Case: Gharkul Industries Private Limited Vs. The Superintendent, Central Excise Range & Others

Smt. Ranjana Desai, J.1. Petitioner 1 is a company registered under the Companies Act, 1956. Petitioner 2 is the director of petitioner 1. Respondent 1 is the Superintendent of Central Excise at Amravati and is discharging his duties under the Central Excise Act, 1944. Respondent 2 is Sicom Limited (for short, SICOM). It is a company registered under the Companies Act, 1956. It is a deemed State Financial Corporation and exercises powers under the State Financial Corporation Act, 1956. SICOM claims to have advanced large amounts to the Company known as Prudential Polywebs Limited (In Liquidation), (for short, the Company in Liquidation), who is represented by respondent 3 i.e. the Official Liquidator, High Court, Bombay. Respondent 4 is the Union of India.2. The petition relates to property consisting of land, building and plant and machinery situated at C-42, MIDC, Amravati (for short, the said property). The said property belongs to the Company in Liquidation. The Company in Liquidation made a reference to BIFR which was dismissed by the BIFR by its order dated 16/8/2000. By the said order, the BIFR recommended that the Company in Liquidation be wound up. An appeal preferred from the said judgment was dismissed by AAIFR on 24/11/2000. On 7/10/2003, in Company Petition No.163 of 1998 winding up of the Company in Liquidation was ordered and respondent 3 was appointed as liquidator.3. The Company in Liquidation has borrowed large amounts from various banks and financial institutions. To secure their advances, its assets including the said property were mortgaged. The said property was mortgaged to SICOM, IDBI, MSFC and the Bombay Mercantile Co-operative Bank Limited. As the Company in Liquidation failed to make payment to SICOM, SICOM invoked its powers under Section 29 of the State Financial Corporation Act, 1952 and issued a Take Over Notice on 10/1/2001. Pursuant thereto, on 8/2/2001, SICOM took possession of the said property and repeatedly advertised the same for sale on 27/3/2001, 2/6/2001 and 26/2/2002. An attempt to sell the said property by private treaty also failed.4. Finally, at the auction held on 24/1/2003, one Global Net Services Private Limited quoted Rs.1.10 crores for the purchase of the said property. It appears that the said Global Net Services Private Limited did not pay the amount of Rs.1.10 crores. Petitioner 1 was the second highest bidder at the said auction and had submitted a bid of Rs.60 lakhs. The said property was then put up for auction yet again on 31/8/2005. At this auction, petitioner 1 was the highest bidder. Its bid in the sum of Rs.1.01 crores was accepted. An application was made in this court vide Company Application No.866 of 2005 for sanction of the sale to petitioner 1. This court vide its order dated 23/12/2005 sanctioned the said sale. In pursuance of this courts order dated 23/12/2005, petitioner 1 paid a sum of Rs.4 lakhs by way of demand draft as advance. According to petitioner 1, it is obliged to and was desirous of paying and intends to pay the balance amount of Rs.97 lakhs to respondent 2 to perfect its title and to obtain a conveyance of the said property. It must be noted here that this court directed SICOM to file an undertaking to bring back such proportionate amount as may be found due and owing within 15 days of such demand being made by the Official Liquidator i.e. respondent 3 towards the claims of the workers of the Company in Liquidation. As per this courts order, SICOM was to receive its prorata entitlement in the sale proceeds. The sale in favour of petitioner 1 was confirmed by this court noting that all secured creditors had approved it. The sale proceeds of the said property would be available for distribution to the creditors of the Company in Liquidation and as directed by the Company Court, the priorities of the creditors will be decided by respondent 3 as per the provisions of the Companies Act if the petitioners prayers are granted by this court.5. It appears that petitioner 1 learnt that there were Excise dues pending against respondent 3. Petitioner 1 by its letter dated 30/12/2005 inquired of respondent 1 as to what were their dues. Respondent 1 by its letter dated 3/1/2006 informed petitioner 1 that against the Company in Liquidation, the total outstanding dues of Central Excise duty, penalty and interest amounting to Rs.1,96,99,848/- were pending. The letter further conveyed to petitioner 1 that the department had lodged claims before respondent 3 and that as per Section 11A of the Central