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Interpretation of clause in the agreement of sale – Excise duty notice calling upon erst while owner is quashed =Excise dues are not the statutory liabilities which arise out of the land and building or the plant and machinery. = “all these statutory liabilities arising out of the land shall be borne by purchaser in the sale deed” and “all these statutory liabilities arising out of the said properties shall be borne by the vendee and vendor shall not be held responsible in the Agreement of Sale.” As per the High Court, these statutory liabilities would include excise dues. We find that the High Court has missed the true intent and purport of this clause. The expressions in the Sale Deed as well as in the Agreement for purchase of plant and machinery talks of statutory liabilities “arising out of the land” or statutory liabilities “arising out of the said properties” (i.e. the machinery). Thus, it is only that statutory liability which arises out of the land and building or out of plant and machinery which is to be discharged by the purchaser. Excise dues are not the statutory liabilities which arise out of the land and building or the plant and machinery. Statutory liabilities arising out of the land and building could be in the form of the property tax or other types of cess relating to property etc. Likewise, statutory liability arising out of the plant and machinery could be the sales tax etc. payable on the said machinery. As far as dues of the Central Excise are concerned, they were not related to the said plant and machinery or the land and building and thus did not arise out of those properties. Dues of the Excise Department became payable on the manufacturing of excisable items by the erstwhile owner, therefore, these statutory dues are in respect of those items produced and not the plant and machinery which was used for the purposes of manufacture. This fine distinction is not taken note at all by the High Court.= We thus conclude that the judgment of the High Court is unsustainable in law. Accordingly, the appeal is allowed and the impugned judgment of the High Court is set aside. As a consequence the notice of the Excise Department calling upon the appellant to pay the dues of the erstwhile owner of the unit in question also stands quashed. The appellant shall also be entitled to cost of this appeal.

published in     http://judis.nic.in/supremecourt/imgst.aspx?filename=40655  

[REPORTABLE]

 
IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.6802/2013
(arising out of SLP(civil) No. 15278 of 2012)

 
M/s. Rana Girders Ltd. …..Appellant

 
Vs.

Union of India & Ors. ….Respondents

 
J U D G M E N T

A.K.SIKRI,J.

1. Leave granted.

2. One M/s. P.J. Steels Pvt. Ltd. (borrower) had taken
loans/financial accommodation from the Uttar Pradesh Financial
Corporation (UPFC). Because of the consistent default on the part of
the said borrower in re-paying the loans, the UPFC took possession of
the land and building of the borrower which were mortgaged/kept as
security with the UPFC. This action was taken under Section 29 of the
State Financial Corporation Act. After taking physical possession of
the unit, the UPFC held public auction on pursuant to advertisement
which was issued on 8th January 2002. In the said public auction
conducted by UPFC, the appellant herein (appellant which was known as
M/s. Sarju Steels Pvt.Ltd. at that time and has now converted into a
Public Limited Company known as M/s. Rana Girders Pvt. Ltd. Dated 20th
March 2002 was the highest and thus, successful bidder in respect of
land and building as well as plant and machinery. Sale Deed dated
8.3.2002 was executed in favour of the appellant qua the land and
building. Likewise, Agreement dated 14.3.2002 was executed in favour
of the appellant conveying the ownership of the plant and machinery.

3. With the aforesaid Sale Deed and Agreement, the appellant has
become the owner, both of the land and building and also plant and
machinery. The borrower has not questioned the validity of the said
auction which has attained finality. It appears that the borrower had
also to discharge the liability qua excise duty which had amounted to
Rs.1,00,72,442/-. To recover that amount, the Commissioner of Customs
and Central Excise, Meerut-I (respondent No.2 herein) is now pressing
the appellant to discharge this liability as purchaser and successor-
in-interest of the land and building plus plant and machinery of the
borrower. The appellant is resisting the demand with the posture that
since the aforesaid properties have been purchased by the appellant in
an open auction from the UPFC, free from all encumbrances, it is not
the liability of the purchaser to make payment of the dues of excise
department.

4. Therefore, the issue which has arisen for our consideration in
this appeal is as to whether excise department can recover the amount
in question from the appellant. This issue has cropped up in the
following factual background:

5. As already pointed out above, after taking possession of the
unit of the borrower under Section 29 of the State Financial
Corporation Act, the UPFC issued an advertisement dated 8.1.2002 in
the newspapers for public auction of the said properties. By the said
advertisement, offers for sale of land and building consisting of land
area 13390 sq. meter and covered area of 2429 sq. meter, plant and
machinery and other fixed assets of the borrower were invited on (“as
is where is basis”). This public notice also stipulated certain terms
and conditions on which offer were invited. First condition thereof,
which is relevant for our purpose, is reproduced below:

“All the statutory liabilities arising out of land shall be
borne by purchaser (except electricity dues). Other terms and
conditions of sale may be sent at the office.”

