CHL Ltd. vs Union Of India

Ranjit Singh, J

The appeal is directed against an order passed by DRT-II, Delhi in the Appeal No. 2/2009 filed by Union of India.

The Recovery Officer of DRT-II, Delhi vide its order dated 14.2.2008, has held that CHIFI and PICUP will have priority over the claims/due of the statutory authorities, who have merely informed their claims without filling proper objections as prescribed under the law. The Recovery Officer has also relieved the auction purchaser from the liability of paying these dues. The sale was also confirmed. Aggrieved against this order, Union of India filed an appeal before the DRT, which has upheld the impugned order to the extent of confirming the auction sale in favour of appellant M/s. CHL Ltd. The Tribunal has further upheld that part of the impugned order dated 14.22008 whereby the secured creditor was held to have priority over the debt of the Customs Department of Union of India. However, the Tribunal set aside that part of the order dated 14.2.2008 of the Recovery Officer whereby respondent No.3 was held not under contractual liability to pay the custom dues. The Customs Department was given liberty to recover its amount as per the law laid down under the Customs Act The impugned order dated 14.2.2008 passed by the Recovery Officer has been modified in the manner as described. The appellant M/s CHL Ltd. obviously felt aggrieved against this part of the order whereby the liability to pay the Customs dues has been fastened on to it. It has thus filed the present appeal.

The brief background of the case is that respondent No.2 Paam Pharmaceuticals (Delhi) Ltd. was leased out Plot No.62, measuring 3937 sq.ms. And Plot No. 185 sq.ms. NSEF, Noida-Dadri Road, Phase-II, Noida, District Gautam Budh Nagar, U.P. The lease was for 15 years. Accordingly respondent No.2 was not the owner thereof but was merely holding a leasehold right. Respondent No.3 Bank advanced various credit facilities to respondent No.2 for which respondent No.2 mortgaged its leasehold rights in the aforesaid plots of land along with super structure constructed thereon. Respondent No.2 failed to discharge its liability towards the Bank and the Bank filed an O.A. No. 48/2005 before the DRT. The Tribunal in its judgment dated 14.11.2006 allowed the O.A. and issued an R.C., pursuant to which recovery proceedings were initiated against respondent No.2. The immovable and movable properties of respondent No.2 were put to sale by way of public auction. He reserve price of the property in question was fixed at Rs.2.50 crores based on the valuation certificate dated 6.2.2007. proclamation of sale was issued on 29.8.2007. The terms and conditions of sale by public auction were also issued. The appellant participated in the auction and gave the highest bid for a sum of Rs. 3.15 crores on 11.10.2007. The appellate deposited the entire amount within the stipulated time. No objection against the auction sale was filed within the period of 30 days. On 16.11.2007, a communication dated 6.10.2007 was received by the Recovery Officer from Tahsildar, Dadri, U.P. giving details of the claim, including that of Union of India, Customs Department against respondent No.1 for a sum of Rs.1,77,91,061.00. No objection, however, was filed before the Recovery Officer.

The entire sale price was deposited by the appellant with the Recovery Officer. Instead of confirming the sale in favour of the appellant auction purchaser the Recovery Officer asked it to respond to the letter dated 6.10.2007. The appellant, instead, filed an application for confirmation of sale and respondent No.3 filed reply that the liability for the Government dues was of the appellant. The appellant, on the other hand maintained that he was in no way liable to pay the alleged dues against respondent No.2 for which he alone was responsible. It is in this background that the impugned order came to be passed part of which is now under challenge in the present appeal.

Counsel for the appellant contends that he is aggrieved against that part of the order whereby finding returned by the Recovery Officer that the appellant is not under contractual liability to pay the Custom dues has been set aside. As per the Counsel by no stretch of imagination such liability can be fastened on to the appellant. The reserve price of the property was fixed at Rs.2.51 crores and the appellant had purchased this property by paying a sum of Rs.3.15 crores, much above the reserve price. The Counsel therefore submits that the Tribunal was totally unjustified to hold this to fasten the appellant with this liability, construing it to be contractual liability to pay the Customs dues. The Counsel for the appellant would also refer to the notice of sale on the basis of which he is being held liable to pay the Customs dues. In the terms and conditions of this auction sale, it was provided that the prospective purchaser is to ascertain information of other dues like, Municipal dues, labour dues, income-tax dues, electricity dues, sales tax dues, property tax, transfer charge and dues of NSEZ and other statutory dues and levies etc. from the authorities concerned before making the bid.