Excise Act, 1944, the liability of the payment of Governments outstanding dues will be on the borrower. Learned counsel for respondent 1 has conceded that Section 11A is mentioned inadvertently. It should read as Section 11. With letter dated 3/1/2006, the petitioners had no quarrel because in terms of Section 11 of the Central Excise Act, it correctly placed the liability of payment of the outstanding dues on the Company in Liquidation. However, by a further letter/notice of the same date, respondent 1 informed petitioner 1 that the liability to pay the said sum of Rs.1,96,99,848/- was that of respondent 3 (the Company in Liquidation) and whoever succeeds respondent 3 in acquiring the said property. The relevant portion of the said letter/notice reads thus: As per Section 11A of the Central Excise Act, 1944, the liability of payment of the Government outstanding dues will be on the borrower or whosoever owns it successively (emphasis supplied).6. As the sale in favour of petitioner 1 was sanctioned by this court in Company Appeal No.866 of 2005, petitioner 1 had applied to this court vide Company Application No.560 of 2006 in Company Petition No.163 of 1998 taking exception to the said letter/notice dated 3/1/2006. However, as legal issues about the maintainability of the company application arose, the said application was withdrawn. This court granted petitioner 1 liberty to adopt appropriate proceedings. Pursuant to the said order, the petitioners have filed the present petition. 7. We have heard Mr. Dhond, learned counsel appearing for the petitioners at some length. We have also perused the written submissions filed by him. Learned counsel submitted that the petitioners have purchased the property in the auction held pursuant to the order of the Company Court. Learned counsel submitted that the sale in favour of the petitioners was ordered and confirmed by this court. In view of the confirmation of the said sale, the petitioners had acquired a clear and marketable title to the said property. According to learned counsel, Section 11 of the Central Excise Act cannot override the provisions of the Companies Act. Learned counsel submitted that it was not open to the respondents to contend that the liability of payment of Excise dues of respondent 3 i.e. the Official Liquidator, who is representing the Company in Liquidation was on the petitioners. He submitted that the proviso to Section 11 may operate only insofar as voluntary inter-party sales effected with a view to defeating the claims of the Excise Department are concerned. It does not operate in case of sale by court or by third party in exercise of its statutory powers. Learned counsel submitted that once the said property is sold and the sale proceeds are received, it is for respondent 3 to decide the priorities and make payments to the creditors. 8. Mr. Dhond submitted that the argument that since the sale was at the instance of SICOM, the Excise Department can follow the said property in the hands of the petitioners is absurd. He submitted that if this interpretation is accepted then the Excise Department would sell the property of a defaulter, realize and receive the sale proceeds; transfer the property to a purchaser, and immediately thereafter pursue its claim for the remainder of Excise dues in the hands of the very purchaser to whom it sold the property. Such a situation cannot be countenanced. Mr. Dhond submitted that therefore the identity of the person at whose instance the sale is effected is not material.9. In the alternative, Mr. Dhond submitted that proviso to Section 11 is inapplicable to the present case as it only applies to a successor of the business. It does not apply to a purchaser of the assets. He submitted that inasmuch as in the present case, what is sold to the petitioners are the assets of the company, the said proviso is not applicable to it. In this connection, learned counsel relied on the judgments of this court in Krishna Lifestyle Technologies Ltd. v. Union of India, 2008 (229) ELT 173 and Tata Metaliks Ltd. v. Union of India 2009 (234) ELT 596. Learned counsel submitted that in the circumstances the letter/notice sent by respondent 1 intimating his intention to pursue his demands in the sum of Rs.1,96,99,848/- against the said property in the hands of petitioner 1 is illegal and unjustified and deserves to be set aside.10. We have also heard Mr. Desai, learned senior counsel appearing for the respondents. He submitted that respondent 1 is entitled in law to recover its dues on the sale of the property of the Company in Liquidation. He submitted that proviso to section 11 is clear on this aspect. He submitted that respondent 1 cannot be faulted for having issued letter dated 3/1/2006. 