Mangalagiri Textile Mills & Anr. Vs. State Bank of India, & Anr. - Once the time specified in the warrant (Under section 14 of SARFAESI) has elapsed, possession of the property in question cannot be taken over, under the same warrant.

HC Andhra Pradesh (18.02.2022) in Mangalagiri Textile Mills & Anr. Vs. State Bank of India, & Anr. (Writ Petition No. 30161 of 2021)  held that;

• We would, thus, hold and direct that the CMMs shall, when passing orders under Section 14 of the Act, mandate a reasonable time-limit for taking over possession of the secured asset in question. 

• This, to our mind, appropriately secures the interests of all concerned parties. Needless to state, it will be open to the bank or financial institution to approach the CMM for extension of time, if need be.

• Once the time specified in the warrant (Under section 14 of SARFAESI) has elapsed, possession of the property in question cannot be taken over, under the same warrant.

Excerpts of the order;

Heard Mr. T. Lakshmi Narayana, learned counsel for the petitioners and Mr. Satyanarayana Moorthy, learned counsel for the respondents – State Bank of India (hereinafter referred to as the „SBI‟).

# 2. By the instant writ petition, the petitioners assail the action(s) taken by the SBI under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as the „Act‟) alleging violation of the procedure prescribed therein as well as non-conformity with The Security Interest (Enforcement) Rules, 2002 (hereinafter referred to as the „Rules‟).

# 3. The factual matrix may first be adverted to. The petitioners obtained loan from the SBI. The account having become a Non-Performing Asset (hereinafter referred to as „NPA‟), the petitioners applied for One-Time Settlement (hereinafter referred to as „OTS‟), whereunder the total amount to be paid was Rs.10,36,25,840.82. The application money of Rs.52,00,000/- was paid and SBI also issued sanction letter dated 23.11.2020. Though as per the terms of OTS, the first instalment to be paid was Rs.1.04 crores by 23.12.2020, the petitioners paid only Rs.32,00,000/- on 23.12.2020. As a consequence, SBI issued letter dated 29.12.2020 informing cancellation of OTS and asking the petitioners to deposit the entire Bank dues with interest at contracted rate. The request of the petitioners by letter dated 03.01.2021 for extension of time for payment of balance amount of first instalment of Rs.72,00,000/- was rejected by the SBI vide letter dated 21.01.2021. The same is pending challenge in W.P.No.2512 of 2021, before this Court. As the petitioners had defaulted, the SBI, prior to sanctioning OTS, on 27.02.2019 had already moved before the Chief Metropolitan Magistrate (hereinafter referred to as the „CMM‟), Guntur, in Crl.M.P. No.201 of 2019, under Section 14 of the Act for taking physical possession of the secured asset/property, in which the following order was made on 28.12.2020:

• “The petition is filed under Section 14(1) of the SARFAESI Act to appoint an Advocate Commissioner to take possession of the petition schedule property and to deliver the possession to the petitioner bank.

• Heard and perused the record.

• It seems that the petitioner bank followed the procedure contemplated under the Act to proceed against the mortgaged property for realization of loan amount due to the petitioner bank. Therefore, the petition has to be allowed.

• In the result, the petition is allowed. Sri K. Veera Bhaskar, Sri P. Koteswara Rao, Sri/Smt. V. Sreelatha, Sri/Smt. J. Rama Lakshmi, Advocates are appointed as Commissioners to take possession of the petition schedule property and to deliver the possession to the petitioner bank. Their fee are fixed at Rs.10,000/- each payable by the petitioner bank. The Commissioner shall issue notice to both parties and advocates on record before execution of warrant. Commissioner is at liberty to break open the schedule for execution of warrant with aid of police when ever required. Warrant returnable with Report by 15.02.2021.

