INTERPLAY BETWEEN SARFAESI AND CENTRAL EXCISE: LIMITS OF RETROSPECTIVE VALIDATION OF EXCISE RULES POST-OMISSION By G. Jayaprakash, Advocate (Former Central Excise Officer)

The Supreme Court in PUNJAB NATIONAL BANK Versus UNION OF INDIA & ORS. - 2022 (2) TMI 1171 - Supreme Court— reaffirmed a cardinal principle in excise jurisprudence: once a rulestands omitted without a saving clause, proceedings initiated thereafter are void ab initio. The Court held that confiscation of assets under Rule 173Q(2) of the Central Excise Rules, 1944, after its omission on 12-5-2000, was without jurisdiction. It further ruled that the SARFAESI Act, 2002, being a special law, overrides Central Excise recovery claims, even after insertion of Section 11E in 2011.

Yet beneath this doctrinal clarity lies a darker administrative reality: the Rathi group’s collusive manipulation of PNB’s consortium lending effectively relegated statutory excise dues, using SARFAESI as a smokescreen. The case exposes how retrospective validation attempts and selective enforcement allowed private borrowers and lenders to override “Crown dues,” converting sovereign priority into a negotiable instrument.

Background of the Case

The controversy arose from a 2007 confiscation order passed by the Commissioner of Central Excise, Ghaziabad, under Rule 173Q(2) for recovery of outstanding excise dues against a Rathi-group manufacturing unit. Meanwhile, the consortium led by Punjab National Bank (PNB) invoked its rights under the SARFAESI Act against the same property.

The Bank contended that:

1. Rule 173Q(2) had been omitted with effect from 12-5-2000 by Notification No. 11/2000-C.E. (N.T.), and hence any confiscation thereafter lacked authority.
2. Even if excise dues existed, the secured creditor’s charge under SARFAESI had statutory priority.

The Department argued that Sections 38A(c) & (e) of the Central Excise Act and Section 6 of the General Clauses Act, 1897, saved such proceedings.

However, the timing of the Rathi–PNB transactions suggested deliberate design: the borrowers continued to obtain fresh loans after the excise show-cause notice, enabling the diversion of assets while departmental claims were pending. The subsequent invocation of SARFAESI allowed the Bank to seize hypothecated property insulated from excise recovery.

Findings of the Supreme Court

The Supreme Court (L. Nageswara Rao and Vineet Saran, JJ.) rejected the Department’s contention and held that:

1. Confiscation under an omitted rule was non est.
2. Section 38A was not a revival clause.
3. Section 6 of the General Clauses Act applied only to pending actions.
4. SARFAESI, being special and later, overrides Central Excise recovery even post-Section 11E.
5. The 2007 confiscation orders were void ab initio.

The judgment incidentally benefited PNB’s consortium, as it extinguished departmental claims competing with the Bank’s charge — a result the Rathi group appeared to have anticipated.

Rule 173Q(2) — Evolution, Omission and Exploitation

Rule 173Q(2) empowered confiscation of land, building, and plant used in evasion cases — an extraordinary power unique to excise law. Its omission on 12-5-2000 was meant to humanise enforcement. Yet the gap between omission and replacement by the 2001 Rules created an exploitable vacuum.

Borrowers with pending duty liabilities leveraged this vacuum to approach banks for enhanced credit, securing hypothecation of very assets that were once liable to confiscation. PNB’s consortium extended fresh loans even after adjudication, ensuring that assets got ring-fenced within SARFAESI protection.

Thus, administrative lapse and lender complicity turned a legal omission into a financial escape tunnel.

Doctrine of Retrospective Validation — Legislative and Judicial Limits

Retrospective validation, as explained in Shri Prithvi Cotton Mills Limited Versus Broach Borough Municipality And Others - 1969 (4) TMI 30 - Supreme Court, can remove the defect that invalidated a law but cannot revive a dead rule. In KOLHAPUR CANESUGAR WORKS LTD. Versus UNION OF INDIA - 2000 (2) TMI 823 - Supreme Court and General Finance Co. And Another Versus Assistant Commissioner of Income-Tax - 2002 (9) TMI 3 - Supreme Court, the Court drew a sharp line between repeal and omission — the latter erases the provision altogether.

Attempts by the Department to retrospectively “validate” confiscation under the omitted rule were therefore unconstitutional. Yet, in practice, financial stakeholders exploited such confusion, treating post-omission departmental hesitation as a de-facto waiver of government dues.

Section 38A and Section 6 — No Revival Power

Section 38A preserves acts done before repeal, not those done after. Likewise, Section 6 of the General Clauses Act saves only proceedings already alive. Neither provision can resurrect powers extinguished by omission.

Hence, departmental reliance on these provisions was misplaced — a vacuum that PNB’s consortium astutely used to perfect its SARFAESI enforcement ahead of any excise recovery.

SARFAESI Act — Priority and Its Misuse

Section 35 of SARFAESI gives overriding effect to the Act. While judicially justified to secure credit markets, it can be misapplied. In this case, the Rathi–PNB nexus effectively converted secured lending into a shield against fiscal accountability.

Even after Section 11E (Central Excise Act) was inserted in 2011 to protect departmental dues, the Supreme Court reaffirmed SARFAESI priority. But the chronology reveals a disturbing pattern — assets charged to banks after excise default, enforcement timed post-omission of confiscatory rules, and departmental paralysis induced by interpretative ambiguity.

This raises a policy question: can private contractual security nullify sovereign statutory dues, when such priority is obtained through timing manipulation?

Constitutional Dimension — Articles 14 & 265

Once Rule 173Q(2) was omitted, confiscation lacked authority of law under Article 265. Allowing PNB’s secured claim to supersede departmental dues obtained through manipulation violates the equality mandate of Article 14. It creates a privileged class of borrowers insulated from sovereign liability by procedural happenstance and banking collusion.

Policy Reflection

The PNB case exposes the systemic risk of uncoordinated fiscal and financial enforcement. Departmental overreach met its mirror image in banking overreach. What began as constitutional rectitude — protecting secured credit — devolved into a tool for evading tax recovery.

The Rathi–PNB episode must therefore be viewed not merely as a clash of statutes, but as a case study in institutional manipulation. The absence of a coordinated inter-agency protocol between CBIC and RBI allowed secured creditors to sidestep the doctrine of “Crown priority,” converting the omission of a rule into an opportunity for asset migration.

Conclusion

The Supreme Court’s ruling restores doctrinal purity but reveals operational vulnerability.

1. Omission is extinction, not suspension — a power once deleted cannot be revived by interpretation.
2. SARFAESI’s override must not become a licence for collusion.

To preserve constitutional equilibrium between fiscal sovereignty and financial stability, Parliament must ensure that retrospective validations cure defects of law, not conceal defects of conduct.

In short, PNB v. UOI should be read not as a triumph of bank security, but as a caution against institutional capture of statutory priorities.

The case is a reminder that the law may omit a rule — but justice cannot omit its memory.