[Reserved]
Civil Misc. Writ Petition No. 1673 of 2004
M/s Luxmi Oil & Vanaspati (Pvt.) Limited ........Petitioner
Vs.
The Commissioner Central Excise .....Respondents
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Hon'ble Rajes Kumar,J.
Hon’ble Pankaj Mithal, J.
M/S Kashi Ram Panna Lal Industries Private Limited had
mortgaged its unit at 97-Khanchandpur, Rania, Kanpur Dehat with the
U.P. Financial Corporation (in short UPFC) for a loan. It defaulted in the
payment of loan. Therefore UPFC took possession of the unit and
advertised it for sale vide Dainik Jagran dated 25th February 2003.
Petitioner a separate legal entity and a private limited company offered
to purchase the aforesaid unit and its tender was accepted by the UPFC
on 3.5.2003. In pursuance of the above acceptance, UPFC executed a
sale dated 9.5.2003 in favour of Subhash Chandra Gupta and Raj
Kumar Gupta, the Directors of the Company on receiving the sale
consideration of Rs. 60,000,00/-. The sale deed specifically provided
that the property is being transferred free from all charges and
encumbrances. Thus, the aforesaid two purchasers became the
absolute owners of the unit whereon petitioner is running its business.
It appears that the previous owners M/S Kashi Ram Panna Lal
Industries Private Limited were in arrears of excise dues also and as
such the department of Central Excise vide letter dated 27.5.2003 called
upon the UPFC to clear the aforesaid dues. The response of the above
letter, if any, is not available on record. However, when the sale deed
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was executed, two demand notices dated 12.10.2004 and 25.10.2004
were issued and served upon the petitioner requiring it to pay excise
dues of Rs. 36,57,000/- of previous owners. The aforesaid two demand
notices have been challenged by the petitioner by means of present writ
petition.
Necessary counter and rejoinder affidavits have been exchanged
between the petitioner and the excise department ie. respondents no. 1
and 2. No counter affidavit has been filed on behalf of the UPFC despite
service of notice upon its counsel. Notices to respondent no. 4 were
directed to be issued vide order dated 24.11.2004 and office reports
dated 3.12.2004 and 11.1.2005 states that neither notices sent by
registered post fixing a date have been returned undelivered nor AD has
been received back. Despite deemed service upon respondent no. 4 no
one has appeared and filed any response on his behalf.
We have heard Sri Gopal Verma, learned counsel for the
petitioner and Sri Shambhu Chopra, learned counsel for the Central
Excise respondents no. 1 and 2 and with their consent proceed to
decide the writ petition finally at the admission stage.
The submission of the learned counsel for the petitioner is that the
Directors of the petitioner are bonafide purchasers in good faith of the
property in dispute for valuable consideration and since the property has
been purchased through public sale from UPFC free from all
encumbrances, petitioner or its directors are not liable for payment of
any excise dues which may be outstanding against the previous owner
of the unit. The decision of the Apex Court on the basis of which the
impugned demand notices have been issued is not applicable in the
facts and circumstances of the case especially when the petitioner/its
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directors have not purchased the business of the previous owner but
only land and building.
On the other hand Sri Shambhu Chopra, learned counsel for the
Central Excise has defended the notices on the ground that the
petitioner is a successor of the previous owners and in view of Rule 230
of the Central Excise Rules, 1944 the Excise Department is entitle to
recover the dues from the assets of the previous owners which had
come to the successor. He has also submitted that the excise dues are
sovereign dues and as such stand priority over all other dues.
The question whether the excise dues of the previous owner can
be recovered from the successor of the property appears to be no longer
res-integra.
A three Judges Bench of the Supreme Court in the case of M/S
Isha Marbles Vs. Bihar State Electricity Board and another JT
1995 (2) SC 626 while considering a similar preposition wherein also a
sale of a unit had taken place under Section 29(1) of the State Financial
Corporation Act, 1951 the question arose whether the Electricity dues of
the previous owner can be recovered from the auction purchaser. Their
Lordships of the Supreme Court held that it is impossible to impose upon
auction purchaser a liability which has not been incurred by him and as
such the liability of the previous owner can not be enforced against the
auction purchaser.
The Apex Court in another case State of Karnataka Vs.
Shreyash Papers Private Limited and others JT 2006(1) SC 180
which was also a case of sale of property under Section 29 of the State
Financial Corporation Act held that the purchaser for value without
notice of the arrears of sales tax of the defaulting earlier company can
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not be held responsible for payment of the same when the property had
fallen to his hands free of charge.
In the instant case there is no dispute that the petitioner/ its
directors are bonafide purchasers in good faith for value of the property
from the UPFC which happened to be a secured creditor vis-a-vis
previous owners M/.S Kashi Ram Panna Lal Industries Private Limited
and that the petitioner/its Directors before purchase had no knowledge
of the outstanding Central Excise dues of the previous owner. Thus, the
case of the petitioner seems to be fully protected by the aforesaid two
decisions. However, some difficulty arises on account of Rule 230(2) of
the Central Excise Rules, 1944 in view of which the Supreme Court in
Macson Marbles Private Limited Vs. Union of India AIR 2004 SC
4927 observed that the aforesaid rule provides for a mode of recovery of
excise dues from the assets owned by the predecessor which could be
recovered from such assets even from the successor.
