State Taxation Tribunal - Tamil Nadu
The Federal Bank Ltd. vs Deputy Commercial Tax Officer on 3 April, 2001
Equivalent citations: [2002]126STC225(TRIBUNAL)
ORDER
L. Palamalai, Administrative Member
1. The prayer in the original petition is to quash the order of the respondent, namely, the Deputy Commercial Tax Officer, Gudiyatham (East), Assessment Circle in Re. No. A3/6842/96 dated March 5, 2001. The facts leading to the present petition are as follows :
The respondent/assessing authority in Ref. No. A3/6842/96 dated August 28, 2000 informed the petitioner-bank that Mr. K Venkatachalam, who was running a business called, "Classic Motor Sales" at Vellore, was in arrears of sales tax and entry tax under the Tamil Nadu General Sales Tax Act, 1959 and under the Tamil Nadu Tax on Entry of Motor Vehicles into Local Areas Act, 1990, as detailed below :
Arrears of sales tax 1992-93 Entry tax Rs.
41,281 1994-95 Entry tax Rs.
29,286 1994-95 TNGST Rs.
10,722 1995-96 TNGST Rs.
6,42,722 SC Rs.
98,037 AST Rs.
1,25,555 Penalty Rs.
12,99,471 1996-97 TNGST Rs.
5,98,181 SC Rs.
23,112 AST Rs.
20,016 Penalty Rs.
9,61,964 1996-97 Entry tax Rs.
39,423 Penalty Rs.
78,846 1997-98 TNGST Rs.
4,15,193 Penalty Rs.
6,22,790 Total Rs.
50,06,599 He further informed that Mr. K. Venkatachalam (deceased) owned immovable property at Kalinjur village at Survey No. 241 and that property was attached and sold in auction by the petitioner-bank and as the arrears due to department being first charge in terms of Section 24(2) of the TNGST Act, 1959, an extract of which was furnished, the petitioner was requested to give details of property sold in auction and purchased by the petitioner-bank in the auction, so as to take further action. Section 24(2) of the TNGST Act, 1959 reads as follows :
"Section 24(2) : Any tax assessed on or has become payable by, or any other amount due under this Act from a dealer or person and any fee due from him under this Act, shall, subject to the claim of the Government in respect of land revenue and the claim of the Land Development Bank in regard to the property mortgaged to it under Section 28(2) of the Tamil Nadu Co-operative Land Development Banks Act, 1934 (Tamil Nadu Act X of 1934), have priority over all other claims against the property of the said dealer or person and the same may without prejudice to any other mode of collection be recovered,--
(a) as land revenue, or
(b) on application to any Magistrate, by such Magistrate as if it were a fine imposed by him."
The petitioner-bank, in the letter dated October 16, 2000, informed the respondent that the property attached on April 5, 1999 for a sum of Rs. 86,06,550 due to the bank has been bid in a public auction by the Bank on September 2, 1999 for a sum of Rs. 45,10,000 and that the property was bid under bona fide belief that the property was not subject to any sort of liability. The bank came to know of the tax liability much later. As the bank was not served with any notice of demand till the time of the letter dated August 28, 2000, the purchase of the property by the bank is protected under Section 24-A of the TNGST Act, 1959 which reads as follows :
"Section 24-A : Transfers to defraud revenue void.--Where, during the pendency of any proceedings under this Act or after the completion thereof, any dealer creates, a charge on, or parts with the possession (by way of sale, mortgage, gift exchange or any other mode of transfer whatsoever) of any of his assets in favour of any other person, with the intention to defraud the 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 as a result of the completion of the said proceeding or otherwise :
Provided that, such charge or transfer shall not be void if it is made--
(i) for adequate consideration and without notice of the pendency of such proceeding under this Act or, as the case may be, without notice of such tax or other sum payable by the dealer ; or
(ii) with the previous permission of the assessing authority,"
2. As the property was purchased in an auction bid for adequate consideration and without notice, the department cannot initiate action to recover the tax dues. On confirmation of the sale on September 2, 1999, the property came to the possession of the bank and action has been initiated to make necessary changes in the Revenue records also. Therefore, the proceedings initiated to recover the arrears may be dropped. The petitioner-bank also sought for a personal hearing before finalising the issue.
