Isabella Mariam

The High Court of Calcutta, Single Bench of Justice Gaurang Kanth held that property tax constitutes a first charge on property, rendering an auction purchaser liable for tax arrears accrued prior to the sale. The Court observed that when a statutory first charge exists—such as property tax under Section 232 of the Kolkata Municipal Corporation Act, 1980—the municipal authority may independently enforce recovery through its statutory mechanism. It further clarified that such enforcement does not conflict with the Insolvency and Bankruptcy Code, as the overriding effect of Section 238 of the IBC is not applicable in this context. Consequently, the writ petition challenging the property tax demand was dismissed.

The petitioners, Cotton Casuals India Private Limited and associated parties, sought quashing of KMC’s demands dated November 18, 2024, for property tax arrears totaling Rs. 1,23,84,142 pertaining to factory modules A-201, A-202, A-301, and A-302 at Paridhan Garment Park, Tangra, Kolkata. They further sought directions to effect mutation of the said properties in their names without levying interest or penalty for periods prior to their purchase on May 7, 2022. The properties, previously owned by M/s Enfield Apparels Ltd., had been sold by the Liquidator pursuant to liquidation orders passed by the National Company Law Tribunal (NCLT), Kolkata Bench, under the Insolvency and Bankruptcy Code, 2016 (IBC).

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The Bank of India had initiated insolvency proceedings against Enfield Apparels Ltd. in 2018. The NCLT admitted the application, appointed a Resolution Professional, and upon failure of any resolution plan, ordered liquidation on April 4, 2019. The Liquidator issued an e-auction notice in May 2019 for the sale of Enfield Apparels’ factory premises. The initial auction was set aside, and by subsequent orders of the NCLT in 2020, the sale was confirmed in favor of Cotton Casuals India Private Limited for a bid amount of Rs. 15.50 crores. Possession was handed over on January 19, 2022, and four separate Deeds of Assignment were executed on May 7, 2022, transferring leasehold rights to the petitioners.

Following the transfer, the petitioners applied to KMC for mutation on August 29, 2024, agreeing to pay property taxes from the date of possession. However, KMC refused to process the mutation applications unless the petitioners cleared all outstanding arrears, including those accrued during Enfield Apparels Ltd.’s ownership. KMC’s demand included property tax dues from the second quarter of 2008 to the second quarter of 2024. Aggrieved by this, the petitioners approached the High Court contending that liability for pre-sale dues lay with the Liquidator and not with them as auction purchasers.

On behalf of the petitioners, Senior Advocate Jaydip Kar argued that they were bona fide auction purchasers under the IBC and had no notice of any arrears. He asserted that the assets were sold on an “as is where is” basis, which pertained only to the condition of the assets and not to encumbrances or statutory dues. It was submitted that KMC was merely an operational creditor under the IBC, and that any municipal tax dues were to be recovered through the liquidation process and not from the purchaser.

Conversely, Counsel for KMC, Biswajit Mukherjee, argued that Section 232 of the Kolkata Municipal Corporation Act, 1980, creates a first charge on the property for unpaid property tax, binding subsequent owners. He submitted that the sale terms explicitly required bidders to undertake due diligence and that the reserve price excluded statutory dues. Therefore, the petitioners, as purchasers, were bound to verify and discharge existing liabilities attached to the property.

The Court observed that under the amended proviso to Section 183(5) of the KMC Act, the Corporation retains the power to refuse mutation where arrears exist. The Court held, “Such refusal is therefore lawful, reasonable, and entirely in conformity with the statutory framework.”

It stated, “The property tax, as per the KMC Act, is an encumbrance on the property itself… This is not the personal liability of the property owner.” The Court reasoned that since the liability is a charge running with the property, it is enforceable against subsequent purchasers irrespective of the mode of sale.

The Court examined the interplay between the IBC and the KMC Act and held that there was no inconsistency between the two statutes. “Where a statutory first charge is created on the property… the municipal authority is entitled to enforce such charge independently… and the overriding effect of Section 238 of the IBC is not attracted,” the Court stated. Therefore, KMC’s right to recover dues through its statutory mechanism remained unaffected by the liquidation process.

Justice Kanth referred to Supreme Court precedents, including Union of India v. Naskapara Jute Mills Co. Ltd. and K.C. Ninan v. Kerala State Electricity Board, stating that assets sold on an “as is where is” basis pass with all existing liabilities and encumbrances. The Court recorded, “When assets are sold on such a basis, the purchaser acquires them with full knowledge that they are being sold without any warranties, representations, or indemnities, and that the purchaser alone bears the responsibility of verifying the condition, liabilities, and encumbrances attached to the assets.”

The Court distinguished earlier decisions cited by the petitioners, such as AI Champdany Industries Ltd. v. Official Liquidator, holding that those judgements did not consider Section 232 of the KMC Act. It observed that unlike cases under the Companies Act, 1956, the present case involved a statutory charge making KMC a secured creditor by operation of law. The Court further noted, “Irrespective of whether the sale is conducted under the IBC or under any other statute, an auction purchaser who had no notice of pre-sale liabilities cannot be saddled with such dues. However, the present case stands apart as the sale terms required independent due diligence and expressly excluded all taxes and levies from the reserve price.”

Justice Kanth reiterated that “The obligation of due diligence and independent verification of all aspects of the sale asset rested entirely upon the bidders.” The Court also cited Clause 7.1.10 of the Expression of Interest, which stated that the reserve price excluded all taxes, levies, and duties. Accordingly, the petitioners were deemed to have acquired the properties subject to the encumbrances, including outstanding municipal taxes.

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The Court stated, “This Court finds no illegality, arbitrariness, or infirmity in the letters dated 18.11.2024 issued by the Respondent Corporation.” Justice Kanth affirmed that KMC acted “squarely within its statutory mandate” under Sections 183(5) and 232 of the KMC Act.

“The refusal to grant mutation of the four leasehold factory units… on account of outstanding property tax and other statutory dues, is fully justified and entirely in accordance with law.” Consequently, the writ petition was dismissed.

Advocates Representing the Parties:
For the Petitioners: Mr. Jaydip Kar, Senior Advocate; Mr. Deepnath Roy Chowdhury, Advocate; Mr. Debdeep Sinha, Advocate; Mr. Dibesh Dwivedi, Advocate.
For the Respondents: Mrs. Sipra Majumder, Advocate; Ms. Debarati Sen (Bose), Advocate; Mr. Biswajit Mukherjee, Advocate; Mr. Gurudas Mitra, Advocate.

Case Title: Cotton Casuals India Private Limited & Ors. v. State of West Bengal & Ors.
Neutral Citation: 2025: CHC-OS:204
Case Number: WPO 1235 of 2024
Bench: Justice Gaurang Kanth