S.R. Rajasekhara Murthy, J.
1. Brindavan Industries, Raichur, was a dealer registered under the Karnataka Sales Tax Act, 1957 ('the KST Act') For the assessment years, 1977 to 1979, it fell into arrears of tax payable under the Act in a sum of Rs. 47,847 and thus became a defaulter under the Act,
2. The defaulter had obtained a loan on the security of the building and machinery, etc., from the Karnataka State Financial Corporation ('KSFC' for short). For default in repaying the loan, the assets of Brindavan Industries, both movables and immovables, were brought to sale by the KSFC and in the auction-sale held on 17th February, 1984, the assets of the defaulter were sold in public auction and the petitioner in this writ petition was the highest bidder. Thus, both the movable and immovable assets of the defaulter were handed over by the KSFC to the petitioner.
3. After the assets were thus transferred in favour of the petitioner, the recovery officer attached to the commercial tax department, Gulbarga, issued a notice to the petitioner on 20th August, 1985, as per annexure-B, calling upon the petitioner to pay the arrears of tax and penalty in a sum of Rs. 47,847 due from Srinivasa Shetty, proprietor of Sri Brindavan Industries, Raichur. This demand was made by the first respondent under section 15 of the Act.
4. The petitioners replied to the said notice on 13th January, 1986, as per annexure-C, and disputed their liability to pay the arrears of tax due from Brindavan Industries. This was followed by another notice issued by the first respondent, as per annexure-D, reiterating the demand from the petitioner in his capacity as transferee of the business. It was also brought to the notice of the petitioner that he would be liable to pay the tax of the defaulter under the Act by virtue of the provisions of section 15(1) of the Act. This notice is challenged by the petitioners in this writ petition.
5. The contention of the petitioners is that there was no transfer of ownership of the business of the defaulter by the defaulter directly and as such they are not liable to pay any tax or penalty payable in respect of the said business.
6. Their further contention is that there was no privity of contract between the petitioner and the defaulter and the assets of the defaulter were sold by the KSFC., and that, therefor, the petitioner-firm cannot be treated as a transferee under section 15 of the Act. It is, therefore, argued by Sri R. Gururajan, learned counsel for the assessee, that the assets of the defaulter were taken over by the KSFC and for realisation of the loan sold the assets in a public auction under section 31 of the State Financial Corporations Act, 1951 ('the SFC Act' for short). Thus, by the transfer of property made by the KSFC in exercise of its powers under section 29(1) of the SFC Act, all rights in or to the property transferred vested in the transferee (petitioner), and for all purposes, the Financial Corporation is deemed to be the owner of the assets of the debtor.
7. It is argued for the respondents by Sri Dattu, the learned High Court Government Pleader, that the dealer Sri Srinivasa Shetty was an assessee in default under the KST Act at the time of transfer and the petitioner who is a transferee of the business of the dealer which included its assets, both movable and immovable, becomes liable to pay the tax and the penalty that remained outstanding by the dealer. Under the said provision the transferee shall be deemed to be the dealer liable to pay the tax and that, therefore, all the provisions of the Act including recovery, become applicable to the transferee also. He also relied upon a decision of this Court in Sarvotham Shenoy v. State of Mysore (S.T.R.P. Nos. 5 and 6 of 1977, disposed of on 15th September, 1978), in which a Full Bench of this Court held that a transferee referred in section 15 of the KST Act is liable to pay the tax or penalty that remained unpaid by the dealer on the date of transfer. Sri Dattu also submitted that the intervention of the KSFC does not take away the effect of section 15 of the Act and the liability that is passed on to the transferee under section 15(1) of the Act. It was also argued by the learned Government Pleader that the property of the defaulter under the SFC Act vests in the transferee by virtue of section 29(1) of the SFC Act. It was also pointed out that the transfer of property made by the KSFC is deemed to be a transfer made by the owner of the property and that, therefore, the notice issued to the purchaser is valid in law and is enforceable against the petitioner-transferee.
8. This case involves an important question as to the liability of the transferee of the assets of the defaulter under the KST Act in a case where the assets of the defaulter are brought to sale, by a creditor of the defaulter.
9. The KSFC was a creditor in this case and it took over the industrial concern, along with its assets both movable and immovable, in exercise of the rights conferred on it under section 29(1) of the SFC Act. On assuming the control of the industrial concern, and its assets, the KSFC exercised its right to transfer the industrial concern by way of lease or sale and realise the loan, the repayment of which was secured by pledge, mortgage, hypothecation or assignment in favour of the KSFC. Any transfer of the property made by the KSFC in exercise of its powers under sub-Section (1) of section 29 of the SFC Act, whether by way of lease or sale, vests in the transferee all rights in or to the property transferred as if the transfer had been made by the owner of the property. Under sub-section (5) of section 29, the Financial Corporation is deemed to be the owner of the industrial concern for the purpose of suit by or against the concern. The next important provision that should be noticed in the State Financial Corporation Act is section 31. Special provisions for enforcement of claims by the Financial Corporation are provided in section 31. Under the said section, the Financial Corporation may sell the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation as security for the loan or advance, by an order of the District Judge within whose jurisdiction the industrial concern carries on it business. Such recovery can also be made under section 31 by enforcing the liability of any surety also.