• Warrant shall be issued on payment of commissioner fee and process on or before on 04.01.2021”‟

# 4. On 04.01.2021, the matter was adjourned, for payment of Commissioner fee and process, to 05.01.2021, on which date it was recorded as under:

“Process memo and fee receipt of Commissioner are filed. Hence, issue warrant along with Police Aid to the Advocate-Commissioner. Placed before Officer as and when report is filed”‟

# 5. Thereafter, on 17.12.2021, the Advocate Commissioners took possession of the property.

# 6. Learned counsel for the petitioners submitted that the order passed by the CMM was beyond 60 days of filing of the application under Section 14 of the Act, which is impermissible in view of Section 14 of the Act. It was further contended that even thereafter, as per order dated 28.12.2020 of the CMM, the warrant was to be executed latest by 15.02.2021, which was the returnable date fixed. He submitted that „return‟ in Black‟s Law Dictionary has been defined as „A court officer‟s bringing back of an instrument to the court that issued it‟. Thus, learned counsel submitted that without the CMM extending the validity of the warrant, the same lost its force and was incapable of being executed and

the same having been done is patently illegal and requires interference by this Court.

# 7. Per contra, learned counsel for the SBI opposed the petitioners‟ submissions and urged for dismissal of the petition. His first objection was that the Advocate Commissioners have not been made party. He submitted that the delay in execution of the warrant was due to the petitioners filing a number of cases. Learned counsel submitted that the period of 60 days was directory, as held by the Hon‟ble Supreme Court in C Bright v District Collector, (2021) 2 SCC 392.

# 8. Based on the rival contentions to which learned counsel confined their submissions, three important questions arise for consideration and determination:

• (a) Whether the instant writ petition ought to be entertained?

• (b) Whether the time-limit under Section 14 of the Act of 30 days to pass an order, extendable in aggregate to 60 days, is mandatory or directory?

• (c) Whether, once the time specified in the warrant had elapsed, could possession of the property in question still be taken over, under the same warrant?

# 13. In State Bar Council of Madhya Pradesh v Union of India, Petition for Special Leave to Appeal (C) 10911/2021, vide Order dated 16.12.2021, the Hon‟ble Supreme Court directed as follows:

• “With a view to resolve the problem being faced by the parties, for the time being and purely as a stop-gap arrangement, we request the concerned High Court(s) to entertain the matters falling within jurisdiction of DRTs and DRATs under Article 226 of the Constitution of India, till further orders.

• We make it clear that once the Tribunal(s) is/are constituted, the matters can be relegated to the Tribunals by the High Court(s).”

# 15. The aforesaid discussion sums up the law. Ordinarily, we must defer to the procedure under the Act. However, Article 226 is, in no manner, effaced by the Act, being an integral part of the basic structure of the Constitution, and still, recourse thereto can be had by an aggrieved party.

# 18. In this backdrop, we are inclined to entertain this writ petition for more reasons than one. First, the facts compel us to do so. Second, it is no longer res integra that even in the face of an available alternative efficacious remedy, a writ petition is maintainable, subject to judicial discretion. Third, the Order dated 16.12.2021 passed by a Bench of three Hon‟ble Judges in State Bar Council of Madhya Pradesh (supra) supports us. As such, we answer Question (a) in the affirmative.

# 20. In terms of C Bright (supra), Question (b) is answered holding that the time limit stipulated in Section 14 of the Act is directory and not mandatory. The conclusion of the Hon‟ble 3-Judge Bench in C Bright (supra) would cover Chief Metropolitan Magistrates as well.

# 21. As such, the petitioners‟ contention that the CMM ought not to have passed the order dated 28.12.2020 on SBI‟s application filed on 27.02.2019 under Section 14 of the Act is negatived. In this view, the CMM‟s order dated 28.12.2020 does not suffer from any illegality, and cannot be faulted with.

# 23. A succinct exposition on Section 14 of the Act can be found in Standard Chartered Bank v V Noble Kumar, (2013) 9 SCC 620 and Authorised Officer, Indian Bank v D Vishalakshi, (2019) 20 SCC 47. However, as the recourse to Section 14 by SBI is not in controversy herein, the need to dwell thereupon is obviated.

