TMI Blog2008 (2) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... ereto, Petitioner made full and final payment of the said consideration on 22 nd March, 2007 and requested Respondent No.4 to release the possession letter for the land and building, plant and machinery and the relevant original documents. Respondent No 5 as the Asset Recovery Management Services of Respondent No. 4 issued sale certificate for the immovable property and also sale certificate for the movables. 3. Respondent No.2 by an Order of 27-11-2001 had made a demand of duty under Central Excise Act, 1944 and had also imposed penalty against M/s. Rotex Textiles Mills Ltd. There also appear to have been other demands against M/s. Rotex Textiles Mills Ltd. These various demands as on 31-5-2007 were to the tune of ₹ 62,69,660-79 with interest at applicable rates. The movables, namely, plant and machinery had been attached by serving an order of attachment dated 23-3-2005. This exercise was done pursuant to the provisions of Section 142(l)(c)(II) of the Customs Act, 1962 read with Customs (Attachment of Property of Defaulters for Recovery of Government Dues), 1995.The Petitioner on coming to know of the said attachment served a notice on Respondent No.2 on 4 th April, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a prior attachment by revenue of the property of tax defaulter under the provisions of the Central Excise Act before it is sold by a secured creditor under the provisions of the SARFAESI Act. 3. Considering the proviso to Section 11 of The Central Excise Act, 1944, can a transfer be said to be a voluntary transfer by the person when the transfer takes place under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. 4. Does the mere purchase of the immovable/movable assets of a tax defaulter amount to transfer or disposal of business or trade in whole or in part or result in effecting change in ownership thereof in such business or trade by any other person. consequence of which, such person is succeeded in such business or trade by any other person. 6. To answer the issues, it would be necessary to reproduce Section 11 along with the proviso which was inserted by the Finance Act No. 2 of 2004 to the Central Excise Act, 1944 and which reads as under:- 11. 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 pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not be recovered then to issue a certificate signed by him and forward it to the Collector of the District, who then could proceed to recover the amounts specified as if it were arrears of land revenue. The expression excisable goods is no longer res integra. We may only refer to what the Supreme Court said in Triveni Engineering Industries Ltd. and another v. Commissioner of Central Excise and another((2000) 7 SCC 29). The Court observed that if an article is a immovable property, it cannot be termed as excisable goods for purposes of the Act, as in an immovable property there is neither mobility nor marketability which are the twin tests as to whether the goods are marketable as understood in the excise law. Whether an article is permanently fastened to anything attached to the earth requires determination of both the intention as well as the factum of fastening to anything attached to the earth and this has to be ascertained from the facts and circumstances of each case.Yet another aspect which we have to consider is the effect of Section 35 of the SARFAESI Act which reads as under:- The provisions of this Act shall have effect, notwithstanding anything inconsistent ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e considering the relevant provisions of a Statute. In the instant case, the sale is by the secured creditor exercising their rights under the SARFAESI Act. The law on the subject of priority of dues can be answered by referring to the Judgment of the Supreme Court in Dena Bank v. Bhikhabhai Prabhudas Parekh and Co. and others(AIR 2000 SC 3654). The Judgment reiterates the law as already declared in a long line of judgments by the Supreme Court. The issue there, arose out of recovery of Sale Tax under the provisions of the Karnataka Land Revenue Act. Dealing with the issue of priority of debt, the Court observed that the principle of priority of Government debts is founded on the rule of necessity and of public policy. This principle flowed from the common law doctrine of priority of State debts. This common law doctrine the Court observed, has been recognized 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 the Constitution. The basic justification for the claim for priority of State debts rests on the well recognized principle that the State is to raise money ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d paramount even over secured creditors.The law otherwise, as was declared in Collector of Aurangabad v. Bank of India(AIR 1967 SC 1831), is that merely because tax arrears are to be recovered as arrears of land revenue does not make the dues, in that case sales tax dues, have priority over dues of secured creditors. The effect of the discussion would be that as between the debts of a secured creditor and even if the debts of revenue are recoverable as arrears of land revenue under the Land Revenue Act that does not give them priority over the debts of a secured creditor. . Even in respect of pawned goods, in The Bank of Bihar v. The State of Bihar and others(AIR 1971 SC 1210) the Supreme Court held that under Section 176 of the Contract Act, the pawnee has special property and lien on the goods and so long as his claim is not satisfied, no other creditor or pawnor has the right to take away the goods or its price. Even if there is seizure by the Government, the Government is bound to pay the due to the pawnee and the balance alone is available to other creditors. If the Government deprives the pawnee of the goods, Government is bound to reimburse such amount which he in the ordin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. v. Deputy Commissioner of C. Excise, Chennai-II has examined the issue in depth. The Court was pleased to hold that tax dues under the Customs Act and Central Excise Act, do not have priority of claim over the dues of a secured creditor as there is no specific provision either in the Central Excise Act or the Customs Act giving those dues first charge, and that the claims of the secured creditors will prevail over the claims of the State. Considering the law declared by the Apex Court in the matter of priority of state debts as already discussed and the provision of Section 35 of SARFAESI Act we are in respectful agreement with the view taken by the Madras High Court. 