Question. The dealer has purchased plant along with land from Financial Institution in auction. The original owner of plant was declared sick unit and was liable to discharge sales tax dues for past years. The Sales Tax Department is contemplating to recover the said dues from the dealer who has purchased the plant and land in auction. Whether the department is justified in such demand?
Answer:- Though the issue raised is in relation to sales tax laws it is required to be seen in light of specific provisions under specific State Sales Tax Act which is at present referred to as VAT Act. In this query the issue can be examined in light of provisions of Maharashtra Valued Added Tax Act, 2002 (MVAT Act, 2002).
The facts appears to be that there may be a unit which has been closed due to financial losses or for any other reason. When the sick unit is not in position to repay the loans taken from the financial institutions like IDBI/UTI, its property being mortgaged to the financial institutions, the said financial institutions take the charge of the assets. These units then dispose of assets. Normally, this may be disposed of by auction sale etc.. Under the authority as per the agreement and as per the relevant Finance Regulation Act the financial institutions are in position to dispose of the assets to recover the loan. However such unit may also be indebted to the sales tax department about its tax arrears. The issue which is raised is whether such arrears can be recovered from the purchaser of the assets from the financial institution.
To give an opinion on above issue, it is necessary to refer to certain relevant provisions of the sales tax law. Under sales tax laws, normally the person succeeding (transferee) in the business is also made liable to all the arrears of the transferor. For this purpose specific provisions are made in the sales tax laws. In relation to the MVAT Act, 2002. The reference can be made to section 44(4)
of the said Act. The said section is reproduced as under:
“44. Special provision regarding liability to pay tax in certain cases –
(4) Where a dealer, liable to pay tax under this 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, sum forfeited and interest due from the dealer under this Act or under any earlier law, up to the time of such transfer, disposal or change, whether such tax including any penalty, sum forfeited and interest has been assessed before such transfer, disposal or change but has remained unpaid, or is assessed thereafter.”
Thus, it is provided that if a dealer transfers his business then the transferee taking over his business is made liable for all the arrears of the transferor till the date of transfer, whether assessed prior to such date of transfer or after the date of transfer.
The important ingredients to attract section 44(4) are that there should be transfer of business by the transferor to transferee. In other words the transferee should take over his business. The takeover of business is something which has many aspects. In contrast there may be only disposal of land, building and plant and machinery etc.. This is referred to as disposal of the assets. If it is only the disposal of assets then it cannot be said that the purchaser is the transferee of the business. In such case he is only purchaser of the assets as any other normal dealer and no liability can befall upon him, as can fall in case of transfer of business. However, when a dealer purchases his assets, some time an issue arises whether it amounts to transfer of business to him by the transferor so as to liable to pay the arrears or only purchase of assets. This issue has been discussed at various levels. A reference can be made to following few important judgments.
1. D’Que Industries (S.A.991 of 1987 dt.12-9-88)
In this case the dealer has purchased the assets including land, building and plant and machinery. The said assets were purchased in the auction made by the financial institution for recovery of its loan amount. The sales tax department on above facts held the dealer as transferee of the sick unit of whose assets were sold by the financial institution and they wanted to make the dealer liable as a transferee. The M.S.T. Tribunal held that when it is only purchase of the assets there is no transfer of business. To become a transferee of the business, Tribunal, amongst others, observed that the transfer of business can take place when there is transfer of assets as well as goodwill of the business and if that is not the position then it is only the purchase of assets and not transfer of business. In this particular case the Tribunal held that there is no transfer of business but only purchase of assets and hence the dealer cannot be liable as transferee of the business.
2. Alpha Silicons vs. Assistant Commissioner of Sales Tax (Recovery), Gulbarga (77 STC 68) (Kar.)
In this case the dealer purchased the assets of a sick unit in the auction held by a financial institution. The liabilities about arrears were thrust upon this dealer and hence he approached the High Court. The High Court observed that since there is transfer of business the dealer is liable to arrears also. In this case the Hon’ble High Court observed that transfer of business takes place when there is, along with assets, transfer of goodwill etc.. Therefore from the judgment it appears that if the purchase of assets is along with goodwill then it will be case of transfer and not purchase of assets and in that case the liability will follow.
3. V. Adinarayan & Others vs. Andhra Bank & Others (142 STC 469) (A.P.)
In this case the dealer has purchased the assets from the bank under Securitisation Act. The liability as a transferee was tried to be thrust upon the dealer. High Court held that since there is no transfer of goodwill etc. there is no question of transfer of business. It is only case of purchase of assets and hence the liability cannot be attracted to him for arrears.
4. Shreya Paper Mart (144 STC 331) (SC)
This is a recent case decided by Hon’ble Supreme Court. The Supreme Court has dealt with the issue similar to where the assets were sold by the financial institution. Supreme Court has observed upon the legal position elaborately. It is held that if there is transfer of business then the liability can be attracted as a transferee. Supreme Court has observed about the nature of transfer. As per the observations of the Supreme Court it appears that there should be a transfer of running business with a view to gain profit out of the same and it should be along with the goodwill.
This is the latest case of the Hon’ble Supreme Court. As per the said judgment now it can very well be said that if the financial institution has only sold the assets after the unit is closed, then there is no possibility that there is transfer of business.
Therefore in relation to above query, we opine that a purchaser of assets of sick unit in auction by Financial Institution cannot be liable to arrears of sick unit and sales tax department cannot be justified in asking such dues from such purchaser.
Replied By: C. B. Thakar, Advocate