The first charge over Property!

[Navjot Singh]

Synopsis in the case of PUNJAB NATIONAL BANK VERSUS UNION OF INDIA & ORS. [2022 (2) TMI 1171 - SUPREME COURT]

1. Brief Background

• The Commissioner Customs and Central Excise ordered the confiscation of all the land, building, plant, machinery, etc. of RIL. This confiscation order was passed under 𝐑𝐮𝐥𝐞 𝟏𝟕𝟑𝐐(𝟐) 𝐨𝐟 𝐭𝐡𝐞 𝐂𝐞𝐧𝐭𝐫𝐚𝐥 𝐄𝐱𝐜𝐢𝐬𝐞 𝐑𝐮𝐥𝐞𝐬, 𝟏𝟗𝟒𝟒.
• In this case, the Punjab National Bank, as the secured creditor, had issued notice to RIL under section 13(2) of the SARFAESI Act, 2002. The Allahabad High Court dismissed the writ petition filed by the bank.

2. Observations by the Apex Court

• In appeal, the Apex Court bench noted that before insertion of Section 11E in the Central Excise Act, 1944 w.e.f. 08.04.2011, there was no provision in the Act of 1944 inter alia, providing for First Charge on the property of the assessee or any person under the Act of 1944.
• Even the provisions contained in Section 11E of the Central Excise Act, 1944 are subject to the provisions contained in the SARFAESI Act, 2002, the court noted.
• The other issue raised in this case was whether the Commissioner Custom and Central Excise could have invoked the powers under Rule 173(Q)(2) of Central Excise Rules, 1944 on 26.03.2007 and 29.03.2007 for confiscation of land, buildings, etc., when on such date, the rule 173Q(2) was not on the Statue Book having been omitted w.e.f. 17.05.2000?
• Answering it against the Department, the bench allowed the appeal and observed that, to conclude, the Commissioner of Customs and Central Excise could not have invoked the powers under Rule 173Q(2) of the Central Excise Rules, 1944 on 26.03.2007 and 29.03.2007 for confiscation of land, buildings, etc., when on such date, the said Rule 173Q(2) was not in the Statute books, having been omitted by a notification dated 12.05.2000.
• Secondly, the dues of the secured creditor, i.e. the Appellant bank, will have priority over the dues of the Central Excise Department, as even after insertion of Section 11E in the Central Excise Act, 1944 w.e.f. 08.04.2011, and the provisions contained in the SARFAESI Act, 2002 will have an overriding effect on the provisions of the Central Excise Act of 1944.

3. Our 2 Cents

• It is well-settled law that, government dues under the doctrine of crown debts do not have automatic priority over secured debts.

• Also, the principles of law discernible from the decision of the Supreme Court in the case of Solidaire India Ltd. are that, if there is a conflict between the two special Acts, the later Act must prevail.

4. In VAT

• In the case of State of Bikaner and Jaipur Vs. Steel Rolling Corporation, Supreme Court held that as per the Provisions of Section 11AAAA of the Rajasthan Sales Tax Act, creates a priority charge of statutory dues over bank's charge on the mortgaged assets. The same view was adopted in the judgment by Madras High Court in INDIAN BANK VERSUS COMMERCIAL TAX OFFICER, RANIPET AND OTHERS [2008 (9) TMI 882 - MADRAS HIGH COURT]

5. In Customs & Excise

• In the absence of any specific clause in both the central act, the specific charge by Bank will prevail.

But the introduction of SARFAESI and DRT act changed the picture?

• It is undoubtedly that both the acts were formulated for the benefits of the bank but in the case of CENTRAL BANK OF INDIA VERSUS STATE OF KERALA AND OTHERS [2009 (2) TMI 451 - SUPREME COURT], the court held that the DRT Act and Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 does not provide for the first charge in respect of secured debts due to Banks and hence the provisions of State Sales Tax Laws creating the first charge will prevail over the dues recoverable from debtors.

• Thus, the facts differ in every case and every act, one needs to go through the fact thoroughly before representing the case before the respective authority.

CA. Navjot Singh

+91 9953357999 | Navjot.singh@taxtru.in