11. We have perused affidavit in reply of Mr. H.S. Pawar, Superintendent, Central Excise Range Amravati. Mr. Pawar has placed reliance on the Supreme Courts judgment in Macson Marble Private Limited v. Union of India, 2003 (158) ELT 424 (SC) and stated that the auction purchaser would be liable to pay the Excise duty of his predecessor. Action of the Excise Department is, thus, justified. 12. Affidavit in reply is filed on behalf of respondent 2, SICOM by Kalpana Harshan, its Assistant Manager (Legal). In the affidavit, it is, inter alia, submitted that respondent 2 took possession of the said property from the Company in Liquidation as a secured creditor having statutory power to do so under the provisions of the State Financial Corporation Act, 1951. After the Company in Liquidation went into liquidation and respondent 3 came to be appointed as the Official Liquidator, respondent 2 conducted the sale of the said property under orders of this court i.e. the Company Court. It is further submitted that since respondent 3 is now in control of all assets of the Company in Liquidation, respondent 1 should be directed to file its claim with respondent 3 who can adjudicate the same as per the provisions of the Companies Act, 1956.13. Admittedly, the liability of the Excise duty of the Company in Liquidation is to the tune of Rs.1,96,99,848/-. Respondent 1 is relying on Section 11 of the Central Excise Act, 1944. This section states the manner in which the sums due to the Central Government can be recovered under the Central Excise Act, 1944. This section, inter alia, states that in respect of duty and any other sums of any kind payable to the Central Government under any of the provisions of the Central Excise Act, 1944, the empowered officer may deduct the said amount so payable from any money owing to the person from whom such sums may be recoverable or due which may be in his hands or under his disposal or control, or may recover the amount by attachment and sale of excisable goods belonging to such person. Proviso to section 11 is of relevance to the present petition. It reads as under : [Provided that where the person (hereinafter referred to as predecessor) from whom the duty or any other sums of any kind, as specified in this section, is recoverable or due, transfers or otherwise disposes of his business or trade in whole or in part, or effects any change in the ownership thereof, in consequence of which he is succeeded in such business or trade by any other person, all excisable goods, materials, preparations, plants, machineries, vessels, utensils, implements and articles in the custody or possession of the person so succeeding may also be attached and sold by such officer empowered by the Central Board of Excise and Customs, after obtaining written approval from the Commissioner of Central Excise, for the purposes of recovering such duty or other sums recoverable or due from such predecessor at the time of such transfer or otherwise disposal or change.]14. The proviso enables the empowered officer to attach and sell, after obtaining permission from the Commissioner of Central Excise, excisable goods, materials, preparations, plants, machineries, vessels, utensils, implements and articles in the custody or possession of the successors of the person from whom Excise dues are recoverable. The proviso contemplates a situation where a person from whom Excise dues are recoverable transfers or otherwise disposes of his business or trade or effects a change in the ownership thereof. In such a situation, the proviso enables the empowered officer to attach and sell, after obtaining permission from the Commissioner of Central Excise, all excisable goods, materials, etc. in the custody or possession of the person to whom the business or trade is transferred or in whose favour a change in the ownership is effected for the purpose of recovering outstanding dues of the Excise Department as on the date of such transfer or disposal.15. We have already noticed that in this case sale of the said property is sanctioned by this court and SICOM has been asked to give an undertaking to bring back proportionate amount as may be found due from the Company in Liquidation to the workers as directed by respondent 3 i.e. the Official Liquidator. This court has made it clear that the sale proceeds of the said property are available for disbursement to the creditors and priorities will have to be decided by respondent 3 as per the Companies Act. Under this courts order, SICOM