Sri Jayajothi Co. Ltd. vs Commissioner of Central Excise and Others

S. Nagamuthu, J.—M/S. Balaramaverma Textile Mills Ltd., Shencottai, Tirunelveli District, was a company incorporated under the Companies Act, 1956. The said company became sick, and therefore, a reference was made to the Board for Industrial and Financial Reconstruction under the Sick Industrial Companies (Special Provisions) Act, 1985. On the orders of the BIFR, the said company was amalgamated with the fourth Respondent-- National Textile Corporation Ltd., which floated a tender to sell some of the properties originally belonging to M/s. Balaramaverma Textile Mills Ltd. The Petitioner participated in the tender and emerged as the successful bidder. Accordingly, a sale deed was executed in favour of the Petitioner-company by the fourth Respondent--National Textile Corporation Ltd. In pursuance of the same, the Petitioner has become the absolute owner of the said properties.

While so, it came to light that M/s. Balaramaverma Textile Mills Ltd., had fallen in arrears to the tune of Rs. 12,00,000 towards excise duty and penalty of Rs. 10,000 payable under the Central Excise Act, 1944 to the third Respondent. Therefore, the third Respondent, by his proceedings in O.C. No. 715 of 2007, dated October 5, 2007, issued a notice to the Petitioner to pay the said amount together with interest at the rate of 13 per cent, per annum. The Petitioner, by means of a reply dated October 24, 2007, refuted the said liability. Thereafter, the second Respondent issued proceedings dated January 23, 2008, u/s 11 of the Central Excise Act, 1944 and Section 142 of the Customs Act, 1962, to recover the arrears from the Petitioner. The said order is under challenge in this writ petition.

The foremost contention of learned Counsel appearing for the Petitioner is that the amount due from M/s. Balaramaverma Textile Mills Ltd., cannot be recovered from the Petitioner, as the Petitioner has not purchased by transfer or otherwise the business or trade of M/s. Balaramaverma Textile Mills Ltd.

Per contra, it is contended by learned Counsel appearing for Respondents Nos. 1 to 3 that under the proviso to Section 11 of the Central Excise Act, 1944, which was introduced by the Act 23 of 2004 with effect from September 10, 2004, the Petitioner is liable to pay the said amount and that is the reason why, a demand notice was issued to him.

The fourth Respondent, in his counter, in paragraphs Nos. 4 to 6, has stated as follows:

I submit that the Petitioner is the purchaser of the property namely an extent of 20.22 acres comprised in S.F. Nos. 207/2, 207/4 and 208/4 in Shencottai Village and Taluk, Tirunelveli District along with buildings, trees, etc., from the fourth Respondent for valuable consideration. The sale was effected after following the procedure by executing a sale deed on April 5, 2007. The property mentioned above was acquired by M/s. NTC under the Sick Textiles Undertakings Nationalisation Act, 1974. The entire property was sold to the Petitioner free from encumbrances or any claim, demand, attachment and charge.

I submit that the fourth Respondent as the vendor will abide by the terms of the sale deed under which the property abovementioned were conveyed in favour of the Petitioner herein. It is needless to point out that the right of the Petitioners is fully protected by virtue of specific provisions of the Transfer of Property Act, 1882.

I submit that the fourth Respondent as owner of M/s. Balaramaverma Textile Mills Ltd., is liable for the legitimate dues payable to the statutory authorities particularly the first Respondent herein. Since the fourth Respondent does not dispute the legitimate statutory liability, it is not proper on the part of the first Respondent to issue the impugned communication without reference to the fourth Respondent herein. The fourth Respondent has no objection for the above writ petition being allowed after recording the facts narrated above.

I have considered the above rival submissions.

The main clause of Section 11 of the Central Excise Act, 1944, deals with the recovery of sums due to the Government including the Central excise levy. Such recovery can be made from the person from whom such sums are due. But in this case, the amount is due only from M/s. Balaramaverma Textile Mills Ltd., or from the fourth Respondent--National Textile Corporation Ltd. As I have already noticed in the counter filed by the fourth Respondent--National Textile Corporation Ltd., it has admitted its liability to pay the said amount.

But the relevant provision, upon which reliance is made by Respondents Nos. 1 to 3 to substantiate their contention that the Petitioner-company is also liable to pay, is the proviso to Section 11 of the 1944 Act, which reads as follows:

Recovery of sums due to Government.--In respect of duty and any other sums of any kind payable to the Central Government under any of the provisions of this Act or of the rules made thereunder, (including the amount required to be paid to the credit of the Central Government u/s 11D), the officer empowered by the Central Board of Excise and Customs constituted under the Central Boards of Revenue Act, 1963, (54 of 1963) to levy such duty or require the payment of such sums may deduct the 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 ; and if the amount payable is not so recovered, he may prepare a certificate signed by him specifying the amount due from the person liable to pay the same and send it to the Collector of the district in which such persons resides or conducts his business and the said Collector, on receipt of such certificate, shall proceed to recover from the said person the amount specified therein as if it were an arrear of land revenue.