 
6. The appellant turned out to be the successful bidder whose bid
in the sum of Rs.43 Lakh for land and building being highest was
accepted by the UPFC. Sale Deed dated 8th March 2002 was executed.
In this Sale Deed it was specifically mentioned that the property is
free from all encumbrances by stating that “the vendor herein confirms
that the property purchased through the sale deed in favour of vendee
is free from all charges and encumbrances…….” The appellant had
paid a sum of Rs.21.50 Lakh at the time of registration of the Sale
Deed and balance amount of Rs.21.50 lakh was to be paid by the
appellant to the UPFC which was payable together with interest at the
rate of 16% P.A. in instalments as specified in the Schedule to the
said Sale Deed. There is no dispute that this balance consideration
has been paid by the appellant to the UPFC. Another condition in the
Sale Deed, which was also mentioned in the public notice was that:

“All the statutory liabilities arising out of said properties
shall be borne by the vendee and vendor shall not be held
responsible.”

 
7. The appellant also purchased plant and machinery in the said
auction for a total consideration of Rs.1 Crore 93 Lakh for which
Agreement dated 15th March 2002 was executed by the parties. This
Agreement also contained both the clauses, similar to the clauses in
the Sale Deed, namely, the said plant and machinery was free from all
encumbrances and that all the statutory liabilities arising out of the
plant and machinery of the industrial unit were to be borne by the
purchaser i.e. the appellant.

8. At that time, some demands of dues on account of Central Excise
payable to respondent No.2 were pending. It appears that the borrower
had filed two appeals against the Order-in-Original dated 29.8.2002 in
this behalf. These two appeals were dismissed by the CESTAT on 30th
April 2003 on account of non-compliance of the pre-deposit amount
directed in its stay order dated 18th March 2003. Some penalties were
also imposed by the adjudicating authority, under the Central Excise
Act which were appealed again by the borrower. That appeal was also
dismissed on 30th April 2003 and 25th May 2004 thereby confirming the
demand of Customs and Excise.

9. After the conclusion of the aforesaid legal proceedings between
the respondent No.2 and the borrower, following amount became due on
account of duty and penalty payable by the borrower to the respondent
No.2:

Adj.Order No. & Amount of confirmed demands

Date Duty (In Rs.) Penalty (In Rs) R.F.
Penalty

28/Commr/MRT/0 4298571 4298571 —-
1000000

2/dated 29.8.02

16/Jt. 669862 669862
—- —–

Commr/2003/

Dated 22.7.2003

82/Off/136/01/02 115576 20000 —-

Dated 22.11.02

———————————————————————–
————-

10. Since the appellant had purchased the land and building as well
as plant and machinery of the borrower in the auction conducted by the
UPFC, the respondent No.2 issued notice dated 25.8.2004 to the
appellant stating that the amount in question had now become the
liability of the appellant and demanded the aforesaid payment. It was
mentioned in the notice that this amount was payable by the appellant
in view of the law laid down by this Court in the case of M/s. Macson
Marbles Pvt. Ltd. Vs. Union of India2003 (158) ELT 424 SC.

11. The appellant herein initially requested the Excise Department
to provide the copies of the adjudication orders relating to the three
cases mentioned in the notice. Thereafter, vide reply dated
7.12.2004, the appellant disputed the liability stating that the
amount was not recoverable from it in terms of the provisions of
Section 11 of the Central Excise Act as it had purchased the aforesaid
properties in auction from UPFC “free from all encumbrances”. The
Central Excise Department, however, insisted that it had become the
liability of the appellant and sent further communication demanding
payment failing with the threat that on failure in making payments the
properties would be attached.

12. At this juncture, the appellant filed the Writ Petition in the
High Court of Judicature at Allahabad, questioning the validity of the
demands raised by the Revenue. After hearing the matter, vide the
impugned judgment dated 1st December 2011, the High Court has been
pleased to hold that in view of the covenants in the Sale Deed and
Agreement it is the liability of the appellant to pay the excise duty.
It is this order which is the subject matter of present appeal.

