Luxmi Oil and Vanaspati P. Ltd. vs Commissioner of Central Excise and Others

M/s. Kashi Ram Panna Lal Industries Private Limited had mortgaged its unit at 97-Khanchandpur, Rania, Kanpur Dehat with 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 February 25, 2003. The petitioner a separate legal entity and a private limited company offered to purchase the aforesaid unit and its tender was accepted by UPFC on May 3, 2003. In pursuance of the above acceptance, UPFC executed a sale dated May 9, 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 the 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 the letter dated May 27, 2003 called upon UPFC to clear the aforesaid dues. The response of the above letter, if any, is not available on record. However, when the sale deed was executed, two demand notices dated October 12, 2004 and October 25, 2004 were issued and served upon the petitioner requiring it to pay excise dues of Rs. 36,57,000 of the previous owners. The aforesaid two demand notices have been challenged by the petitioner by means of the present writ petition.

Necessary counter and rejoinder affidavits have been exchanged between the petitioner and the excise Department, i.e., respondents Nos. 1 and 2. No counter-affidavit has been filed on behalf of UPFC despite service of notice upon its counsel. Notices to respondent No. 4 were directed to be issued vide the order dated November 24, 2004 and office reports dated December 3, 2004 and January 11, 2005 states that neither the 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 Shri Gopal Verma, learned counsel for the petitioner and Shri Shambhu Chopra, learned counsel for Central excise respondents Nos. 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 bona fide purchasers in good faith of the property in dispute for valuable consideration and since the property has been purchased through a public sale from UPFC free from all encumbrances, the 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 directors have not purchased the business of the previous owner but only land and building.

On the other hand Shri 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 entitled 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 Isha Marbles Vs. Bihar State Electricity Board and Another, , while considering a similar proposition wherein also a sale of a unit had taken place u/s 29(1) of the State Financial Corporations 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 the auction purchaser a liability which has not been incurred by him and as such the liability of the previous owner cannot be enforced against the auction purchaser.

The apex court in another case of State of Karnataka and Another Vs. Shreyas Papers Pvt. Ltd. and Others, which was also a case of sale of property u/s 29 of the State Financial Corporations Act held that the purchaser for value without notice of the arrears of sales tax of the defaulting earlier company cannot 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 bona fide purchasers in good faith for the value of the property from UPFC which happened to be a secured creditor vis-�-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 Pvt. Ltd. Vs. Union of India (UOI), observed that the aforesaid rule provides for a mode of recover)'' 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:

Goods, plant and machinery chargeable with duty not paid.-- (1) When the duty leviable on any goods is owing 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 materials 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; 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 consequence 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 due from the producer, manufacturer or dealer up to 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 u/s 100 of the 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 a lower pedestal than a deed of mortgage. The aforesaid rule does not talk of "charge" and by implication it cannot 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" would be created over those goods. The word "detained" cannot 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 the 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 realisation 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 the 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 (UOI) and Others Vs. SICOM Ltd. and Another, while considering the doctrine of priority in the matter of realisation of dues under the Central Excise Act vis-�-vis secured debts under the State Financial Corporations 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 an unsecured one.

The Central Excise Department neither by any covenant nor by 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 Pvt. Ltd. Vs. Union of India (UOI), nowhere held that rule 230 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 bona fide purchasers.

In view of the aforesaid facts and circumstances, the impugned notices dated October 12, 2004 and October 25, 2004 (annexures 7 and 8) are quashed. A writ of certiorari is accordingly issued. The petition succeeds and is allowed. Parties shall bear their own costs.