TMI Blog2022 (2) TMI 1171X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion of the learned Counsel for the Respondent that notwithstanding the omission of Section 173Q(2) from the 1944 Rules vide notification dated 12.05.2000, the Respondent No. 3 was entitled to continue the proceedings on account of Section 38A(c) and Section 38A(e) of the Central Excise Act, 1944, read along with Section 6 of the General Clauses Act, 1897. In the case at hand, the proceedings initiated under the erstwhile Rule 173Q(2) would come to an end on the repeal of the said Rule 173Q(2) of the Central Excise Rules, 1944. Respondent Counsel s submission that the proceedings would be saved on account of Section 38A(c) and 38A(e) of the Central Excise Act, 1944 and Section 6 of the General Clauses Act, 1897, is misplaced and lacks statutory backing. Firstly, as has been held by a Constitution Bench of this Court in Kolhapur Canesugar Works Ltd. Vs Union of India Ors. [(2000) 2 SCC 536], Section 6 of the General Clauses Act, 1897 is applicable where any Central Act or Regulation made after commencement of the General Clauses Act repeals any enactment. It is not applicable in the case of omission of a Rule . Hence, the question of applicability of Section 6 is decided in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of sales tax dues (amounting to Crown debt) shall have precedence over the right of the bank to proceed against the property of the borrowers mortgaged in favour of the bank, where it was held that the Crowns preferential right of 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 of recovery of its debts over a mortgagee or pledgee of goods or a Secured Creditor. Thus, the provisions contained in the SARFAESI Act, 2002, even after insertion of Section 11E in the Central Excise Act, 1944 w.e.f. 08.04.2011, will have an overriding effect on the provisions of the Act of 1944. 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 Appellantbank, will have priority over the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... banks, with the Appellant/Punjab National Bank as the lead bank, and mortgaged/hypothecated all its movable and immovable properties for securing the loan. RIL created a charge on both the assets (raw material, stock in progress, finished goods, receivables etc.) and block (land, building, plant, machinery and other fixed assets) of the company in favour of the Appellant bank. 4. Subsequently, the Commissioner Customs and Central Excise, Ghaziabad vide order dt. 26.03.2007, confirmed the demand of excise duty of ₹ 7,98,02,226/and a penalty of ₹ 7,98,03,000/on RIL. The Commissioner also ordered, under rule 173Q(2) of the 1944 Rules, for the confiscation of all the land, building, plant, machinery and materials used in connection with manufacture and storage. 5. The Central Excise Commissioner, vide another order dated 29.03.2007, confirmed a demand of central excise duty amounting to ₹ 2,67,00,348 and ₹ 74,24,332 from RIL. The Commissioner also imposed a penalty of ₹ 3,41,24,680/and further, under rule 173Q(2) of the 1944 Rules, ordered confiscation of land, building, plant, machinery, material, conveyance etc. of RIL that were used in connection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ests in the state and no person can claim any right, title, or interest over it. While dismissing the Writ Petition of the Appellant bank, the Allahabad High Court, eventually held that: In view of the matter, the question of first charge or second charge over the properties would not arise. The debt does not get extinguished but it cannot be recovered from the confiscated property that being the position, we do not find any merit in the Writ Petition. So far as the challenge to the order of confiscation is concerned, we may mention that the petitioner has no locus standi to challenge the order of confiscation as the Respondent no. 4 has already preferred an appeal against it. However, if in appeal preferred by Respondent no. 4, the order of confiscation is set aside then the bank can proceed against the properties in question in accordance with law 10. Aggrieved by the abovementioned High Court Order, this appeal has been filed by way of Special Leave Petition. 11. Mr. Dhruv Mehta, learned Senior Counsel for the Appellant Bank has raised before us the following two issues which arise for our consideration: Issue No.1: Whether the Ld. Commissioner Custom and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 2017, which are pari materia to the earlier Rule 211 of the 1944 Rules, instead of the word anything , provided for vesting of confiscated Goods in the Central Government. III. Thus, after omission of Rule 173Q(2) of 1944 Rules w.e.f. 12.05.2000 and after supersession of Rule 211 of 1944 Rules in the year 2001, the newly enacted Rule 28 of the Rules of 2001, Rule 28 of the Rules of 2002 and Rule 28 of the Rules of 2017, did not provide for confiscation of any land, building, plant, machinery etc. and their consequent vesting in the Central Government, as Rule 28 only provided for vesting in the Central Government the Goods confiscated by the Central Excise Authorities under the Excise Act, 1944. In support of the abovementioned submissions, Mr. Dhruv Mehta relies upon a judgment of the Gujarat High Court, in the matter of Kotak Mahindra Bank Ltd. Vs. District Magistrate [2010 SCC online Gujarat 10656]. 