It is urged that the sale of the property was stated to be subject to the liabilities and clams attached to the said property. Condition 4 of the proclamation of sale which is relied reads as under:

"(4) The prospective purchaser to ascertain the information of other dues like Municipal dues, labour dues, income tax dues, electricity dues, sales tax, property tax, transfer charges and dues of NSEZ and other statutory dues and levies etc. from the authorities concerned before making the bid. It shall be the responsibility of any proposed bidder to carry out all due diligence. The sale of the property will be subject to the liabilities and clams attached to the said property."

It is on this condition that the Tribunal appears to have held that the appellant is liable for the dues of Customs.

The Customs Department, Government of India, had appeared before the Recovery Officer to file objection contending it had certain claims against the company and thus it would have first charge over the property. The plea was that the sale was liable to be cancelled. Various grounds raised by the respondent Union of India before the Tribunal have been noted in verbatim in the impugned order. As can be noticed, the Customs authorities in exercise of power conferred upon it under Section 142(1) of the Customs Act, coupled with relevant rules had attached the property in question, but such an attachment order was never served on either the appellant or on other respondents, i.e., borrower etc. The recoveries which were due were received from the Tehsildar, Dadri on 16.11.2007 and the plea was that these encumbrances were disclosed. The Tribunal, after noticing various contentions, went on to decide the question whether the dues of the Customs Department can be recovered and if so, from whom? Going by the notice for sale proclamation, the Tribunal below has observed that these dues were reflected in the notice and the auction purchaser was aware bout it. On this basis, while upholding the order confirming the sale in favour of the appellant and also holding that secured creditor has priority over the dues of custom the liability to pay the Custom dues has been fastened on to the appellant by the Tribunal below and liberty has been granted to the Customs Department to take legal recourse for the recovery.

Counsel for the appellant would contest this finding returned by the Tribunal below by minutely referring to he conditions of auction sale. As per the Counsel, the sale of the property was subject to the liabilities and claim attached to the said property. The plea of the Counsel is that there was no liability attached to the property though the property may have been attached about which no notice was given to the appellant. His submission seems to be that if the property is attached by any Department, then the recovery has to be on the basis of priority which such Department would get in accordance with law for the recovery of the said dues and in case this property had been attached for those dues, then those encumbrances may carry on with the property. In support of his submission that the recoveries of the sales tax or the customs duties cannot be fastened don to auction purchaser, the Counsel has placed reliance on a Bombay High Court judgment in the case of Tata Metaliks Ltd v. union of India, 2008 (126) ECC 183. The High Court in this case has considered the provisions of Section 142 of the Customs Act. Section 142(c) of the Act provides that if the amount cannot be recovered from such person in any manner as provided in Clauses (a) and (b) of the said section, ten the Assistant Commissioner or Deputy Commissioner may prepare a certificate signed by him specifying the amount due from such person and sent to the Collector of district where such person owns any property or resides and the Collector on receipt of such certificate shall proceed to recover from such person an amount specified thereunder as if it were arrears of land revenue. This sub-section further states that the proper officer may, on authorization by the Commissioner of Customs, distrain any movable or immovable property belonging to or under the control of such person, and detain the same until the amount payable is paid. Further power is given that in case the amount remains unpaid for a period of 30 days to cause sale of the said property and with the sale proceeds to satisfy the amount payable etc.