# 24. Learned counsel for SBI has vehemently relied on the judgement by a learned Single Judge of the Delhi High Court in Housing Development Finance Corporation Ltd. v Rakesh Kumar, 2021 SCC OnLine Del 5209, to contend that there is no requirement for the CMM to fix a time limit for taking possession of the secured asset in exercise of power under Section 14 of the Act. He, therefore, urges us that no interference is called for in the present matter. He would canvass that as no time-limit was required to be fixed, taking over of possession after expiry of the time in the warrant would not render the taking over illegal.

# 28. An incongruous position cannot be countenanced where the authority conferred power under Section 14 of the Act is required to exercise that within a maximum period of sixty days, or at the very least, as a result of C Bright (supra), endeavour so to do, but the actual taking over of physical possession, to be done through a person appointed by the Chief Metropolitan Magistrate/District Magistrate, would be at such person‟s will. This is not the intent of the Act.

# 33. The same principle would hold the field. We would, thus, hold and direct that the CMMs shall, when passing orders under Section 14 of the Act, mandate a reasonable time-limit for taking over possession of the secured asset in question. This, to our mind, appropriately secures the interests of all concerned parties. Needless to state, it will be open to the bank or financial institution to approach the CMM for extension of time, if need be.

# 34. In the present case, the learned CMM, in fact, adopted the correct approach in law by fixing a date by which the warrant was to be executed. Further, the time-limit is in the interest of the secured creditor, as the Advocate Commissioner would also be bound to act within the stipulated time-frame. As already observed, the CMM can be re-approached for extension of time, if required.

# 35. Therefore, Question (c) is answered thus - once the time specified in the warrant has elapsed, possession of the property in question cannot be taken over, under the same warrant.

# 38. The order to take possession was issued by the learned CMM on 28.12.2020 fixing the returnable date as 15.02.2021. However, without any prayer/application being made before the learned CMM by the SBI and the CMM also not having extended time or the life of the warrant, the same was still acted upon and executed by the Advocate Commissioner on 17.12.2021, by which physical possession of the asset in question has been taken over.

# 39. At the cost of repetition, the Court would note that the order passed by the CMM was a judicial order and conferred upon the Advocate Commissioner authority to take over physical possession. Thus, the Advocate Commissioner could not have exceeded jurisdiction beyond the time specifically stipulated by the Court. It is true that the CMM‟s order of 05.01.2021 records that the matter be placed before the Officer as and when report is filed. But the same has to be read harmoniously and contextually juxtaposed with the earlier orders dated 28.12.2020 and 04.01.2021 passed by the CMM.

# 41. Thus, we have no hesitation to hold that the action of the Advocate Commissioner in taking over physical possession of the asset on 17.12.2021, purportedly in terms of the order dated 28.12.2020 passed in Crl.M.P. No.201 of 2020 by the learned CMM cannot be sustained as it was clearly devoid of the authority of law and, accordingly, is declared illegal.

# 46. Moreover, in Rajesh Kumar v State of Bihar, (2013) 4 SCC 690, particularly at Paragraphs 14-16, it has been held that the power to mould relief is well-recognised and is available to a Writ Court to render complete justice.

# 47. We have noticed an injustice and a violation of law. We, thus, proceed to fashion out the appropriate relief, despite no formal application for the same being made via pleadings. However, in the course of arguments, learned counsel for the petitioner did urge us to pass an order that would subserve justice.

# 50. Therefore, we direct that status quo ante as on 16.12.2021 be restored forthwith. Necessary consequences in law shall entail. The SBI is at liberty to approach the CMM concerned seeking an appropriate order to extend time for taking possession of the secured asset within four weeks from today. The learned CMM shall proceed further in accordance with law, after giving both parties an opportunity of hearing. All questions of fact and law in this regard, and the rights and contentions thereto of both sides, remain open for consideration by the learned CMM, and we have not expressed any opinion, either way, thereon. This order, however, shall not result in any recoveries being made from the Advocate Commissioners of any fees paid in terms of the CMM‟s order.

