HC Bombay (18.02.2021) in Medineutrina Pvt. Ltd. Vs District Industries Centre (D.I.C.) and Other [Writ Petition No. 7971/2019] held that;
It goes without saying that when a statutory charge is created on the property, the same would go with the property and would follow the property, in whosoever hands the property goes.
Thus the notice of such a statutory charge on the property, is always presumed in law, to one and all and none can claim ignorance of the same.
Thus the purchase of the property on 'as is where is and what is there is ' basis, would mean that the property was being had by the auction purchaser, with all its rights, obligations and liabilities, whatsoever they may be, which would include, all dues, impositions, restrictions as may have been imposed upon the same and consequent to acquiring title to the property, cannot be permitted to quibble out of it, on the alleged plea of not being noticed about any such liability/imposition.
That apart, it is equally a duty of the auction purchaser, before bidding for the same, to make inquiries about the impositions upon the property, so that he can have it free of any encumbrances. After acquiring title to the property, the auction purchaser cannot be heard to say that he will have the rights associated with the property and not the liabilities. He takes it lock, stock and barrel, with everything.
Excerpts of the order;
# 2. The present petition raises a challenge to the action on the part of respondent no. 1/ District Industries Centre in refusing to transfer the property in its record, in favour of the petitioner, unless the liability of the respondent no. 2/Sales Tax Department, claiming earlier dues against M/s. Wood Stock Holdings, a Company which was owning the immovable property, attached and auctioned by the respondent no. 3/Bank, under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, “the SARFAESI Act” hereinafter) is made by the petitioner, who is the auction purchaser. Further relief is claimed against the respondent no.3/Bank to issue No Objection Certificate (NOC) and issuance of a fresh sale certificate, free from all encumbrances in favour of the petitioner.
# 3. The factual matrix of the matter and contentions of the petitioner, are as under :-
(a) M/s. Wood Stock Holdings the owner of plot no. 206, MIDC, Butibori, Pohi, Tah. Hingna, Distt. Nagpur along with the factory building constructed thereupon having a total built up area of 908.988 sq. meters had availed loan from the respondent no. 3, on account of non-payment of which action under the SARFAESI Act was initiated by the respondent no. 3/Bank, resulting in attachment of the above immovable property, which was put to auction.
(b) On 14/3/2017, the petitioner being the highest bidder to the tune of Rs. 71,25,000/-, his offer was accepted.
(c) On 29/3/2017, the respondent no.3/Bank issued a sale certificate in favour of the petitioner. The symbolic possession of the above said immovable property was also handed over to the petitioner on 29/3/2017 by the respondent no. 3/Bank.
(d) On 12/1/2018, the petitioner applied to the respondent no.1/District Industries Center (DIC) for issuance of NOC to get the said property transferred in its name.
(e) On 6/2/2018 the DIC/respondent no. 1 informed the petitioner that for the purpose of transfer of the said immovable property, in its record, it will have to take NOC from the respondent no. 2/Sales Tax Department as there were arrears of sales tax dues upon M/s. Wood Stock Holdings and also certain other documents, as listed in the communication dated 6/2/2018, were also directed to be submitted.
(f) A communication dated 3/3/2015, is also placed on record by the petitioner, which is addressed by the respondent no. 2/Sales Tax Department to the respondent no.1/DIC stating that M/s Wood Stock Holdings was in arrears of sales tax dues for the period from 1/4/2010 to 31/3/2011 for Rs. 7,17,130/- which was not recovered and since it was learnt that the dealer was in process of disposal of the plot at MIDC, the respondent no. 1/DIC was requested to obtain NOC from the Sales Tax Department before approving the transfer of the business.
(g) It is contended that by operation of Section 26 –E of the SARFAESI Act, the property stood transferred to the petitioner free from encumbrances and any charge which may be claimed by the respondent no.2 on account of arrears of sales tax under Section 37 of the Maharashtra Value Added Tax Act, 2002 (for short, MVAT Act, 2002 hereinafter), would be subservient to the provisions of Section 26-E of the SARFAESI Act, due to which the action on part of the respondent nos. 1 and 2 of not issuing the NOC for transfer of the land in favour of the petitioner, on account of the so called dues claimed by the respondent no. 2, was clearly not in consonance with law and therefore illegal.
(h) It is further contended that no notice whatsoever of any charge was given to the petitioner by the respondent nos. 2 and 3 and therefore, the petitioner in absence thereof was not liable for payment of any dues of the respondent no. 2 as the charge was not enforceable against the petitioner, who was an auction purchaser, without any notice of the charge.