is entitled to receive its pro-rata entitlement from the said sale proceeds so are all other secured creditors. The Excise Department can also pursue its claim for Excise dues of the Company in Liquidation with respondent 3.16. The question is whether the Excise Department after receiving its pro-rata entitlement from respondent 3, for the purpose of recovering remainder of its dues from the Company in Liquidation, follow the said property in the hands of the petitioners who are the purchasers in the auction sale sanctioned by this court in Company Petition No.163 of 1998 at the instance of SICOM who had issued a Take Over notice under Section 29 of the State Financial Corporations Act, 1951 and taken possession of the said property.17. We have already noted the submissions of Mr. Dhond, learned counsel for the petitioners who has taken strong exception to such a course being adopted by the Excise Department. In this connection, it is necessary to refer to Mascons case (supra) because the respondents have heavily relied on it.18. In Macsons case (supra), an industrial unit run by respondent 4 therein was brought to sale in terms of Section 29 of the State Financial Corporations Act, 1951 by the Rajasthan Financial Corporation, respondent 3 therein. The appellant participated in auction and its bid was accepted on 28/8/1987. On 4/12/1987, the Excise Department issued show cause notice under Section 11-A of the Central Excise Act to respondent 4 in relation to its liability for Excise duty of Rs.1,04,586.17. The appellant by its letter contended that it had no liability to pay Excise dues of respondent 4. The Department not having accepted the appellants contention, the appellant filed a writ petition in the High Court. The High Court took the view that it was open to the Department to proceed against the plants and machineries of the appellant. Before the Supreme Court, it was argued that the sale having taken place under the State Act was free from encumbrances and the transferors rights or liabilities cannot be that of transferee. The Supreme Court rejected this contention by observing that Section 29(2) of the State Financial Corporations Act, 1951 makes it clear that the property pledged, mortgaged, hypothecated or assigned to the Financial Corporation can be brought to sale and, such a sale if resulted in transfer of property, shall vest in the successor all rights in the property transferred as if the transfer has been made by the owner of the property. The Supreme Court further observed that when sale made by the Corporation is deemed to be a sale made by the owner of the property, necessarily Rule 230(2) of the Central Excise Rules would be attracted. The said Rule, observed the Supreme Court, clearly indicates that it is a mode of recovery of Excise dues from the assets owned by a predecessor and on his liabilities being assessed could be recovered from the successor.19. There can be no debate over the law laid down by the Supreme Court by the above authoritative pronouncement. The Supreme Court has clarified that if the sale is effected at the instance of SICOM by reason of Section 29(2) of the State Financial Corporations Act, 1951, it is a sale made by SICOM as an owner of the property and such a sale shall vest in the transferee all rights in the property. The Supreme Court has further clarified that therefore in order to recover the dues of the person in default, the Excise Department can follow the property in the hands of the purchaser who is the successor of the property.20. This judgment however does not lay down a proposition that if the dues of the Excise Department are not satisfied from the sale proceeds, it can follow the property in the hands of the successive purchaser for the remainder of its dues. The question with which we are concerned here is, where the sale proceeds are available for being appropriated towards realization of Excise duty, whether the Excise Department can attach the auctioned assets for the recovery of balance duty. This question never arose before the Supreme Court in Mascons case (supra). 