# 51. The Registry shall circulate a copy of this Judgement to all Chief Metropolitan Magistrates/Chief Judicial Magistrates and District Magistrates in the State of Andhra Pradesh, for ensuring that while passing order under Section 14 of the Act, a reasonable time is fixed for the person authorised to execute/carry out/implement/give effect to such order by actual taking over and delivery of physical possession of the properties covered under such order and further, to obviate any ambiguity or chance of transgression, such time shall also be incorporated in the consequential warrant/authorisation issued to such authorised person.

# 52. We note that an objection was raised on behalf of the SBI that the Advocate Commissioner concerned ought to have been made a party in the instant proceeding. Such stand was adopted in the counter-affidavit. This, in the considered opinion of the Court is not required since, in the present case, this Court is not considering the reasons and/or the justification for the Advocate Commissioner having executed/given effect to the order authorising him to take over physical possession of the property in question, much beyond the time fixed/granted by the CMM to do so. As has been held by us, the order under Section 14 of the Act loses its force/effect, in law, upon expiry of the returnable date, as fixed by the CMM, unless extended. Thus, for the instant adjudication, the Advocate Commissioner is not a party required to be heard. Moreover, the Advocate Commissioner, being conferred only the power, limited, of taking over physical possession by the CMM under Section 14 of the Act, has no vested right of being heard with regard to the validity/life thereof.

# 53. Ergo, this writ petition is disposed of in the afore-stated terms. Pending application(s), if any, do not survive for consideration and, accordingly, stand consigned to records. In these facts and circumstances, there shall be no order as to costs.

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Jupiter Industries vs. Canara Bank - Since petitioners have already invoked their statutory remedy under Section 17 of the SARFAESI Act, it would be just and proper, if they are relegated to the forum of the Tribunal for adjudication of their grievances.

 HC Telangana (24.02.2022) in Jupiter Industries vs. Canara Bank (W.P.No.10102 of 2022)  held that;

• Since petitioners have already invoked their statutory remedy under Section 17 of the SARFAESI Act, it would be just and proper, if they are relegated to the forum of the Tribunal for adjudication of their grievances.

Excerpts of the order;

Heard Mr. S. Ravi, learned Senior Counsel for the petitioners.

 

# 2. This petition under Article 226 of the Constitution of India has been filed by the petitioners for quashing the sale notice dated 21.01.2022, issued by the respondent/Canara Bank, under Section 13(4) of Securitisation and Reconstruction of FinancialAssets and Enforcement of Security Interest Act, 2002 (for short ‘the SARFAESI Act’) and for a direction to the respondent to apply the circulars of the Reserve Bank of India dated 17.03.2016 and 14.07.2017, while considering the case of the petitioners under the SARFAESI Act. 

 

# 3. It appears that petitioners had availed financial assistance from the respondent by way of term loan facility for carrying out their business activities.

 

# 4. It is stated that petitioner No.1 is a Medium, Small and Micro Enterprise (MSME); Without any prior intimation, respondent had issued demand notice dated 06.04.2021 under Section 13(2) of the SARFAESI Act; petitioner submitted objection/representation against demand notice dated 06.04.2021. However, without considering the objection raised by the petitioners, respondent issued fresh demand notice dated 15.07.2021 under Section 13(2) of the SARFAESI Act, demanding an amount of Rs.5,59,24,939.66 to be paid within 60 days. Thereafter, respondent issued notice prior to sale on 03.12.2021. Petitioners tried for settling the loan account through One Time Settlement (OTS), but such efforts did not bear fruit. Finally, respondent issued the impugned sale notice dated 21.01.2022, proposing to hold auction sale of the schedule property on 28.02.2022.

 

# 5. As per the impugned sale notice, the outstanding dues of the petitioners has been quantified at Rs.5,96,26,118.98 as on 21.01.2022. 6. We may mention that petitioners have, in the meanwhile, filed Securitization Application before the Debts Recovery Tribunal-II,  Hyderabad (for short ‘the Tribunal’) under Section 17 of the SARFAESI Act, which has been registered as S.A.No.35 of 2022. Petitioners have also filed an interlocutory application for stay, which has been numbered as I.A.No.101 of 2022. But it is submitted that there is no Presiding Officer in the Tribunal. Hence, the writ petition.

