{"id":252826,"date":"2006-01-05T00:00:00","date_gmt":"2006-01-04T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/state-of-karnataka-anr-vs-shreyas-papers-pvt-ltd-ors-on-5-january-2006"},"modified":"2015-04-02T04:36:21","modified_gmt":"2015-04-01T23:06:21","slug":"state-of-karnataka-anr-vs-shreyas-papers-pvt-ltd-ors-on-5-january-2006","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/state-of-karnataka-anr-vs-shreyas-papers-pvt-ltd-ors-on-5-january-2006","title":{"rendered":"State Of Karnataka & Anr vs Shreyas Papers Pvt. Ltd. & Ors on 5 January, 2006"},"content":{"rendered":"
Supreme Court of India<\/div>\n
State Of Karnataka & Anr vs Shreyas Papers Pvt. Ltd. & Ors on 5 January, 2006<\/div>\n
Author: Srikrishna<\/div>\n
Bench: Ruma Pal, B.N. Srikrishna<\/div>\n
           CASE NO.:\nAppeal (civil)  3170-3173 of 2000\n\nPETITIONER:\nState of Karnataka & Anr.\n\nRESPONDENT:\nShreyas Papers Pvt. Ltd. & Ors.\n\nDATE OF JUDGMENT: 05\/01\/2006\n\nBENCH:\nRuma Pal & B.N. Srikrishna\n\nJUDGMENT:\n<\/pre>\n
J U D G M E N T<\/p>\n
SRIKRISHNA, J.\n<\/p>\n
There are three questions of law to be decided in these appeals:\n<\/p>\n
\tFirstly, whether the purchaser of assets of a concern sold by a State
\nFinancial Corporation, in exercise of its powers under Section 29<\/a> of the State
\nFinancial Corporations Act, 1951 (hereinafter “the SFC Act<\/a>“), would be
\nliable under the Karnataka Sales Tax, 1957 (hereinafter “the KST Act”), for
\nthe arrears of sales tax of the concern whose assets have been transferred?\n<\/p>\n
\tSecondly, under what circumstances does a charge created on a
\nproperty become unenforceable against a transferee of such a property?\n<\/p>\n
\tFinally, whether a completely novel relief, not argued\/claimed before
\nthe High Court or decided by the impugned judgment, may be claimed
\nbefore this Court?\n<\/p>\n
The Facts in Civil Appeal 3170\/2000
\n\tA company by name Mishal Paper Mills (P) Ltd. (hereinafter “the
\nDefaulting Company”), was running a medium-scale duplex board
\nmanufacturing unit. The Second Respondent, Karnataka State Industrial
\nInvestment & Development Corporation Ltd. (hereinafter “the
\nCorporation”), had extended financial assistance to the Defaulting Company.
\nHowever, the Defaulting Company defaulted in repayment of the loans
\ngranted to it by the Corporation. Acting under the provisions of Section
\n29(1)<\/a> of the SFC Act, the Corporation took over the assets of the Defaulting
\nCompany. On 17.3.1992, the Corporation advertised the sale of the “assets”
\nof the Defaulting Company i.e. the land, building, plant and machinery. In
\nresponse to the advertisement, and after several rounds of negotiations,
\nShreyas Papers (P) Ltd. (hereinafter “the First Respondent”) entered into an
\nagreement with the Corporation for purchase of the land, building, plant and
\nmachinery of the Defaulting Company, which was put up for sale. In Clause
\n(2) of the offer to purchase (dated 5.6.1992), the First Respondent
\nspecifically stated:\n<\/p>\n
“We shall be taking over the unit with ‘zero’ liabilities
\nand shall not be held responsible for any existing
\nstatutory liabilities of the above said unit like Sale Tax,
\nExcise Duty, Municipal taxes, E.S.I. and P.F.\n<\/p>\n
development loan, Central and State subsidy and rank
\nliabilities etc. except as agreed in the meeting for KEB.
