Gujarat Industrial Investment Corp. Ltd. vs Union of India

Mukesh R. Shah, J.—By way of this petition under article 226 of the Constitution of India, the petitioner Gujarat Industrial Investment Corporation Limited has prayed for an appropriate writ, direction and order to quash and set aside the impugned notices of attachment dated April 19, 2007 (annexure A) and March 15, 2004 (annexures B1, B2 and B3) issued by respondent No. 2, Assistant Commissioner of Central Excise, Junagadh. It is also further prayed to quash and set aside the impugned letters dated April 19, 2007 (annexure C) and December 13, 2006 (annexure D) of respondent No. 2. It is also further prayed to declare that the respondents have no priority over the rights of the petitioner to sell the secured assets on the principle of crown debt having priority.

It is also further prayed to declare that the proviso to section 11 of the Central Excise Act, 1944 will have no application in case of a sale made by the petitioner or any financial corporation under the provisions of section 29 of the State Financial Corporations Act, 1951.

It is the case on behalf of the petitioner that the petitioner is a Government Company registered under the provisions of the Companies Act, 1956. That the Government of India vide notification published in the Government Gazette dated April 30, 1988, in exercise of the powers conferred under section 46(1) of the State Financial Corporations Act, 1951 (hereinafter referred to as the "SFC Act") has made applicable the provisions of sections 27(2), 27(3), 29, 30, 31, 32A, 32B, 32C, 32D, 32E, 32F, 41A, 42 and 44 of the State Financial Corporations Act, 1951 to the petitioner. It is the case on behalf of the petitioner that petitioner had sanctioned a term loan of Rs. 2,03,00,000 and Rs. 1,97,00,000 was disbursed to Rohil Zinc Limited, Mumbai for setting up its unit at 204/205, GIDC Estate, Junagadh 362 001. According to the petitioner, the land, building, plant and machinery of Rohil Zinc situated at 204/205, GIDC Estate, Junagadh were mortgaged in favour of the petitioner GIIC for securing aforesaid loan. According to the petitioner, as the said Rohil Zinc failed to pay the outstanding dues to the petitioner as per the terms and conditions of the loan, the possession of the mortgaged assets of Rohil Zinc Limited were taken over by the petitioner on March 28, 2002 in exercise of the powers under section 29 of the State Financial Corporations Act, 1951. It is the case of the petitioner that thereafter the petitioner tried to sale the said properties however since no viable offers have been received, sale has not been effected and the properties continued to remain in possession of the petitioner.

It appears that respondent No. 2, Assistant Commissioner, Central Excise wrote a letter dated April 19, 2002 to the petitioner stating that excise dues totalling to Rs. 44,64,800 is outstanding against Rohil Zinc Limited. That the petitioner was also requested to provide the details of the assets under possession of the GIIC and the future course of action contemplated by the petitioner. That by three notices dated March 15, 2004, respondent No. 2 has attached movable/immovable properties of the aforesaid Rohil Zinc Limited, which is in the hands of the petitioner. That the said notices are issued under the provisions of the Customs (Attachment of Property of Defaulters for Recovery of Government Dues) Rules, 1995. According to the petitioner, in response to the aforesaid notice, the petitioner-GIIC wrote a letter dated March 29, 2004 to respondent No. 2 stating that petitioner has a first charge over the properties and that the possession of the assets of Rohil Zinc Limited were taken over by the petitioner on March 28, 2002 under the provisions of section 29 of the State Financial Corporations Act, 1951.

That thereafter, the petitioner filed Special Civil Application No. 7166 of 2005 against respondent No. 2 and Union of India before this court challenging the aforesaid notices of attachment dated March 15, 2004. However, the special civil application came to be withdrawn with a liberty to make representation to the respondent authority. It appears that thereafter, the petitioner made detailed representation on dated July 27, 2005 requesting him to withdraw the notices of attachment. That by communication dated December 13, 2006, respondent No. 2 has informed the petitioner that Central excise dues payable in respect of Rohil Zinc Limited being crown debt has to be paid as first priority amongst all the recoveries. According to the petitioner, by the said letter the officer of the petitioner were to initiate action for sale of any properties of Rohil Zinc Limited were threatened with personal responsibility. That thereafter, respondent No. 2 again wrote another letter dated April 19, 2007 to the petitioner and according to the petitioner contents of the said letter are similar to the aforesaid letter dated December 13, 2006 of respondent No. 2.