3. In reply to the letter of the bank dated October 16, 2000, the respondent sent a letter on November 3, 2000 informing, among others, that as early as in the year 1996 itself, a B6 notice was issued in Rc. No. A2/5647/96 dated September 6, 1996, which was served on the bank on September 13, 1996, stating that the B6 notice issued would be valid until the arrears are cleared. In reply to the notice, the bank also sent a letter on November 6, 1996 stating that the dealers, namely, Classic Motor Sales were not maintaining any credit balance with the bank. Again, a letter was sent by the respondent on September 29, 1997 to transfer any credit standing in the name of the defaulter, namely, Classic Motor Sales to the department. In reply to this letter also, the bank on October 6, 1997 stated that the party was not having any deposit account with the bank. Therefore, the assessing authority held that the sale confirmation on September 2, 1999 was only after the bank had valid notice of the arrears. Therefore, the bank was advised to transfer the bid amount of Rs. 45,10,000, which was the valuation of the property towards the sales tax arrears. A personal opportunity was also given on November 16, 2000 to the bank to represent further, if any. After the personal hearing, the respondent/assessing authority issued the present impugned order on March 5, 2001. In this order, the assessing authority has indicated that the bank was aware of the arrears due from the defaulter/assessee in this case right from September 6, 1996 and in such circumstances, for the sales tax arrears, the bank, which has acquired the property of the defaulter, has to pay the amount to the extent of Rs. 45,10,000 which was the value of the assets, as concluded in the auction. The assessing authority concluded that if the bank failed to transfer the amount of Rs. 45,10,000 (value of the assets) on or before March 25, 2001, action would be taken under Section 24(2)(a) of the TNGST Act against the bank to realise the arrears in this case. The present petition is against this impugned order dated March 5, 2001.
4. Mr. V. Ramachandran, learned Senior Counsel appearing for the petitioner, contended as follows :
The petitioner, a banking company, had advanced a loan to Classic Motor Sales, a partnership firm, carrying on business at Vellore and the said Classic Motor Sales had mortgaged its land and building situated in Survey No. 241 at Kalinjur Village, Vellore for the loan taken from the bank. The total dues including interest, amounted to Rs. 1,04,25,621 and to recover this amount, action was taken by filing an application before the Debt Recovery Tribunal (hereinafter called DRT) and the DRT decreed the claim of the petitioner and in pursuance of the order of the DRT dated February 9, 1999 in O.A. No. 378/98, a recovery certificate dated February 23, 1999 was issued for the amount of Rs. 1,04,25,621. Thereafter, the property in Survey No, 241 at Kalinjur Village, which was already mortgaged to the petitioner, was attached and brought to sale in public auction on July 7, 1999. The upset price of the property was fixed at Rs. 45,00,000. Publication regarding the sale was made in two leading dailies. No objection was raised by the Sales Tax Department, though wide publicity was given about the sale of the property belonging to Classic Motor Sales. In the public auction, in the absence of higher bidders, the auction property was knocked down by the petitioner as the highest bidder for Rs. 45,10,000. Subsequently, from February 9, 1999, the petitioner became the absolute owner of the property. The petitioner is protected as bona. fide purchaser, as contemplated in Section 24-A of the TNGST Act, 1959. The property was purchased in auction without notice about the arrears to the extent of Rs. 50,06,599 from Classic Motor Sales, as contended by the Sales Tax Department. The arrears were not brought to the notice of the Bank before the sale took place on auction. In fact, on February 28, 1994, the Sales Tax Department sent a B6 notice for Rs. 93,000, which was due from Classic Motor Sales and thereafter, on payment of the arrears by the defaulter, this B6 notice was withdrawn by the department on March 3, 1994. Again on September 29, 1997, a communication was received from the Sales Tax Department, wherein it was stated that a sum of Rs.68,018 was due from Classic Motor Sales. The letter dated September 29, 1997, referred to an earlier reference dated September 6, 1996, and the letter further stated that a notice in form B6, referring to the above claim, had been issued demanding a sum of Rs. 68,018. A reply was sent to the respondent stating clearly that no deposit account of the said firm was with the bank and further, the respondent was informed that the cash credit account of the firm exceeded the limit sanctioned and therefore, the