changes were made in the Constitution of the said Partnership Firm & on March, 2005, the partners continued namely Mr. Chinubhai Dalsukhhai Sanghvi and Mr. Arvind Chimanlal Sanghvi.
4) Security bond to the sale tax department for availing the deferment of the tax was given by the partners of the old Kumkum Industry.
5) Form of security bond was executed by the partners of Kumkum industries creating pari pasu charge for availment of Deferment Tax Scheme and thereby, it was ensured by them not to transfer or sell or otherwise dispose of in any manner or mode the assets of the unit, without written permission of the sale tax authority.
6) In the event of any breach, the entire amount of the tax was to become due to be paid on the purchase effected by the unit and the amount would be required to be paid within 60 (sixty) days in the Government treasury from the date of such sale along with transfer rate of interest @ 24%.
7) However, prior to giving personal undertaking in the year 2001 by the partners of the old Kumkum industries, the property was mortgaged to the Bank. As the old Kumkum Industry could not continue the business profitably, the Bank enforced its dues & by tripartite agreement, sold the properties to new Kumkum Industries along with the ongoing concern on 14th March, 2005 by way of registered sale deed.
8) Partners of (new) Kumkum Industries continued the name of Kumkum Industries & enjoyed the benefits available to the original Kumkum Industries. It also availed the loan from the Bank of India which was subsequently transferred to Syndicate Bank & mortgaged the property & due to non payment of dues of the Bank, under the SARFAESI Act, the property was sold to the present petitioners by way of registered sale dated 31st January, 2007 & entire sale consideration was paid to the Syndicate Bank.
9) Partners of old Kumkum Industries intimated sale of 2005 to the new Kumkum Industries in December, 2006 for the first time.
10) Respondent-Sales Tax Department created charge over the property by mutating an entry for the first time in October, 2007.
24. In light of these developments, some of the following points arise for consideration:
1) Whether in wake of execution of security bond creating charge for availment of Deferment Sale Tax Scheme by the partners of old Kumkum Industries, any transfer made of the property could have been permissible under the law to the new Kumkum Industries ?
2) Whether creation of pari passu charge by the original owners in favour of the respondent State would entitle it to enforce its dues on equal footing?
3) Whether the sale of the property to the present petitioners by the bank due to the mortgage created by new Kumkum Industries is hit by any provision of law ?
4) Whether the dues of the sales tax department can take preference over the secured debt of the Bank?
5) Whether doctrine of priority of crown debt would be applicable in case of sales tax department?
6) Whether the provisions of Section 26 of the Sales Tax Act would entitle the recovery of sale tax dues from the present petitioners even if it is held that transfer is merely of assets and not the transfer of business ?
25. Firstly, the decision of this Court rendered in the case of Burhankhan Khalidkhan Pathan Vs. Sales Tax officer (II) & 2 in Special Civil Application No.4343 of 2009, will be needed to be reproduced profitably to have answer to the contention of first charge/priority to prevail over the secured debt wherein this very Court answered the questions in the following manner:
“15. Taking first issue, as rightly pointed out by the learned advocate for the petitioner, purchase of the property was by Smt. Meena Parikh, who had purchased it from the State Bank of India, which had sold it after invoking notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the total area of the land is 7000 sq.meters and the area of the land purchased by the present petitioner was 4812 sq.meters on 31.8.2007 by an entry No.4497/- effected in the Revenue record. Admittedly, prior to the purchase, there was no objection raised against that and as rightly pointed that sales tax dues cannot claim priority over the secured dues of the Bank. The Bank after exercising its powers had sold the same by way of an auction.
16. It is pertinent to mention that this Court in Special Civil Application No.3786 of 2010 and connected petitions decided by the Division Bench in the case of Tax Recovery Officer vs. Industrial Finance Corporation of India followed the decision of this Court in the case of Kotak Mahindra Bank v. Dist. Magistrate reported in 2011(1) GLR 18, wherein Division Bench was concerned with the dues of the Central Excise Department vis-a-vis the debts of the secured creditor being financial institution, which was exercising power under SARFAESI Act. Division Bench held therein that unsecured Crown debt has no priority over secured debt of a secured creditor by holding thus:-
“30. In the present case,there is nothing on record to suggest that under the Central Excise Act or the Rules framed thereunder priority of charge over the secured debt has been created. No such law has been brought on record to suggest that the Central Government has any first charge or priority over the secured or unsecured debt. Similar contention was raised on behalf of the Central Government referring to certain provisions of the Central Excise Act, 1944 in the case of Union of India v. Sicom Ltd., reported in 2009(2) SCC 121, the Supreme Court rejected such claim. The Madras High Court also while dealing with the provisions of the Central Excise Act, also rejected the claim of the Excise & Customs Department of the Central Government to have priority over the secured or unsecured debt. In that view of such authoritative pronouncements of the Supreme Court and the decision of the Full Bench of the Madras High Court, we hold that the Excise & Customs Department of the Central Government cannot claim any priority over the secured debt of a secured creditor-Kotak Mahindra Bank as created under the Securitization Act.”