(l) The provisions of the SARFAESI Act and the Rules made there under, make it obligatory upon the respondent no. 3/Bank to have found out the encumbrances upon the said property, and made them known to the petitioner, so that a conscious decision could be taken to have the property or not.
(j) Since the property was sold on “Ás is where is and what is there is basis”, there was no question of the petitioner being liable for anything than payment of the purchase price.
5. The reply and contentions of the respondent no. 2 are as under :-
(a) statutory charge was created on the property.
(b) the said property, was already attached by the Sales Tax Department on 21/9/2015 under Rule 11 of the Maharashtra Land Revenue Code, 1966 and the attachment order was duly served upon Mr. Rahul Dalmia, the Managing Partner of M/s. Wood Stock.
(c) the said property after its attachment was given on Suprutnama to the partner of M/s. Wood Stock on the next day of the attachment i.e. on 22/9/2015 (Annexure R-1).
(d) the Sales Tax Department had an earlier charge upon the property for arrears of tax not paid, which was created before amendment in Section 26-E of the SARFAESI Act, which has come into force on 1/9/2016 by insertion of Chapter-IV-A in the SARFAESI Act and therefore the priority as mentioned in Section 26-E of the SARFAESI Act would not have any retrospective application.
(e) It was contended that the respondent no.3/Bank was aware of the sale tax dues, due to which reason, the sale was not free from encumbrances but was on “As is where is and whatever there is basis”, which was reflected from the sale certificate issued in favour of the petitioner, in view of which the petition was liable to be dismissed.
# 6. The respondent no. 3/Bank has contended that it was not aware about any claim by the Sales Tax Department and therefore non-disclosure of something of which the Bank itself was unaware of, could not be laid at the doorstep of the Bank. Reliance was further placed on Section 26-E of the SARFAESI Act to oppose the claim by the respondent no. 2. Reliance is placed on Mahendra Mahato and another v. The Central Bank of India, W.P. No. 38111 (W) of 2013, decided on 29/8/214 by a learned Single Judge of the Calcutta High Court.
# 18. In the instant case, the provisions of Section 31-B of the Recovery of Debts and Bankruptcy Act, 1993 (for short, “the RDB Act, 1993” hereinafter) and those of Section 26-E of the SARFAESI Act, both give priority to the rights of the secured creditor, to realise secured debts, due and payable to them by sale of assets in which security interest is created, over all other debts and Government dues including revenues, taxes, cesses and rates due to the Central Government, State Government or local bodies, which position, in fact also stands recognised and accepted under the MVAT Act 2002, by user of the expression “but subject to any provision regarding creation of first charge in any Central Act for the time being in force”, as used in Section 37(1) therein and therefore the priority as created by Section 26-E of the SARFAESI Act, will prevail over the first charge as created by Section 37(1) of the MVAT Act, 2002.
# 21. That takes us to the next contention of Mr. Dawda, learned Counsel for the petitioner, that the petitioner had no notice of the Charge created in favour of the respondent no.2, and in absence of such a notice, the charge was not enforceable upon the petitioner. Section 100 of the Transfer of Property Act (T.P. Act, hereinafter for short), is pressed into service, in support of this contention. Reliance is also placed upon Section 55 of the T.P. Act to contend that a charge being an encumbrance, notice of the same ought to have been given to the petitioner, in absence of which the petitioner cannot be held liable for any dues of the respondent no. 2.
# 23. The expression “charge” came up for consideration before the Hon'ble Apex Court in Shreyas Papers (supra), where dilating upon the subject, in view of the provisions of Section 100 of the T.P. Act, vis-a-vis the charge created under the Karnataka Sales Tax Act, it was held as under :-
“20. As the section itself unambiguously indicates, a charge may not be enforced against a transferee if she/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 Chintaman Datar, [(1974) 2 SCC 799, 811 (para 18)] and in Ahmedabad Municipal Corpn. of the City of Ahmedabad v. Haji Abdulgafur Haji Hussenbhai, (1971) 1 SCC 757, 759-61 (paras 3 & 4) : AIR 1971 SC 1201, 1202-04(para 3)] (hereinafter “Ahmedabad Municipal Corpn.”). In this connection, we may refer to the latter judgment, which is particularly relevant for the present case.
