Important point
Charge in terms of Section 100 of Transfer of Property Act may not be enforced against a transferee if he had no notice of same unless by law, the requirement of such notice had been waived.

Headnote:(i) Karnataka Sales Tax Act, 1954 —Section 15—State Financial Corporations Act, 1951—Section 29—Assets of a Defaulting Company sold by the State Financial Corporation and respondent No. 1 purchased it—Whether purchaser could be held liable for arrears of sales tax of Defaulting Company—Under Section 15 of Karnataka Sales Tax Act liability of defaulting transferor on to the transferee could be foisted only if the "ownership of the business" was transferred—Provision was intended to operate only when there was complete transfer of "ownership of business" so as to render transferee as a successor-in-interest of transferee—Only transfer of individual assets of Defaulting Company rather than Defaulting Company being sold as a going concern, provision of Section 15 was not attracted.
       Held : A careful reading of Section 15(1) of the KST Act shows that the consequences contemplated therein, namely, foisting of the liabilities of the defaulting transferor onto the transferee, would come into effect only if the "ownership of the business" is transferred. Although, Mr. Hegde strenuously urged that "business" could not be separated from the assets of the business, we are unable to accept this contention. Business is an activity, directed with a certain purpose, more often towards producing income or profit. Ownership of assets is merely an incident rather than a characteristic of business. Hence, the mere transfer of one or more species of assets does not necessarily bring about the transfer of the "ownership of the business" for "ownership of a business" is much wider than mere ownership of discrete or individual assets. In fact, "ownership of business" is wider than the sum of the ownership of a business’ constituent assets. Above all, transfer of "ownership of business" requires that the business be sold as a going concern [Commissioner of Income Tax v. K.H. Chambers, (1965) 2 SCR 43 at p. 49]. In our view, therefore, Section 15(1) is intended to operate only when there is complete transfer of "ownership of business" so as to render the transferee as a successor-in-interest of the transferor. Only in such an eventuality does Section 15(1) make the transferee liable for the transferor’s sales tax liabilities. (Para 16)
       In the present case, since it is not a matter of dispute that there was only the transfer of individual assets of the Defaulting Company, rather than the Defaulting Company being sold as a going concern, in light of our expressed views, Section 15 of the KST Act is not attracted. The first limb of Mr. Hegde’s arguments must, therefore, fail. (Para 18)
       (ii) Transfer of Property Act, 1872 —Section 100—Charge—Assets of a Defaulting Company sold by State Financial Corporation in exercise of its power under Section 29 of State Financial Corporation Act—Liability for arrears of sales tax of Defaulting Company—Whether could be recovered from transferee as a charge on assets—Charge could not be enforced against a transferee if he had no notice of same, unless by law, requirement of such notice had been waived—However constructive notice could be sufficient to satisfy the requirement of notice—No material to show if transferee of assets of Defaulting Company had notice of liability if Defaulting Company for arrears of sales tax—Liability could not be enforced against transferee.
       Held : As the section itself unambiguously indicates, a charge may not be enforced against a transferee if s/he has had no notice of the same, unless by law, the requirement of such notice has been waived. This position has long been accepted by this Court in Dattatreya Shanker Mote v. Anand Chitaman Datar [(1974) 2 SCC 799 at p. 811 (paragraph 18)] and in Ahmedabad Municipal Corporation of the City of Ahmedabad v. Haji Abdul Gafur Haji Hussenbhai [AIR 1971 SC 1201at pp. 1202-1204 (Paragraph 3)] (hereinafter "Ahmedabad Municipal Corporation"). (Para 21)
       In the present case, firstly, no provision of law has been cited before us that exempts the requirement of notice of the charge for its enforcement against a transferee who had no notice of the same. It remains to be seen, therefore, if in the facts of the present case, the First Respondent had notice—actual or constructive—of the charge. At the outset, in the advertisement/notice dated 17.3.1992 issued by the Corporation, mention is only made of the sale of the Defaulting Company’s assets and there is no indication, whatsoever, of any sales tax arrears. Further, the bid offer made on behalf of the First Respondent on 5.6.1992 specifically excludes any statutory liabilities, including sales tax. This offer was accepted by the Corporation on 15.7.1992. Even at the stage, there was no mention of any sales tax arrears. The sale of the assets took place pursuant to the agreement dated 12.8.1992 in which a specific clause was inserted that the First Respondent would be liable to pay all property taxes, other taxes, electricity bills, water taxes and rents from the date of the agreement (i.e. 12.8.1992). For the first time, by letter dated 8.1.1993 of the Second Appellant to the Mandal Panchayath, Aloor Taluk, the issue of sales tax dues of the Defaulting Company was brought to the surface. This is further borne out by the correspondence between the First Respondent and the Corporation. Thus, it is evident that the First Respondent had no actual notice of the charge prior to the transfer. As to whether the First Respondent had constructive notice of the charge, no substantive argument on this issue was made, either before the High Court or at any rate before us. Hence, we cannot hold that the First Appellant had constructive notice of the charge. (Para 23)

