M/S Hm Industries vs. State Of Hp And Others

Held

The Court allowed the writ petition. It held that the rights, title, and interest acquired by a bona fide auction purchaser under the SARFAESI Act cannot be defeated, nullified, or extinguished by a red ink entry in revenue records pertaining to the past business liabilities of the erstwhile loanee-dealer. The Court reasoned that such liability cannot be fastened on an auction purchaser unless they acquire ownership by transfer of the business under Section 39 of the HP VAT Act, 2005, which was not the case here. Furthermore, the bank's failure to disclose known encumbrances (State taxes/dues) in the sale notice, despite stating the property was free from encumbrances, and non-compliance with Rule 8(7) of the Security Interest (Enforcement) Rules, meant that such undisclosed liabilities could not be fastened on the auction purchaser. The Court also noted that the State Tax Authorities had not registered their claims or obtained attachment orders as required by Section 26-B(4) of the SARFAESI Act before the auction process concluded. The Court declared the adverse red ink entry in the revenue records inoperative, illegal, and quashed it. It directed the respondents to register the sale certificate in the petitioner's name and release a specific amount of Rs. 4,60,610/- with statutory benefits within four months.

Facts

The petitioner, M/s H M Industries, purchased an immovable property, including a factory building, in an e-auction held on September 11, 2018, from UCO Bank (Respondent No. 4) under the SARFAESI Act, 2002. The petitioner received a sale certificate on January 20, 2023. Subsequently, the petitioner discovered a mutation entry (No. 688, dated July 21, 2018) in the revenue records indicating that the property was charged with Respondent No. 1 (State of H.P.) and Respondents No. 2 and 3 (Department of Excise and Taxation). This was despite UCO Bank having a prior charge over the property recorded via mutation No. 298, dated January 10, 2018. The petitioner sought to quash these claim entries and associated tax liabilities.

Key Issues

1. Whether the rights, title, and interest acquired by a bona fide auction purchaser under the SARFAESI Act can be defeated or nullified by a prior 'red ink' entry in revenue records concerning outstanding State Sales Tax/Excise Taxes, when such liabilities were attributable to the original loanee-dealer and not disclosed in the sale notice? (Question of law turning on the SARFAESI Act, 2002, and the HP VAT Act, 2005). Petitioner's arguments: The petitioner contended that their rights as a bona fide auction purchaser cannot be extinguished by a red ink entry for past liabilities of the original dealer, especially when these liabilities were not disclosed in the sale notice as required by Rule 8(7) of the Security Interest (Enforcement) Rules, 2002. They argued that the business liability of the erstwhile loanee-dealer cannot be fastened on the auction purchaser unless the auction purchaser acquires ownership by transfer of the business under Section 39 of the HP VAT Act, 2005, which did not occur. They relied on Supreme Court judgments like C Natarajan and Shakeena. Revenue/State's arguments: The judgment does not record specific arguments made by the respondents (State of H.P. & Ors.).