Punjab National Bank vs The Union of India and others

Prem Chand Jain, J.—The Punjab National Bank, Kharar (hereinafter referred to as the Bank), has filed this appeal under Clause 10 of the

Letters Patent, against the judgment and order of a learned Single Judge of this Court, dated September 1, 1972, by which the petition filed under

Article 226 of the Constitution of India, was dismissed. The facts of the case may briefly be stated thus :--

The Panipat Woollen & General Mills Co. Ltd. (hereinafter referred to as the Company), had set up two units at Kharar, one called the Panipat

Woollen & General Mills and the other, the Kharar Textile Mills. The main object of the mills was to produce woollen cloth, cotton yarn and

stapple yam, etc. For the running of the mills, the Company required raw material for which orders were placed with different firms within India

and also outside India. To meet the demands of the payments of the bills in time, the Company entered into an agreement, called Cash-Credit

Agreement, with the Bank, on December 23, 1955. According to the agreement, the Company pledged all its goods and took advances on cash-

credit system on the pledged goods. By mutual negotiations it was agreed upon between the Bank and the Company that the raw materials and

finished goods would remain in the godowns provided by the Company and the Bank would put its looks on the same, that the goods and the

merchandize which would be deposited from time to time in the godowns, would remain in the exclusive possession and under the exclusive control

of the Bank till the money or part of it borrowed by the Company from the Bank was paid back. Consequent to the agreement, the Company

stored goods in the godowns situated in its premises and pledged the entire goods lying in the godowns with the Bank. The total advances which

the Company took from the Bank estimated roughy to Rupees forty-seven or forty-eight lacs. It transpires that the Comrany did not pay back the

money received by way of advances on cash-credit system and the Bank sold part of the goods lying in godown of Kharar Textile Mills containing

397 bales of cotton yarn valuing at Rs. 27,00,000/- to a firm at Delhi and accepted an advance of Rs. 10,008/- towards the same. It may be

mentioned at this stage that during the course of arguments Civil Miscellaneous No. 5102 of 1973 was filed on behalf of M/s. Bishan Dass Bal

Kishan & Company, in whose favour the goods had been agreed to be sold by the Bank, for being impleaded as a respondent in the appeal, under

Order 1, rule 10, read with section 151 of the Code of Civil Procedure. The parties to the appeal did not object and by our order dated 16th

August, 1973, the said firm was impleaded as a respondent in the appeal.

From the facts narrated in the petition, it further transpires that on July 3, 1972, the Inspector, Central Excise, respondent No. 4, sealed

godowns Nos. 8, 10, 12, 13 and 17 belonging to Panipat Woollen Mills and godown No. 6 belonging to M/s. Kharar Textile Mills, without any

notice to the Bank. This action was purported to have been taken on the ground that the Company owed to the Central Excise Department an

amount of about Rs. 4,75,000.00 towards excise duty. On corning to know of this action, the Manager of the Bank informed the Inspector that his

action was illegal in as much as the bales of cotton lying in the godowns belonged to the Bank, but respondent No. 4 took no notice of the plea

and the approach made by the Bank to the higher authorities also did not bear any fruit. It is this action of respondent No. 4 that was challenged by

the Bank by filing Civil Writ No. 2759 of 1972, and as earlier observed, that petition was dismissed by the learned Single Judge, and hence the

present appeal.

It was contended by Mr. J.N. Kaushal, Senior Advocate, learned counsel for the appellant, that the arrears of excise duty could not be realised

from out of the share of the Bank which the Bank was entitled to receive as pawnee from the sale proceeds of the excisable goods, that the arrears

could be recovered only from the property belonging to the Company, that there was no provision in the Central Excise & Salt Act, 1944,

(hereinafter referred to as the Act) or the rules made thereunder, for the payment of arrears of excise duty out of the property in which the person

liable to pay excise duty has a limited interest and that the Bank in its capacity as pawnee, is entitled to realise the money advanced by it for the

purchase of those goods, and the goods pawned with the Bank cannot be attached or detained for realising the arrears of excise duty. On the

other hand, it was contended by Mr. Kuldip Singh, learned counsel for the Department, that the liability to pay excise duty was attached to the

excisable goods, and the Department, for realising the arrears of excise duty, could follow the goods in the hands of any person for realisation of

arrears of the excise duty, and that the Department was justified in detaining the goods in the godowns of the two mills for the realisation of the

arreass of the excise duty.