 

# 7. Be that as it may, since petitioners have already invoked their statutory remedy under Section 17 of the SARFAESI Act, it would be just and proper, if they are relegated to the forum of the Tribunal for adjudication of their grievances. Further, if the petitioners deposit 15% of the outstanding dues as claimed by the respondents within a period of thirty days from today, respondents shall not take further steps pursuant to the impugned sale notice dated 21.01.2022 which, in any event, would be subject to outcome of S.A.No.35 of 2022 stated to have been filed by the petitioners before the Tribunal.

 

# 8. However, if there is any default by the petitioners in making the payment as above, it would be open to the respondent to  proceed against the petitioners for realization of dues in accordance with law.

 

# 9. Writ Petition is, accordingly, disposed of. Related interlocutory application also stands disposed of.

 

# 10. No costs.

 

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Punjab National Bank Vs. Union of India & Ors. - 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.

Supreme Court (24.02.2022) in Punjab National Bank Vs. Union of India & Ors. [Civil Petition No. 2196 of 2012] held that;

• .Moreover, section 35 of the SARFAESI Act, 2002 inter alia, provides that the provisions of the SARFAESI Act, shall have overriding effect on all other laws.

• It is further pertinent to note that even the provisions contained in Section 11E of the Central Excise Act, 1944 are subject to the provisions contained in the SARFAESI Act, 2002.

• 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.

• 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) was not in the Statute books,

• Secondly, the dues of the secured creditor, i.e. the Appellant-bank, will have priority over the dues of the Central Excise Department, as even after insertion of Section 11E in the Central Excise Act, 1944 w.e.f. 08.04.2011, and the provisions contained in the SARFAESI Act, 2002 will have an overriding effect on the provisions of the Central Excise Act of 1944.

 

Excerpts of the order;

# 1. The present Civil Appeal arises out of the judgment and order dated 05.08.2008 passed by the Allahabad High Court, wherein the writ petition filed by the Appellant was dismissed in limine.

 

# 2. The brief facts of the case, relevant for the purpose of the present appeal, are that the Commissioner, Customs and Central Excise, Ghaziabad (Respondent No. 2) issued a show cause notice dated 31.12.1996 to M/s Rathi Ispat Ltd./Respondent No. 4 (for short “RIL”) for evasion of excise duty and violation of the Central Excise Act, 1944. By an order dated 25.11.1997, Respondent No. 2 confirmed an excise duty demand of Rs.6,97,62,102/  against RIL and imposed a penalty of Rs.7,98,03,000/  under Rule 173Q(1) and confiscated the land, building, plant and machinery of RIL under Rule 173Q(2) of the Central Excise Rules, 1944 (for short“1944 Rules”). Sub Rule 2 of Rule 173Q of the Central Excise Rules, 1944, came to be omitted by a notification dated 12.05.2000 issued by the Government of India. Subsequently, the order dated 25.11.1997 was set aside by the Customs, Excise & Gold (Control) Appellate Tribunal (CEGAT), now known as the Customs Excise and Service Tax Appellate Tribunal (CESTAT), on the ground of violation of principles of natural justice, and the matter was remanded back for de novo proceedings.

 

# 3. In 2005, RIL availed credit facilities under various schemes from the consortium of 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 Rs.7,98,02,226/ and a penalty of Rs.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 Rs.2,67,00,348 and Rs.74,24,332 from RIL. The Commissioner also imposed a penalty of Rs.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 with manufacture, production, storage or disposal of goods.

 

# 6. However, in light of the fact that RIL had defaulted in clearing the loan amount and had failed to liquidate outstanding dues, the Appellant bank, on 02.08.2007, issued notice to RIL under section 13(2) of the SARFAESI Act, 2002, further, notice was issued to RIL under section 13(4) of SARFAESI Act, 2002.