question of remitting any sum to the respondent, did not arise. Thereafter, till August 28, 2000, there was no further reference from the respondent regarding any arrears due from Classic Motor Sales. In such circumstances, it cannot be claimed that the petitioner had notice of arrears to the extent of Rs. 50,06,599 before the property mortgaged to the petitioner was brought to sale in pursuance of the orders of the DRT. Therefore, the claim of a sum of Rs. 45,10,000 towards sales tax dues of Classic Motor Sales from the petitioner-bank, is totally unwarranted. The property, which was mortgaged to the petitioner, was long prior to the accrual of liability to the Sales Tax Department. Thus, the sale in public auction was to settle a prior liability due to the petitioner. Further, as explained, the petitioner is a bona fide purchaser coming squarely within the purview of Section 24-A of the TNGST Act, 1959. Further, the property in question belonged to Mr. K. Venkatachalam, a partner of the firm and the demand by the department was raised on the firm and not on the partner. In such circumstances, Section 24(2) of the TNGST Act, 1959 cannot be invoked against the individual property of a partner, without issuing a notice of demand in the name of the partner, namely, Mr. K. Venkatachalam, who mortgaged the property with the petitioner-bank. The petitioner-bank did not have notice of the tax liability due either from the firm, namely, Classic Motor Sales or from Mr. K. Venkatachalam, the owner of the property. Even according to the notice of the department earlier, the demand was for an arrear of Rs. 68,018 only. Therefore, the present demand of Rs. 45,10,000, is totally unwarranted. If the department chooses to take action against the petitioner, then, the sale confirmed in favour of the petitioner in public auction, has to be set aside first before initiating any action against the property, which has become the absolute ownership property of the petitioner-bank.
5. The Supreme Court, in the case of Tax Recovery Officer v. Gangadhar Viswanath Remade (Decd.) reported in [1998] 234 ITR 188, has considered the scope of Section 281 of the Income-tax Act, 1961, which declares as void any transfer made by the assessee during the pendency of proceedings under the Act, with the intention to defraud the Revenue. This section is similar to Section 24-A of the TNGST Act, 1959. The Supreme Court categorically held that "if the department desires to have the transaction of transfer declared void under Section 281, the department being in the position of a creditor, will have to file a suit for a declaration that the transaction of transfer is void under Section 281 of the Income-tax Act. Thus, in the present case, if the department chooses to take action, then, a suit has to be filed in the civil court to declare that the transaction transferring title of the property is void. Without doing so, the property purchased by the petitioner in public auction for adequate consideration without notice of arrears to the extent of Rs. 50,06,599, cannot be attached.
6. Referring to the decision of this Special Tribunal in the case of N. Padma Coffee Works v. Commercial Tax Officer, Rockfort Assessment Circle, Tricky reported in [1999] 114 STC 494, it was contended that this Special Tribunal has also made the following observation in connection with bona fide purchase, as contemplated in Section 24-A of the TNGST Act, 1959 :
"The necessity of the purchase, the intention of the transfer, the relationship between the vendee and vendor are all vital factors to find out the reasonableness of the person in purchasing the property, Sometimes, unexplained secrecy or haste in the transactions may also throw some light as to bona fides or mala fides."
7. Thus, on the whole, the action of the respondent is totally unwarranted in this case and therefore, the impugned order dated March 5, 2001 may be quashed.
8. On perusing the records, it is seen from the order of the DRT, Chennai, dated February 9, 1999, which is available at page 33 of the typed set, that an equitable mortgage has been created on June 14, 1993 in respect of the impugned property belonging to the partner, Mr. K. Venkatachalam as additional security. Only this property, on which an equitable mortgage was created, was brought to public auction, in pursuance of the arrears due to the bank and in the absence of any highest bidder, the bank itself purchased the property in the public auction on August 2, 1999 and paid a sum of Rs. 45,10,000 and the sale was confirmed on September 2, 1999. Apparently, this money was received back by the bank, so as to satisfy a part of the arrears due to the bank. The point to be considered in this case, is the priority of charge arising out of sales tax arrears vis-a-vis, the arrears due to others including a mortgagee.