In the light of this provision, the High Court has considered the effect of prior attachment by revenue of the property excisable goods of tax defaulter under the provisions of the Central Excise Act before it is sold by a secured creditor under the provisions of the SARFAESI Act. Since this issue did not arise in this case before the Hon'ble High Court, it was not considered but what the Hon'ble Court has held in this case is that the provisions of the AARFAESI Act will prevail over the provisions of the Customs Act and the Central Excise Act and once a person has purchased the assets in auction held under the SARFAESI Act, he will hold the assets free from any encumbrances. The demand from the petitioner, therein thus who was the auction purchaser and had approached the High Court, was held without jurisdiction. Relevant observations are as under:

"We are clearly, therefore, of the opinion that considering the provisions of the SARFAESI Act, the provisions of the said Act will prevail over the provisions of the Customs Act and Central Excise Act. Once the Petitioner had purchased the assets in an auction held under the SARFAESI Act, they will hold the assets free from any encumbrances. If is, therefore, not open to respondent Nos.1 to 3 to demand dues of respondent No.7 from the petitioners herein. The demand, therefore, is clearly without jurisdiction. It is open to Revenue to recover the amount from respondent No.7."

The Counsel has also made reference to the case of Krishna Lifestyle Technologies v. Union of India, 2008(110) Bom. L.R. 456. This was a case where this issue about the effect of prior attachment by the revenue of the property of the tax defaulter under the provisions of the Central Excise Act before it is sold by a secured creditor under the provisions of the SARFAESI Act arose and was considered. The property in issue before the High Court was attached before it was put to sale. The attachment could be of excisable goods. The Court found that the secured creditor had admittedly a charge on the property which was attached. The Bombay High Court after considering various judgments has finally come to the conclusion as under:

"From a consideration of the law, it would be clear that merely because there was an attachment of properties in the hands of the original debtor that by itself would be of no consequence considering the express provisions of Section 35 of the SARFAESI Act. Attachment of properties other than excisable goods would be non est as there is no power under Section 11. As the power was exercised before the sale to the petitioner on 10.3.2007, the proviso on the facts of the case would not apply. It was therefore open to the creditors irrespective of the act of the Revenue Authorities who had proceeded to attach the properties to sell the same, considering they are secured creditors. We have earlier reproduced the section. We may note that it overrides anything inconsistent in any other law. In the instant case, the secured assets can only be sold in terms of the SARFAESI Act. In these circumstances, the attachment on 23.3.2005 would be of no legal consequences. All proceeds from the sale can any be disposed of in terms of the provisions of the SARFAESI Act. Respondent Nos. as secured creditor would have priority of claim over the dues of the state as in the Central Excise Act, there is no provision "claiming first charge."

12 The learned Counsel for the respondent, Union of India, made some attempt to distinguish this judgment but, in my view, without much success. It has clearly been enunciated by the High Court that mere attachment of the property in the hands of original debtor would of no consequences considering the express provisions of Section 35 of the SARFAESI Act. The Court has held that it will be open for the creditors irrespective of the attachment of the property to sell the same considering they are secured creditors. As per the Court, it overrides anything inconsistent in any other law. It is also held that the secured assets can only be sold in terms of the SARFAESI Act and in these circumstances the attachment would be of no consequences. Finding also is that all proceeds from the sale can only be disposed of in terms of the provisions of the SARFAESI Act and the secured creditors would have priority of claim over the dues of the State as in the Central Excise Act there being no provisions in the Act to claim first change. Nothing is pointed before me that the provisions contained in the Customs Act has created first charge over any property on account of the order of attachment. It is, therefore, not possible to sustain that part of the judgment whereby liability has been fastened on the appellant to pay the Custom dues.

This to me otherwise also sounds unfair and unreasonable. The violation of the provisions of the Customs Act has been done by the borrower who had also violated the schedule of payment for the loan it took, it will be unfair to ask the auction purchaser to discharge the liability arising out of the violation of the provisions of the Customs Act, I am in respectful agreement with the legal position enunciated by the Hon'ble High Court of Bombay and accordingly would allow this appeal and set aside the part of the impugned order whereby the appellant has been held liable for discharging the Customs dues.

The appeal is allowed in the above terms.