\nand labour dues.”\n<\/p>\n
This offer was accepted by the Corporation and the sale took place
\nconsequent thereto.\n<\/p>\n
\tOn 8.1.1993, the Commercial Tax Officer (Recovery), Dharwad
\n(hereinafter “the Second Appellant”) addressed a letter to the Secretary,
\nMandal Panchayat, Aloor, Haliyal Taluk, Karnataka, requesting him to enter
\nencumbrance into the Record of Rights of the properties specified therein,
\non the ground that those properties were the properties of a defaulter of sales
\ntaxthe Defaulting Companyto the extent of Rs.21,79,715\/-. The First
\nRespondent wrote a letter (dated 31.5.1993) to the Corporation thereby
\nrequesting that a letter be addressed to the Second Appellant to withdraw his
\nletter dated 8.1.1993, as the Corporation was the first charge holder and the
\nassets had been sold to it by the Corporation free of all charges. A letter was
\naddressed, as requested, on 5.7.1993 by the Corporation to the Second
\nAppellant. On 11.8.1993, the Second Appellant issued a notice under
\nSection 15 of the KST Act informing the First Respondent that a charge had
\nbeen created on the properties of the Defaulting Company on 17.2.1992 as
\nthe latter had defaulted in payment of sales tax. It also noted that the assets
\nof the Defaulting Company had been transferred from the Corporation to the
\nFirst Respondent on 12.8.1992. It was further stated that the First
\nRespondent being the transferee of the business, was jointly liable to
\ndischarge the arrears of sales tax of the Defaulting Company by virtue of
\nSection 15(1) of the KST Act.\n<\/p>\n
\tAs the sales tax authorities were not willing to relent, the First
\nRespondent moved a Writ Petition No. 32428\/93 before the High Court of
\nKarnataka, assailing the claim of the Second Appellant. The substantive
\nreliefs claimed therein were two fold:\n<\/p>\n
“(A) \tDeclare that the provisions of Section 15 of the
\nKarnataka Sales Tax Act are void;\n<\/p>\n
(B)\tIssue a writ of mandamus or any other appropriate
\nwrit or order or direction restraining the
\nrespondents 1 and 2 not to take any action against
\nthe petitioner for the recovery of the alleged sales
\ntax recovery as mentioned in the communication
\nNo. RRY.CR.3.92-93.1168 dated 11.8.1993″\n<\/p>\n
\tBy a common judgment (dated 22.9.1999)  rendered in four similar
\nwrit petitions, the High Court of Karnataka allowed the writ petition. The
\nHigh Court held that the petitioner, being the purchaser in the auction from
\nthe Corporation, only of the land, building, plant and machinery, could not
\nbe considered as the transferee of the ownership of the business of the
\nDefaulting Company. The High Court found that although land, buildings,
\nplant and machinery of the Defaulting Company had been transferred to the
\nFirst Respondent, since the goodwill of the business had not been
\ntransferred, there was no transfer of the ownership of the business. On this
\nreasoning, the High Court took the view that Section 15 of the KST Act
\nwould not apply to the First Respondent and consequently that the First
\nRespondent was not liable for the sales tax arrears of the Defaulting
\nCompany. Being aggrieved thereby, the State of Karnataka (hereinafter “the
\nFirst Appellant”) and the Second Appellant are before us.\n<\/p>\n
The Appellant’s Contentions
\n\tMr. Hegde, learned counsel for the appellants, made three broad
\nsubmissions: Firstly, he placed heavy reliance on certain relevant provisions
\nof the KST Act, and contended that the High Court had completely
\nmisunderstood the import of these sections. He urged that upon a true
\ninterpretation of the provisions of the KST Act, particularly Sections 13<\/a> and
\n15<\/a> read with Section 2<\/a>(f-2), it would be clear that the First Respondent was
\nthe entity to whom the business of the Defaulting Company had been
\ntransferred. Therefore, Mr. Hegde urged, the sales tax dues of the Defaulting
\nCompany could rightfully be claimed and recovered from the First
\nRespondent.\n<\/p>\n
\tSecondly, Mr. Hegde submitted that since a charge over the properties
\nof the Defaulting Company had been created under the KST Act, the First
\nRespondent as the transferee held the properties subject to the charge.\n<\/p>\n
\tFinally, and as an alternative submission, Mr. Hegde contended that,
\nmerely because the Corporation had acted in exercise of its power under
\nSection 29<\/a> of the SFC Act, it did not get any priority over the dues of the