9. The Supreme Court, in the case of State Bank of Bikaner & Jaipur v. National Iron & Steel Rolling Corporation reported in [1995] 96 STC 612, held that the claim of the Sales Tax Department took priority over the claim of the appellant-Bank as mortgagee of the property in question. In that case, the State Bank of Bikaner and Jaipur had given cash credit facilities to National Iron & Steel Rolling Corporation and as security, created a mortgage of the factory premises on October 18, 1977 and the Plant and machinery installed in the premises were also pledged subsequently as security on June 10, 1981. In civil suit for recovery of the advance amounting to Rs. 3,79,672 under the cash credit facility and future interest, the mortgaged property was brought to sale. While the suit was pending, the department got imploded on May 18, 1990 on the ground that the department had a prior claim for a recovery of a sum of Rs, 1,19,122 as sales tax due from National Iron & Steel Rolling Corporation. In that case, the Supreme Court categorically held that the charge of the Sales Tax Department is the first charge on the property and it has priority over all other charges on the property including a mortgage. The Supreme Court categorically stated that the charge operates on the entire property of the dealer including the interest of the mortgagee therein. Referring to "Dattatreya Shanker Mote's case reported in (1974) 2 SCC 799, the Supreme Court held that :
".........a charge is a wider term than a mortgage. It would cover within its ambit a mortgage also. Therefore, when a first charge is created by operation of law over any property, that charge will have precedence over an existing mortgage."
10. This decision of the Supreme Court has been followed by the Madras High Court in the case of Central Bank of India v. State of Tamil Nadu reported in [1999] 113 STC 145. The Madras High Court categorically held that :
"Sections 24(2) and 26(6) of the Tamil Nadu General Sales Tax Act, 1959 as amended by Tamil Nadu Act 78 of 1986, sufficiently safeguard and also enable the State to enforce the recovery of the taxes and other dues under the Tamil Nadu General Sales Tax Act, 1959, as the first statutory charge holder in supersession of even the claims of an existing mortgagee, who claims to be a secured creditor."
11. Thus, definitely, the sales' tax arrears take precedence over the claims of an existing mortgagee also. In the present case, no dispute was raised as to the fact whether the arrears amounting to Rs. 50,06,599 due from Classic Motor Sales, have arisen before the petitioner-bank became the purchaser of the property in public auction with effect from September 2, 1999 as stated. Thus, the liability of Classic Motor Sales to pay sales tax in pursuance of the order of assessment, has not been disputed in the original petition. But, in terms of the decisions cited, the demand raised by the Sales Tax Department prior to September 2, 1999, will have precedence over the claims of the mortgagee petitioner in this case. The fact remains that the department has approached the petitioner with a demand to pay the value of the property amounting to Rs. 45,10,000, inasmuch as the charge of the Department has priority over the claims of the petitioner-bank, in terms of Section 24(2) of the:TNGST Act. The claim of the petitioner that the purchase of property for adequate consideration without notice is a moot point, in the light of the admitted position that the petitioner-bank was aware of the arrears due from Classic Motor Sales at least to the extent of Rs. 68,018, as admitted in the affidavit. In this connection, it is relevant to refer to the following observations of this Special Tribunal in the case of N. Padma Coffee Works v. Commercial Tax Officer, Rockfort Assessment Circle, Tricky reported in [1999] 114 STC 494 at 497 :
"A reading of Section 3 of the Transfer of Property Act, 1882 leads to the conclusion that, not only a wilful abstention from an enquiry which a person ought to have made, but the gross negligence to make enquiry also would amount to notice of a fact to him. When the prudence of a person requires to make enquiry, but due to his own negligence he failed to make enquiry, he falls in the category of a person, with notice."
