TMI Blog2013 (11) TMI 1392X X X X Extracts X X X X X X X X Extracts X X X X ..... ent order was passed and adjudicated under Rule 230(2). The mandatory and primary condition of sub-section (3) to Section 170 is that the Revenue should not be in a position to recover the dues from the predecessor and then “only” the successor is liable - The appellant company has taken over assets and liabilities of Kuldeep Singh Punn - The liabilities taken over, were mentioned in the books of accounts and not those which were not mentioned or were clandestine activities undertaken by Kuldeep Singh Punn in his personal or individual capacity as a sole proprietor, before the company was incorporated on 29th January, 1998 and started business with effect from 1st April, 1998 - the succession is not stated or claimed to be fraudulent - The statutory provisions or the legislative mandate is the primary and guiding principle, to make the successor vicariously liable to pay the liabilities of the predecessor - to initiate and continue proceedings against a firm, which was dissolved, it was necessary that there should be a statutory provision. Separate legal entity – Vicarious liability - Whether the appellant-company can be held to be vicariously liable for the dues and the liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Sections 11A, 11AB and 11AC of the Central Excise Act, 1944 (Act, for short) read with Rules 9(2), 173Q, 209A and 226 of the Central Excise Rules, 1944. 3. In paragraph 37 of the said notice, it was stated as under:- Whereas it appears that M/s Freezair India/M/s Freezair India (P) Ltd. has not paid Central Excise duty amounting to Rs.45,62,325/- on the cooling/indoor units of split air conditioner other parts of air conditioner manufactured and cleared by them, without disclosing the production/clearances with the intent to evade payment of duty (as per Annexure-A), during the years 1996-97, 1997-98 1998-99 without getting themselves registered with the Central Excise department, by wilfully suppressing the clearances from the department, without accounting for the production and clearances in the statutory records, without submitting RT-12 returns, without filing classification declaration, without following the prescribed procedure, without maintaining prescribed Central Excise records in contravention of above referred rule. Therefore, it appears that they have rendered themselves liable to penal action under the provision of Section 11AC of Central Excise A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arender Singh Punn. Prior to 29-01-98, the said company was known as Freezair India situated at the same address and Sh. Kuldeep Singh Punn was Proprietor (at present, Director of the said company). (Emphasis Supplied) 8. After considering the reply, the alibi and defence was rejected and in paragraph 44 of the said order the adjudicating authority, i.e., Commissioner, Central Excise, Delhi-1 directed and confirmed demand of Central Excise duty of Rs.45,62,325/- under Rule 9(2) read with proviso to Section 11A of the Act. Penalty of equivalent amount was imposed on the appellant under Section 11 AC of the Act read with Rule 173Q. Interest under Section 11AB of the Act was directed to be imposed. Recovery was directed against the appellant even for the period prior to the incorporation. Penalty of Rs.3 lacs and Rs.2 lacs was imposed on Kuldeep Singh Punn and Narender Singh Punn under Rule 209A of the Rules. 9. The appellant herein preferred an appeal before Customs, Excise and Gold (Control) Appellate Tribunal under Section 35B of the Act. In the grounds of appeal, one of the primary contentions raised was that the appellant company was incorporated on 29th January, 1998 and ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be willing to wave off and not press for recovery of penalty. Revenue did not agree to the said proposal. By order dated 14th September, 2011, the appeal was allowed to be withdrawn with liberty to the appellant to prefer an appeal or reference before the High Court. Pursuant to the said liberty, the present reference was filed and stands admitted for hearing and disposal in terms of order dated 14th November, 2011. The question raised is whether the appellant-company can be held to be vicariously liable for the dues and the liability of Kuldeep Singh Punn, an individual and promoter director. The important issue is whether the appellant could have been assessed and charged with the liability to pay excise duty, penalty and interest for the period prior to 1st April, 1998, i.e., whether the original adjudication/assessment order itself is flawed and bad for levying, imposing and creating duty liability on the appellant for the period prior to 1st April, 1998? Another question raised is whether the said liability can be enforced based on the premise that the appellant is liable to pay the said amount because the company upon incorporation has taken over the assets and liabilities o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sent case, what is sought to be enforced in the impugned order is entirely different. It holds that the appellant company liable for the dues and liabilities of Kuldeep Singh Punn, its promoter director. The liabilities are for the period prior to the incorporation of the company or beginning of the operations. 14. In view of the aforesaid discussion, we reject the argument of the respondent that in the present case that the corporate veil should be lifted and, thereby make the appellant company liable to pay duty for the failure and fraudulent transactions made by Kuldeep Singh Punn, sole proprietor. The said activities and liabilities indulged were in his capacity as a sole proprietor and not because he was or would be the promoter director of the appellant. In the absence of any such statutory provision relied upon and pointed out to us, the said plea of the respondent has to be rejected. Principle of vicarious liability has to be created and enacted under statute by the Legislature. Sometimes the doctrine is applicable by the courts to punish and impose penalties or fines by lifting the corporate veil as offences or violations of law committed by natural persons behind the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s been no assessment of duty on the predecessor either before or after transfer; i.e., with effect from 1st April, 1998 or with the incorporation of the appellant-company on 29th January, 1998. In other words the predecessor, i.e., Kuldeep Singh Punn has not been assessed or charged with the liability. For the period even prior to 1st April, 1998, the appellant company has been assessed, which is wrong and incorrect. This is not permissible and is not postulated under Rule 230(2) of the Rules. No provision has been highlighted or pointed out under which this adjudication can be sustained and upheld. Respondent may have succeeded and would have applied Rule 230(2), if the original assessment had been rightly made and assessed in the hands of Kuldeep Singh Punn the sole proprietor for the period prior to 1st April, 1998. However, Rule 230(2) cannot be invoked to make, levy and impose duty, penalty etc. in original assessment against the appellant company and make it primarily liable for the alleged evasion of duty, prior to the date of its incorporation or starting production. 