\nState. Therefore, he argued, the Corporation was liable to make good the
\namount of sales tax arrears of the Defaulting Company, at least to the extent
\nof the sale proceeds of the assets of the Defaulting Company.\n<\/p>\n
Transfer of “Ownership of Business” under Section 15 of the KST Act
\n\tTo determine whether the First Respondent is liable for sales tax
\narrears of the Defaulting Company, a survey of the applicable provisions in
\nthe SFC Act<\/a> and KST Act becomes necessary.\n<\/p>\n
\tSection 2<\/a>(f-2) of the KST Act defines the expression “business” in an
\ninclusive manner and provides that activities of different nature, as
\ncontemplated in sub-sections (i) and (ii), would be included within the
\ndefinition of the expression. Section 13(2)(i) of the KST Act provides that if
\na default is made in making payment of sales tax, then:
\n“the whole of the amount outstanding on the date of
\ndefault shall become immediately due and shall be a
\ncharge on the properties of the person or persons liable to
\npay the tax or any other amount due under this Act.”\n<\/p>\n
Section 15(1) of the KST Act provides:\n<\/p>\n
“When the ownership of the business of a dealer liable
\nto pay the tax or penalty, or any other amount under the
\nprovisions of this Act, is transferred, the transferor and
\nthe transferee shall jointly and severally be liable to pay
\nany tax or penalty or any other amount payable in
\nrespect of such business and remaining unpaid at the
\ntime of transfer, and for the purpose of recovery from
\nthe transferee such transferee shall be deemed to be the
\ndealer liable to pay the tax or penalty or other amount
\nunder this Act.”\n<\/p>\n
\tSection 29<\/a> of the SFC Act gives an extraordinary power to the
\nCorporation. It provides that in the event of a borrower making a default in
\nits obligations towards repayment or in relation to any guarantee, then the
\nCorporation:\n<\/p>\n
 “shall have the right to take over the management or
\npossession or both of the industrial concerns, as well as
\nthe right to transfer by way of lease or sale and realise the
\nproperty pledged, mortgaged, hypothecated or assigned
\nto the Financial Corporation.”\n<\/p>\n
Sub-section (2) of Section 29<\/a> provides that:\n<\/p>\n
 “Any transfer of property made by the Financial
\nCorporation, in exercise of its powers under sub-section
\n(1), shall vest in the transferee all rights in or to the
\nproperty transferred as if the transfer had been made by
\nthe owner of the property.”\n<\/p>\n
Finally, sub-section (5) of this Section provides:
\n “Where the Financial Corporation has taken any action
\nagainst an industrial concern under the provisions of sub-
\nsection (1), the Financial Corporation shall be deemed to
\nbe the owner of such concern, for the purposes of suits by
\nor against the concern, and shall sue and be sued in the
\nname of the concern.”\n<\/p>\n
\tA careful reading of Section 15(1) of the KST Act shows that the
\nconsequences contemplated therein, namely, foisting of the liabilities of the
\ndefaulting transferor onto the transferee, would come into effect only if the
\n“ownership of the business” is transferred. Although, Mr. Hegde strenuously
\nurged that “business” could not be separated from the assets of the business,
\nwe are unable to accept this contention. Business is an activity, directed with
\na certain purpose, more often towards producing income or profit.
\nOwnership of assets is merely an incident rather than a characteristic of
\nbusiness. Hence, the mere transfer of one or more species of assets does not
\nnecessarily bring about the transfer of the “ownership of the business” for
\n“ownership of a business” is much wider than mere ownership of discrete or
\nindividual assets. In fact, “ownership of business” is wider than the sum of
\nthe ownership of a business’ constituent assets. Above all, transfer of
\n“ownership of business” requires that the business be sold as a going
\nconcern.  In our view, therefore, Section 15(1)<\/a> is intended to operate only
\nwhen there is complete transfer of “ownership of business” so as to render
\nthe transferee as a successor-in-interest of the transferor. Only in such an
\neventuality does Section 15(1)<\/a> make the transferee liable for the transferor’s
\nsales tax liabilities.\n<\/p>\n
\tMr. Hegde referred to two judgments of the Karnataka High Court
\nboth of which, unfortunately, take an erroneous view of the matter. In
\nKarnataka State Industrial Investment and Development Corporation Ltd. v.