When the department initiated action against the purchasers of property belonging to defaulters, it has been categorically held in the decision, reported, in N. Padma Coffee Works v. Commercial Tax Officer, Rockfort Assessment Circle, Tricky [1999] 114 STC 494 at 504 as follows :
"As mentioned earlier in all cases, notices have been issued by the Sales Tax Department and the petitioners/purchasers pleaded that they are bona fide transferees, which fact was not accepted by the Sales Tax Department, as they have the right to decide. No doubt, this assumption is not binding on the purchasers and they are entitled to initiate civil suits to establish their right to the property. But without doing that, they are not entitled to initiate these proceedings under Article 226 of the Constitution of India to accept their claim of bona fide purchase for value without notice."
12. The reliance placed on the decision reported in Tax Recovery Officer v. Gangadhar Viswanath Ranade (decd.) [1998] 234 ITR 188 (SC), is not relevant to the present case, which has to be considered in the light of the priority of charge of the State Government over the equitable mortgage of the petitioner-bank. In the decision reported in [1998] 234 ITR 188 (Tax Recovery Officer v. Gangadhar Viswanath Ranade), the Supreme Court considered the question whether in a proceeding under Rule 11 of the Second Schedule to the Income-tax Act, the Tax Recovery Officer can declare a transfer as void under Section 281 of the Income-tax Act, 1961. The brief facts of that case are as follows :
The assessee, a contractor, was assessed for the years 1962-63 to 1964-65 and the demands became final on 7th August, 1967. There were also income-tax demands, which were outstanding for the subsequent years when the Tax Recovery Officer served notices on the assessee under Rule 2 of the Second Schedule to the Income-tax Act, 1961 on October 21, 1972 and thereafter, attached the immovable residential property on October 23, 1972. It was contended by the assessee that a mortgage was executed in favour of the Bank of Maharashtra on December 2, 1967 for raising a loan of Rs. 75,000 and that a trust deed was also executed in favour of his wife and his daughter on February 21, 1969 and that the said property was conveyed by a registered deed to his wife and his daughter on February 27, 1969. Therefore, it was claimed that on the date on which the Tax Recovery Officer initiated proceedings, the property was in full possession of the wife and daughter of the assessee, The bank also filed objections. Thereafter, a show cause notice was issued by the officer on January 21, 1974 under Section 281 of the Income-tax Act. An enquiry was conducted by the Income-tax Officer and evidence was recorded and thereafter, an order was passed on May 9, 1974 declaring, inter alia, that the transfer in favour of the wife of the assessee and his daughter, was void as against the department under Section 281 of the Income-tax Act, 1961. This was challenged before the High Court and the High Court in its judgment dated January 9, 1981 reported in [1989] 177 ITR 163 (Gangadhar Viswanath Ranade v. Income-tax Officer), held that the proceedings taken pursuant to the declaration or expression of an opinion by the Income-tax Officer or authority under Section 281 were a mere prelude to the procedure for the recovery of tax and that the order dated May 9, 1974, did not in any way, affect the rights of the parties pertaining to the said property which could be considered in proceedings under Rule 11. Thus, the order of the Tax Recovery Officer was set aside by the High Court. The High Court has upheld the contention of the respondent that the Tax Recovery Officer has no power under Rule 11 of the Second Schedule to the Income-tax Act, to declare as void a transfer of property effected by the assessee during the pendency of proceedings against him under the Income-tax Act, on the ground that the transfer was with the intention to defraud the Revenue and was void as against the department under Section 281 of the Income-tax Act, as it then stood. Against the order of the High Court only, the question of law was raised before the Supreme Court and this was considered by the Supreme Court in Tax Recovery Officer v. Gangadhar Viswanath Ranade (decd.) [1998] 234 ITR 188. The relevant section considered in that case by the Supreme Court reads as follows :
"Section 281 : Where, during the pendency of any proceeding under this Act, any assessee creates a charge on or parts with the possession by way of sale, mortgage, exchange or any other mode of transfer whatsoever, of any of his assets in favour of any other person with the intention to defraud the Revenue, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of the completion of the said proceedings :
Provided that such charge or transfer shall not be void if made for valuable consideration and without notice of the pendency of the proceeding under this Act."
