A Company in the course of business obtained financial assistance from financial institutions and banks. For securing the debt, the said company had mortgaged its immovable properties and thus created security interest in the said properties. The Company defaulted in repayment and the banks and financial institutions sold the mortgaged properties under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short ‘SARFAESI Act’). Sale Certificate was issued in favour of the Auction Purchaser and it was mentioned in the said Sale Certificate that the sale is on “as is where is” and “as is what is” basis. The Sale Certificate was duly registered and possession was handed over to the Auction Purchaser.

Thereafter, the Sales Tax Department intimated the Auction purchaser that the dues of the Company are recoverable and in view of the statement in the Sale Certificate that the sale is on “as is where is” and “as is what is” basis proceeded to attach the property of the Auction Purchaser purchased under SARFAESI Act.

The Auction Purchaser approached the Bombay High Court challenging the said attachment by way of Writ Petition No. 2608 of 2014. The Sales Tax Department, put forth an argument before the Hon’ble High Court that the Auction Purchaser has acquired a capital asset within the definition of the term “capital asset” as appearing in section 2(14) of the Income Tax Act, 1961. The term “business” as appearing in section 2(5A) of the Bombay Sales Tax Act (for short ‘BST Act’) includes a capital asset. Section 19(4) of the BST Act was heavily relied upon, that a dealer who is liable to pay tax under the BST Act transfers or otherwise disposes of his business to any other person or affects change in the ownership thereof, then the person succeeding  shall jointly and severally liable to pay the tax. It was also asserted before the Hon’ble High Court that once the Sales Tax dues are in arrears, they are always payable, then, there is a charge on the properties of the dealer or any other person within the meaning of section 38C of the BST Act. That would enable the Sales Tax Department to go after the properties of the Auction Purchaser.

The Division Bench of the Hon’ble High Court held that a debt, which is secured or which by reason of the provisions of a statute becomes the first charge over the property must be held to prevail over the Crown debt which is an unsecured one. The Crown's preferential right to recovery of debts over other creditors is confined to ordinary or unsecured creditors. As to the liability of the successor in interest, such a liability can be fastened on that person who had purchased the entire unit as an ongoing concern and not a person who had purchased land and building or the machinery of the erstwhile concern. It is only in those cases where the buyer had purchased the entire unit i.e. the entire business itself, that he would be responsible to discharge the liability of the previous owner. The subsequent purchaser cannot be fastened with the liability relating to the dues of the Government. The general stipulation in the agreement and sale certificate would not enable the authorities to levy attachment and on the properties, which are no longer belonging to the Company i.e. previous owner. The Auction Purchasers are not the defaulters nor they are successor in interest. In these circumstances, the attempt to foist the liability of the defaulting Company (previous owner) on the Auction Purchaser and proceed against their properties cannot be sustained and the order of attachment was quashed.

By Dominic Braganza

Partner

Abhay Nevagi & Associates, Advocates, Pune