 

# 7. In light of the section 13(4) notice, the Office of the Assistant Commissioner, Customs and Central Excise Division informed the bank, vide a letter dated 27.11.2007, that the property was already confiscated by virtue of Rule 173Q(2) of 1944 Rules and that an appeal is pending against the orders and the matter is subjudice. Appellant bank replied to the above letter on 22.12.2007, whereby it informed the department that the properties in question had been mortgaged with the bank and RIL was required to satisfy the debts. In furtherance of this, the Appellant bank took symbolic possession of the properties on 28.12.2007. Subsequently, the Appellant bank was informed by the Assistant Commissioner, Customs and Central Excise, vide a letter dated 15.01.2008, that the properties of RIL should not be dealt with without their written consent.

 

# 8. In essence, it has been the contention of the Customs & Excise Department that in view of the fact that that all the movable and immovable properties of RIL stand confiscated by the orders passed by the Commissioner, Customs & Central Excise, Ghaziabad, the possession of the property in question cannot be taken by the Appellant bank.

 

# 9. Aggrieved by the orders of confiscation (dated 26.03.2007 and 29.03.2007) and the further communications/letters by the department (dated 27.11.2007 and 15.01.2008), the Appellant bank filed a Writ Petition before the Allahabad High Court, which was dismissed with the observations that:

• “We find that in the present case, taxes are not sought to be recovered from M/s Rathi Ispat Ltd., respondent No. 4, by way of attachment or otherwise from the movable or immovable assets of the respondent no.4, but the stand of the Central Excise Authorities is that the properties stand confiscated and vests in the Central Government as a result of the order of confiscation”

The High Court further held that:

• “From the meaning of the word confiscate/confiscation”, we find that if any property has been confiscated it vests 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 Central Excise could have invoked the powers under Rule 173(Q)(2) of Central Excise Rules, 1944 on 26.03.2007 and 29.03.2007 for confiscation of land, buildings etc., when on such date, the rule 173Q(2) was not on the Statue Book having been omitted w.e.f. 17.05.2000?

• Issue No.2: Whether in the absence of any provisions providing for First Charge in relation to Central Excise dues in the Central Excise Act, 1944, the dues of the Excise department would have priority over the dues of the Secured Creditors or not?

 

# 31. We have heard learned counsel for both the parties at length and have carefully perused the record.

 

# 32. The Commissioner Customs and Central Excise, Ghaziabad vide order dt. 26.03.2007, ordered the confiscation of all the land, building, plant, machinery etc. of RIL. This confiscation order was passed under rule 173Q(2) of the Central Excise Rules, 1944. However, in the impugned order, the High Court has not considered that on the date of the confiscation orders i.e. 26.03.2007 and 29.03.2007, Rule 173Q(2) stood omitted from the statute books vide government notification dated 12.05.2000.

 

# 33. We do not find merit in the submission 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.

 

# 34. Constitution bench of this Court in Kolhapur Canesugar Works Ltd. Vs Union of India & Ors. [(2000) 2 SCC 536] has held that:

• “11. In the factual backdrop of the case discussed earlier the question that arises for determination is whether after omission of the old Rule 10 and 10A and its substitution by the new Rule 10 by the Notification No 267/77 dated 6.8.77 the proceedings 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 Rs. 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.

• xxxxx

• 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 proceedings shall continue and be disposed of under the old rule as if the rule has not been deleted or omitted then such a proceeding will continue. If the case is covered by Section 6 of the General Clauses Act or there is a parimateria provision in the statute under which the rule has been framed in that case also the pending proceeding will not be affected by omission of the rule. In the absence of any such provision in the statute or in the rule the pending proceedings would lapse on the rule under which the notice was issued or proceeding was initiated being deleted/omitted. It is relevant to note here that in the present case the question of divesting the Revenue of a vested right does not arise since no order directing refund of the amount had been passed on the date when Rule 10 was omitted.

 

# 35. We, therefore, hold that the decisions of the Full Bench of the Gujarat High court and the Division Bench of the Karnataka High Court noted above were not correctly decided. The said decisions are overruled.