21. If the Departments contention that such a course is permissible is accepted, it will lend to absurd results. Illustration can be given of a sale conducted by the Excise Department. If in a given case, the Excise Department dues are Rs.1,000/- and the property is sold by it for Rs.100/-, can it attach the same property in the hands of the buyer for remainder of its dues, thus jeopardizing the buyers title The answer to this question has to be in the negative.22. We must however, make it clear that if the person who is liable to pay Excise duty enters into a clandestine sale with another person to defeat the Excise Departments dues, the proviso to Section 11 will clearly be attracted. Fraudulent inter parties sales would come within the purview of the proviso. Genuine sales conducted under the orders of the court which are not vitiated by fraud or collusion have a sanctity and must convey a clear and marketable title to the buyer. There is another vital aspect of this question. Though we are not directly concerned with it in this matter, it cannot be ignored. Quite often, such sales are conducted for the benefit of a body of creditors. Sometimes, it is difficult to get buyers due to market conditions. If sales which are not vitiated by fraud or collusion are made so vulnerable by putting a wrong interpretation on proviso to Section 11, it would be counterproductive. We are, therefore, of the opinion that the Excise Department cannot contend that liability of payment of its dues will be on whosoever owns the property of the borrower successively till its dues are completely paid off.23. We also feel that Mr. Dhonds alternative submission deserves to be accepted. The proviso to Section 11 refers to transfer or disposal of business or trade in whole or in part. It does not refer to the transfer or disposal of mere assets. It is not the case of the petitioners that they have purchased the business or trade of the Company in Liquidation. Neither respondent 2 nor the Excise Department in its affidavit has stated so. Learned Company Judge in his order dated 5/12/2003 has stated that other financial institutions have communicated their consent to the sale of the assets of the Company in Liquidation. He has observed that the quality and the value of the assets of the Company in Liquidation is deteriorating. It is, therefore, clear that the land, plant and machinery being the assets of the Company in Liquidation were brought to sell. 24. In this connection, we may usefully refer to the judgment of the Division Bench of this court in Krishna Lifestyles case (supra), to which one of us (Devadhar, J.) was a party. This court was considering whether the mere purchase of the immoveable / moveable assets of a tax defaulter amounts to transfer or disposal of business or trade in whole or in part or result in effecting change in ownership thereof in such business or trade by any other person in consequence of which such person is succeeded in such business or trade by any other persons. In that case, the Excise Department was seeking to recover its dues from the petitioner who was declared highest bidder in the sale of the land, building and machinery of the person in default. This court held that there was no material on record to show that the business had been transferred to the petitioner and, therefore, the petitioner has succeeded in business. This court observed that though assets of the company were sold, sale of assets by itself would not be transfer of business in whole or in part. There must be material on record to show that the business has been transferred to the petitioner and consequent thereto the petitioner has succeeded in the said business. This court recorded that the Excise Department in that case had not proceeded on the proviso to Section 11. This court concluded that the issue of the petitioner being liable for the arrears of Central Excise dues will not, therefore, arise.25. In Tata Metaliks case (supra), this court reiterated the same view.26. Since in this case also, there is nothing to indicate that the petitioners have purchased the business or trade of the Company in Liquidation, we are of the opinion that proviso to Section 11 of the Central Excise Act, 1944 will not be attracted. 27. While concluding, we may also add that learned Company Judge of this court has noted in his order dated 15/12/2003 that SICOM had issued an advertisement for the sale of the said property on 27/3/2001, 2/6/2001 and 26/2/2002. There was no response to the advertisement. Effort to sell the said property by private treaty was also futile. Offers received were below the valuation. Global Net Services who had offered Rs.1.11 crores backed out and ultimately the petitioners bid was accepted. Learned Single Judge has rightly observed that the court must be mindful of the fact that the property is situated in Amravati region; that no higher bid is forthcoming and that further delay would lead in deterioration of the assets. Learned Single Judge has also observed that dues of the workmen have yet to be paid and their entitlement will have to be protected by respondent 3 upon adjudication.