14. With respect to the first issue, the Senior Counsel for the Appellant concluded his submission by stating that the Commissioner had no power, authority or jurisdiction to invoke the provisions contained in Rule 173Q(2) of the Central Excise Rules, which stood ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owing judgements: i. Bank of Bihar vs State of Bihar [(1972) 3 SCC 196] ii. Dena Bank vs Bhikhabhai Prabhu Dass Parikh Anr. [(2000) 5 SCC 694] iii. Central Bank of India Vs. Siriguppa Sugurs Chemicals Ltd. Ors. [(2007) 8 SCC 353] iv. Union of India vs SICOM Ltd. Anr. [(2009) 2 SCC 121] v. Rana Girders Ltd. Vs Union of India Ors. [(2012) 10 SCC 746] vi. Sitani Textiles and Fabrics (Pvt.) Ltd. Vs. Assistant Collector of Customs Central Excise [1998 SCC Online Andhra Pradesh 416] vii. UTI Bank Ltd. Vs. Dy. Commissioner Central Excise [2006 SCC Online Madras 1182 (Full Bench)] viii. Krishna Lifestyle Technologies Ltd. Vs. Union of India Ors. [2008 SCC Online Bombay 137] 18. Mr. Mehta has, thus, submitted that in view of the above submissions and decided cases, the Appellant bank, being a secured creditor under the provisions of SARFAESI Act, 2002, had First Charge on the secured Assets and is entitled to recover its secured dues, prior to the dues of the Excise Department. It has also been submitted that the intention of the Legislature, apart from the provisions contained in Section 11E in the Central Excise Act, 1944 [i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcise Authorities in respect of the land, building, plant and machinery of RIL can be defeated by a security interest created by RIL in favour of the Appellant and other banks, almost 8 years after the confiscation proceedings (under Rule 173Q(2) of the Central Excise Rules, 1944) had been initiated by the respondent No. 2 against RIL? 22. Mr. K.M. Nataraj, ASG, has contended that the proceedings under Rule 173Q(2) of the 1944 Rules commenced by show cause notice dated 31.12.1996. Notwithstanding the omission of Section 173Q(2) from the 1944 Rules vide notification dated 12.05.2000, the respondent No. 3 was entitled to continue proceedings on account of Section 38A(c) and Section 38A(e) of the Central Excise Act, 1944. The respondent No. 2 was therefore entitled to pass orders dated 26.03.2007 and 29.03.2007 in exercise of his powers under the repealed Rule 173Q(2) of the 1944 Rules, even though as on the date of the said orders, the 1944 Rules had been replaced. In support of the same he submitted that it is not in dispute that the confiscation proceedings against RIL were initiated in 1996 i.e. much before the repeal of the 1944 Rules and although the order initially passed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se Act would apply with full force to save the proceedings which had already been initiated under Rule 173Q(2) of the 1944 Rules, as Section 38A(c) of the Act saves the rights and liabilities which were not only acquired but also accrued as on the date of the amendment or repeal of a provision, and Section 38A(e) of the Act saves investigations that had commenced into such rights and liabilities. 25. Mr. Natraj, learned ASG has further submitted that the second issue raised by the Appellant (regarding the priority of the dues of the secured creditor over that of crown debts or government debts) does not arise at all in the facts of the present case, since the confiscation order by the Respondent No. 2 is not merely an order for recovery of dues but instead is in the nature of a penal order to punish the wrongdoer i.e. RIL. This, is evident from the fact that even under the 1944 Rules, confiscation is provided for under Rule 173Q whereas mere recovery of dues is provided for under section 11 of the Central Excise Act, 1944. 26. It is contended by Mr. K.M. Nataraj, ASG, that in the present case, the confiscation proceedings were initiated almost 9 years prior to the charge bein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernment. In respect of duty and any other sums of any kind payable to the Central Government under any of the provisions of this Act or of the rules made thereunder including the amount required to be paid to the credit of the Central Government under Section 11D, the officer empowered by the Central Board of Excise and Customs constituted under the Central Boards of Revenue Act, 1963 (54 of 1963) to levy such duty or require the payment of such sums [may deduct or require any other Central Excise officer or a proper officer referred to in section 142 of the customs act, 1962 (52 of 1962) to deduct the amount so payable from any money owing to the person from whom such sums may be recoverable or due which may be in his hands or under his disposal or control or may be in the hands or under disposal or control of such other officer, or may recover the amount] by attachment and sale of excisable goods belonging to such person; and if the amount payable is not so recovered, he may prepare a certificate signed by him specifying the amount due from the person liable to pay the same and send it to the Collector of the district in which such person resides or conducts his business and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... continued or enforced and any such penalty, forfeiture or punishment may be imposed as if the rule, notification or order, as the case may be, had not been amended, repealed, superseded or rescinded. (Central Excise Act, 1944) w.e.f. 08.04.2011 Section 11E. Liability under Act to be first charge. Notwithstanding anything to the contrary contained in any Central Act or State Act, any amount of duty, penalty, interest, or any other sum payable by an assessee or any other person under this Act or the rules made thereunder shall, save as otherwise provided in section 529A of the Companies Act, 1956, (1 of 1956) the Recovery of Debts Due to Banks and the Financial Institutions Act, 1993 (51 of 1993) and the Securitisation and Reconstruction of Financial Assets and the Enforcement of Security Interest Act, 2002, (54 of 2002) be the first charge on the property of the assessee or the person, as the case may be. Rule 173 Q of Central Excise Rules. 