10. Therefore, the question that arises in this case is : whether by virtue of the intervention of the Financial Corporation, who is a secured creditor of the defaulter, the transferee of the ownership of the business becomes liable to pay the tax of the defaulter
11. Section 15 of the KST Act was introduced by Act 5 of 1972 and came into force from the 1st of July, 1972.
12. The Financial Corporation has exercised its rights over the business assets of the dealer who was a defaulter to the Financial Corporation. The Financial Corporation was, therefore, a secured creditor which had a right to recover the loan by enforcing the security, by way of sale or lease. Therefore, the Financial Corporation is in the position of a creditor of the dealer who, as in the present case, is also a defaulter under the KST Act.
13. Under section 15 the transferee of the ownership of the business of a dealer is made liable to pay any tax or penalty remaining unpaid at the time of transfer. The Full Bench of this Court in Sarvotham Shenoy's case (S.T.R.P. Nos. 5 and 6 of 1977, decided on 15th September, 1978), referred to above has held that the transferee is liable to pay the tax or penalty which remained unpaid at the time of transfer. The question that arose for consideration by the Full Bench was : whether under section 15 of the Mysore Sales Tax Act, a transferee is liable to pay tax or penalty even though not demanded from the transferor prior to the date of transfer of the business.
It was contended on behalf of the transferee in that case that the tax becomes payable by the transferee only if the tax had been assessed and it becomes payable on the date of transfer, that is, the tax payable must have been quantified and it must have remained as arrears payable at the time of transfer. The Full Bench overruled the view taken by this Court in Tejanasa's case reported in [1969] 23 STC 47 (Mys) wherein, it was held, that the tax or penalty becomes payable by the transferee only when the order of assessment is made and the tax is quantified and it had become payable before the transfer of ownership of the business. The Full Bench observed that on the plain wordings of the section it must be held that what is transmitted to the transferee is the liability of the dealer to pay any tax or penalty which has become payable on account of or by reason of transactions which had taken place prior to the date of transfer of business and which had remained unpaid on the date of transfer.
Therefore, the action taken by the first respondent to recover the tax from the petitioner who is the transferee of the business assets of the defaulter, relying upon the decision in Sarvotham Shenoy's case (S.T.R.P. Nos. 5 and 6 of 1977, decided on 15th September, 1978), must be held valid and enforceable.
Though section 15(1) refers to the transfer of ownership of a business of a dealer for purpose of enforcing the liability of the dealer against the transferee of the business, all the provisions of the Act and the rules of recovery are made applicable to the transferee as well. Under section 15(1) of the Act, the transferee becomes a dealer for the purpose of the Act and hence is treated as a 'defaulter' liable to pay the tax under the Act.
The petitioner, therefore, cannot avoid the liability to pay the tax that was due from the owner of the business, the dealer. This liability is transmitted to him by virtue of the provisions of section 15, which is enacted to extend the liability to the transferee of the business. Along with the ownership of the business, which is transferred, the liability of the transferor under the Act in respect of the transactions prior to the date of transfer, is also transmitted to the transferee along with the business. The transferee, thus, takes over not only the assets but also the liability to pay the tax, if any, due in respect of the business prior to the date of sale.
That the petitioner, in the present case, purchased the concern in an auction held by the KSFC, should not make any difference as long as the ownership of the business is transferred. The ownership, in this context, should be understood and interpreted as the assets of the business, both movable and immovable along with the goodwill of the business. The KSFC has only acted as an agent for the transfer, being a creditor of the dealer. The KSFC, like any other creditor, has taken steps under the Act to recover the loan advanced by it to the defaulter on the security of the business assets. By the transfer of the property, what is transferred in the auction held by the KSFC, is the property pledged, mortgaged, hypothecated or assigned to the KSFC, on which the KSFC had a lien or first charge for the loan or advance.
By the mere transfer of the assets of the business by the KSFC as a result of the auctioning of the business assets offered as security to the KSFC, the 'defaulter' is not absolved of the liability to pay tax to the department nor by the auction of his assets as a result of which all his rights, title and interest in those assets stand transferred, the 'defaulter' acquires an immunity against any coercive steps being taken against him. The other provisions of the Act under which coercive process can be taken for recovery of the arrears of tax, are still open for the department to be enforced against him, such as the recovery of the tax assessed as an arrear of land revenue, the attachment and sale of any property of the dealer by the prescribed officer or by a Magistrate, as if it were a fine imposed by him.
But section 15 of the Karnataka Sales Tax Act creates a statutory liability on the transferor and the transferee, who are jointly and severally liable to pay any tax or penalty or any other amount payable in respect of the business transferred and remaining unpaid at the time of transfer. Under these provisions a statutory liability is imposed on the transferee who is deemed to be a dealer for purposes of the Act. Thus, the transferee gets into the shoes of the transferor and takes over the liability of the transferor along with the ownership of the business. This provision is specifically enacted in order to enforce such liability even against the transferee in cases where the dealer transfers the business to any person with the object of avoiding payment of the tax payable by him in respect of the said business. Thus, notwithstanding the mode or the manner in which the business is transferee to him, the transferee can be proceeded against for recovery of any tax due from the transferor as if he were the dealer liable to pay the tax.
An argument was advanced by Sri Gururajan that the transferor of the business was the KSFC and not the dealer and that, therefore, the provisions of section 15 can be made applicable only in a case of a direct transfer by the dealer. This argument has to be rejected in the light of the special provisions of section 29 of the State Financial Corporations Act under which the transfer is made by the KSFC in the capacity of a deemed owner which status is conferred on the KSFC to takeover the possession of the industrial concern and all its assets.
For the reasons stated above, the contentions of the petitioner must fail and the writ petition is accordingly dismissed.
14. Writ petition dismissed.