Decision:
1[ds]19. There can be no debate over the law laid down by the Supreme Court by the above authoritative pronouncement. The Supreme Court has clarified that if the sale is effected at the instance of SICOM by reason of Section 29(2) of the State Financial Corporations Act, 1951, it is a sale made by SICOM as an owner of the property and such a sale shall vest in the transferee all rights in the property. The Supreme Court has further clarified that therefore in order to recover the dues of the person in default, the Excise Department can follow the property in the hands of the purchaser who is the successor of the property.20. This judgment however does not lay down a proposition that if the dues of the Excise Department are not satisfied from the sale proceeds, it can follow the property in the hands of the successive purchaser for the remainder of its dues. The question with which we are concerned here is, where the sale proceeds are available for being appropriated towards realization of Excise duty, whether the Excise Department can attach the auctioned assets for the recovery of balance duty. This question never arose before the Supreme Court in Mascons case (supra).If the Departments contention that such a course is permissible is accepted, it will lend to absurd results. Illustration can be given of a sale conducted by the Excise Department. If in a given case, the Excise Department dues are Rs.1,000/and the property is sold by it forcan it attach the same property in the hands of the buyer for remainder of its dues, thus jeopardizing the buyers title The answer to this question has to be in the negative.22. We must however, make it clear that if the person who is liable to pay Excise duty enters into a clandestine sale with another person to defeat the Excise Departments dues, the proviso to Section 11 will clearly be attracted. Fraudulent inter parties sales would come within the purview of the proviso. Genuine sales conducted under the orders of the court which are not vitiated by fraud or collusion have a sanctity and must convey a clear and marketable title to the buyer. There is another vital aspect of this question. Though we are not directly concerned with it in this matter, it cannot be ignored. Quite often, such sales are conducted for the benefit of a body of creditors. Sometimes, it is difficult to get buyers due to market conditions. If sales which are not vitiated by fraud or collusion are made so vulnerable by putting a wrong interpretation on proviso to Section 11, it would be counterproductive. We are, therefore, of the opinion that the Excise Department cannot contend that liability of payment of its dues will be on whosoever owns the property of the borrower successively till its dues are completely paid off.23. We also feel that Mr. Dhonds alternative submission deserves to be accepted. The proviso to Section 11 refers to transfer or disposal of business or trade in whole or in part. It does not refer to the transfer or disposal of mere assets. It is not the case of the petitioners that they have purchased the business or trade of the Company in Liquidation. Neither respondent 2 nor the Excise Department in its affidavit has stated so. Learned Company Judge in his order dated 5/12/2003 has stated that other financial institutions have communicated their consent to the sale of the assets of the Company in Liquidation. He has observed that the quality and the value of the assets of the Company in Liquidation is deteriorating. It is, therefore, clear that the land, plant and machinery being the assets of the Company in Liquidation were brought to sell.In this connection, we may usefully refer to the judgment of the Division Bench of this court in Krishna Lifestyles case (supra), to which one of us (Devadhar, J.) was a party. This court was considering whether the mere purchase of the immoveable / moveable assets of a tax defaulter amounts to transfer or disposal of business or trade in whole or in part or result in effecting change in ownership thereof in such business or trade by any other person in consequence of which such person is succeeded in such business or trade by any other persons. In that case, the Excise Department was seeking to recover its dues from the petitioner who was declared highest bidder in the sale of the land, building and machinery of the person in default. This court held that there was no material on record to show that the business had been transferred to the petitioner and, therefore, the petitioner has succeeded in business. This court observed that though assets of the company were sold, sale of assets by itself would not be transfer of business in whole or in part. There must be material on record to show that the business has been transferred to the petitioner and consequent thereto the petitioner has succeeded in the said business. This court recorded that the Excise Department in that case had not proceeded on the proviso to Section 11. This court concluded that the issue of the petitioner being liable for the arrears of Central Excise dues will not, therefore, arise.25. In Tata Metaliks case (supra), this court reiterated the same view.26. Since in this case also, there is nothing to indicate that the petitioners have purchased the business or trade of the Company in Liquidation, we are of the opinion that proviso to Section 11 of the Central Excise Act, 1944 will not be attracted.While concluding, we may also add that learned Company Judge of this court has noted in his order dated 15/12/2003 that SICOM had issued an advertisement for the sale of the said property on 27/3/2001, 2/6/2001 and 26/2/2002. There was no response to the advertisement. Effort to sell the said property by private treaty was also futile. Offers received were below the valuation. Global Net Services who had offered Rs.1.11 crores backed out and ultimately the petitioners bid was accepted. Learned Single Judge has rightly observed that the court must be mindful of the fact that the property is situated in Amravati region; that no higher bid is forthcoming and that further delay would lead in deterioration of the assets. Learned Single Judge has also observed that dues of the workmen have yet to be paid and their entitlement will have to be protected by respondent 3 upon adjudication.