1944 Prior to 12.5.2000 Rule 173 Q. Confiscation and Penalty( 1) If any manufacturer, producer or licensee of a warehouse ( a) Removes any excisable goods in contravention of any of the provisions of these r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nfiscation, property to vest in Central Government: (1) When anything is confiscated under these rules, such things shall thereupon vest in Central Government. (2) The officer adjudging confiscation shall take and hold possession of the things confiscated, and every Officer of Police, on the requisition of such officer, shall assist him in taking and holding such possession. Rule 28 of Central Excise Rules, 2001 [Issued in supersession of Central Excise Rules, 1944] Rule 28. Confiscated property to vest in Central Government: When any goods are confiscated under these rules, such things shall thereupon vest in the Central Government. The Central Excise Officer adjudging confiscation shall take and hold possession of the things confiscated, and every officer of police, on the requisition of such Central Excise Officer, shall assist him in taking and holding such possession. Rule 28 of Central Excise Rules, 2002 [Issued in supersession of Central Excise Rules, 2001] Rule 28. Confiscated property to vest in Central Government: When any goods are confiscated under these rules, such things shall thereupon vest in the Central Government. The Centr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction company for the securitisation or reconstruction, as the case may be; or (iv) debenture trustee registered with the Board appointed by any company for secured debt securities; or (v) any other trustee holding securities on behalf of a bank or financial institution, in whose favour security interest is created by any borrower for due repayment of any financial assistance.] (ze) secured debt means a debt which is secured by any security interest; (zf) security interest means right, title or interest of any kind, other than those specified in section 31, upon property created in favour of any secured creditor and includes- (i) any mortgage, charge, hypothecation, assignment or any right, title or interest of any kind, on tangible asset, retained by the secured creditor as an owner of the property, given on hire or financial lease or conditional sale or under any other contract which secures the obligation to pay any unpaid portion of the purchase price of the asset or an obligation incurred or credit provided to enable the borrower to acquire the tangible asset; or (ii) such right, title or interest in any intangible asset or assignment or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business of the borrower which is relatable to the security for the debt; (c) appoint any person (hereafter referred to as the manager), to manage the secured assets the possession of which has been taken over by the secured creditor; (d) require at any time by notice in writing, any person who has acquired any of the secured assets from the borrower and from whom any money is due or may become due to the borrower, to pay the secured creditor, so much of the money as is sufficient to pay the secured debt. (5) Any payment made by any person referred to in clause (d) of subsection (4) to the secured creditor shall give such person a valid discharge as if he has made payment to the borrower. (6) Any transfer of secured asset after taking possession thereof or take over of management under subsection (4), by the secured creditor or by the manager on behalf of the secured creditor shall vest in the transferee all rights in, or in relation to, the secured asset transferred as if the transfer had been made by the owner of such secured asset. (7) Where any action has been taken against a borrower under the provisions of subsection (4), all costs, charges and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceedings initiated by the notice dated 27.4.77 could be continued in law. If the question is answered in the affirmative then the order dated 15/27th October, 1977 of the Asstt. Collector of Central Excise confirming the demand for recredit of the amount of ₹ 61,41,930 cannot be interfered with. On the other hand, if the question is answered in the negative then the said order is to be taken as nonest. .. 34. (...) It is not correct to say that in considering the question of maintainability of pending proceedings initiated under a particular provision of the rule after the said provision was omitted the Court is not to look for a provision in the newly added rule for continuing the pending proceedings. It is also not correct to say that the test is whether there is any provision in the rules to the effect that pending proceedings will lapse on omission of the rule under which the notice was issued. It is our considered view that in such a case the Court is to look to the provisions in the rule which has been introduced after omission of the previous rule to determine whether a pending proceeding will continue or lapse. If there is a provision therein that pending ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f pending proceedings then it can be reasonably inferred that the intention of the legislature is that the pending proceeding shall not continue but a fresh proceeding for the same purpose may be initiated