We have carefully considered the aforesaid Rule. It is reproduced
herein below for the sake of convenience:-
230. Goods, plant and machinery chargeable with duty
not paid-
(1) When the duty leviable on any goods is owning
from or by any person carrying on trade or
business,whether as a producer, manufacturer
or as dealer in such goods, all excisable goods,
and all material and preparations from which
any such goods are made, and all plant,
machinery, vessels, utensils, implements and
articles for making or manufacturing or
producing any such goods, or preparing any
materials, or by which the trade or business is
carried on, in the custody or possession of the
person carrying on such trade or business or in
the custody of possession of any agent or other
person in trust for or for the use of the person
carrying on such trade or business, may be
detained for the purpose of exacting such duty;
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and any officer duly authorised by general or
special order of the Central Board of Excise and
Customs or the Collector may detain such
goods,materials,preparations, plant, machinery,
vessels, utensils and articles until such duties
or any sums recoverable in lieu thereof are paid
or recovered.
(2) Where any such person transfers or otherwise
disposes of his business in whole or in part, or
effects any charge in the ownership thereof, in
consonance of which he is succeeded in the
business or trade or part thereof by any other
person or persons, all excisable goods,
materials, preparations, plant, machinery,
vessels, utensils, implements and articles in the
custody or possession of the person or persons
succeeding may also be detained for the
purpose of exacting duty from the producer,
manufacturer or dealer upto the time of such
transfer, disposal or charge, whether such duty
has been assessed before such transfer,
disposal or charge, but has remained unpaid, or
is assessed thereafter.
A plain and simple reading of the aforesaid rule makes it clear that
it only authorises detention of all excisable goods, materials,
preparations, plant, machinery, vessels, utensils, implements and
articles in the custody or possession of the person or persons carrying
on such trade or business or from person succeeding the business or
trade or part thereof for such time till the dues are paid or recovered. It
does not in any way create ‘charge’ over any of the goods enumerated
above. ‘Charge’ as defined under Section 100 Transfer of Property Act
only creates a right of payment out of the specified property and is
distinct from mortgage where transfer of property or interest takes place.
In this way ‘charge’ stands on or lower pedestal than a deed of
mortgage. The aforesaid rule does not talk of ‘charge’ and by implication
it can not be said that if any duty leviable on any goods or owing to any
person in custody or possession of business is not paid, then a ‘charge’
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would be created over those goods. The word ‘detained’ can not be
interpreted to mean that it creates a ‘charge’ on the goods in respect of
the amount of the arrears of excise dues. The only power given in this
rule is to detain the goods which are in custody or possession of the
person carrying on such trade or business. Apart from the above rule,
there is no other provision under the Central Excise Act or the Rules
which envisages to create any charge over the assets of a unit to enable
the realization of the excise duty on top priority. Moreover, the petitioner
had not succeeded the erstwhile owners in business or trade. The
petitioner or its directors having acquired the above property without any
‘charge’ independent of the business or trade of previous owners is not a
person in custody or possession of the above property, as the successor
of the previous owner against whom there was a demand of excise duty.
No doubt sovereign dues/crown debts have a preferential rights of
recovery over other ordinary and unsecured creditors but in the absence
of any provision creating a ‘charge or a first charge’ in favour of central
excise, the claim of the secured creditor would normally prevail over the
crown debts also.
The Apex Court in Union of India and others Vs. SICOM
Limited and another 2009 (2) SCC 121 while considering the doctrine
of priority in the matter of realization of dues under the Central Excise
Act vis-a-vis secured debts under the State Financial Corporation Act,
1951 held that a debt which is secured becomes a first charge over the
property and must be held to prevail over the crown debt which is
unsecured one.
The Central Excise Department neither by any covenant nor by
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any provision of law had any charge over the above property. Therefore,
the financial corporation being a secured creditor by virtue of the
mortgage qua the excise dues had a preferential right over the assets of
M/S Kashi Ram Panna Lal Industries (P) Limited. Thus, UPFC rightly
exercised its preferential rights in acquiring the said property and
transferred it to the petitioner/its directors. The petitioner having
purchased the property free from all encumbrances and without any
‘charge’ is not liable for the payment of any excise dues which may be
outstanding in the name of the previous owners.
The Apex Court in Macson Marbles (Supra) nowhere held that
Rule 340 of the Rules create a ‘charge’ over the excisable goods or
property in favour the Central Excise Department.
In view of the above, the debt of UPFC had a priority being a
secured creditor by virtue of a deed of mortgage over the dues of the
Central Excise which had no ‘charge’ over the property in the absence of
any provision creating any ‘charge’ over it. Thus, UPFC rightly invoked
its preferential claim and transferred the property.
The Central Excise having no ‘charge’ over the property has no
right to recover such dues from subsequent purchasers, who happens to
be bonafide purchasers.
In view of the aforesaid facts and circumstances, the impugned
notices dated 12.10.2004 and 25.102004 (annexures 7 and 8) are
quashed. A writ of certiorari is accordingly issued. Petition succeeds and
is allowed.
Parties shall bear their own costs.
SKS
August 6, 2010.