That thereafter, the petitioner has been served with one another notice of attachment of immovable properties of Rohil Zinc Limited dated April 19, 2007 (annexure A) stating that a sum of Rs. 45,25,601 is to be recovered from Rohil Zinc Limited.

Feeling aggrieved and dissatisfied with the aforesaid action of respondent No. 2 in attaching movable and immovable properties of Rohil Zinc Limited which according to the petitioner is in their possession, in exercise of the powers under section 29 of the State Financial Corporations Act, 1951 and being aggrieved and dissatisfied with the communication dated December 13, 2006 and April 19, 2007, by which, according to the petitioner, officers of the petitioner are threatened that if they initiate any action for sale of any property of Rohil Zinc Limited they will be held personal liable/responsible, the petitioner has preferred the present special civil application for the aforesaid reliefs.

Shri Aspi Kapadia, learned advocate for the petitioner has vehemently submitted that at the relevant time when properties in question mortgaged with the petitioner were attached, i.e., in the year 2004/2007, the same was wholly without jurisdiction. It is submitted that considering the provision of section 11 of the Central Excise Act, 1944 which was applicable at a time when attachment order was passed Government dues were not having first charge and therefore, when the petitioner was having the charge over the property in question and the said property was mortgaged with the petitioner and the petitioner was in possession of the property in question in exercise of power under section 29 of the State Financial Corporations Act, 1951, the order of attachment was absolutely illegal and wholly without jurisdiction and authority under law and therefore, same deserves to be quashed and set aside.

When the attention of the learned advocate for the petitioner was drawn to the provision of section 11E of the Central Excise Act and it was pointed out that in view of the amendment now dues of the Central Government/Government would have priority and there shall be a statutory first charge, it is submitted by Shri Kapadia, learned advocate for the petitioner that firstly section 11E shall not have retrospective in operation. It is submitted that at the relevant time when the properties were attached in the year 2004/2007 the authority was not having jurisdiction and/or authority at all and therefore, the impugned notices of attachment deserves to be quashed and set aside. It is submitted that the considering section 11E of the Central Excise Act, now it will be open for the Central Government and/or respondent No. 2 to issue fresh order of attachment in view of the amendment in the law and the Central Government dues having first priority/first charge. However, according to the petitioner impugned notices considering the provision of law at the relevant time must be quashed and set aside. Shri Kapadia, learned advocate for the petitioner has heavily relied upon the decision of the Orissa High Court in the case of Suburban Ply and Panels (P) Ltd. Vs. Regional Provident Fund Commissioner and Others, in support of his above submission and prayed to quash and set aside the impugned attachment notice.

Shri Kapadia, learned advocate for the petitioner has further submitted that even otherwise the provisions of section 11E of the Central Excise Act create statutory charge over the property of the assessee and not mortgage over the property. It is submitted that therefore, the excise dues are secured by a charge, whereas the dues of the petitioner are secured by a mortgage. It is submitted that charge cannot be enforceable in hands of the transferee who had no knowledge of the charge. It is submitted that vested rights have accrued in favour of GIIC by exercising its rights as a mortgagee and taking over possession of the property of Rohil Zinc Limited under section 29 of the State Financial Corporations Act, 1951. It is submitted that therefore, at present property is not in the hands of Rohil Zinc Limited but is in the hands of GIIC petitioner, it is requested to grant relief as prayed for.

It is further submitted by Shri Kapadia, learned advocate for the petitioner that as such impugned letters dated April 19, 2007 and December 13, 2006 (annexures C and D) of respondent No. 2 are most arbitrary, which deserve to be quashed and set aside. It is submitted that by aforesaid letters the officer of the petitioner-company are given threats that if any proceedings are initiated to sell the property of Rohil Zinc Limited they shall be held personally responsible. It is submitted that such letters and giving threats is absolutely arbitrary and high handed action which cannot be sustained and same deserves to be quashed and set aside.

Making the above submissions and relying upon the above decision, it is requested to allow the present special civil application and grant the relief as prayed for.

The present petition is opposed by Shri Varun Patel, learned advocate for the Central Excise Department. It is submitted that as such and in view of the introduction of section 11E of the Central Excise Act, by which, now there would be a statutory charge over the property with respect to the dues of the Central Government, the petitioner is not entitled to any relief as prayed for.