\nAssistant Commissioner of Commercial Taxes, Bangalore<\/a>,  the High Court
\nheld that when Section 29<\/a> of the SFC Act was read with Section 15 of the
\nKST Act, the transferee would be jointly liable with the State Finance
\nCorporation concerned. As we have already held, Section 15<\/a> operates only
\nin a situation where the ownership of the business is transferred. The learned
\nSingle Judge, however, did not notice this point. Similarly, we are unable to
\naccept the correctness of the judgment in Alpha Silicones v. Assistant
\nCommercial Tax Officer (Recovery), Gulbarga and Anr<\/a>.  as it held that even
\nthe mere transfer of assets would amount to transfer of ownership of the
\nbusiness. We overrule these two judgments to the extent that they conflict
\nwith the views expressed herein.\n<\/p>\n
\tIn the present case, since it is not a matter of dispute that there was
\nonly the transfer of individual assets of the Defaulting Company, rather than
\nthe Defaulting Company being sold as a going concern, in light of our
\nexpressed views, Section 15 of the KST Act is not attracted. The first limb
\nof Mr. Hegde’s arguments must, therefore, fail.\n<\/p>\n
Enforceability of the Charge
\n\tThe next limb of Mr. Hegde’s arguments was that since Section
\n13(2)(i) of the KST Act creates a charge on the property of the Defaulting
\nCompany, the charge would continue on the properties, even if it changes
\nhands by transfer.\n<\/p>\n
\tWhile the expression “charge” is not defined by the KST Act, this
\nconcept is well known in property law and has been defined by Section 100<\/a>
\nof the Transfer of Property Act, 1882 (hereinafter “the TP Act<\/a>“). Here
\n“charge” is defined as:\n<\/p>\n
\t“Where immoveable property of one person is by
\nact of parties or operation of law made security for the
\npayment of money to another, and the transaction does
\nnot amount to a mortgage, the latter person is said to
\nhave a charge on the property; and all the provisions
\nhereinbefore contained which apply to a simple mortgage
\nshall, so far as may be, apply to such charge.\n<\/p>\n
\tNothing in this section applies to the charge of a
\ntrustee on the trust-property for expenses properly
\nincurred in the execution of his trust, and, save as
\notherwise expressly provided by any law for the time
\nbeing in force, no charge shall be enforced against any
\nproperty in the hands of a person to whom such property
\nhas been transferred for consideration and without notice
\nof the charge.” (emphasis supplied)<\/p>\n
\tAs the section itself unambiguously indicates, a charge may not be
\nenforced against a transferee if s\/he has had no notice of the same, unless by
\nlaw, the requirement of such notice has been waived. This position has long
\nbeen accepted by this Court in Dattatreya Shanker Mote v. Anand Chitaman
\nDatar<\/a>,  and in Ahmedabad Municipal Corporation of the City of Ahmedabad
\nv. Haji Abdul Gafur Haji Hussenbhai<\/a>  (hereinafter “Ahmedabad Municipal
\nCorporation”). In this connection, we may refer to the latter judgment,
\nwhich is particularly relevant for the present case.\n<\/p>\n
\tAhmedabad Municipal Corporation was a case where a person was in
\narrears of property tax, due under the Bombay Provincial Municipal
\nCorporation Act, 1949. Consequently, the Municipal Corporation created a
\ncharge over the property of the defaulter. However, the property was sold in
\nexecution of a mortgage decree. When the Municipal Corporation purported
\nto exercise their charge over the property, the purchaser in court auction
\nfiled a suit for a declaration that he was the owner of the property and that
\nthe arrears of municipal taxes due by the transferor were not recoverable
\nfrom him by proceeding against the property purchased in auction. In the
\nappeal before this Court, the Municipal Corporation’s main argument was
\nthat where the local law provided for the creation of a charge against a
\nproperty for which municipal taxes were due, transferees of such properties
\nwere imputed with constructive knowledge of any charge created against the
\nproperties that they had purchased. This argument was, however, rejected.
\nThis Court held that while constructive notice was sufficient to satisfy the
\nrequirement of notice in the proviso to Section 100<\/a> of the TP Act, whether
\nthe transferee had constructive notice of the charge had to be determined on
\nthe facts and circumstances of the case.  In other words, this Court held that
\nthere could be no fixed presumption as to the transferee having constructive
\nnotice of the charge against the property. In fact, the principle laid down in
\nAhmedabad Municipal Corporation has been correctly applied in a sales tax
\ncase similar to the present case.\n<\/p>\n
\tIn the present case, firstly, no provision of law has been cited before
\nus that exempts the requirement of notice of the charge for its enforcement
\nagainst a transferee who had no notice of the same. It remains to be seen,
\ntherefore, if in the facts of the present case, the First Respondent had
\nnoticeactual or constructiveof the charge. At the outset, in the
\nadvertisement\/notice dated 17.3.1992 issued by the Corporation, mention is
\nonly made of the sale of the Defaulting Company’s assets and there is no
\nindication, whatsoever, of any sales tax arrears. Further, the bid offer made
\non behalf of the First Respondent on 5.6.1992 specifically excludes any
\nstatutory liabilities, including sales tax. This offer was accepted by the
\nCorporation on 15.7.1992. Even at that stage, there was no mention of any
\nsales tax arrears. The sale of the assets took place pursuant to the agreement
\ndated 12.8.1992 in which a specific clause was inserted that the First
\nRespondent would be liable to pay all property taxes, other taxes, electricity
\nbills, water taxes and rents from the date of the agreement (i.e. 12.8.1992).
