Auction Purchasers Cannot Escape Pre-Existing Property Tax Burden in Liquidation Sales, Rules Calcutta High Court

In a significant ruling that clarifies the interplay between insolvency proceedings and municipal taxation laws, the Calcutta High Court has held that auction purchasers of assets in liquidation remain liable for outstanding property tax arrears that predate the sale.

From Liquidation Auction to Mutation Dispute

The dispute arose when Cotton Casuals India Private Limited and four associated petitioners acquired four leasehold factory modules totaling 45,208 sq ft at Paridhan Garment Park in Kolkata. These units, formerly owned by M/s Enfield Apparels Ltd, were purchased through the liquidation process under the Insolvency and Bankruptcy Code, 2016. Possession was handed over in January 2022, followed by formal assignment deeds in May 2022.

When the petitioners applied for mutation of the properties with the Kolkata Municipal Corporation in August 2024, they offered to pay taxes only from the date of purchase. The Corporation responded with demands totaling over Rs 1.23 crore, covering dues from 2008 onward along with interest and penalties. This prompted the writ petition seeking to quash the demands and compel mutation without the pre-acquisition arrears.

Petitioners Argue Clean Slate Under IBC Terms

Senior counsel for the petitioners contended that the sale occurred on an “as is where is, whatever there is and without recourse” basis, and that the Expression of Interest documents placed no explicit obligation regarding municipal tax arrears. They stressed that under the IBC’s waterfall mechanism, operational creditors such as the municipal corporation should have submitted claims before the liquidator. Because the petitioners were bona fide purchasers who paid substantial consideration plus transfer fees to WBIDC, fastening historic liabilities upon them would be contrary to the protective principles recognized in several Supreme Court judgments.

Corporation Asserts Statutory First Charge

Appearing for the Kolkata Municipal Corporation, counsel relied on Section 232 of the Kolkata Municipal Corporation Act, 1980, which expressly provides that property tax constitutes a first charge on the land or building. They argued that the “as is where is” clause and the requirement of independent due diligence contained in multiple clauses of the Expression of Interest placed every bidder on notice of potential encumbrances. The Corporation further submitted that its statutory right to recover arrears runs with the property irrespective of the insolvency process.

Court Distinguishes Precedents and Upholds Charge

Justice Gaurang Kanth carefully examined the cited authorities, including AI Champdany Industries , IISCO Ujjain Pipe , and Grasim Industries . He noted that those decisions were rendered either under the old Companies Act regime or in situations where no statutory first charge existed. In the present case, Section 232 of the KMC Act creates a charge that travels with the property itself.

The court emphasized that the sale notice and Expression of Interest repeatedly required bidders to conduct their own investigation and explicitly stated that the reserve price excluded all taxes and levies. Consequently, the petitioners could not claim they lacked notice of potential municipal liabilities.

Key Observations from the Judgment

Justice Kanth observed:

> “When a property is sold on an ‘as-is-where-is’ basis, encumbrances on the property stand transferred to the purchaser upon the sale.”

He further held:

> “Section 232 of the KMC Act makes the property tax dues as first charge on the property and hence make it an encumbrance attached to the property. Hence, the Petitioner is liable to make the payment towards the outstanding property tax dues for the pre-liquidation period also.”

Rejecting the attempt to extend the “clean slate” doctrine applicable to resolution plans, the court clarified:

> “An auction purchaser does not step into the shoes of the Corporate Debtor for its revival but merely purchases an asset…”

Petition Dismissed – Practical Implications

The writ petition was dismissed in its entirety. The Calcutta High Court upheld the Corporation’s refusal to mutate the properties until all outstanding dues, including arrears, are cleared. The ruling reinforces that municipal corporations can enforce statutory charges against auction purchasers even when assets are sold through IBC liquidation, provided the sale documents adequately caution bidders about the need for due diligence.

This decision is likely to prompt greater caution among insolvency professionals drafting sale notices and among prospective bidders evaluating distressed industrial assets burdened by historic municipal dues.