It is submitted that as such there is no question of applying section 11E of the Act, retrospectively. It is submitted that as such the aforesaid issue is now not res integra in view of the decision of the Hon''ble Supreme Court in the case of State of Madhya Pradesh and Another Vs. State Bank of Indore and Others, . It is submitted that while interpreting or considering the similar provision under the M.P. General Sales Tax Act, 1958, section 33C of the said act, it is held that section 33C creates a statutory first charge that prevails over any charge that may be in existence and therefore, the charge thereby created in favour of the State in respect of the sales tax dues of the second respondent prevailed over the charge created in favour of the bank in respect of the loan taken by the second respondent loanee. Considering the above, it is observed and held that there is no question retrospectivity in such a case, on the date when it was introduced, section 33C operated in respect of all charges that were then in force and gave sales tax dues precedence over them. It is submitted that applying the ratio laid down by the hon''ble Supreme Court in the said decision to the facts of the case on hand, more particularly, section 11E of the Central Excise Act, there is no question of applying section 11E retrospectively and on the date of which section 11E has come into it gives central excise dues precedence over them.

Shri Patel, learned advocate for the respondent Central Excise Department has also relied upon the decision of the hon''ble Supreme Court in the case of Dena Bank Vs. Bhikhabhai Prabhudas Parekh and Co. and Others, which came to be considered by the hon''ble Supreme Court in the case of State of Madhya Pradesh and Another Vs. State Bank of Indore and Others, .

It is submitted by Shri Patel, learned advocate for the respondent, Central Excise Department that in view of section 11E of the Central Excise Act, Parliament intended to give priority of the Central Government dues over the dues of the bank, financial institutions and other secured creditors and it shall be a statutory first charge in the matter of recovery of the dues of the Central Government, i.e., as dues of the Excise Department, etc., the petitioner financial institution cannot be permitted to sell the properties and recover their dues first in exercise of the powers under section 29 of the State Financial Corporations Act, 1951 under the guise that the properties are mortgaged with them. It is submitted that if the petitioner is permitted to sell the properties over which Central Government dues would have statutory first charge, in that case, it would be giving a priority to the petitioner over the Government dues and therefore, the same would be contrary to the legislative intends to section 11E of the Central Excise Act.

Now, so far as challenge to the letters dated April 19, 2007 and December 13, 2006 on the ground that respondent No. 2 has threatened the officer of the petitioner if they sale the properties which is under attachment is concerned, it is submitted that it is the misconception on the part of the petitioner to treat and/or consider the same as threats. It is submitted that as such by aforesaid letters/communications the petitioner is informed and/or restrained from selling the properties of Rohil Zinc Limited, which was under attachment and they were informed if they proceed further with the sale, the officer may be held responsible. It is submitted that it is unfortunate that the petitioner has treated and/or considered the same as threats rather than treating it in its true perspective.

Now, so far as contention on behalf of the petitioner that now in view of section 11E of the Act, it will be open for respondent No. 2 issue fresh attachment order, however to quash and set aside the impugned attachment notice is concerned, it is submitted that aforesaid shall be in exercise in futility. It is submitted that as such and in view of section 11E of the Central Excise Act, by which, Central Government dues would have first charge it will be statutory first charge and therefore, no relief can be granted to the petitioner as prayed for.

Making the above submissions and relying upon the above decisions, it is requested to dismiss the present special civil application.

Heard the learned advocates for the respective parties at length. Challenge in the present special civil application is the impugned notice of attachment of the movable and immovable properties issued by respondent No. 2, Assistant Commissioner, Central Excise, Junagadh for the central excise dues of Rohil Zinc Limited. It is the case on behalf of the petitioner that petitioner is a secured creditor and is in possession of the properties attached in exercise of section 29 of the State Financial Corporations Act, 1951 and considering the law prevailing at the relevant time the said notice of attachment deserves to be quashed and set aside. However, in view of the subsequent amendment, more particularly, section 11E of the Central Excise Act the dues of the Central Government should have been first charge and therefore, being a statutory first charge holder, it is always open for the Excise Department to recover the same from the properties so attached. Section 11E reads as under:

"11E. Liability under Act to be first charge.--Notwithstanding anything to the contrary contained in any Central Act or State Act, any amount of duty, penalty, interest or any other sum payable by an assessee or any other person under this Act or the rules made thereunder shall, save as otherwise provided in section 529A of the Companies Act, 1956 (1 of 1956), the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of 1993) and the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002 (54 of 2002) be the first charge on the property of the assessee or the person, as the case may be."