\nFor the first time, by letter dated 8.1.1993 of the Second Appellant to the
\nMandal Panchayath, Aloor Taluk, the issue of sales tax dues of the
\nDefaulting Company was brought to the surface. This is further borne out by
\nthe correspondence between the First Respondent and the Corporation. Thus,
\nit is evident that the First Respondent had no actual notice of the charge
\nprior to the transfer. As to whether the First Respondent had constructive
\nnotice of the charge, no substantive argument on this issue was made, either
\nbefore the High Court or at any rate before us. Hence, we cannot hold that
\nthe First Appellant had constructive notice of the charge.\n<\/p>\n
In these circumstances, we are of the view that the First Respondent
\nwas a purchaser for value without notice of the sales tax arrears of the
\nDefaulting Company or the consequent charge on the property. This would,
\ntherefore, attract the principle laid down by this Court in Ahmedabad
\nMunicipal Corporation, which is also embodied in the proviso to Section
\n100<\/a> of the TP Act. Thus, the property in the hands of the First Respondent
\nwas free of the charge and it is not open to the appellants to enforce the
\nliabilities of the Defaulting Company in this manner against the First
\nRespondent.\n<\/p>\n
The Liability of the State Financial Corporation
\n\tMr. Hegde then turned to his final argument that, in any event, the
\nCorporation as the transferee of the assets, by virtue of the provisions of
\nSection 29<\/a> of the SFC Act, would be liable to the extent of the charge
\ncreated on the assets transferred.\n<\/p>\n
In our view, it is not necessary for us to go into this question. As we
\nhave pointed out at the commencement, only two issues were raised in the
\nwrit petition and seem to have been argued before the High Court: First,
\nwith regard to the validity of Section 15 of the KST, the High Court has
\ndealt with it, and in this appeal by the State, this contention could not have
\nbeen advanced. The second issue urged before us was with regard to the
\nliability of the First Respondent for the charge created on the properties of
\nthe Defaulting Company. The High Court, rightly in our view, held that the
\nFirst Respondent before us was not liable for the tax arrears of the
\nDefaulting Company. No issue as to the liability of the Corporation was
\nraised or argued before, or decided by the High Court.\n<\/p>\n
It is well accepted that, save for exceptional circumstances, new
\nreliefs, not argued or claimed before the High Court, cannot be prayed for
\nbefore this Court. In these circumstances, we decline to enter into the said
\nquestion, and leave it open to be sorted out between the appellants and the
\nSecond Respondent in any appropriate proceedings.\n<\/p>\n
The Final Findings
\n\tIn light of our findings above, we find no merit in C.A. No.
\n3170\/2000 and consequently it is dismissed.\n<\/p>\n
\tCivil Appeal Nos. 3171-3173\/2000 pertained to the tax dues of M\/s
\nAlpha Pharmaceuticals, which is the Second Respondent in these three
\nappeals. At the stage of admission before this Court, the appeal against the
\nSecond Respondent was dismissed. During the final arguments, Mr. Hegde,
\nstated that the sales tax arrears arising out of the common judgment of the
\nHigh Court of Karnataka in Writ Petition Nos. 14332\/98 and 14442-43\/98
\nhave already been recovered from the transferee concerned namely M\/s Bal
\nPharma Ltd., which is the First Respondent in these appeals. Consequently,
\nthese appeals are dismissed as infructuous.\n<\/p>\n
\tThere shall be no order as to costs.<\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India State Of Karnataka & Anr vs Shreyas Papers Pvt. Ltd. & Ors on 5 January, 2006 Author: Srikrishna Bench: Ruma Pal, B.N. Srikrishna CASE NO.: Appeal (civil) 3170-3173 of 2000 PETITIONER: State of Karnataka & Anr. RESPONDENT: Shreyas Papers Pvt. Ltd. & Ors. DATE OF JUDGMENT: 05\/01\/2006 BENCH: Ruma Pal & […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-252826","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nState Of Karnataka & Anr vs Shreyas Papers Pvt. 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