13. A perusal of the order of the High Court would demonstrate that
the Excise Department had contested the petition filed by the
petitioner herein on the ground that the appellant being the successor-
in-interest which had purchased the land and building as well as plant
and machinery, was liable to make the payment having regard to the
judgment of this Court in M/s. Macson case. The appellant, on the
other hand, had argued that since the appellant had not purchased the
entire unit of the principal borrower the judgment of M/s. Macson case
was not applicable. On the contrary it is the law laid down in Union
of India vs. SICOM Ltd. 2009 (2) SCC 121, ratio whereof was
attracted. It was argued that the M/s. Macson case was specifically
distinguished by this Court in SICOM Ltd. holding that the ratio of
M/s. Macson case would be applicable only in transfer of “ownership
of business” i.e. when there is a sale of business as an ongoing
concern and not in case of mere transfer of its specified assets.
Significantly, the High Court took note of this distinction by
referring to various other judgments as well on the lines of SICOM
Ltd. of this Court as well as some High Courts. However, leaving the
discussion on this aspect inconclusive, the High Court chose to rest
its decision on an altogether different foundation, namely stipulation
in the Sale Deed dated 8.3.2002 to the effect that the statutory
liabilities arising out of the property shall be borne by the vendee
(i.e. the appellant). These clauses Sale Deed pertaining to land and
building and Agreement of Sale qua plant and machinery have already
been noted above. According to the High Court, these covenants
provided clear and unambiguous stipulation as per which the appellants
agreed to discharge the statutory liabilities and since the excise
dues were statutory in nature, it had become the liability of the
appellant to pay the same. However, in so far as penalty is concerned,
it is held that such a burden cannot be fastened on to the appellant
as it is in the nature of quasi-criminal liability which was leviable
only on the defaulter viz. the borrower. The writ petition is thus,
partly allowed.

14. Before us, it was strenuously argued by the learned counsel for
the Revenue that since the excise duty is a statutory liability such a
duty has to be paid by the person who purchased the property of
borrower in default even when sold in auction under section 29 of the
State Financial Corporation Act. He further argued that in any case
the High Court was right in holding that by virtue of the stipulations
in the Sale Deed as well as in the Agreement of Sale, so far as the
appellant is concerned, it was liable to discharge the excise
liability. In the circumstances, two questions arise for consideration
namely (1) on the interpretation of stipulation contained in the Sale
Deed of the land and building and Agreement of Sale of plant and
machinery, whether the appellant had agreed to discharge the dues
payable to the excise department by the borrower. (2) Whether such a
liability arises in law (de-hors the stipulation in Sale Deed
/Agreement of Sale) having regard to the legal provisions contained in
the Excise Act and State Financial Corporation Act?

15. We shall discuss the second question in the first instance. As
noted above, in so far as second question is concerned, though the
High Court has discussed the position in law in detail but has
refrained from giving its final opinion on this question.

16. Whether UPFC would have priority being a secured creditor by
virtue of Deed of Mortgage or the Central Excise in respect of its
dues having regard to the Rule 230(2) of the Central Excise Rules,
came up for consideration before this Court in State of Karnataka &
Anr. Vs. Shreyash Papers (P) Ltd. & Ors. JT 2006 (1) SC 180. Dealing
with the provisions of Rule 230 of the Excise Rules, the Court held
that this provision 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 dues are paid
or recovered. However, the rule does not in any way create a charge
over any of the goods enumerated therein. After explaining the term
“charge” as defined in Section 100 of Transfer of Property Act, it was
held that charge would be different from the word “detained”. As Rule
230 only empowers detention and there was 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 realization of the Central
Excise Duty on top priority. The Court held that UPFC had a priority
being a secured creditor on the one hand and Central Excise having no
“charge” over the property. The Court specifically took note of the
fact that the petitioner in that case was not the successor of the
erstwhile owner in business or trade and having acquired the property
without any charge independent of business or trade of the previous
owner, was not a person in custody or possession of the property as a
successor of the previous owner against whom there was a demand of
excise duty.

