2008 (2) TMI 2 - HC - Central Excise

Court rules excise dues not priority over secured creditors under SARFAESI Act. Revenue attachment void, SARFAESI transfers voluntary.

The court ruled in favor of the petitioner, stating that excise dues do not have priority over secured creditors under the SARFAESI Act. The prior ... Priority of State debts - priority of secured creditor under the SARFAESI Act - overriding effect of Section 35 of the SARFAESI Act - attachment under Section 11 of the Central Excise Act - excisable goods - proviso to Section 11 - succession to business or trade - transfer under SARFAESI deemed to be transfer by the ownerPriority of State debts - priority of secured creditor under the SARFAESI Act - Whether excise dues recoverable under the Central Excise Act have priority of claim over the claim of a secured creditor under the SARFAESI Act. - HELD THAT: - The Court examined the principle of priority of State debts and the established position that State dues ordinarily have preference over ordinary unsecured creditors but not over secured creditors unless a statute expressly confers such priority. In light of the SARFAESI Act's non obstante clause (Section 35) and relevant authorities, the Court held that where secured assets are governed by the SARFAESI Act the rights and priorities created thereby prevail and, in the absence of any specific provision in the Central Excise Act creating a first charge in favour of excise dues, the secured creditor's claim will prevail over the excise claim. The Court approved the reasoning of the Madras High Court Full Bench on this point and applied the settled principle that State preference does not displace a prior perfected security unless the statute so provides. [Paras 8, 9, 10]Excise dues do not have priority over the claim of a secured creditor under the SARFAESI Act in the absence of a statutory first charge in favour of the revenue.Attachment under Section 11 of the Central Excise Act - excisable goods - overriding effect of Section 35 of the SARFAESI Act - What is the legal effect of a prior attachment by the revenue of the property of a tax defaulter before sale by a secured creditor under the SARFAESI Act. - HELD THAT: - The Court analysed the legal character of attachment under Section 11 (which authorises attachment of excisable goods) and authorities holding that attachment does not create proprietary title or a lien which would defeat a prior perfected security. Given Section 35 of the SARFAESI Act, which makes its provisions operate notwithstanding inconsistencies in other laws, the Court held that attachment of properties (other than excisable goods) by revenue prior to a SARFAESI sale is of no legal consequence to displace the secured creditor's powers of sale. Consequently proceeds of sale of secured assets must be dealt with under the SARFAESI scheme and the secured creditor's priority is not defeated by the revenue's earlier attachment in the facts of this case. [Paras 11]Revenue's prior attachment (on the facts, and other than of excisable goods) does not defeat the SARFAESI sale or the secured creditor's priority; the attachment was of no legal consequence in this case.Transfer under SARFAESI deemed to be transfer by the owner - Whether a transfer effected by a secured creditor under the SARFAESI Act can be characterized as a voluntary transfer by the person (predecessor). - HELD THAT: - Relying on the Supreme Court's reasoning in Macson Marbles and the statutory effect of Section 13(6) of the SARFAESI Act (paralleling the State Financial Corporation Act provision considered in Macson Marbles), the Court concluded that a transfer effected under the SARFAESI framework is to be treated as a transfer by the owner of the secured asset. Accordingly, the contention that such a transfer is not 'voluntary' by the predecessor and hence outside the scope of the proviso to Section 11 was rejected. [Paras 12]A sale under the SARFAESI Act is to be regarded as a transfer by the owner; the contention that it is not a voluntary transfer by the predecessor is rejected.Proviso to Section 11 - succession to business or trade - Whether mere purchase of immovable/movable assets in a SARFAESI sale amounts to transfer or disposal of business or trade in whole or in part with succession such that the proviso to Section 11 of the Central Excise Act is attracted. - HELD THAT: - The Court analysed the meaning of 'transfer or otherwise disposes of his business or trade in whole or in part' and 'succeeded in such business or trade' in the proviso to Section 11, considering authorities (including Shreyas Papers and K. H. Chambers) and established tests: change of