Rule 230 of the Central Excise Rules (hereinafter referred to as the Rules) the interpretation of which would decide the controversy and on

which reliance was placed by the learned counsel for the parties Jeads as under:--

Goods, plant and machinery chargeable with duty and not paid. (1) When the duty leviable on any goods is owing from or by any person carrying

on trade or business, whether as a producer, manufacturer or as dealer in such goods, all excisable goods, and all materials and preparations from

which any such goods are made, and all plant, machinery, vessels, utensils, implements and articles for making or manufacturing or producing any

such goods, or preparing any materials or by which the trade or business is carried on, in the custody or possession of the person carrying on such

trade or business, or in the custody or possession of any agent or oilier person in trust for or for the use of the person carrying on such trade or

business may be detained for the purpose, of exacting such duty and any officer duly authorised by general or special order of the Control Board

of Revenue on the Collector may detain such goods in (sic) preparations, plant machinery, vessels utensils and articles until such duties or any sums

recoverable in lieu thereof are paid or recovered.

(2) Where any such person transfers or otherwise disposes of his business in whole or in part, or effects any change in the ownership thereof, in

consequence of which he is succeeded in the business or trade or part thereof by any other person or persons, all excisable goods, materials,

preparations, plant, machinery, vessels utensils, implements and articles in the custody or possession of the person or persons succeeding may also

be detained for the purpose of exacting duty due from the producer, manufacturer or dealer or dealer up to the time of such transfer, disposal or

change, whether such duty has been assessed before such transfer, disposal or change, but has remained unpaid, or is assessed thereafter.

The learned Single Judge interpreted the above mentioned rule in this manner :--

Reading of this Rule shows that the arrears of excise duty form a charge on all excisable goods, raw materials, plants and machinery of the licencee

under the Act. It matters little if the licencee disposes of his business in favour of another person. The liability of the excise duty in substance

attached to the Mills and the raw materials and finished products stocked in the godowns of the Mills which produce these goods. In this situation

the principle laid down in the two authorities mentioned earlier does not apply to the facts of this case. The ratio of these cases appears to be that

what does not belong to the defaulter cannot be realised as arrears of land revenue. The realisation of duty under the Act stands, on absolutely

different footing. This liability attaches to the unit which manufactures excisable articles, regardless of its ownership or the subsequent changes in its

ownership. Whoever advances a credit to such a Company even if it is made on the basis of an express charge cannot be allowed to say that his

charge should have a priority over the statutory duties of the Union of India under the Act. The reason is simple. A company which undertakes to

manufacture goods under a licence under the Act does not remain the unfettered owner of the Milles and cannot pledge what it really does not

own.

After hearing the learned counsel for the parties, we find considerable force, in the contentions raised by the learned counsel for the appellant,

and with respect, are unable to agree with the learned Single Judge on the interpretation put by him on rule 230. From the perusal of the rule, we

do not find any provision which may permit creation of a charge on all excisable goods for recovery of the arrears of excise duty. Under sub-rule

(1) of rule 230, any duty leviable on any goods owing from or by any person, is recoverable from the articles mentioned in that sub-rule which are

in the custody or possession of the person carrying on such trade or business or in the custody or possession of any agent or other person in trust.

It is also provided in that sub-rule that for the purpose of exacting a duty any officer duly authorised may detain such goods, materials,

preparations, plant, machinery, vessels'' utensils and articles until such duties or any sums recoverable in lieu thereof are paid or recovered. The

condition precedent for the applicability of sub-rule (1) is that the articles have to be in the custody or possession of the person carrying on such

trade or business or in the custody or possession of any agent or other person in trust. There is no gainsaying that the excisable goods which have

now been detained, are not in the custody or possession of the defaulting Company. It also cannot be said that the articles referred to in sub-rule

(1) are in the custody or possession of the bank as agent or the person in trust of the Company. Sub-rule (1) does not talk of charge and by

implication it cannot be said that if any duty leviable on any goods and owing from or by any person is not paid, then on the goods mentioned in

sub-rule (1), a charge would be created. The word ""detained"" cannot be interpreted to mean that a charge is created on the goods in respect of the

amount of the arrears of excise duty. The only power given under sub-rule (1) is to detain the goods which are in the custody or possession of the

person carrying on such trade or business or in the custody or possession of any agent or the person in trust, while the procedure for the recovery

of the sums due to the Government, is provided in section 11 of the Act which reads as under :--

Recovery of sums due to Government.--In respect of duty and any other sums of any kind payable to the Central Government under any of

the provisions of this Ac for of the rules made there under, the officer empowered by the Central Board of Excise and Custom constituted under

the Central Boards of Revenue Act, 1963, to levy such duty or require the payment of such sums may deduct the amount so payable from any

money owing to the person from whom such sums may be recoverable or due which may be in his hands or under his disposal or control, or may

recover the amount by attachment and sale of excisable goods belonging to such person; and if the amount payable is not so recovered, he may

prepare a certificate signed by him specifying the amount due from the person liable to pay the same and send it to the Collector of the district in

which such person resides or conducts his business and the said Collector, on receipt of such certificate, shall proceed to recover from the said

person the amount specified therein as if it were an arrear of land revenue.