Judgment

Srikrishna, J.—There are three questions of law to be decided in these appeals:

2. Firstly, whether the purchaser of assets of a concern sold by a State Financial Corporation, in exercise of its powers under Section 29 of the State Financial Corporations Act, 1951 (hereinafter "the SFC Act"), would be liable under the Karnataka Sales Tax, 1957 (hereinafter "the KST Act"), for the arrears of sales tax of the concern whose assets have been transferred?

3. Secondly, under what circumstances does a charge created on a property become unenforceable against a transferee of such a property?

4. Finally, whether a completely novel relief, not argued/claimed before the High Court or decided by the impugned judgment, may be claimed before this Court?

The Facts in Civil Appeal 3170/2000

5. A company by name Mishal Paper Mills (P) Ltd. (hereinafter "the Defaulting Company"), was running a medium-scale duplex board manufacturing unit. The Second Respondent, Karnataka State Industrial Investment & Development Corporation Ltd. (hereinafter "the Corporation"), had extended financial assistance to the Defaulting Company. However, the Defaulting Company defaulted in repayment of the loans granted to it by the Corporation. Acting under the provisions of Section 29(1) of the SFC Act, the Corporation took over the assets of the Defaulting Company. On 17.3.1992, the Corporation advertised the sale of the "assets" of the Defaulting Company i.e. the land, building, plant and machinery. In response to the advertisement, and after several rounds of negotiations. Shreyas Papers (P) Ltd. (hereinafter "the First Respondent") entered into an agreement with the Corporation for purchase of the land, building, plant and machinery of the Defaulting Company, which was put up for sale. In Clause (2) of the offer to purchase (dated 5.6.1992), the First Respondent specifically stated:

"We shall be taking over the unit with `zero’ liabilities and shall not be held responsible for any existing statutory liabilities of the above said unit like Sale Tax, Excise Duty, Municipal taxes, E.S.I. and P.F. development loan, Central and State subsidy and rank liabilities etc. except as agreed in the meeting for KEB, and labour dues."

The offer was accepted by the Corporation and the sale took place consequent thereto.

6. On 8.1.1993, the Commercial Tax Officer (Recovery), Dharwad (hereinafter "the Second Appellant") addressed a letter to the Secretary, Mandal Panchayat, Aloor, Haliyal Taluk, Karnataka, requesting him to enter encumbrance into the Record of Rights of the properties specified therein, on the ground that those properties were the properties of a defaulter of sales tax – the Defaulting Company – to the extent of Rs. 21,79,715/-. The First Respondent wrote a letter (dated 31.5.1993) to the Corporation thereby requesting that a letter be addressed to the Second Appellant to withdraw his letter dated 8.1.1993, as the Corporation was the first charge holder and the assets had been sold to it by the Corporation free of all charges. A letter was addressed, as requested, on 5.7.1993 by the Corporation to the Second Appellant. On 11.8.1993, the Second Appellant issued a notice under Section 15 of the KST Act informing the First Respondent that a charge had been created on the properties of the Defaulting Company on 17.2.1992 as the latter had defaulted in payment of sales tax. It also noted that the assets of the Defaulting Company had been transferred from the Corporation to the First Respondent on 12.8.1992. It was further stated that the First Respondent being the transferee of the business, was jointly liable to discharge the arrears of sales tax of the Defaulting Company by virtue of Section 15(1) of the KST Act.

7. As the sales tax authorities were not willing to relent, the First Respondent moved a Writ Petition No. 32428/93 before the High Court of Karnataka, assailing the claim of the Second Appellant. The substantive reliefs claimed therein were two fold:

(A) Dec

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2006 Supreme(SC) 17

Important pointCharge in terms of Section 100 of Transfer of Property Act may not be enforced against a transferee if he had no notice of same unless by law, the requirement of such notice had been waived.

Cases Referred (7)

Important point
Charge in terms of Section 100 of Transfer of Property Act may not be enforced against a transferee if he had no notice of same unless by law, the requirement of such notice had been waived.