ownership, preservation of integrity, identity and continuity of the business. The Court held that transfer of discrete assets alone does not amount to transfer of a business or succession thereto; there must be evidence that the purchaser has succeeded to the business (wholly or partly) and that identity and continuity are substantially preserved. Applying these tests to the material on record, the Court observed that Respondents had not proceeded under the proviso, and there was no allegation or evidence that the Petitioner had succeeded to the business; therefore the proviso was not attracted and the Petitioner could not be made liable for arrears on that basis. [Paras 14, 15, 16, 17, 18]Mere purchase of assets at a SARFAESI sale does not, without more, amount to a transfer of business or succession; on the facts no succession was established and the proviso to Section 11 does not apply.Final Conclusion: The petition was allowed: the secured creditor's SARFAESI sale stands and the excise department's attachment and claim do not prevail as a prior charge under the facts; the proviso to Section 11 is not attracted because succession to the business was not established, and hence the petitioner is not liable for the central excise arrears on that ground. No order as to costs. Issues Involved:1. Priority of tax dues under the Central Excise Act, 1944 over secured creditors under the SARFAESI Act, 2005.2. Effect of prior attachment by revenue on property sold by a secured creditor under the SARFAESI Act.3. Whether a transfer under the SARFAESI Act is a voluntary transfer by 'the person' under Section 11 of the Central Excise Act, 1944.4. Whether the purchase of assets of a tax defaulter amounts to a transfer or disposal of business or trade, resulting in a change in ownership.Issue-wise Detailed Analysis:1. Priority of Tax Dues:The court examined whether tax dues under the Central Excise Act, 1944 have priority over secured creditors under the SARFAESI Act, 2005. It was determined that the excise dues do not have priority over the claims of secured creditors. The court referenced the Supreme Court judgment in Dena Bank v. Bhikhabhai Prabhudas Parekh and Co., which established that the Crown's preferential right to recover debts does not extend to secured creditors. The SARFAESI Act, particularly Section 35, overrides other laws, including the Central Excise Act, ensuring that secured creditors have priority.2. Effect of Prior Attachment:The court considered the impact of a prior attachment by the revenue on the property sold by a secured creditor. It was concluded that an attachment does not create any interest in the property but only prevents its alienation. The court cited the case of Narayan Ganesh Varde v. Fatma Daud, which held that attachment does not confer title or make the attaching creditor a secured creditor. The SARFAESI Act's provisions override the attachment, and the secured creditor's sale of the property is valid and takes precedence.3. Voluntary Transfer under SARFAESI Act:The court addressed whether a transfer under the SARFAESI Act is considered voluntary under Section 11 of the Central Excise Act, 1944. It was determined that the transfer by a secured creditor under the SARFAESI Act is deemed a transfer by the owner of the property. The court referenced the Supreme Court judgment in Macson Marbles Pvt. Ltd. v. Union of India, which held that such transfers are considered voluntary. Therefore, the transfer to the petitioner was deemed voluntary.4. Transfer or Disposal of Business:The court examined whether the purchase of assets amounts to a transfer or disposal of business or trade, resulting in a change in ownership. It was concluded that merely purchasing assets does not constitute a transfer of business unless the purchaser succeeds in the business. The court referenced the Supreme Court judgment in State of Karnataka v. Shreyas Papers Pvt. Ltd., which held that the transfer of assets does not equate to the transfer of business. The petitioner had not succeeded in the business of the tax defaulter, and therefore, the proviso to Section 11 of the Central Excise Act did not apply.Conclusion:The court ruled in favor of the petitioner, stating that the excise dues do not have priority over the claims of secured creditors under the SARFAESI Act. The prior attachment by the revenue was deemed non-est, and the transfer under the SARFAESI Act was considered voluntary. The purchase of assets did not amount to a transfer of business, and the petitioner was not liable for the arrears of Central Excise dues. The petition was allowed, and the rule was made absolute in terms of the prayer clause (a), with no order as to costs.