17. It will not be out of place to mention at this stage that the Division Bench of this Court in the case of Baroda City Co-operative Bank Ltd. vs. State of Gujarat, reported in 2010(3) GLR 2132, considered judgments of other Courts and those of Supreme Court on the question of tax dues of State vis-a-vis the unsecured debt of private parties and held in the following manner:-
“16. From the judgments referred to above, it will be evident that-
(a) The arrears of tax due to the State can claim priority over the unsecured debt.
(b) If first charge by way of priority is not claimed under the Statute, the said doctrine is not applicable.
(c) Normally, the doctrine of first charge/priority of State will prevail over the private debt which is an unsecured debt.
(d) In normal course, the doctrine of first charge/priority cannot prevail over secured debts, but if first charge of the State is over the secured debts, both debts being equal, the State can claim priority even over the secured debts, and
(e) The secured debts under the Securitization Act or debt under the R.D.D.B. Act has no first charge, and thereby, cannot compete with first charge/priority claim of the State if made under the Statute.”
18. In light of the decision above, it can be held that dues of Sales Tax Department cannot have primacy over the secured debt of Banks. The petitioner was fully secured by the Kabulatnama given in his favour by both Smt. Meena Parikh and the Directors of the erstwhile company. In such situation, it can be held that the purchaser has purchased the property for value without notice from the auction held by secured creditor Financial Institution. It cannot be effected by any subsequent attachment nor by way of any earlier deed on the part of the erstwhile owners and, therefore,on both these counts also the Court is of the opinion that the title of the present petitioner cannot be affected. And therefore, any notice issued in relation to the land purchased by the present petitioner by way of a registered sale deed on and by an entry mutated cannot be effected and the same requires to be protected by way of an order in this petition.”
26. As far as answers to question nos.1 and 2 are concerned, as mentioned in detail hereinabove by chronology of events that the order of attachment came to be passed by the sales tax authority in the year 2010 and the order was sent to the Talati-Cum-Mantri to mutate such entry in the revenue record much after the present petitioners already purchased the property by way of registered sale deed. It is also needed to be noted that, after the undertaking was furnished by the old Kumkum Industries on availing benefits of deferment tax, at no stage, the sales tax authority had intimated the revenue authorities to mutate the entry in respect of the said land. This Court had noticed the same scenario in case of Burhankhan Khalidkhan Pathan(Supra). Following observations were made on this issue:
“13. At the same time, taking second ground raised at this stage, admittedly the order of the first attachment was passed by the sales tax authority on 18.7.2003 and the said order was sent to the Talati- cum-Mantri of Khetraj Gram Panchayat and Mamlatdar, Kalol with a request to effect necessary entry in the relevant revenue record. Inward entry of this communication was made for this very purpose in the offices of the Talati and Mamlatdar on 2.8.2003. This order unequivocally is suggestive of the fact that though the notices have been served duly to M/s. Swet Zinc Limited under Section 152 and Section 200 of the Land Revenue Code after calculating total dues of Rs.8,14,106/- with interest and penalty, it had failed to pay the same and thereby discharge its liability to pay the sales tax dues differed. Resultantly, there was a need to auction the said property and hence this outstanding dues, which arose in the form of charge was to be mutated in the Revenue record. What gets revealed from the record is that till the order of the second attachment dated 23.7.2008 was sent, no entry was mutated by the office of Mamlatdar despite specific request in the form of direction through the communication dated 18.7.2003. There is no explanation as to why despite a specific order of attachment and intimation to both these offices, no entry has been mutated, and corresponding vigilance is also absent on the part of the office of the Sales Tax Authority to ensure that its order had been duly effected and executed. This non-action and non-performance on the part of the concerned authorities and lack of due care on the part of the Sales Tax Authorities to ensure the execution of its order of attachment, by way of mutation of the entry in the revenue record led to the transfer of the property without the dues of the sales tax authority being noticed and registered. There could be no dispute that the actions initiated by the respondent No.1 was necessary for protecting and safeguarding the legitimate tax revenue of the State.