In the case of State of Madhya Pradesh and Another Vs. State Bank of Indore and Others, while considering the pari materia provisions under the M.P. General Sales Tax Act, 1958, more particularly, section 33C of the said Act, it is observed and held by the hon''ble Supreme Court that charge created by section 33C of the said Act in favour of the State in respect of sales tax dues shall prevail over other charges (such as bank loan) including those created prior to enforcement of the said provision. It is also held that effect does not involve any question of retrospectivity. In paragraph 5, the hon''ble Supreme Court held as under (page 624 of 108 Comp Cas):

"Section 33C creates a statutory first charge that prevails over any charge that may be in existence. Therefore, the charge thereby created in favour of the State in respect of the sales tax dues of the second respondent prevailed over the charge created in favour of the bank in respect of the loan taken by the second respondent. There is no question of retrospectivity here, as, on the date when it was introduced, section 33C operated in respect of all charges that were then in force and gave sales tax dues precedence over them. This position in law is discussed in detail in the judgment of this court in Dena Bank Vs. Bhikhabhai Prabhudas Parekh and Co. and Others, .

In view of section 11E of the Central Excise Act and the aforesaid decision of the hon''ble Supreme Court in the case of State of Madhya Pradesh and Another Vs. State Bank of Indore and Others, and when it is found that the Central Government would have first charge over the properties for the dues of the Central excise and therefore, the Excise Department can attach the property, Shri Kapadia, learned advocate for the petitioner has submitted that in such a case and situation, it will be open for the Excise Department to issue fresh notice of attachment, however considering the law prevailing at the relevant time when the impugned notices of attachment were issued, the said were without jurisdiction and therefore, this court must quash and set aside the impugned notices of attachment. The aforesaid cannot be accepted. The learned advocate for the petitioner virtually concedes or admits that in view of section 11E of the Central Excise Act, the Department can attach the property for recovery of dues. Therefore, to quash and set aside the impugned notices of attachment and thereafter to permit the Department to issue fresh notice of attachment would be exercise in futility. Therefore, in view of section 11E of the Central Excise Act when Central Government would have first charge over the properties of Rohil Zinc Limited for its Central excise dues and consequently it will always be open for the Department to attach the property for recovery of dues, we are of the opinion that impugned notices of attachment need not be set aside as even otherwise subsequently it permissible for respondent No. 2 to attach the properties of Rohil Zinc Limited. Therefore, as such challenge to the impugned notice of attachment had become academic in light of the section 11E of the Central Excise Act.

Now, so far as another prayer on behalf of the petitioner and/or relief sought by the petitioner to declare that section 11E of the Central Excise Act, 1944 will have no application in case of a sale made by the petitioner or any financial corporation under the provisions of section 29 of the State Financial Corporations Act, 1951 is concerned, it is the case on behalf of the petitioner that as such movable and immovable properties attached by respondent No. 2 for the Central excise dues is/are mortgaged with the petitioner and therefore, despite the Central Government having first charge over the properties, the petitioner may not be restrained from selling the mortgaged properties in exercise of powers under section 29 of the State Financial Corporations Act, 1951. The aforesaid also cannot be accepted and has no substance. It is not in dispute and it cannot be disputed that in view of section 11E of the Central Excise Act, the Central Government would have first charge on the property with respect to there Central excise dues, etc. However, no such provisions have been incorporated in the said Financial Corporation Act. Identical question came to be considered by the hon''ble Supreme Court in the case of Central Bank of India Vs. State of Kerala and Others, , more particularly, statutory first charge of sales tax vis-�-vis mortgage and it is observed and held that the first charge created of section 26B of the Kerala General Sales Tax Act, 1963 shall prevail over mortgaged created prior to enactment of section 26B. In the case before the hon''ble Supreme Court even there was a decree in favour of the mortgagee bank against the borrower and during the execution proceedings the notice was issued to the mortgagor under section 49(2) of the Kerala Revenue Recovery Act for payment of sales tax arrears and the hon''ble Supreme Court confirmed the view taken by the High Court in holding that even at the said stage the first charge created by section 26B of the Kerala General Sales Tax Act, 1963 would have primacy over the mortgagee bank''s dues. In the aforesaid decision, the hon''ble Supreme Court confirmed the following view taken by the Kerala High Court (page 567 of 153 Comp Cas):

"Writ Appeal No. 538 of 2006 was dismissed by the Division Bench by placing reliance upon the judgment in South Indian Bank Ltd. Vs. State of Kerala, in which the following view was expressed:

"Right of the State to have priority in the matter of recovery of sales tax from the defaulters over the equitable mortgages created by them in favour of banks and financial institutions is no more res integra. Dealing with the provisions parallel to section 26B of the Kerala General Sales Tax Act by the various sales tax laws of other States, Supreme Court has already recognised the statutory first charge in respect of sales tax arrears. Reference may be made to the decisions of the apex court in State Bank of Bikaner and Jaipur Vs. National Iron and Steel Rolling Corporation and Others, , Delhi Auto and General Finance Private Limited Vs. Tax Recovery Officer, Income Tax and Others, , Dattatreya Shanker Mote and Others Vs. Anand Chintaman Datar and Others, , Dena Bank Vs. Bhikhabhai Prabhudas Parekh and Co. and Others, : [2005] 5 SCC 694 and various other decisions. We may refer to the latest decision of the apex court in State of Madhya Pradesh and Another Vs. State Bank of Indore and Others, , wherein the court examined the charge created under section 33C of the M.P. General Sales Tax Act, 1958 and held that section 33C creates a statutory first charge that prevails over any charge that may be in existence. The court held that the charge thereby created in favour of the State in respect of the sales tax dues of the second respondent prevailed over the charge created in favour of the bank. Judicial pronouncements settled the law once for all stating that State has got priority in the matter of recovery of debts due and the specific statutory charge created under the Sales Tax Act notwithstanding the equitable mortgages created by the defaulters in favour of the banks prior to the liability in favour of the State. A Division Bench of this court in Sherry Jacob Vs. Canara Bank, , held that the Revenue recovery authorities shall have the liberty to proceed against the property of the company under the Revenue Recovery Act on the strength of the first charge created over the property by virtue of section 26B of the Kerala General Sales Tax Act. The court held that the statutory first charge would prevail over any charge or right in favour of a mortgage or secured creditors and would get precedence over an existing mortgage right.

We are in this case concerned with the question as to whether section 26B of the Kerala General Sales Tax Act would take away the efficacy of a decree passed by the civil court prior to the introduction of the said section. We are of the view that till the decree is executed through the executing court, title of the mortgaged property remains with the mortgagor. Decree passed by the civil court is the formal expression of an adjudication which conclusively determines the rights of parties, but unless and until the decree is executed the bank would not procure the property and the State''s overriding rights would have precedence over that of the bank. When a first charge is created by the operation of law over any property, that charge will have precedence over an existing mortgage and the decree obtained by the bank against the mortgagor will not affect the State since State was not a party to the suit. Decree has only conclusively determined the rights between the mortgagor and mortgagee which would not affect the statutory rights of the State. The expression ''rights of parties'' used in section 2(2) means rights of parties to the suit. State which has got a statutory first charge under section 26B of the Kerala General Sales Tax Act would prevail over the rights created in favour of the bank by an unexecuted decree. We therefore, hold that the decree obtained by the bank will not have any precedence over the first charge created in favour of the State under section 26B of the Kerala General Sales Tax Act."

In our opinion, the High Court has rightly held that the first charge created by section 26B of the Kerala Act will have primacy over the bank''s dues."

Even otherwise, if the contention on behalf of the petitioner is accepted, in that case, section 11E of the Central Excise Act, by which, there would be a statutory first charge over the properties of the defaulter in favour of the Central Government with respect to their excise dues would become redundant and/or nugatory. Under the circumstances, contention on behalf of the petitioner that despite section 11E of the Act their right to recover dues of the borrower/mortgagee in exercise of the powers under section 29 of the State Financial Corporations Act, 1951, cannot be accepted.

Now, so far as challenge to the impugned letters dated April 19, 2007 and December 13, 2006, by which, according to the petitioner, respondent No. 2 gave threats to the officer of the petitioner that if they are proceeded further with the sale of the properties attached and they will face consequence and they will held personally responsible is concerned, on considering the aforesaid letters, as such it cannot be said that any threats were given. By the aforesaid letters, as such the attention of the petitioner was drawn and they were informed not to proceed further with the sale of the property attached and they are further informed that if still they proceed further with the sale of the property attached, in that case, the concerned officer may be held responsible. Such communication cannot be said to be threats as contended on behalf of the petitioner. Under the circumstances, impugned letters are not required to be quashed and set aside on the ground that by said letters no threats given to the officer of the petitioner. In view of the above and for the reasons stated above, the petitioner is not entitled to any relief as claimed and the present petition deserve to be dismissed and is accordingly dismissed. Rule is discharged. No costs.