11. That brings us to the second question as to what is the effect of an order of attachment. Admittedly, the Revenue had attached the property before it was put to sale. Under section 11 attachment could only be of excisable goods. The secured creditor admittedly had a charge in their favour before the property was attached. In that context, we may now consider some Judgments. In Narayan Ganesh Varde v. Fatma Daud(AIR (39) 1952 Bombay 70) this Court observed that an attachment does not create any interest in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would be non-est as there is no power under Section 11. As the power was exercised before the sale to the Petitioner on 10.3.2007, the proviso on the facts of the case would not apply. It was therefore open to the creditors irrespective of the act of the Revenue Authorities who had proceeded to attach the properties to sell the same, considering they are secured creditors. We have earlier reproduced the section. We may note that it overrides anything inconsistent in any other law. In the instant case, the secured assets can only be sold in terms of the SARFAESI Act. In these circumstances, the attachment on 23.3.2005 would be of no legal consequences. All proceeds from the sale can only be disposed of in terms of the provisions of the SARFAESI Act. Respondent No. 4 as secured creditor would have priority of claim over the dues of the state as in the Central Excise Act, there is no provision claiming first charge . 12. We now proceed to answer the third question as to whether the transfer effected by the secured creditor to the Petitioner can be said to be a transfer which is voluntary and not involuntary. The submission on behalf of the Petitioner herein is that the transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as Section 13(6) of the SARFAESI Act is concerned. We may only state at this stage, that Rule 230(2) of the Central Excise Rules has since been omitted. The law, however, on the subject would be that such a transfer is a transfer by the person in favour of the purchaser. The argument on behalf of the Petitioner on that count must be rejected. 13. With that, we come to the fourth question. On the reading of the proviso to Section 11, according to the Petitioner, the following three conditions must be cumulatively satisfied: (a) the person from whom duty is recoverable/due, transfers or otherwise disposes or effects any change in ownership; (b) of business or trade, either in whole or in part; (c) in consequence of which he is succeeded in such business or trade. It is submitted that if the Revenue fails to prove any of the conditions then the proviso would not apply. Reliance is placed on the Judgment of the Supreme Court in State of Karnataka v. Shreyas Papers Pvt. Ltd.(2006(1) SCC 615). According to the learned Counsel, the Supreme Court has conclusively and authoritatively held that sale of assets would not amount to sale of business. Our attention is invited as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the KST Act reads as under:- 15(1) When the ownership of the business of a dealer liable to pay tax or penalty or any other amount under 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 as 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 . The language used by the Section is the transfer of the ownership of the business. The Supreme Court after considering various provisions, noted that the consequences contemplated under Section 15 of the Act, would come into effect only if the ownership of the business is transferred. I t was sought to be argued that the assets had been transferred from the business. This was not accepted by the Court and in that context the Court observed 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s such there must be a transfer of the whole or part of the business and succeeding in such business or trade for the proviso to be attracted. . In Commissioner of Income Tax v. K. H. Chambers((1965) 55 ITR 674) the Court was considering the provisions of the Income Tax Act. The Court observed that there is no clear and exhaustive definition of the expression succession and consequently sought to place reliance on decided cases and text books which throw light on the matter. The Court then observed as under :- In order to constitute a succession there must be, broadly speaking, a taking over of the whole of the business concerned; ... But if a business is taken over as a whole, the fact that minor assets of the business are omitted from the transfer will not prevent there being a succession. The fact that the purchaser already has a similar business in not a material fact in establishing succession. The purchase of a business with a view to closing down would not appear to constitute succession . The following observations are also material: This is an authority for the position that if a business was taken over as a going concern the mere fact that some assets, which wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only do the same business but also must continue the business to which it has succeeded. The Gujarat High Court in Kalaria Oil Mills v. The State of Gujarat and others(1968 Sales Tax Cases 477) was again considering as to what is required to constitute succession in business under Section 19(4) of the Bombay Sales Tax Act, 1959. The Court noted that the goodwill of the business, the other assets and liabilities of the business and the tenancy rights of the premises where the Company was conducting its business were not transferred to the Petitioner. In those circumstances, held that there was only a sale of the machinery and not the sale of the whole business. We have already referred to the Judgment in Shreyas Papers Pvt. Ltd.(supra). The High Court there had found hat mere transfer of land, building, plant and machinery by the State Financial Corporation would not make the purchaser a transferee. In Oriental Fire General Insurance Co. Ltd. v. Commissioner of Income Tax((2000) 244 ITR 631(Delhi) was pleased to hold that carrying on the business and its place has been taken by an entirely new entity to run in continuity and as a going concern of the same business. Substantial ..... X X X X Extracts X X X X X X X X Extracts X X X X
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