C.W.P No. 1385 of 2008 ::1:: IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH C.W.P No. 1385 of 2008 Date of decision : September 11, 2008 M/S T.C.Spinners Pvt Limited ...... Petitioner through Mr.Jagmohan Bansal, Advocate v. The Union of India & others, ...... Respondents through Ms.Anjali Kakkar, Advocate CORAM : HON'BLE MR.JUSTICE ADARSH KUMAR GOEL HON'BLE MR.JUSTICE AJAY TEWARI *** 1. Whether Reporters of Local Newspapers may be allowed to see the judgment ? 2. To be referred to the Reporters or not ? 3. Whether the judgment should be reported in the Digest ? *** AJAY TEWARI, J The writ petition has been filed challenging the letters dated 31.10.2007 and 4.1.2008 whereby respondent No.3 asked the petitioner to pay the outstanding excise duty of Rs.990.36 lacs of M/S Euro Cotspin Ltd (for short “ECL”), in terms of the provisions of Section 11 of the Central Excise Act, 1944 (for short “the Act”) read with Section 142 of the Customs Act. E.C.L was a defaulter of various financial institutions which ultimately authorized one of them i.e Punjab National Bank to sell the secured assets of ECL under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 ( for short “SARFAESI Act”) to realize total duties running into approximately Rs.165 C.W.P No. 1385 of 2008 ::2:: crores. In response to advertisements, one M/S A.V Cotex Ltd ( for short “AVC”) agreed to buy the said assets for a total sale consideration of Rs.29 crores. However, on the default of the said AVC, an agreement was entered into between it and the petitioner, as per which the petitioner made the required payment to make up 25% of the total purchase price. On the basis of this agreement, the petitioner further entered into an agreement with the Punjab National Bank which also handed over custody of the secured assets of the ECL. Thereafter, by the impugned letters, respondent No.3 directed the petitioner to clear the outstanding dues as aforesaid and it is this action which is impugned by way of the present writ petition. The matter is not res integra. More than a decade ago, the Hon'ble Supreme Court in M/S Isha Marbles vs Bihar State Electricity Board & another, reported as JT 1995(2) SC 626, held that a bona fide auction-purchaser under a statutory sale was not liable to clear electricity dues of the previous owner by holding as follows :- “What we have discussed above appears to be the law gatherable from the various provisions which we have detailed out above. It is impossible to impose on the purchasers a liability which was not incurred by them.” Thereafter, in State of Karnatka and another versus Shreyas Papers Pvt.Ltd. & others reported as JT 2006(1) SC 180, the Hon’ble Supreme Court stated the following questions:- “1.1 Firsly, whether the purchaser of assets of a concerns old by a State Financial Corporation, in exercise of its powers under Section 29 of the State C.W.P No. 1385 of 2008 ::3:: Financial Corporations Act, 1951 (hereinafter “the SFC Act) would be liable under the karnatka Sales Tax, 1957 (hereinafter “the KST Act”), for the arrears of sales tax of the concern whose assets have been transferred? 1.2 Secondly, under what circumstances does a charge created on a property become unenforceable against a transfree of such a property?” The Hon’ble Court held as follows:- “In these circumstances, we are of the view that the first respondent was a purchaser for value without notice of the sales tax arrears of the defaulting company or the consequent charge on the property. This would, therefore, attract the principle laid down by this Court in Ahmedabad Municipal Corporation, which is also embodied in the proviso to Section 100 of the TP Act. Thus, the property in the hands of the first respondent was free of the charge and it is not open to the appellants to enforce the liabilities of the defaulting company in this manner against the first respondent.” The third judgment on the point is the case of UTI Bank Ltd. versus Deputy Commissioner of Central Excise reported as AIR 2007 Madras 118 wherein the Full Bench of the Madras High Court speaking through Hon’ble Mr Justice P.Sathashivam (as his Lordship then was) held as follows: “All the decisions relied on by Mr.V.T.Gopalan, clearly show that the Government is entitled to claim its dues/taxes/duties in preference to other ordinary debts. C.W.P No. 1385 of 2008 ::4:: In all those cases, there is no provision as found in SAFRFAESI Act or a specific provision claiming to have “first charge” as provided in Rajasthan Sales Tax Act in State Bank of Bikaner & Jaipur versus National Iron and Steel Rolling Corporation (1995(2) SCC 19; (1995 AIR SCW 214-Three Judge Bench), Madhya Pradesh General Sales Tax in State of M.P. versus State Bank of Indore (2002(10) SCC 441 – Three Judge Bench) and Karnataka Sales Tax Act in Dena Bank Versus Bhikhabhai Prabhudas Parekh & Co.(2000) 5 SCC 694; (2001 CLC 118). As explained in the case of Constitution bench Judgment in Builders Supply Corporation versus Union of India (AIR 1965 SC 1061), the arrears of tax due to the State can claim priority over private debts and thus the rule of common law amounts to law in force in the territory of British India at the relevant time within the meaning of Article 372(1) of the Constitution of India and therefore continues to be in force thereafter. In Dena Bank case (cited supra) it is held that the Crown’s preferential right to recover all debts over other creditors is confined to ordinary and unsecured creditors. In the light of the above discussion, we conclude:- “(i) Generally, the dues to Government i.e. tax, duties etc. (Crown’s debts) get priority over ordinary debts. C.W.P No. 1385 of 2008 ::5:: (ii) Only when there is a specific provision in the statute claiming “first charge” over the property, the Crown’s debt is entitled to have priority over the claim of others. (iii) Since there is no specific provision claiming “first charge” in the Central Excise Department cannot have precedence over the claim of secured creditor viz., the petitioner Bank. (iv) In the absence of such specific provision in the Central Excise Act as well as in Customs Act, we hold that the claim of secured creditor will prevail over Crown’s debits.” In view of our above conclusion, the petitioner UTI Bank being secured creditor is entitled to have preference over the claim of the Deputy Commissioner of Central Excise, first respondent therein.” It may be specifically noted here that no such “first charge” has been pleaded by the Excise Authorities in the present case also. Lastly, reference may be made to the decision of this Court in Union of India versus Punjab Financial Corporation reported as 2007(1) ISJ (Banking) 258. In this case, the Court held as follows: “The result of the above discussion is that the plea raised by the petitioners in regard to its priority of recovering excise dues or the other such like dues under the Excise Act cannot be upheld either on the applicability of doctrine of priority of Crown debts or C.W.P No. 1385 of 2008 ::6:: that any such priority has been so created under any of the provisions of the Excise Act or Rules or the Customs Act.” In the circumstances, the inescapable conclusion is that the Excise Department cannot enforce the payment of their dues against the property purchased by the petitioner though they would have the liberty to seek redress against the original debtors. In view of what has been stated herein above, the present writ petition is allowed and the impugned letters are quashed. No costs. ( AJAY TEWARI ) JUDGE ( ADARSH KUMAR GOEL ) JUDGE September 11, 2008 'kk'