Thus, Section 281 declares as void any transfer made by the assessee during the pendency of proceedings under the Act, with the intention to defraud the Revenue. Under Rule 11(1), where any claim is preferred to, or any objection is made to the attachment or sale of, any property in execution of a certificate, on the ground that such property is not liable to such attachment or sale, the Tax Recovery Officer shall proceed to investigate the claim or objection. Thus, the Tax Recovery Officer has to examine, who is in possession of the property and in what capacity and that he can attach the property only if such property is in the possession of the assessee in his own right, or in the possession of a tenant or a third party on behalf of/ for the benefit of the assessee. Under Rule 11 of the Second Schedule to the Income-tax Act, the Tax Recovery Officer cannot declare any transfer made by the assessee in favour of a third party as void. Only in that context, the Supreme Court observed in the decision reported in Tax Recovery Officer v. Gangadhar Viswanath Ranade (decd.) [1998] 234 ITR 188 that if the department finds that a property of the assessee was transferred by him to a third party with the intention to defraud the Revenue, it will have to file a suit under Rule 11(6) to have the transfer declared void, under Section 281 of the Income-tax Act, 1961.
13. However, in the present case before us, the situation is entirely a different one. According to Section 24(2) of the TNGST Act, 1959, the charge of the Sales Tax Department on the property of the defaulter, will be the first charge even over the mortgage created earlier on the property. Only in that context of first charge, the assessing authority has proceeded in this case to take action on the property of the defaulter-assessee, by stating that the transferee is not a bona fide purchaser without notice. In such circumstances, the ratio of the decision of this Special Tribunal reported in N. Padma Coffee Works v. Commercial Tax Officer, Rockfort Assessment Circle, Tricky [1999] 114 STC 494 squarely applies. When the arrears of the defaulter-assessee are not disputed and no plea was made that the demands in question were subsequent to the date of sale, namely, September 2, 1999 and that the department asserts that the petitioner-bank was not a bona fide purchaser without notice, then, it is for the petitioner-bank, the purchaser of the property, to initiate civil suit to establish the right to the property.
14. There is no merit in the plea that the individual property of a partner cannot be proceeded against for the arrears due from a firm. According to Section 19(1) of the TNGST Act, 1959, when a firm is liable to pay any tax or other amount under the Act, the firm and each of the partners of the firm shall be jointly and severally liable for such payment of tax. Therefore, the individual property of the assessee is also liable to tax and the charge created under Section 24(2) of the Act covers individual property of the partners of a firm also. Therefore, even without any separate demand notice served on the partner of the firm concerned, the property is liable to be charged under Section 24(2) of the TNGST Act, 1959.
15. It is pertinent to mention that in deciding this original petition, only the arrears of taxes relating to sales tax have been considered by excluding the entry tax. Sales tax arrears alone in this case amount to Rs. 48,17,763. In such circumstances, the petitioner has got statutory right to prefer revision petition before the Deputy Commissioner of Commercial Taxes having territorial jurisdiction, with reference to the order of the respondent/assessing authority dated March 5, 2001. As already observed, for action to attach the property of the defaulter-assessee now vested with the petitioner-bank, a civil suit could be filed to establish the right to the property. If the department considers that the amount of Rs. 45,10,000 given to the bank on realisation of the sale of the property is incorrect, in view of the first priority of charge as contemplated in Section 24(2) of the TNGST Act, 1959, it is also open to the department to approach the DRT at Chennai, if deemed fit, for appropriate action as per law. However, the fact remains that in the writ jurisdiction, an issue involving investigation into controverted questions of fact, cannot be decided. For all the above reasons, I am of the opinion that there is absolutely no case to quash the proceedings of the respondent/assessing authority in Rc. No. A3/6842/96 dated March 5, 2001, as prayed for.
16. Accordingly, the original petition is disposed of in the above manner. In view of the disposal of the original petition as above, the miscellaneous petition therein does not survive.
17. The time taken during the pendency of this original petition shall be deducted in calculating the period of limitation for filing the revision petition.
The original papers, if any filed, shall be returned to the petitioners.
And this Tribunal doth further order that this order on being produced be punctually observed and carried into execution by all concerned.
Issued under my hand and the seal of this Tribunal on the 3rd day of April, 2001.