21. Ahmedabad Municipal Corpn. [(1971) 1 SCC 757, 759-61 (paras 3 & 4) : AIR 1971 SC 1201, 1202-04 (para 3)] was a case where a person was in arrears of property tax, due under the Bombay Provincial Municipal Corporation Act, 1949. Consequently, the Municipal Corporation created a charge over the property of the defaulter. However, the property was sold in execution of a mortgage decree. When the Municipal Corporation purported to exercise their charge over the property, the purchaser in court-auction filed a suit for a declaration that he was the owner of the property and that the arrears of municipal taxes due by the transferor were not recoverable from him by proceeding against the property purchased in the auction. In the appeal before this Court, the Municipal Corporation's main argument was that where the local law provided for the creation of a charge against a property for which municipal taxes were due, transferees of such properties were imputed with constructive knowledge of any charge created against the properties that they had purchased. This argument was, however, rejected. This Court held that while constructive notice was sufficient to satisfy the requirement of notice in the proviso to Section 100 of the TP Act, whether the transferee had constructive notice of the charge had to be determined on the facts and circumstances of the case. [Ibid., at SCC pp. 765-66 (para 12) : AIR pp. 1207-08 (para 8)] In other words, this Court held that there could be no fixed presumption as to the transferee having constructive notice of the charge against the property. In fact, the principle laid down in Ahmedabad Municipal Corpn. [(1971) 1 SCC 757, 759-61 (paras 3 & 4) : AIR 1971 SC 1201, 1202-04(para 3)] has been correctly applied in a sales tax case similar to the present case. [CTO v. R.K. Steels, (1998) 108 STC 161 (Mad)]
22. 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. ….”
Thus for a 'Charge' as defined is Section 100 of the T.P. Act, to become effective, it is necessary that the transferee, ought to have had prior notice of such ''Çharge”, be it either express, implied or constructive or the prior existence of such “Çharge”, is shown to have been within the knowledge of the transferee.
# 25. In respect of a 'Charge', created upon immovable property on account of non-payment of Municipal Taxes, in AI Champdany Industries Limited (supra) relied upon by Mr. Dawda, learned Counsel for the petitioner, the Hon'ble Apex Court, while considering the issue of its enforcement and what is meant by an encumbrance, had held as under :-
“12. The terms and conditions of the sale must be read as a whole. It must be given a purposive meaning. The word “encumbrance” in relation to the word “immovable property” carries a distinct meaning. It ordinarily cannot be assigned a general and/or dictionary meaning.
13. We may, however, notice some dictionary meanings of the said word as reliance thereupon has been placed by Mr Sibaji Sen. In Stroud's Judicial Dictionary of Words and Phrases, 5th Edn., encumbrance is defined as
“being, ‘a claim, lien, or liability, attached to property’; and this definition is wide enough to cover the plaintiff's claim, which was, as assignee for value of a reversionary interest, against a person coming in under a subsequent title”.
In Supreme Court on Words and Phrases it is stated that
“the word ‘encumbrance’ means a burden or charge upon property or a claim or lien upon an estate or on the land”.
In Advanced Law Lexicon, encumbrance is defined as:
“An infringement of another's right or intrusion on another's property.”
In Black's Law Dictionary encumbrance is defined as:
“Any right to, or interest in, land which may subsist in another to diminution of its value, but consistent with the passing of the fee….”
Encumbrance, therefore, must be capable of being found out either on inspection of the land or the office of the Registrar or a statutory authority. A charge, burden or any other thing which impairs the use of the land or depreciates in its value may be a mortgage or a deed of trust or a lien or an easement. Encumbrance, thus, must be a charge on the property. It must run with the property. If by reason of the statute no such burden on the title which diminishes the value of the land is created, it shall not constitute any encumbrance.
# 26. It is correct that in the instant case, there is nothing on record, to show that any charge created on the property and that the same stood attached by the respondent no.2, was brought to the notice of the petitioner. In fact, the reply on part of the respondent no. 3/Bank indicates that the respondent no.3/Bank itself was not aware of any charge upon the said property, or that it stood attached, as claimed by the respondent no.2. Thus, the petitioner as an auction purchaser, could not have had any notice of any such charge or attachment, in view of the language of Section 100 of the T. P. Act, and the charge would thus be unenforceable as against the petitioner, on this count.