 

# 36. In the case in hand, Rule 10 or Rule 10A is neither a "Central Act" nor a "Regulation" as defined in the Act. It may be a Rule under Section 3(51) of the Act. Section 6 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".

 

# 37. The position is well known that at common law, the normal effect of repealing a statute or deleting a provision is to obliterate it from the statute book as completely as if it had never been passed, and the statute must be considered as a law that never existed. To this rule, an exception is engrafted by the provisions Section 6(1). If a provision of a statute is unconditionally omitted without a saving clause in favour of pending proceedings, all actions must stop where the omission finds them, and if final relief has not been granted before the omission goes into effect, it cannot be granted afterwards. Savings of the nature contained in Section 6 or in special Acts may modify the position. Thus, the operation of repeal or deletion as to the future and the past largely depends on the savings applicable. In a case where a particular provision in a statute is omitted and in its place another provision dealing with the same contingency is introduced without a saving clause in favour of 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 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 the negative. Secondly, on the issue of applicability of Section 38A(c) and 38A(e) of the Central Excise Act, 1944, it is held that the Respondent would not be able to enjoy its protection because Section 38A(c) and 38A(e) are attracted only when “unless a different intention appears”. In the present case, the legislature has clarified its intent to not restore/revive the power of confiscation of any land, building, plant machinery etc., after omission of the provisions contained in Rule 173Q(2) w.e.f 12.05.2000. This intention of the legislature can be drawn out from the fact that power to confiscate any land, building, plant, machinery etc. after omission w.e.f. 12.05.2000 has not been introduced in the subsequent Central Excise Rules, 2001, Central Excise Rules, 2002 and Central Excise Rules, 2017. Additionally, this intent is also fortified by the fact that Rule 211 of the Central Excise Rules, 1944, inter alia, provided that “anything” confiscated under the Rules shall thereupon vest in Central Government, whereas Rule 28 of the Central Excise Rules of 2001, 2002 and 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. Lastly, 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 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 petitioner Bank which took possession of the property under Section 13 of the SARFAESI Act, being a special enactment, undoubtedly is a secured creditor. We have already referred to the provisions of the Central Excise Act and the Customs Act. They envisage procedures to be followed and how the amounts due to the Departments are to be recovered. There is no specific provision either in the Central Excise Act or the Customs Act, claiming "first charge" as provided in other enactments, which we have pointed out in earlier paragraphs.

• 26. In the light of the above discussion, we conclude,

• “(i) Generally, the dues to Government, i.e., tax, duties, etc. (Crown's debts) get priority over ordinary debts.

• (ii) Only when there is a specific provision in the statute claiming "first charge" over the property, the Crown's debt is entitled to have priority over the claim of others.

• (iii) Since there is no specific provision claiming "first charge" in the Central Excise Act and the Customs Act, the claim of the Central Excise Department cannot have precedence over the claim of secured creditor, viz., the petitioner Bank.

• (iv) In the absence of such specific provision in the Central Excise Act as well as in Customs Act, we hold that the claim of secured creditor will prevail over Crown's debts."

• In view of our above conclusion, the petitioner UTI Bank, being a secured creditor is entitled to have preference over the claim of the Deputy Commissioner of Central Excise, first respondent herein.”  (emphasis supplied)

 

This Court, while dismissing the Civil Appeal No.3627 of 2007 filed against the judgment of the Full Bench, vide order dated 12.09.2009 held as under:

• “Having gone through the provisions of the Securitization Act, 2002, in light of the judgment of the Division Bench of this court in the case of Union of India vs Sicom Ltd. & Anr., reported in 2009 (1) SCALE 10, we find that under the provisions of the said 2002 Act, the appellants did not have any statutory first charge over the property secured by the respondent bank. In the circumstances, the Civil Appeal is dismissed with no order as to costs”  (emphasis supplied)

 

Hence the reasoning given by the High Court stands strong and has been affirmed by this Court.