17. Learned counsel for the respondents, heavily relied on the
judgment of this Court in M/s. Macson (supra), reference to which is
also made in the notice dated 25.02.1984 that was served upon the
appellant by the Excise Department. He submitted that in that case
this Court had held that even the successor in interest is liable to
discharge the liability of the Excise Department. We may, however,
note that this case was considered and specifically distinguished in
SICOM Ltd. (supra). In that case, considering the statutory right of
the Financial Corporation under the State Financial Corporation Act,
1951 and the non-obstante clause occurring therein, it was
categorically held that State Financial Corporation shall have a
preferential claim in relation to its secured debts. This position is
explained in paragraphs 16 and 23 of the said judgment in the
following manner:
“16. If a company had a subsisting interest despite a lawful
seizure, there cannot be any doubt whatsoever that a
charge/mortgage over immovable property will have the same
consequence.
xxxxxxxxxxxxx
23. Furthermore, the right of a State Financial Corporation is a
statutory one. The Act contains a non obstante clause in
Section 46-B of the Act which reads as under:
“46-B. Effect of Act on other laws.—The provisions of this
Act and of any rule or orders made thereunder shall have
effect notwithstanding anything inconsistent therewith
contained in any other law for the time being in force or
in the memorandum or articles of association of an
industrial concern or in any other instrument having effect
by virtue of any law other than this Act, but save as
aforesaid, the provisions of this Act shall be in addition
to, and not in derogation of, any other law for the time
being applicable to an industrial concern.”

 

18. In so far dues of the Government in the form of tax or excise
etc. are concerned, the Court was of the opinion that rights of the
Crown to recover the dues would prevail over the right of the subject.
Crown debt means the debts due to the State or the King. Such
creditors, however, must be held to mean unsecured creditors. The
principle of Crown debt pertains to the common law principle. When
Parliament or State Legislature makes an enactment, the same would
prevail over the common law and thus the common law principles which
existed on the date of coming into force of the Constitution of India,
must yield to a statutory provision. A debt, which is secured or
which by reason of the provisions of a statute becomes the first
charge over the property must be held to prevail over the Crown debt
which is an unsecured one. On this reasoning, the debt payable to
secured creditor like the Financial Corporation was prioritised vis-a-
vis the Central Excise Dues.

19. For this principle, the Court referred to its earlier judgment
in Dena Bank v.. Bhikhabhai Prabhudas Parekh & Co. & Ors. (2000) 5 SCC
694 explaining the doctrine of priority to Crown Debts, thus:

“What is the common law doctrine of priority or precedence of
Crown debts/ Halsbury, dealing with general rights of the Crown
in relation to property, states that where the Crown’s right and
that of a subject meet at one and the same time, that of the
Crown is in general preferred, the rule being “detur digniori
(Laws of England, 4th Edn.,Vol.8, para 1076, at p.666).Herbert
Broom states:

“Quando jus domini regis et subditi concurrunt jus regis
praegerri debat. – Where the title of the kind and the tile of a
subject concur, the king’s title must be preferred. In this case
detur digniori is the rule. …..where the titles of the kind
and of a subject concur, the kind takes the whole. ….where the
king’s title and that of a subject concur, or are in conflict,
the king’s title is to be preferred.”(Legal maxims; 10th
Edn.,pp.35-36)

This Common law doctrine of priority of State’s debts has
been recognised by the High Courts of India as applicable in
British India before 1950 and hence the doctrine has been
treated as “law in force” within the meaning of Article 372(1)
of Constitution.”

 
It was, furthermore, observed :

“However,, the Crown’s preferential right to
recovery of debts over other creditors is confined to ordinary
or unsecured creditors. The common law of England or the
principles of equity and good conscience (as applicable to
India) do not accord the Crown a preferential right for recovery
of its debts over a mortgagee or pledge of goods or a secured
creditor. It is only in cases where the Crown’s right and that
of the subject meet at one and the same time that the Crown is
in general preferred. Where the right of the subject is complete
and perfect before that of the king commences, the rule does not
apply, for there is no point of time at which the two rights
are at conflict, nor can there be a question which of the two
ought to prevail in a case where one, that of the subject, has
prevailed already.In Giles v.Grover it has been held that the
Crown has no precedence over a pledge of goods. In Bnk of Bihar
v. State of Bihar the principle has been recognised by this
Court holding that the rights of the pawnee who has parted with
money in favour of the pawner on the security of the goods
cannot be extinguished even by lawful seizure of goods by making
money available to other creditors of the pawnor without the
claim of the pawnee being first fully satisfied.Rashbehary Ghose
states in Law of Mortgage (TLL,7th Edn.,p.386) – “it seems a
government debt in India is not entitled to precedence over a
prior secured debt.”

 
20. Coming to the liability of the successor in interest, the Court
clarified the legal position enunciated in M/s. Macson by observing
that such a liability can be fastened on that person who had purchased
the entire unit as an ongoing concern and not a person who had
purchased land and building or the machinery of the erstwhile concern.
This distinction is brought out and explained in paragraph 24 and 25
and it would be useful for us to reproduce herein below:

“Reliance has also been placed by Ms.Rao on Macson Marbles
Pvt.Ltd. (supra) wherein the dues under Central Excise Act was
held to be recoverable from an auction purchaser, stating:

We are not impressed with the argument that the State Act
is a special enactment and the same would prevail over the
Central Excise Act. Each of them is a special enactment and
unless in the operation of the same any conflict arises this
aspect need not be examined. In this case, no such conflict
arises between the corporation and the Excise Department. Hence
it is unnecessary to examine this aspect of the matter.