# 27. The above would be a correct position, if we were faced with a situation where a charge was created by virtue of Section 100 of the T.P. Act; by a written document between parties inter se or by a statutory provision contained in any Central/State/Local law, in terms of which the charge was not on the property. There is always a difference between a charge created by contract and a statutory charge created by the provisions of a statute on the property, be it a Central/State/local law. A statutory debt/charge is also different from a Crown debt, and prevails upon a Crown debt, as has been held in Union of India and others v. SICOM Limited and another, (2009) 2 SCC 121, in the following words :-
“9. Generally, the rights of the Crown to recover the debt would prevail over the right of a subject. Crown debt means the “debts due to the State or the King; debts which a prerogative entitles the Crown to claim priority for before all other creditors”. [See Advanced Law Lexicon by P. Ramanatha Aiyar (3rd Edn.), p. 1147.] Such creditors, however, must be held to mean unsecured creditors. Principle of Crown debt as such pertains to the common law principle. A common law which is a law within the meaning of Article 13 of the Constitution is saved in terms of Article 372 thereof. Those principles of common law, thus, which were existing at the time of coming into force of the Constitution of India are saved by reason of the aforementioned provision. A debt which is secured or which by reason of the provisions of a statute becomes the first charge over the property having regard to the plain meaning of Article 372 of the Constitution of India must be held to prevail over the Crown debt which is an unsecured one
10. It is trite that when Parliament or a State Legislature makes an enactment, the same would prevail over the common law. Thus, the common law principle which was existing on the date of coming into force of the Constitution of India must yield to a statutory provision. To achieve the same purpose, Parliament as also the State Legislatures inserted provisions in various statutes, some of which have been referred to hereinbefore providing that the statutory dues shall be the first charge over the properties of the taxpayer. This aspect of the matter has been considered by this Court in a series of judgments.” (emphasis supplied)
# 28. The language of Section 37(1) of the MVAT Act 2002, has to be viewed in that contextual background. Section 37(1) of the MVAT Act, 2002, creates a 'First Charge on the property of the dealer', or as the case may be, person, for any amount of tax, penalty, interest, sum forfeited, fine or any other sum payable under the MVAT Act 2002. Though the dues of the Bank as a secured creditor, in light of the language of Section 26-E of the SARFAESI Act, which has now been brought into force w.e.f. 1/9/2016, will have priority, that does not have the effect of wiping out the dues payable under any Central/State/Local Act, where, for the recovery of such dues, a first charge has been created on the property by such statute, which in the case of the MVAT Act, 2002, has been so created. It goes without saying that when a statutory charge is created on the property, the same would go with the property and would follow the property, in whosoever hands the property goes.
# 29. Thus the notice of such a statutory charge on the property, is always presumed in law, to one and all and none can claim ignorance of the same. In AI Champandy Industries Limited (supra) itself the Hon'ble Apex Court has made a distinction between an encumbrance as it is understood in the general parlance and an encumbrance which is a charge on the property and runs with the property and has held that if by reason of the statute no such burden on the title which diminishes the value of the land is created, it shall not constitute any encumbrance.
# 36. Thus the purchase of the property on 'as is where is and what is there is ' basis, would mean that the property was being had by the auction purchaser, with all its rights, obligations and liabilities, whatsoever they may be, which would include, all dues, impositions, restrictions as may have been imposed upon the same and consequent to acquiring title to the property, cannot be permitted to quibble out of it, on the alleged plea of not being noticed about any such liability/imposition. In case the auction purchaser, did not want to have the property, with its liabilities, he ought to have insisted on having the same free of all encumbrances, altogether, before bidding for the same. That apart, it is equally a duty of the auction purchaser, before bidding for the same, to make inquiries about the impositions upon the property, so that he can have it free of any encumbrances. After acquiring title to the property, the auction purchaser cannot be heard to say that he will have the rights associated with the property and not the liabilities. He takes it lock, stock and barrel, with everything.
