Government Trust Selling Assets is Not Exempt from Tax:  Bombay High Court Declares SASF a 'Deemed Dealer' Under MVAT Act

Absence of Profit Motive Does Not Exempt an Entity from Tax Liability - In a decisive ruling Bombay High Court dismissed the appeals filed by Stressed Assets Stabilization Fund (SASF) and upheld its classification as a ‘deemed dealer’ under the Maharashtra Value Added Tax Act, 2002 (MVAT Act). The Court ruled that the sale of movable property by SASF in loan recovery proceedings constitutes a ‘sale’ under the MVAT Act, making it liable to pay sales tax, despite being a government-backed trust with no profit motive.

Rejecting SASF’s contention that it merely facilitated debt recovery and did not engage in business, the Court made it clear that any entity selling goods—irrespective of its commercial intent—can be classified as a dealer under tax laws. It further held that Article 285 of the Constitution, which exempts Union property from state taxation, does not shield SASF from sales tax liability, as the tax is levied on transactions, not government ownership.

"A Government Trust Conducting Commercial Sales is Not Beyond the Reach of Tax Laws" – High Court Rejects SASF’s Constitutional Defense

SASF, a trust established by the Central Government in 2004 to take over the stressed assets of IDBI Bank, challenged its tax liability under the MVAT Act, arguing that, as a government-backed entity, it was immune from state taxation under Article 285 of the Constitution. The Court dismissed this argument outright, holding that government ownership does not automatically grant tax immunity if the entity engages in taxable transactions.

"The Constitution does not create a blanket exemption for commercial dealings of a government trust. Article 285 protects Union-owned property from state taxation, but it does not shield financial transactions where goods are sold. When SASF engages in the sale of movable assets, it enters the realm of commercial taxation and cannot claim immunity merely because the proceeds flow to the Central Government," the Court observed.

Emphasizing that the nature of the transaction determines taxability, not the ownership of the entity, the Court ruled that Article 285 does not apply when a government-backed trust actively participates in economic activity through sales of movable assets.

"A Trust Need Not Operate for Profit to Be a Dealer" – High Court Upholds SASF’s Classification Under MVAT Act

SASF contended that it was not a ‘dealer’ under the MVAT Act because it had no profit motive and merely acted as a conduit for asset recovery. The High Court rejected this defense, ruling that the absence of a profit motive is irrelevant under tax law if an entity engages in the sale of goods.

"The presence or absence of a profit motive does not determine taxability. The Explanation to Section 2(8) of the MVAT Act creates a legal fiction, bringing government-backed financial institutions within the ambit of 'dealers' when they engage in sales of goods. Once an entity carries out taxable transactions, it must comply with sales tax obligations, regardless of its broader purpose," the Court ruled.

Citing Harish Tondon v. Additional District Magistrate (1995) 1 SCC 537, the Court reaffirmed that when a statute creates a deeming provision, courts must give it full effect, even if it departs from commercial realities.

"Selling Assets for Loan Recovery is a Taxable Sale" – High Court Rejects Claim That SASF Was Merely Enforcing Securities

SASF insisted that it was not engaged in the sale of goods but merely enforcing securities by auctioning assets of defaulting borrowers. The Court rejected this claim, ruling that the sale of movable assets—regardless of the underlying purpose—constitutes a ‘sale’ under the MVAT Act.

"The legal characterization of a transaction is determined by its substance, not by the intent behind it. When SASF auctions movable assets, it engages in a sale transaction, irrespective of whether the motive is to recover a loan. A financial institution that sells goods in the course of its activities is subject to sales tax like any other dealer," the Court ruled.

The Court found that movable assets such as plant and machinery were separately auctioned, apart from immovable properties, making them liable for VAT. It held that the nature of the sale—whether voluntary or forced—does not alter its taxability.

"No Retrospective Relief – Tax Liability Stands from the Date of Transaction"

SASF sought relief by requesting that the Determination Order (DDQ) imposing tax liability be applied prospectively to avoid retrospective tax demands. The Maharashtra Sales Tax Tribunal (MSTT) had denied this request, holding that tax liability arises from the date of the taxable transaction, not from the date of assessment. The High Court upheld this ruling, rejecting SASF’s plea for exemption from past tax dues.

"Tax liability is not dependent on when the assessment is made but on when the taxable event occurs. The fact that SASF did not collect VAT from buyers at the time of sale does not absolve it of its responsibility to pay tax. A dealer cannot escape liability by claiming ignorance of the law," the Court ruled.

Rejecting the argument that retrospective tax liability would cause undue hardship, the Court observed that SASF had been conducting these transactions for years and could not now claim exemption merely because it had failed to anticipate tax obligations.

"No Special Treatment for Government-Backed Entities" – Bombay High Court Dismisses SASF’s Appeals

The Court concluded that SASF’s arguments for exemption lacked legal merit, affirming that:

• SASF is a deemed dealer under the MVAT Act and is liable to pay VAT on sales of movable assets.

• The sale of assets in loan recovery proceedings constitutes a taxable sale under the law.

• Article 285 of the Constitution does not protect government-backed commercial transactions from state taxation.

• The tax liability applies retrospectively, and SASF cannot claim relief on the grounds of financial hardship.

"The appeals stand dismissed. The appellant is directed to comply with the tax liability as determined by the authorities. No entity, even if backed by the government, can claim exemption from tax laws when it engages in sale transactions," the Court concluded.

Conclusion

The Bombay High Court’s ruling reinforces the principle that financial institutions and government-backed trusts are not beyond the reach of tax laws when they engage in commercial sales. The judgment sends a clear message that:

• State tax authorities can levy VAT on financial asset sales, even if conducted by a government-backed entity.

• A profit motive is not a prerequisite for sales tax liability—any entity selling goods falls within the tax net.Government ownership does not grant blanket tax immunity—commercial transactions are subject to tax like any other business activity.

• Retrospective tax liability is valid when a dealer has engaged in taxable transactions, even if unaware of its obligations at the time.

By rejecting the attempt to claim tax exemption under the guise of financial restructuring, the Bombay High Court has upheld the principle that taxation is based on transactions, not on ownership or motive.

Date of decision: 03/03/2025