What is incomprehensible is the fact that this large amount of tax, which was due from the original assessee for which three notices were already issued and yet taxes were not recovered. In such circumstances, no reason is forthcoming as to why the entry of attachment, has not been mutated. Even while attaching the same for the second time in the year 2008 no attempt appears to have been made on the part of the authorities to verify as to at what level the fault lied, which resulted into the property twice having changed the hands without any charge of sales tax authority having been mentioned.
We would like to observe here that not only the scrupulous execution of the orders of Sales Tax Authority attaching the property needs to be done by mutating entry in the revenue record at the relevant time but also apt vigilance be observed on the part of the sales tax authority to ensure that the intimation once having been sent to the concerned revenue authority, is duly taken note of and executed by it and Revenue authority is also to report back, failing failure of the recovery of the Government dues is almost inevitable. Possibilities also cannot be ruled out of collusion so as to frustrate recovery. Consequently, the Government dues are neither recorded nor recovered allowing the property to change hands. Not only notice of attachment eventually fail in such circumstances but, this would encourage unscrupulous practices for defeating the tax collection.
14. Coming to the first issue, in the instant case, admittedly, till the second attachment order was made on 23.7.2008, there was no entry in the revenue record and, therefore, the present petitioner cannot be expected to record any outstanding dues and particularly with both erstwhile owners Smt. Meena Parikh and Shri Krishnavadan Desai for himself and as a attorney holder of Mr. Shailesh Jayantilal Shah when had executed Kabulatnama of the property being marketable with clear title, the second attachment cannot affect his title with all protections that have been taken prior to his executing the registered sale deed and mutating his entry in the revenue record.”
27. Here, the case appears to be graver than we noticed in the earlier petition as here, there does not appear to be any communication to the revenue authority. For the first time, entry was made in October, 2007 & the order of attachment came to be passed by the sales tax authority in the year 2010 and therefore, naturally there would be no mutation of entry indicating charge of the sale tax authority in the revenue record and resultantly, when the petitioner purchaser bought such property particularly from the Bank with whom such property was mortgaged and no dues of any authority reflected in the revenue record, the Deputy Commissioner (Appeals), while rightly remanding the matter back for registration, also must have noticed absence of such charge in the revenue record.
28. There appears to be apparent act of callousness and total apathy towards the departmental dues. There also appears to be concealment on the part of both the first transferee, original partners & subsequent purchasers. As the ongoing business was already transferred to the second purchasers who continued the business in the same name & style of Kumkum Industries(new), possibility of their being hands-in- gloves with the original partners also could not be ruled out. No notice of change in the Constitution of Partnership Firm was given as required under the law even when such transfer was effected the first time. However, even after new partners continued business, no steps were taken by the department to insist upon its charge to be executed.
29. At the same time, subsequently when, on the very property, huge amount of loan had been availed and the property was mortgaged with the Bank of India & such loans of Bank of India was transferred to Syndicate Bank, purchase of property by the present petitioners, by way of registered sale deed, in absence of any charge of the sales tax authority cannot be held to be mala fide act to defeat the right of department. Again, when challenge to the authority of the bank to transfer the said property in wake of its secured debt is not legally tenable, present petitioners would not become liable for the legal dues of the erstwhile owners.
30. In the instant case also, as mentioned earlier, transfer is of asset only and not of ongoing concern and therefore, when the petitioner herein is the purchaser from the bank without any notice, he cannot be affected by the act of erstwhile owner in absence of any charge.
30A. Section 26(4) of the Sales Tax Act speaks regarding the liability to pay tax in certain cases. Clause-(4) of this Section speaks that the liability of a person to pay tax jointly or severally with any party, in whose favour the business is transferred, in whole or part. Section 26(4) is reproduced for proper understanding:
“Where a dealer, liable to pay tax under this Act, transfer his business in whole or in part, by sale, lease, leave or license, hire or in any other manner whatsoever the dealer and the person to whom the business is transferred shall jointly and severally be liable to pay the tax (including any penalty) due from the dealer under this Act or under any earlier law upto the time of such transfer, whether such tax (including any penalty) has been assessed before such transfer, but has remained unpaid or is assessed thereafter.”
30B. Again, it is expected that the retiring partners are to intimate the status or a change of Constitution of Partnership Firm within a period of 45(forty five) days from the date of retirement of a partner. Admittedly, in the instant case, the first owners have not intimated within the time specified and have made breach of provisions of Section 25 of the Sales Tax Act and yet, Section 73 of the Sales tax Act would not help the cause of the State, which failed to help its own cause by not intimating to any of the authorities or parties of the outstanding dues of the earlier owners. Section 73 of the Act is reproduced hereunder:
“73. Transfer to defraud revenue void-[Where a dealer after any tax has become due from him] creates a charge on, or part with the possession by way of sale, mortgage, exchange or any other mode of transfer, whatsoever, of any of his property in favour of any other person with the intention of defrauding the Government revenue, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the dealer.”