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, machinery, 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.

A close reading of the above provision would make it abundantly clear that only in a case where the transfer or otherwise disposal of the business or trade in whole or in part effects any change in the ownership thereof, in consequence of which the transferee succeeds in such business or trade, such person, who succeeds in the business, is liable to pay the dues. Therefore, the crucial question is as to whether the transfer of the trade or business has been effected. The contention of the Petitioner is that the trade or business conducted by M/s. Balaramaverma Textile Mills Ltd., was not at all transferred to the Petitioner. The said trade or business was transferred only to the fourth Respondent--National Textile Corporation Ltd. That is the reason why, the fourth Respondent-- National Textile Corporation Ltd. has admitted its liability to pay the dues on behalf of M/s. Balaramaverma Textile Mills Ltd. But in so far as the Petitioner-company is concerned, there has been no such transfer of either business or trade by the fourth Respondent--National Textile Corporation Ltd. Instead, what has been transferred is only certain properties belonging to M/s. Balaramaverma Textile Mills Ltd., which stood transferred to the fourth Respondent--National Textile Corporation Ltd. Therefore, in my considered opinion, the Petitioner, who has purchased some properties and is not the transferee of the trade or business, is not liable to pay dues as provided in the proviso to Section 11 of the Central Excise Act, 1944.

In this regard, learned Counsel for the Petitioner has relied on a judgment of the hon''ble Supreme Court in State of Karnataka and Another Vs. Shreyas Papers Pvt. Ltd. and Others, . That was a case, where the hon''ble Supreme Court was to consider the scope of Section 15(1) of the Karnataka Sales Tax Act, 1957, which reads as follows:

When the ownership of the business of a dealer liable to pay the tax or penalty, or any other amount under the provisions of this Act, is transferred, the transferor and the transferee shall jointly and severally be liable to pay any tax or penalty or any other amount payable in respect of such business and remaining unpaid at the time of transfer, and for the purpose of recovery from the transferee such transferee shall be deemed to be the dealer liable to pay the tax or penalty or other amount under this Act.

While interpreting the term "business" as found in the said provision, the hon''ble Supreme Court in paragraph No. 15 has held as follows (page 338 of 144 STC):

A careful reading of Section 15(1) of the Karnataka Sales Tax Act, 1957 shows that the consequences contemplated therein, namely, foisting of the liabilities of the defaulting transferor onto the transferee, would come into effect only if the ''ownership of the business'' is transferred. Although, Mr. Hegde strenuously urged that ''business'' could not be separated from the assets of the business, we are unable to accept this contention. Business is an activity, directed with a certain purpose, more often towards producing income or profit. Ownership of assets is merely an incident rather than a characteristic of business. Hence, the mere transfer of one or more species of assets does not necessarily bring about the transfer of the ''ownership of the business'' for ''ownership of a business'' is much wider than mere ownership of discrete or individual assets. In fact, ''ownership of business'' is wider than the sum of the ''ownership of a business'' constituent assets. Above all, transfer of ''ownership of business'' requires that the business be sold as a going concern. CIT v. K.H. Chambers [1965] 55 ITR 674 (SC). In our view, therefore, Section 15(1) is intended to operate only when there is complete transfer of ''ownership of business'' so as to render the transferee as a successor-in-interest of the transferor. Only in such an eventuality does Section 15(1) make the transferee liable for the transferor''s sales tax liabilities.

In the said judgment, the hon''ble Supreme Court has affirmed the view taken by the Principal Seat of this Court in Deputy Commercial Tax Officer, Thudiyalu Assessment Circle, Coimbatore and another Vs. R.K. Steels, .

A reading of the above judgments would make it manifestly clear that there is a world of difference between business and ownership of assets. The above two judgments came up for consideration by a Full Bench of this Court in B. Suresh Chand Vs. State of Tamil Nadu, , wherein, while dealing with a similar provision in Tamil Nadu General Sales Tax Act, the Full Bench has also taken the similar view falling in line with the view taken by the Division Bench in Deputy Commercial Tax Officer, Thudiyalu Assessment Circle, Coimbatore and another Vs. R.K. Steels, as well as the judgment of the hon''ble Supreme Court, referred to above.

In view of the above settled position of law, since it is undoubtedly clear that the Petitioner has not got the business or trade of either M/s. Balaramaverma Textile Mills Ltd. or the fourth Respondent transferred and since the Petitioner has got the transfer by sale, only the properties belonging to the said fourth Respondent--National Textile Corporation Ltd., the amount due towards Central Excise as well as towards interest under the Central Excise Act, 1944, from M/s. Balaramaverma Textile Mills Ltd., cannot be recovered from the Petitioner at all and thus, the Petitioner is not liable to pay the same.

In view of all the above, the impugned order dated January 23, 2008, passed by the second Respondent is set aside and the writ petition is allowed. No costs. Consequently, connected miscellaneous petition is closed.