 

# 39. This Court, in Dena Bank vs Bhikhabhai Prabhu Dass Parikh & Anr. [(2000) 5 SCC 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 appellant-bank 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 Labour Commissioner for disbursal to the cane growers and to the employees. There is no dispute that the sugar was pledged with the appellant bank for securing a loan of the first respondent and the loan had not been repaid. The goods were forcibly taken possession of at the instance of the revenue recovery authority from the custody of the pawnee, the appellant bank. In view of the fact that the goods were validly pawned to the appellant bank, the rights of the appellant bank as pawnee cannot be affected by the orders of the Cane Commissioner or the demands made by him or the demands made on behalf of the workmen. Both the Cane Commissioner and the workmen in the absence of a liquidation, stand only as unsecured creditors and their rights cannot prevail over the rights of the pawnee of the goods.”        (emphasis supplied)

 

3 41. The Bombay High Court in Krishna Lifestyle Technologies Ltd. Vs. Union of India & Ors. [2008 SCC Online Bombay 137], wherein the issue for consideration was “whether tax dues recoverable under the provisions of The Central Excise Act, 1944 have priority of claim over the claim of secured creditors under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002” held that:

• “Considering the language of Section 35 and the decided case law, in our opinion it would be of no effect, as the provisions of SARFAESI Act override the provisions of the Central Sales Tax Act and as such the priority given to a secured creditor would override Crown dues or the State dues.

 

In so far as the SARFAESI Act is concerned a Full Bench of the Madras High Court in UTI Bank Ltd. v. Deputy Commissioner of C. Excise, ChennaiII 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.” (emphasis supplied)

 

# 42. An SLP (No. 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 provision. A debt which is secured or which by reason of the provisions of a statute becomes the first charge over the property having regard to the plain meaning of Article 372 of the Constitution of India must be held to prevail over the Crown debt which is an unsecured one.    (emphasis supplied)

 

# 43. In view of the above, we are of the firm opinion that the arguments of the learned counsel for the Appellant, on the second issue, hold merit. Evidently, prior to insertion of Section 11E in the Central Excise Act, 1944 w.e.f. 08.04.2011, there was no provision in the Act of 1944 inter alia, providing for First Charge on the property of the Assessee or any person under the Act of 1944. Therefore, in the event like in the present case, where the land, building, plant machinery, etc. have been mortgaged/hypothecated to a secured creditor, having regard to the provisions contained in section 2(zc) to (zf) of SARFAESI Act, 2002, read with provisions contained in Section 13 of the SARFAESI Act, 2002, the Secured Creditor will have a First Charge on the Secured Assets. Moreover, section 35 of the SARFAESI Act, 2002 inter alia, provides that the provisions of the SARFAESI Act, shall have overriding effect on all other laws. It is further pertinent to note that even the provisions contained in Section 11E of the Central Excise Act, 1944 are subject to the provisions contained in the SARFAESI Act, 2002.

 

# 44. Thus, as has been authoritatively established by the aforementioned cases in general, and Union of India vs SICOM Ltd. (supra) in particular, 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.

 

# 45. Moreover, the submission that the validity of the confiscation order cannot be called into question merely on account of the Appellant being a secured creditor is misplaced and irrelevant to the issue at hand. The contention that a confiscation order cannot be quashed merely because a security interest is created in respect of the very same property is not worthy of acceptance. However, what is required to be appreciated is that, in the present case, the confiscation order is not being quashed merely because a security interest is created in respect of the very same property. On the contrary, the confiscation 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 8-9 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) 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 Appellant-bank, will have priority over the dues of the Central Excise Department, as even after insertion of Section 11E in the Central Excise Act, 1944 w.e.f. 08.04.2011, and the provisions contained in the SARFAESI Act, 2002 will have an overriding effect on the provisions of the Central Excise Act of 1944.

 

# 48. Accordingly, the Appeal is Allowed and the confiscation orders dated 26.03.2007 and 29.03.2007, passed by the Commissioner Customs and Central Excise, Ghaziabad, are quashed.

 

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