Kolkata, September 25 - In a significant ruling impacting future auction sales of liquidated assets, the Calcutta High Court has held that Cotton Casuals India Pvt. Ltd., which bought factory units from a company under liquidation, must also pay old property tax dues owed by the previous owner. Justice Gaurang Kanth dismissed the company's plea seeking relief from tax arrears, affirming that the Kolkata Municipal Corporation (KMC) acted lawfully in refusing to mutate the property without full payment.
Background
The case stemmed from a writ petition filed by Cotton Casuals India Pvt. Ltd. and others against the State of West Bengal and the Kolkata Municipal Corporation (KMC). The petitioners purchased four factory modules in Paridhan Garment Park, Tangra, from the liquidator of Enfield Apparels Ltd., which was undergoing liquidation proceedings under the Insolvency and Bankruptcy Code (IBC).
After paying ₹15.5 crore for the property and ₹3.49 crore in transfer fees, Cotton Casuals took possession in January 2022 and executed deeds of assignment in May 2022. When they applied for property mutation in August 2024, KMC demanded over ₹1.23 crore as arrears for property tax dating back to 2008 - dues accumulated by the previous owner.
The company argued that it was liable only from the date of possession, not for earlier dues incurred before the liquidation sale.
Arguments Before the Court
Senior Advocate Jaydip Kar, appearing for the petitioners, contended that under the IBC, once assets of a company are liquidated, past liabilities should be settled by the liquidator from the sale proceeds. He argued that the sale was conducted on an "as is where is" basis, which, he said, referred to the physical condition of the property - not hidden encumbrances like unpaid municipal taxes.
He stressed that the auction notice made no mention of any pending property tax, and therefore, Cotton Casuals, as a bona fide purchaser, could not be burdened with the previous owner's arrears.
On the other hand, Advocate Biswajit Mukherjee, representing the KMC, argued that property tax under Section 232 of the Kolkata Municipal Corporation Act, 1980 is a first charge on the property - meaning it runs with the land, not the owner.
"Unless the dues are cleared, mutation cannot be done," he submitted, adding that auction buyers must perform due diligence before bidding.
Mukherjee cited the Supreme Court ruling in K.C. Ninan v. Kerala State Electricity Board (2023) to assert that when property is sold on an “as is where is” basis, all liabilities and encumbrances transfer to the purchaser.
Court's Observations
Justice Kanth closely examined the Expression of Interest (EOI) and the auction sale notice, which repeatedly emphasized that the assets were being sold “as is where is, whatever there is and without recourse.” The Court observed that these clauses explicitly required bidders to verify all liabilities and that the reserve price excluded taxes, levies, and duties, leaving it to bidders to inquire further.
"The responsibility of due diligence rested entirely upon the purchasers," the Judge noted, adding that under Section 232 of the KMC Act, the property tax was a statutory encumbrance, not a personal debt.
Quoting from the Supreme Court’s observations, Justice Kanth wrote:
"When assets are sold on an ‘as is where is’ basis, the purchaser acquires them with full knowledge that they are sold without any warranties or indemnities."
He clarified that even though the sale took place under the Insolvency and Bankruptcy Code, there was no conflict between the IBC and the KMC Act. The overriding power of Section 238 of the IBC, therefore, did not erase KMC’s right to recover dues from the property itself.
The Court distinguished older cases like AI Champdany Industries Ltd. and IISCO Ujjain Pipe, noting that in those instances, no statutory charge existed on the property. In contrast, the KMC Act specifically made municipal tax dues a charge running with the property, giving the corporation priority in recovery.
Decision
Concluding the 27-page judgment, the Court upheld the KMC's refusal to mutate the property until full clearance of arrears. It ruled that Cotton Casuals India Pvt. Ltd., as an auction purchaser, must pay outstanding municipal taxes for the period even before it acquired possession.
Justice Kanth observed that KMC's letters dated 18 November 2024, demanding payment of arrears and declining mutation, were "entirely in accordance with law."
"The Respondent Corporation acted squarely within its statutory mandate under Sections 183(5) and 232 of the Kolkata Municipal Corporation Act," the judgment concluded, dismissing the writ petition.
Case Title: Cotton Casuals India Private Limited & Ors. vs. The State of West Bengal & Ors.
Case Number: WPO 1235 of 2024