Bonafide Intent Must Be Proved When Property is Purchased from GST Defaulters
By: Admin | December 26, 2024
Categories: Important Pronouncements | 4 Min Read
The Hon’ble Madras High Court in S. Geetha v. State Tax Officer, Madurai Rural (West) [W.P. (MD) No. 16916/2024, dated July 25, 2024], stressed the importance of proving bonafide intent when purchasing property from GST defaulters to challenge an order under Section 81 of the CGST Act.
Case Background
1. Transaction Details
Ms. S. Geetha (“the Petitioner”) purchased two parcels of land on August 3, 2022, for Rs. 2,41,600 and Rs. 1,55,000, totaling 1.25 acres. She acquired the property from a partnership firm after verifying an encumbrance certificate, which showed no prior claims.
2. Discovery of Tax Arrears
Subsequently, it was discovered that the firm owed Rs. 9,81,867 under the CGST Act. A demand order and recovery notice had been issued before the purchase.
3. Attachment of Property
On May 27, 2024, authorities issued a communication under Section 81 of the CGST Act, attaching the properties to secure government revenue. The attachment occurred without prior notice to the Petitioner.
Legal Issue
Does a buyer need to prove bonafide intent when purchasing property from GST defaulters?
Court’s Observations and Decision
1. Obligations Under Section 81 of the CGST Act
The Act prohibits defaulters from transferring property to avoid tax liabilities. Therefore, the buyer must demonstrate good faith in the transaction. Reliance on an encumbrance certificate alone is not sufficient proof.
2. Questions on Transaction Value
The Court raised concerns about the low purchase price of Rs. 3,96,600 for 1.25 acres, which suggested a lack of transparency in the transaction.
3. Directions to the Petitioner
The Court instructed the Petitioner to file a suit for declaration in a competent court within 30 days to establish their bonafide intent. Additionally, authorities were directed not to sell the property for three months if the suit was filed on time.
4. Failure to File a Suit
If the Petitioner fails to act within the given timeframe, authorities may proceed with the property’s attachment and sale in accordance with the law.
Relevant Provisions
Section 81 of the CGST Act:
Transfers intended to defraud government revenue are void unless the transfer is:
- For adequate consideration,
- Made in good faith, and
- Conducted without knowledge of pending tax liabilities.
Key Takeaways
- Buyers must prove bonafide intent when acquiring property from GST defaulters.
- Encumbrance certificates alone do not establish good faith.
- Exercising due diligence is crucial to avoiding legal and financial complications.
For more GST-related updates, stay tuned.