30C. This proviso to provision states that such transfer will not be void if made for valuable consideration and without any notice of any proceedings under this Act. As reflected, this transfer to the present petitioner was in absence of any notice and in absence of any charge created before any revenue authority.
31. The decision of the Apex Court rendered in the case of 144 Sales Tax Cases P.311 shall also come to the rescue of the present petitioners as the sale to the petitioners was not of ongoing concern, but, of the property only. The Apex Court held thus:
“The consequence contemplated by section 15(1) of the Karnataka Sales Tax Act, 1957, viz., foisting of the liabilities of the defaulting transferor on to the transferee, would come into effect only if the “ownership of the business” is transferred. “Business” is an activity, directed with a certain purpose, more often towards producing income or profit. Ownership of assets is merely an incident rather than a characteristic of business. Hence, the mere transfer of one or more species of assets does not necessarily bring about transfer of the “ownership of the business” for “ownership of a business” is much wider than mere ownership of discrete or individual assets. In fact, “ownership of business” is wider than the sum of the ownership of a constituent assets. Above all, transfer of “ownership of business” requires that the business be sold as a going concern. Therefore, section 15(1) is intended to operate only when there is complete transfer of “ownership of business” so as to render the transferee as a successor-in-interest of the transferor. Only in such eventuality does section 15(1) make the transferee liable for the transferor's sale tax liabilities.”
32. Thus, it can be seen that in the matter before the Apex Court in absence of complete transfer of “ownership of business” did not render the transferee a successor-in-interest of the transferor. The Court held that the transferee would be liable for transferor's sales tax liability only in the event of transfer of ongoing concern & not when there is any transfer of asset.
33. Keeping in mind, of course, the provisions of the Sales Tax Act, the Court held that this being a purchase without any notice of dues or charge on the property, the property in the hand of the transferor would be free of charge and it would not be open for the department to enforce liability against the purchasers.
34. Emphasis is of pari passu charge created by earlier owner in favour of the Sale Tax Department. However, before this charge was created, the date indicates that the Bank had already lent the amount and secured debt was created; even before the first owner created the charge. Subsequently also, when the second owner availed huge amount of loan from the Bank, such charge was not even within the notice of the Bank also.
35. “Pari passu” is a Latin phrase which literally means “with an equal step” or “on equal footing”. Black's Law Dictionary (8th Edition) defines pari passu as “proportionally” at an equal pace without preference. The phrase is used to indicate simultaneous & equal charge for which when more than one creditors has a charge on the same property though created at different times, on agreement amongst themselves, such charge would rank equal in enforcement.
36. In the circumstances, even if the pari passu charge would entitle the State to have proportionally equal share as a creditor, there has to be an agreement amongst other creditors, or it should be within the knowledge of the creditors that such charge was created and in absence of any agreement, or knowledge of the Bank, creation of pari passu charge cannot come to the rescue of the State Government.
37. This court is conscious of the fact that there is a huge amount of dues of sales tax department which is a public money, however, the department shall also have to find out as to why, after undertaking was given by the erstwhile owners and the partners of old Kumkum Industries not to sell or transfer in any mode or manner the land, building, factory etc. no charge at any point of time was created in the records of right ensuring the safeguard of recovery of the dues of the department. The concerned officers who are in-charge of such correspondence ensuring recovery need to answer these questions and on due inquiry in accordance with prevalent law/rules if anyone is found negligent or guilty, he/they should be held liable for such inaction/acts.
The department may also independently initiate action qua the erstwhile owners for not having fulfilled their lawful responsibilities, as it has already been noticed from the record & as discussed hereinabove that the transfer to the present petitioner is not the transfer of business, but only of the land & he since held to be the bona fide purchaser value without notice, he is found not to be responsible for any dues of erstwhile owners, however, the responsibility of the earlier owners may not get absolved thereby.
38. In light of the discussion held above, this petition succeeds and consequently, the attachment Order dated 5th April, 2010 attaching the land, building, plant and machineries is hereby quashed and stands set aside. The respondents shall be at liberty to recover Sales Tax dues from erstwhile owners of Kumkum Industries in accordance with law, if law so permits. However, for such past dues, no recovery qua the present petitioners is held permissible.
Rule is accordingly make absolute in the above terms. Cost to be cost in the cause.
(Akil Kureshi, J.) chandrashekhar* (Sonia Gokani, J.)