From the bare perusal of this section, we find that one of the methods prescribed for the recovery of sums, is by attachment and sale of excisable

goods belonging to the person from whom the amount is recoverable. In the instant case, the goods do not completely belong to the Company and

the same have been pledged in favour of the Bank. Their Lordships of the Supreme Court in The Bank of Bihar v. The State of Bihar 1971 3 UJ

638 have described the incidence of ''pawn'' and the interest of a ''pawnee'' thus ;--

According to the Statement in Halsbury''s Laws of England ""Pawn"" has been described as security where by contract a deposit of goods is made a

security for a debt and the right to the property vests in the pledgee so far as is necessary to secure the debt ; in this sense it is intermediate

between a simple lien and a mortgage which wholly passed the property in the thing conveyed (I) The pawnee has a special property or special

interest in the thing pledged, while the general property therein continues in the owner. That special property or interest exists so that the pawnee

can compel payment of the debt or can sell the goods when the right to do so arises. This special property or interest is to be distinguished from

the mere right of detention which the holder of a lien possesses, in that it is transferable in the sense that pawnee May assign or pledge his special

property or interest in the goods. (2), where judgment has been obtained against the pawnor of goods and execution has issued thereon, the sheriff

cannot seize the goods pawned unless he satisfies the claim of the pawnee"", (based mainly on Rogers v. Kenney). ""On the bankruptcy of the

pawnor the pawnee is a secured creditors in the bankruptcy with respect to things pledged before the date of the receiving order and without

notice of a prior available act of bankruptcy"". (4) It has not been shown how the Law in India is in any way different from the English law relating

to the rights of the pawnee vis-a-vis other unsecured creditors of the pawnor.

In our judgment the High Court is in error in considering that the rights of the pawnee who had parted with money in favour of the pawnor on

the security of the goods can be defeated by the Government and the money being made available to other creditors of the pawnor without the

claim of the pawnee being fully satisfied. The pawnee has special property and a lien which is not of ordinary nature on the goods and so long as

his claim is not satisfied no other creditor of the pawnor has any right to take away the goods or its price. After the goods had been seized by the

Government it was found to pay the amount due to the plaintiff and the balance could have been made available to satisfy the claim of other

creditors of the pawnor. But by a mere act of lawful seizure the Government could not deprive the plaintiff of the amount which was secured by the

pledge of the goods to it. As the act of the Government resulted in deprivation of the amount to which the plaintiff was entitled it was bound to

reimburse the plaintiff for such amount which the plaintiff in ordinary course would have realized by the sale of the goods, pledged with it on the

pawnor making a default in payment of debt.

From these observations of their Lordships of the Supreme Court, it is clear that the interest of a pawnee is a special interest. The goods pledged

may in the ordinary sense continue to be owned by the pawnor ; but in the goods a special property or interest exists which vests in the pawnee

and that special property or interest is not liable to attachment or sale.

Faced with this situation, Mr. Kuldip Singh, learned counsel for the respondents, contended that under sub-rule (2), the pledge made in favour

of the Bank by the Company could be ignored and the special interest of the Bank could also be made liable for exacting duty due from the

Company. We are unable to agree with this contention of the learned counsel. Under sub-rule (2), the excisable goods, materials, preparations,

plant, machinery, vessels, utensils, implements and articles are liable to be detained in the hands of the transferee also for the purposes of exacting

duty due upto the time of transfer, from the producer, manufacturer or dealer. In the instant case, the Company has neither transferred nor

disposed of its business in favour of the Bank. This sub-rule envisages those cases in which there is a complete transfer and has no applicability to

a case where a special interest in the shape of a pledge has been created. The Bank is not a transferee as envisaged under sub-rule (2). In this view

of the matter, we hold that the arrears of excise duty are only recoverable from the sale proceeds of the excisable goods which after the payment

of the amount which was secured by pledging the goods to the Bank, would come in the hands of the Company and the goods so pledged by the

Company cannot be detained for the purpose of exacting arrears of xcise duty.

No other point was urged.

For the reasons recorded above, we allow this appeal with costs, set aside the judgment and order of the learned Single Judge and quash the

orders Annexures ''B'' and ''D'' dated 3rd July, 1972 and 15th July, 1972, respectively.