By TIOL News Service

NEW DELHI, AUG 20, 2013: THIS  is how the story begins: - A unit is started with a loan from institutions like the State Finance Corporation. After some time the unit becomes sick. - Sick of everything - major reasons for the sickness would be excessive activism of a multitude of government agencies of this welfare state. In the meantime after a couple of Audit parties, preventive parties, Show Cause Notices and adjudication, arrears are born and by the time the Central Excise officer goes to serve the adjudication order, he is informed that the unit is closed, taken over by the SFC and sold. After a while the new owner comes for registration and then the department demands the dues of the old unit from him. 

The present case is not much different, except here the sale deed/agreement by the UP Financial Corporation (UPFC) contained a clause, "All the statutory liabilities arising out of said properties shall be borne by the vendee and vendor shall not be held responsible”

The appellant filed the Writ Petition in the High Court of Judicature at Allahabad, questioning the validity of the demands raised by the Revenue. After hearing the matter, vide the impugned judgment dated 1 st December 2011, the High Court has been pleased to hold that in view of the covenants in the Sale Deed and Agreement it is the liability of the appellant to pay the excise duty.

It is this order which is the subject matter of present appeal.

In the High Court, the Excise Department had contested the petition filed by the petitioner on the ground that the appellant being the successor-in-interest which had purchased the land and building as well as plant and machinery, was liable to make the payment having regard to the judgment of the Supreme Court in the Macson case.

The appellant, on the other hand, had argued that since the appellant had not purchased the entire unit of the principal borrower the judgment of Macson case was not applicable. On the contrary it is the law laid down in Union of India vs. SICOM Ltd , ratio whereof was attracted. It was argued that the Macson case was specifically distinguished by the Supreme Court in SICOM Ltd . holding that the ratio of M/s. Macson case would be applicable only in transfer of "ownership of business" i.e. when there is a sale of business as an ongoing concern and not in case of mere transfer of its specified assets. Significantly, the High Court took note of this distinction by referring to various other judgments as well on the lines of SICOM Ltd . of this Court as well as some High Courts. However, leaving the discussion on this aspect inconclusive, the High Court chose to rest its decision on an altogether different foundation, namely stipulation in the Sale Deed to the effect that the statutory liabilities arising out of the property shall be borne by the vendee (i.e. the appellant).

Now, before the Supreme Court, two questions arise for consideration namely

++ On the interpretation of stipulation contained in the Sale Deed of the land and building and Agreement of Sale of plant and machinery, whether the appellant had agreed to discharge the dues payable to the excise department by the borrower.

++ Whether such a liability arises in law (de-hors the stipulation in Sale Deed (Agreement of Sale) having regard to the legal provisions contained in the Excise Act and State Financial Corporation Act?

The Supreme Court discussed the second question first.

Whether UPFC would have priority being a secured creditor by virtue of Deed of Mortgage or the Central Excise in respect of its dues having regard to the Rule 230(2) of the Central Excise Rules, came up for consideration before the Supreme Court in State of Karnataka & Anr. Vs. Shreyash Papers (P) Ltd. & Ors. - 2006-TIOL-01-SC-CT . Dealing with the provisions of Rule 230 of the Excise Rules, the Court held that this provision authorizes detention of all excisable goods, materials, preparations, plant, machinery, vessels, utensils, implements and articles, in the custody or possession of the person or persons carrying on such trade or business or from person succeeding the business or trade or part thereof for such time till dues are paid or recovered. However, the rule does not in any way create a charge over any of the goods enumerated therein. After explaining the term "charge" as defined in Section 100 of Transfer of Property Act, it was held that charge would be different from the word "detained". As Rule 230 only empowers detention and there was no other provision under the Central Excise Act or the Rules which envisages to create any charge over the assets of a unit to enable the realization of the Central Excise Duty on top priority. The Court held that UPFC had a priority being a secured creditor on the one hand and Central Excise having no "charge" over the property. The Court specifically took note of the fact that the petitioner in that case was not the successor of the erstwhile owner in business or trade and having acquired the property without any charge independent of business or trade of the previous owner, was not a person in custody or possession of the property as a successor of the previous owner against whom there was a demand of excise duty.

The Counsel for the respondents heavily relied on the judgment of the Supreme Court in Macson case in which it was held that even the successor in interest is liable to discharge the liability of the Excise Department. The Supreme Court, however, noted that this case was considered and specifically distinguished in SICOM Ltd . In that case, considering the statutory right of the Financial Corporation under the State Financial Corporation Act, 1951 and the non-obstante clause occurring therein, it was categorically held that State Financial Corporation shall have a preferential claim in relation to its secured debts.

On a harmonious reading of the judgments in Macson and SICOM, the Supreme Court concluded that it is only in those cases where the buyer had purchased the entire unit i.e. the entire business itself, that he would be responsible to discharge the liability of Central Excise as well. Otherwise, the subsequent purchaser cannot be fastened with the liability relating to the dues of the Government unless there is a specific provision in the Statute, claiming "first charge for the purchaser". As far as Central Excise Act is concerned, there was no such specific provision as noticed in SICOM as well. Proviso to Section 11 is now added by way of amendment in the Act only w.e.f. 10.9.2004.

So, the Supreme Court held that in so far as legal position is concerned, UPFC being a secured creditor had priority over the excise dues. It is further held that since the appellant had not purchased the entire unit as a business, as per the statutory framework he was not liable for discharging the dues of the Excise Department.

Now, coming to the first question, the Supreme Court observed, “We may notice that in the first instance it was mentioned not only in the public notice but there is a specific clause inserted in the Sale Deed/ Agreement as well, to the effect that the properties in question are being sold free from all encumbrances. At the same time, there is also a stipulation that "all these statutory liabilities arising out of the land shall be borne by purchaser in the sale deed" and "all these statutory liabilities arising out of the said properties shall be borne by the vendee and vendor shall not be held responsible in the Agreement of Sale." As per the High Court, these statutory liabilities would include excise dues. We find that the High Court has missed the true intent and purport of this clause. The expressions in the Sale Deed as well as in the Agreement for purchase of plant and machinery talks of statutory liabilities "arising out of the land" or statutory liabilities "arising out of the said properties" (i.e. the machinery). Thus, it is only that statutory liability which arises out of the land and building or out of plant and machinery which is to be discharged by the purchaser. Excise dues are not the statutory liabilities which arise out of the land and building or the plant and machinery. Statutory liabilities arising out of the land and building could be in the form of the property tax or other types of cess relating to property etc. Likewise, statutory liability arising out of the plant and machinery could be the sales tax etc. payable on the said machinery. As far as dues of the Central Excise are concerned, they were not related to the said plant and machinery or the land and building and thus did not arise out of those properties. Dues of the Excise Department became payable on the manufacturing of excisable items by the erstwhile owner, therefore, these statutory dues are in respect of those items produced and not the plant and machinery which was used for the purposes of manufacture. This fine distinction is not taken note at all by the High Court.”