2005 (11) TMI 546 - HC - Central Excise

Summary

Issues Presented and Considered

The core legal questions considered by the Court include:

• Whether the purchaser of assets of an industrial unit at auction under Section 29 of the State Financial Corporation Act, 1951, becomes liable for the predecessor's outstanding Central Excise dues.
• The applicability and effect of the proviso to Section 11-A of the Central Excise Act, 1944, and Rule 230(2) of the Central Excise Rules, 1944 (now repealed), on recovery of excise dues from a successor in interest.
• Whether the transfer of assets alone, as opposed to transfer of business or trade in whole or in part, attracts liability for excise dues of the previous owner under the Central Excise Act or Rules.
• The effect of the repeal and subsequent amendments of the Central Excise Rules and Act provisions on the liability of the purchaser as on the date of transfer (May 2003).
• The relevance of judicial precedents, particularly the principle laid down in Isha Marbles vs. Bihar State Electricity Board, regarding liability of a purchaser for predecessor's dues in absence of statutory provisions or contractual stipulations.

Issue-wise Detailed Analysis

Issue 1: Liability of purchaser under Section 29 of the State Financial Corporation Act for predecessor's Central Excise dues

The petitioner purchased assets of the industrial unit at an auction conducted by the Rajasthan Financial Corporation (RFC) under Section 29 of the State Financial Corporation Act, 1951, due to default by the previous owner in repayment of loans. The conveyance deed transferred assets subject only to clearance of dues payable to RIICO, and no other liabilities of the previous owner were disclosed or undertaken by the purchaser.

The petitioner received demand notices from the Central Excise Department for dues amounting to Rs. 16,73,410/- against the predecessor. The petitioner contended that under Section 29 of the SFC Act, the purchaser is not liable for predecessor's liabilities unless specifically stipulated.

The Court examined the terms of the auction advertisement and the conveyance deed, noting that only land, building, and plant were sold, and the sale was expressly subject to only RIICO dues. Other liabilities, including excise dues, were not transferred or disclosed.

Issue 2: Applicability of proviso to Section 11-A of the Central Excise Act, 1944, and Rule 230(2) of Central Excise Rules, 1944

The respondents relied on the proviso to Section 11-A of the Central Excise Act, 1944, which empowers excise officers to attach and sell excisable goods and assets in possession of the successor to recover dues from the predecessor where the business or trade is transferred in whole or part. They also relied on Rule 230(2) of the Central Excise Rules, 1944 (now repealed), which provided a similar mechanism for recovery from successors in business.

The Court analyzed the legislative history and timeline of these provisions. It noted that:

• Rule 230(2) of the 1944 Rules was repealed and ceased to be in force from 1st July 2001.
• The Central Excise Rules, 1944, were superseded by the Central Excise Rules, 2001, which did not contain any provision corresponding to Rule 230(2).
• The proviso to Section 11-A of the Central Excise Act was inserted only by Finance Act No. 2 of 2004, effective from 1st April 2004, after the date of the asset transfer (May 2003).

Therefore, at the time of the transfer, neither Rule 230(2) nor the proviso to Section 11-A was in force or applicable.

Issue 3: Distinction between transfer of assets and transfer of business or trade

The Court emphasized that both Rule 230(2) and the proviso to Section 11-A operate only when there is a transfer of business or trade in whole or in part, or a change in ownership thereof, resulting in succession of the business by another person. Mere piecemeal transfer of assets, divorced from transfer of business or trade, does not attract these provisions.

In the present case, only assets were transferred at auction, not the business or trade itself. The previous owner continued to exist as a legal entity, and the business was not transferred as a going concern. The Court held that the provisions invoked by the respondents do not apply to such asset transfers.

Issue 4: Effect of absence of statutory provision on liability of purchaser

Given the absence of any statutory provision on the statute book between 1st July 2001 and 1st April 2004 corresponding to Rule 230(2) or the proviso to Section 11-A, the Court held that the purchaser of the assets in May 2003 could not be held liable for the predecessor's excise dues. The transfer under Section 29 of the SFC Act took effect free from encumbrances except as explicitly stipulated (i.e., RIICO dues).

Issue 5: Application of judicial precedents

The Court relied on the Supreme Court decision in Isha Marbles vs. Bihar State Electricity Board, which held that in absence of any statutory provision or contractual stipulation, a purchaser of property cannot be saddled with the predecessor's liabilities. The principle is that liability does not automatically transfer by mere purchase of assets unless there is a charge or specific agreement.

The respondents relied on Macson Marbles Pvt. Ltd. vs. Union of India, where the Supreme Court upheld recovery from successors under Rule 230(2). However, the Court distinguished the present case on the ground that Rule 230(2) was not in force at the time of transfer and no retrospective effect was given to the later inserted proviso to Section 11-A.

Significant Holdings

The Court held:

"Therefore, as on the date purchase of the assets took place in May 2003 no corresponding liability followed the transfer of assets in the hands of buyer to clear the dues of previous owner which had not been paid by him under the Central Excise Act."

"The condition for invoking Rule 230(2) or proviso to Section 11 relates to transfer of business or trade in whole or in part or change in ownership of trade or business, but it does not contemplate piecemeal transfer of assets divorced from the transfer of trade or business."

"In absence of statutory provision the principle laid down in Isha Marbles case fully governs the facts of the present case."

Core principles established include:

• Liability for excise dues of a predecessor does not automatically transfer to a purchaser of assets at auction under Section 29 of the SFC Act unless there is a statutory provision or contractual stipulation to that effect.
• The proviso to Section 11-A of the Central Excise Act and Rule 230(2) of the Central Excise Rules operate only when there is a transfer of business or trade in whole or part, not mere transfer of assets.
• Where the statutory provisions are not in force at the time of transfer, the purchaser takes the assets free from predecessor's excise liabilities.
• Judicial precedent supports that in absence of charge or statutory provision, successor cannot be saddled with predecessor's liabilities.

Accordingly, the Court quashed the impugned demand and recovery notices issued by the Central Excise Department against the petitioner and restrained them from proceeding against the assets purchased at auction.