Purchasers In Securitization Auction Held By NBFI Are Liable To Discharge Tax Dues For Recovery Of Which Attachment Was Made By Sales Tax Dept: Bombay HC

Finding that the attachment as also the charge on the property did not extinguish merely for the reason that the secured creditor exercised its first charge to recover the dues payable to it by the borrower, and despite such sale, the sales tax dues, subject matter of attachment, were not satisfied and had remained outstanding in the present case, the Bombay High Court held that the legal character of the property, being an encumbered property and that it continued to be an encumbered property under the valid attachment/charge of the Government, subsisted even in the hands of the purchasers.

The High Court held so while considering whether the first and second petitioners who are auction purchasers in a securitization auction held by the third petitioner (NBFI), are liable to discharge the sales tax dues, for the recovery of which, the property as purchased by them, was attached by the Sales Tax Department before the auction; and/or whether the petitioners have purchased an encumbered property.

The Division Bench of Justice G.S. Kulkarni and Justice Jitendra Jain observed that “the Sales Tax Department had a charge on the said property as purchased by petitioner Nos.1 and 2, given attachment order dated 11 August 2017, which has remained to be valid and subsisting. Further, the position in law is also clear that after the recognition of the first charge of petitioner No.3 as a secured creditor, the charge of the Sales Tax Department to recover the sales tax dues would be valid and subsisting, which would empower the Sales Tax Department to enforce the same”.

Therefore, the Bench rejected the petition with no cost and allowed the Respondents to get their legal dues from the first and second Petitioner.

Senior Advocate G.S. Godbole appeared for the Petitioners, whereas Special Counsel V.A. Sonpal and Shruti D. Vyas appeared for the Respondents.

The brief facts of the case are that Taurus Auto Dealers Pvt Ltd defaulted a sum of rupees Seven crore seventy-one lakhs from the third Petitioner following which the third Petitioner published possession notice in a local newspaper. However, to the surprise of the third Petitioners, the Sales Tax Department issued an attachment order under section 34 of the Maharashtra Value Added Tax Act, 2022 which sought to recover sales tax dues of ten crore thirty-one lakhs thirty-eight thousand and three rupees from the defaulting borrowers. The attachment order came to be challenged and relief was granted to the third Petitioner. Later, the third Petitioner auctioned the defaulter’s property.

After considering the submission, the Bench found out that the earlier orders passed by the Bench on Jan 10, 2020, in Writ Petition 4860/2019 cannot be accepted since it never created any infeasible right to the third Petitioner to sell the property free from encumbrances.

The Bench also noted that there was a charge/ encumbrance on the disputed property with effect from August 11, 2017, since the first and second Petitioner purchased the property along with such charge/encumbrance.

Therefore, it would ordinarily mean that a burden/ charge and the legal liability to pay the encumbrance will fall on the purchaser, added the Bench.

The High Court stated that the law is also clear if considered Section 100 of the transfer of property wherein liability is directed towards the First and Second Petitioner being absolute owner of the property as per the auction terms which clearly states that the purchaser of the property sold has taken the property subject to all defects.

Accordingly, the High Court concluded that the charge of the Sales Tax Department would not get extinguished.

Cause Title: Shailesh K. Bothra and Ors v. State of Maharastra and Ors.

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