Property was not accepted as collateral security for availing loan facility wherein the owner of the property was charged with any tax liability and penalty under the GST Act.

T.V. Arun Ram v. Deputy Commissioner, (Sales Tax)

High Court of Madras

W.P (MD) No.12805 of 2022, W.M.P. (MD) Nos. 9087, 9088, and 9089 of 2022

Date of Judgement: 25 August 2022

Relevant Sections: Section 73(5), Section 74, and Section 107(1) of CGST/TNGST Act, 2017

Category: Input Tax Credit / Collateral Loan Restriction / Recovery Safeguards

Facts of the Case [¶1–2]

1. The petitioner, T.V. Arun Ram, managing partner of N.C.N. Traders, applied for a business loan of ₹4.56 crores. While the bank (third respondent) sanctioned the loan based on collateral property documents, it was withheld due to objections raised by the Sales Tax Department.
2. The objections stemmed from arrears of GST dues (₹51.46 lakhs with 100% penalty) pending against the petitioner’s father, Thiagarajan, who earlier retired from the same business partnership. The liability arose from a show cause notice issued under Section 74 concerning wrong availment of ITC for FY 2017–18 and 2018–19.
3. The appeal against the order was filed under Section 107(1) of the TNGST Act and is pending adjudication.
4. Meanwhile, the property used as loan collateral (in the name of the father) was objected to by the Sales Tax Department to prevent any alienation, fearing loss of recovery source.
5. The encumbrance certificate initially showed no charge, but a communication dated 22.08.2022 recorded the lien.

Questions in Consideration [¶1, 3–4]

• Whether the State Tax Department’s objection to the loan disbursement was valid when recovery proceedings against the father were pending appeal?
• Whether the petitioner’s request for quashing the objection letter and directing loan release could be allowed?

Observation of the Court [¶3–5]

1. The Court accepted the Government’s submission that the objections were a precautionary measure to safeguard revenue, considering the loan was being secured by a property belonging to a defaulter (petitioner’s father).
2. The Department’s action was justified as the recovery prospects would be jeopardized in case of alienation of the property through mortgage.
3. The bank’s stance of withholding the loan in light of the departmental communication was also found reasonable.
4. The petitioner was free to provide alternate, unencumbered collateral if available.

Judgement of the Court [¶5]

• The Writ Petition was dismissed.
• The impugned communication by the Department was not quashed.
• Petitioner was allowed the liberty to offer alternate security to the bank.
• No costs were awarded; miscellaneous petitions were closed.

Between Fine Lines

• The Court upheld the tax department’s right to secure potential recovery by restricting alienation of collateral.
• Even if the liability is under appeal, public interest justifies precautionary protection.
• A loan can be rightfully withheld if recovery of tax dues is threatened.
• Change in business ownership does not affect recovery rights when collateral belongs to the defaulter.
• The petitioner can still pursue the loan by substituting the security offered.

Summary of Referred Cases

Takeaway

“Collateral in Crosshairs: Revenue Interest Overrides Business Expansion”