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Commissioner, Trade Tax, U.P. vs M/s Radico Khaitan Ltd.

Civil Appeal · 2022 INSC 976Decided 19 Sept 2022
Civil Appeal Nos. 6396-6397 of 2009
M.R. Shah · Krishna Murari

Background

M/s Shaw Scott Distillery (P) Ltd. owed substantial trade tax arrears for 1980-82. Before any recovery proceedings began, it sold its plant, machinery, and goods to a purchaser (later renamed M/s Radico Khaitan Ltd.) in December 1985 and January 1986 for about Rs. 12.12 lakh. Years later, after reassessment and issuance of a recovery certificate against the original assessee, the tax department invoked Section 34 of the U.P. Trade Tax Act to endorse that recovery certificate against the purchaser as well, treating the earlier sale as a fraudulent transfer. The purchaser challenged this endorsement, and the Trade Tax Tribunal and later the Allahabad High Court both ruled in its favour, prompting the Revenue to appeal to the Supreme Court.

Decision Breakdown

The Supreme Court held that Section 34 only applies when property is transferred during the pendency of tax proceedings with intent to defraud the revenue, and does not affect a bona fide transferee for value. Here, at the time of the 1985-86 sale, no assessment or recovery proceedings were pending against the original assessee (the earlier assessment had concluded in 1984 and was reopened only in 1988, with the recovery certificate issued only in 1990). Since the sale predated any pending proceedings and its consideration was undisputed, Section 34 could not be invoked against the purchaser. The Court found no error in the High Court's dismissal of the Revenue's revision applications and dismissed both appeals with no costs.

Lesson Learnt

A tax authority cannot invalidate a genuine, paid-for sale of property to recover another party's tax dues unless the transfer actually took place while proceedings against the defaulter were pending and was made with intent to defraud the revenue: a bona fide purchaser for value who bought before any such proceedings began is protected.

Official source (sci.gov.in)View Judgment (PDF)

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