Sales Tax cannot be levied on the purchaser of the property, who has no prior knowledge of the dues of the defaulter: Bombay HC [Read Judgment]

Business Income - Bombay High Court 2 - Tax Scan

Recently, the division bench of the Bombay High Court, in a recent ruling, held that a bonafide purchaser who purchased the property of the defaulter cannot be liable to Sales Tax dues of the latter under the provisions of the Bombay Sales Tax Act.

The Court was considering a petition filed by a Company M/s Sonoma Management Partners Pvt Ltd, who was a successful holder in an auction of a property conducted by the Bank of Baroda and Bank of Maharashtra under the provisions of SARFAESI Act. The petitioners maintained that they were unaware of the sales tax dues of the defaulter company and had made a huge payment towards the sale consideration. At the time of registration of the property, the petitioners learnt that there was an encumbrance of the Sales Tax to the extent of Rs.18,38,709. Later it was revealed that the respondent banks had attached the said property  from the defaulter company who had a sales tax due of nearly 28 lakhs. Then the auction was conducted and the authorized officer of these two banks assured the petitioners that only secured assets of the defaulter company were being auctioned and “not the dues.” Despite this the sales tax department sought to levy the charges on the petitioner.

The petitioners submitted before the Court that the Sales Tax dues (save and except to the extent of Rs.18,38,709/-) cannot be recovered by enforcing their alleged charge under Section 38C of the BST Act against the said property, legitimately purchased by the Petitioners and without having any notice of the alleged dues of the Sales Tax Authorities.

The division bench comprising of Justice S C Dharmadhikari and Justice B P Colabawalla noticed the fact that the entire purchase was done by the Petitioners before the alleged dues of the Sales Tax Authorities was brought to their notice.

“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 to pay tax under the BST Act, transfers or otherwise disposes of his business in whole or in part or effects any change in the ownership thereof, in consequence of which he is succeeded in the business or part thereof by any other person, the dealer and the person succeeding, shall jointly and severally be liable to pay the tax including any penalty and interest due from the dealer. This is admittedly not the case before us. The Petitioners are not the successor in business of the Defaulter Company. 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 property. They can by no stretch of the imagination be termed as a successor of the business of the Defaulter Company to enable the Sales Tax 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.”

Read the full text of the Judgment below.