# 38. The property, which is a security interest, under Section 13 (6) of the SARFAESI Act, consequent to the transfer of the secured asset after taking possession thereof, either physical or symbolic, by the secured creditor, vests in the transferee with all rights in the property transferred, as if the transfer had been made by the owner. The issue regarding the knowledge of the encumbrances known to the secured creditor, thus assumes significance. In so far as encumbrances on account of statutory/ Government/Municipal/Revenue dues are concerned, the responsibility of obtaining the details thereof is of the secured creditor. The knowledge of these encumbrances can easily be solicited, obtained from the authorities by the secured creditor. Thus, the secured creditor is clearly possessed of the wherewithal, to obtain the information about encumbrances of the above nature. This is necessary for the secured creditor, for the reason that these encumbrances, have to be mentioned in the notice of sale under Rule 8 (7) (a) of the Security Interest (Enforcement) Rules, 2002 [for short, SI (E), Rules, 2002” hereinafter]. So also, Rule 8 (7) (f) of the SI (E), Rules, 2002 requires the sale notice to contain all the other terms and conditions which the authorised officer considers it necessary for a bidder/purchaser to know the nature and value of the property, which would obviously include information about any charge, lien or other imposition upon the property. Thus, information and details regarding any encumbrances upon the property which is the security interest, which are easily obtainable from the statutory authorities, ought to be so obtained by the secured creditor as well as the authorised officer, which then needs to be entered in the notice of sale under Rule 8 (7) (a) of the SI (E), Rules, 2002, which would result in bringing the information about any encumbrance to the knowledge of the prospective bidders. In absence of any such information, an auction purchaser may in the facts of the given case, raise a claim that the purchase by him was without notice of any such encumbrance and any charge found subsequent to the confirmation of the auction, shall on that count, be not enforceable against the auction purchaser, which may lead to litigation.
# 41. The secured creditor under the SARFAESI Act, therefore must in all cases ensure :
(a) that the property offered as a security interest is free from any encumbrance whatsoever, at the time when it is so offered initially, to avail financial credit by the owner/s;
(b) in all such cases, a title verification certificate, by a lawyer, at the penalty of cancellation of his license to practice, in case such certificate is found to be false, should be a must, which certificate should also contain a statement that the lawyer has also verified the suits filing register of the Court, within whose jurisdiction, the property is situated to ascertain, whether the same is the subject matter of any litigation and an affidavit from the borrowers that it is not so;
(c) in all such cases, a valuation certificate, by a government approved, at the penalty of cancellation of his licence, in case such certificate is found to be false, should be a must;
(d) immediately upon creation of security interest in its favour for payment of its dues, the bank must inform all the Central/State/Local Authorities regarding creation of such security interest, including the Sub-Registrar of documents and City Survey office concerned;
(e) the bank/secured creditor, should before any property is attached and auctioned :
(i) enquire with the Central/State/Local authorities regarding any dues on the property sought to be auctioned and in case such dues are found, to mention the same in the public notice to be published inviting bids, so that the bidder, is made aware of the liability and encumbrance, which the property carries with it.
(ii) where the secured creditor, has taken symbolic possession and is not in physical possession of the property, the public notice must indicate the nature of such possession and if the Secured creditor is unable to secure actual possession, the reason for not getting such possession (whether there is a tenant/licensee/family member/encroacher etc in occupation of the property, so that the bidder, is consciously made aware of the situation in which the property is and makes a conscious offer/bid.
(iii) Where the secured creditor, is aware of Statutory dues the payment of which is a charge upon the property, the same could be included in the reserve price, for sale of the property or got deposited from the bidder separately, so that the encumbrance could be cleared, by the secured creditor.
(iv) where the secured creditor is aware of encumbrance, the value for discharging such encumbrance, either can be included in the reserve price or got deposited from the bidder, so that the encumbrance could be cleared, by the secured creditor.
The secured creditor, as a creation of a Statute, is meant for the benefit and interest of the citizens and is not expected to play hide and seek, in its dealings, but has to act fairly and is under an obligation in law, to make a full and candid disclosure as to the dues and encumbrances in respect of the property put to auction and the status as to possession of the property, for which it has to make reasonable enquiries, which should be demonstrable from the record. The secured creditor cannot be heard to say that it was for the bidder to obtain such information, for the reason, that being a lender, it is already holding the documents of the borrower, which confer upon it a right to obtain such information.
# 42. What we have stated above, is nothing new, but the statutory obligation of the secured creditor, as the owner of the property under Section 13(6) & (7) of the SARFAESI Act, read with Rules 8 (7) (a) and (f), Rules 9 (7) (9) and (10) of the SI (E) Rules, 2002 with a liability to transfer a clear and marketable title, as the seller.
# 44. Thus even in the present case, the dues as claimed by the respondent no.2, being a charge on the property, under Section 37(1) of MVAT Act, 2002, and the property having stood attached by the respondent no.2, before the auction, the petitioner, would be liable to pay the same to the respondent no.2, in order to obtain a clear and marketable title to the property, having purchased the same on 'As is where is and whatever there is basis'. In case the petitioner discharges the aforesaid dues of the respondent no.2, it would then be entitled to a no dues certificate from the respondent no. 2.
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