The Department having initiated the proceedings under
Section 11A of this Act adjudicated liability of respondent No.4
and held that respondent No.4 is also liable to pay penalty in a
sum of Rs.3 lakhs while the Excise dues liable would be in the
order of a lakh or so. It is difficult to conceive that the
appellant had any opportunity to participate in the adjudication
proceedings and contend against the levy of the penalty.
Therefore, in the facts and circumstances of this case, we think
it appropriate to direct that the said amount, if already paid,
shall be refunded within a period of three months. In other
respects, the order made by the High Court shall remain
undisputed. The appeal is disposed of accordingly.”

 
The decision, therefore, was rendered in the facts of that
case. The issue with which we are directly concerned did not
arise for consideration therein. The Court also did not notice
the binding precedent of Dena Bank as also other decisions
referred to hereinbefore.”

 
21. A harmonious reading of the judgments in Macson and SICOM would
tend us to conclude that it is only in those cases where the buyer had
purchased the entire unit i.e. the entire business itself, that he
would be responsible to discharge the liability of Central Excise as
well. Otherwise, the subsequent purchaser cannot be fastened with the
liability relating to the dues of the Government unless there is a
specific provision in the Statute, claiming “first charge for the
purchaser”. As far as Central Excise Act is concerned, there was no
such specific provision as noticed in SICOM as well. Proviso to
Section 11 is now added by way of amendment in the Act only w.e.f.
10.9.2004. Therefore, we are eschewing our discussion regarding this
proviso as that is not applicable in so far as present case is
concerned. Accordingly, we thus, hold that in so far as legal
position is concerned, UPFC being a secured creditor had priority over
the excise dues. We further hold that since the appellant had not
purchased the entire unit as a business, as per the statutory
framework he was not liable for discharging the dues of the Excise
Department.

22. With this, we now revert to the first issue, namely
interpretation of the clause in the Sale Deed for land and building
and similar clause in Agreement of Sale for machinery on the basis of
which appellant is held to be liable to pay the dues. These clauses
have already been incorporated in the earlier portion of our judgment.

 

23. We may notice that in the first instance it was mentioned not
only in the public notice but there is a specific clause inserted in
the Sale Deed/Agreement as well, to the effect that the properties in
question are being sold free from all encumbrances. At the same time,
there is also a stipulation that “all these statutory liabilities
arising out of the land shall be borne by purchaser in the sale deed”
and “all these statutory liabilities arising out of the said
properties shall be borne by the vendee and vendor shall not be held
responsible in the Agreement of Sale.” As per the High Court, these
statutory liabilities would include excise dues. We find that the
High Court has missed the true intent and purport of this clause. The
expressions in the Sale Deed as well as in the Agreement for purchase
of plant and machinery talks of statutory liabilities “arising out of
the land” or statutory liabilities “arising out of the said
properties” (i.e. the machinery). Thus, it is only that statutory
liability which arises out of the land and building or out of plant
and machinery which is to be discharged by the purchaser. Excise dues
are not the statutory liabilities which arise out of the land and
building or the plant and machinery. Statutory liabilities arising
out of the land and building could be in the form of the property tax
or other types of cess relating to property etc. Likewise, statutory
liability arising out of the plant and machinery could be the sales
tax etc. payable on the said machinery. As far as dues of the Central
Excise are concerned, they were not related to the said plant and
machinery or the land and building and thus did not arise out of those
properties. Dues of the Excise Department became payable on the
manufacturing of excisable items by the erstwhile owner, therefore,
these statutory dues are in respect of those items produced and not
the plant and machinery which was used for the purposes of
manufacture. This fine distinction is not taken note at all by the
High Court.

24. We thus conclude that the judgment of the High Court is
unsustainable in law. Accordingly, the appeal is allowed and the
impugned judgment of the High Court is set aside. As a consequence
the notice of the Excise Department calling upon the appellant to pay
the dues of the erstwhile owner of the unit in question also stands
quashed. The appellant shall also be entitled to cost of this appeal.
…………………………………..J.
[Anil R. Dave]

 

 

 
…………………………………..J.
[A.K.Sikri]

 
New Delhi.
Dated: August 16, 2013

 

 

 

 

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