under the new provision. (emphasis supplied) 35. The Gujarat High Court in Kotak Mahindra Bank Ltd. Vs. District Magistrate [2010 SCC online Gujarat 10656] has held that from a perusal of Rule 28, it is clear that the Legislature intended to confiscate only goods which is distinct from immovable property like land, building, plant, machinery etc. We quote, with approval, the reason for which, the High Court held that The competent authority of Excise and Customs Department, including the Commissioner of Central Excise and Customs, VadodaraII had no jurisdiction to confiscate the land under Rule 173Q (2), the said rule having been omitted and substituted by Rule 28, by the time the Order dated 25.02.2006 was passed. The order being without jurisdiction is nullity in the eye of law and thereby the authorities cannot derive advantage of the order dated 25.02.2006. 36. In the case at hand, the proceedings initiated under the erstwhile Rule 173Q(2) would come to an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y provided for vesting in the Central Government of the Goods confiscated by the Central Excise Authorities under the Excise Act, 1944. This derivation of the legislature s intent, in conjunction with the ratio laid in the case of Kotak Mahindra Bank (supra) makes it apparent that the confiscation proceedings were not saved by these mentioned provisions and that the final confiscation order dated 26.03.2007 and 29.03.2007 were passed without jurisdiction by the Commissioner of Central Excise and Customs. 37. Secondly, coming to the issue of priority of secured creditor s debt over that of the Excise Department, the High Court in the impugned judgment has held that In view of the matter, the question of first charge or second charge over the properties would not arise. In this context, we are of the opinion that the High Court has misinterpreted the issue to state that the question of first charge or second charge over the properties, would not arise. 38. A Full Bench of the Madras High Court in the case of UTI Bank Ltd. Vs. Dy. Commissioner Central Excise [2006 SCC Online Madras 1182], while dealing with a similar issue, has held that: 25. In the case on hand, the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 694], wherein the question raised was whether the recovery of sales tax dues (amounting to Crown debt) shall have precedence over the right of the bank to proceed against the property of the borrowers mortgaged in favour of the bank, observed as under: 10. However, the Crowns preferential right of 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 of recovery of its debts over a mortgagee or pledgee of goods or a Secured Creditor. (emphasis supplied) 40. Further, in Central Bank of India Vs. Siriguppa Sugars Chemicals Ltd. Ors. [(2007) 8 SCC 353], while adjudicating a similar matter, this Court has held as under: 18. Thus, going by the principles governing the matter, propounded by this Court there cannot be any doubt that the rights of the appellantbank over the pawned sugar had precedence over the claims of the Cane Commissioner and that of the workmen. The High Court was, therefore, in error in passing an interim order to pay parts of the proceeds to the Cane Commissioner and to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 12462/2008) against the above judgement of the Bombay High Court stands dismissed by this Court on 17.07.2009 by relying upon the judgement in the matter of Union of India vs SICOM Ltd. Anr. Reported in [(2009) 2 SCC 121], wherein the question involved was Whether realization of the duty under the Central Excise Act will have priority over the secured debts in terms of the State Financial Corporation Act, 1951 and this Court held as under: 9. Generally, the rights of the crown to recover the debt would prevail over the right of a subject. Crown debt means the debts due to the State or the king; debts which a prerogative entitles the Crown to claim priority for before all other creditors. [See Advanced Law Lexicon by P. Ramanatha Aiyear (3rd Edn.) p. 1147]. Such creditors, however, must be held to mean unsecured creditors. Principle of Crown debt as such pertains to the common law principle. A common law which is a law within the meaning of Article 13 of the Constitution is saved in terms of Article 372 thereof. Those principles of common law, thus, which were existing at the time of coming into force of the Constitution of India are saved by reason of the aforementioned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orders, in the present case, deserve to be quashed because the confiscation orders themselves lack any statutory backing, as they were rooted in a provision that stood omitted on the day of the passing of the orders. Hence, it is this inherent defect in the confiscation orders that paves way for its quashing and not merely the fact that a security interest is created in respect of the very same property that the confiscation orders dealt with. 46. Further, the contention that in the present case, the confiscation proceedings were initiated almost 89 years prior to the charge being created in respect of the very same properties in favour of the bank is also inconsequential. The fact that the charge has been created after some time period has lapsed post the initiation of the confiscation proceedings, will not provide legitimacy to a confiscation order that is not rooted in any valid and existing statutory provision. 47. 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) wa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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