18. Rule 230(2) is restrictive and part of the recovery mechanism i.e. it enables recovery of tax dues fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 20. The proviso was inserted with effect from 10th September, 2004. This is probably the reason why the proviso was not referred to by the learned counsel for the parties. The proviso has to be harmoniously read with Rule 230(2). The Rule permits detention of assets of the predecessor, while the proviso postulates and permits sale etc. The said proviso further supports the interpretation given above drawing distinction between levy or charge, computation and recovery as three separate steps. Proviso to Section 11 stipulates where a person (described as predecessor) from whom any duty or other sums are recoverable or due, transfers or disposes of his business or trade in whole or in part or effects change of ownership, then subject to requisite compliances, of excisable goods, material, preparations etc. in custody or possession ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overnance require compliance with the law and statute. Revenue cannot ignore the basic principles and if we accept the contention of the Revenue in the present case, it may lead to unacceptable consequences and injustice in other cases. If we were to hold that the appellant company is responsible, liable and could have been assessed for period prior to 1st April, 1998, there would be inappropritate and unsatisfactory consequences, which are undesirable. In law, equity and as a legal principle, it would imply that the penalty could have been and should have been imposed on the appellant even for the prior period. Further personal penalty could and should have been imposed even on unconnected persons/directors for the prior period (In the present case it is an accepted position that Narender Singh Punn was not a director and not involved in day-to-day work prior to 1st April, 1998). This may result in legal consequences which are unpalatable and unacceptable. The appellant company can possibly set off and claim as expenditure operational costs but penalty and fines payable/paid for infraction of law and offences is not allowed as deduction (see Section 37 of the Income Tax Act, 1961) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, were mentioned in the books of accounts and not those which were not mentioned or were clandestine activities undertaken by Kuldeep Singh Punn in his personal or individual capacity as a sole proprietor, before the company was incorporated on 29th January, 1998 and started business with effect from 1st April, 1998. Even otherwise the appellant at best has taken over the liability but this does not mean that the assessment or adjudication order should be passed or could have been passed against the appellant. 27. Recovery of liability is distinct and separate from the charge or adjudication of the liability. The general principle or rule is that a successor is not liable for the debt of the predecessor but this rule is subject to judge-made doctrines which have been carved out as exceptions. Primarily these doctrines are species of liability based upon fraud or inherent inequitableness. Sometime, the doctrine is invoked as the liability arises out of the interest or charge on the property sold. The liability is akin to the liability in rem. 28. There could be five basic situations in which successor s liability may be recognized, namely (1) expressed or implied assumptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er Section 11 of the Act in the manner prescribed thereunder. If it discontinues its business, it shall within the specified time inform the prescribed authority accordingly. A dealer and its partners are jointly and severally responsible to pay the tax assessed on the dealer. But there is no provision expressly empowering the assessing authority to assess a dissolved firm in respect of its turnover before its dissolution. The question is whether such a power can be gathered by necessary implication from the other provisions of the Act. 9. The first question is whether a firm is a separate assessable entity for the purposes of the Act or whether it is only a compendious term used to denote a group of partners. The definition of dealer takes in three categories of assessable units, namely, person, firm or a Hindu joint family. The substantive and the procedural provisions of the Act prescribe the mode of assessment and realization of the tax assessed on such a dealer. If we read the expression firm in substitution of the word dealer , it will be apparent that a firm is an independent assessable unit for the purposes of the Act. Indeed, a firm has been given the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plated by that section was given. The Madras High Court in R.D. Fernandes, in re [ (1957) STC 368] relied upon the provisions of the Partnership Act to reach the desired end. The Punjab High Court in Khushi Ram Behari Lal Co. v. Assessing Authority, Sangrur [ (1964) 15 STC 165] distinguished the Full Bench decision, which is the subject-matter of the present appeal before us on the ground that the dissolution of the firm in the case before it was long after the assessment proceedings were initiated. It also relied upon Section 16 of the Act to support its conclusion that the liability of the firm continued till the registration was cancelled. It may also be noticed that the question in that case arose after the amended definition wherein the expression firm was omitted. The Madras High Court in R. Ponnuswami Gramani v. Collector of Chingleput District [ (1960) 11 STC 80] followed the earlier decision of that court; and it does not contain any reasoning on the question. The Bombay High Court in Bankatlal Badruka v. State of Bombay [ (1961) 12 STC 405] based its conclusion only on the circumstance that the notice of dissolution under Rule 35 of the Hyderabad General Sales Tax Rul ..... 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