1. Confiscation of immovable assets under omitted Central Excise Rules — Conflict between state confiscation and secured creditor's rights under SARFAESI Act. (Para 1 , 2 , 3 , 4 , 5 , 6 , 7 , 8 , 9 )
Back
Next 
2022 Supreme(SC) 203
SUPREME COURT OF INDIA
(From the High Court of Judicature at Allahabad)
L. NAGESWARA RAO, VINEET SARAN, JJ.
Punjab National Bank – Appellant
Versus
Union of India and Others – Respondents
Civil Appeal No. 2196 of 2012
Decided On : 24-02-2022
Important Points
Confiscation orders passed under an omitted rule without a saving clause are void. Additionally, secured creditors under the SARFAESI Act have priority over Central Excise dues, as the SARFAESI Act overrides the Central Excise Act, and government dues are generally treated as unsecured Crown debts.
Subject
Commercial Law - Banking and Finance
Act Referred
Central Excise Act, 1944: S.11, S.38A, S.11E, S.33, S.6
Central Excise Rules, 1944: R.173Q(1), R.211
Central Excise Rules, 2001: R.28
Central Excise Rules, 2002: R.28
Central Excise Rules, 2017: R.28
SARFAESI Act, 2002: S.13(2), S.13(4), S.13(4)(d), S.2(zc), S.2(zd), S.2(ze), S.2(zf), S.35, S.26E
General Clauses Act, 1897: S.6
Recovery of Debts Due to Banks and the Financial Institutions Act, 1993: S.31B
Constitution of India: Art.13, Art.372
Companies Act, 1956: S.529A
Transfer of Property Act, 1882: S.69, S.69A
State Financial Corporation Act, 1951
Central Excise Rules, 1944: R.173Q(1), R.211
Central Excise Rules, 2001: R.28
Central Excise Rules, 2002: R.28
Central Excise Rules, 2017: R.28
SARFAESI Act, 2002: S.13(2), S.13(4), S.13(4)(d), S.2(zc), S.2(zd), S.2(ze), S.2(zf), S.35, S.26E
General Clauses Act, 1897: S.6
Recovery of Debts Due to Banks and the Financial Institutions Act, 1993: S.31B
Constitution of India: Art.13, Art.372
Companies Act, 1956: S.529A
Transfer of Property Act, 1882: S.69, S.69A
State Financial Corporation Act, 1951
Headnote
(A) Central Excise Act, 1944 - Rule 173Q(1) and Rule 173Q(2) - Powers of Customs and Central Excise Commissioner - Confiscation of property - The Court found that the orders of confiscation dated 26.03.2007 and 29.03.2007 were made in violation of law since Rule 173Q(2) was omitted from the statute on 12.05.2000 and thus had no legal backing - The provisions of the SARFAESI Act, 2002, have an overriding effect over the provisions of the Central Excise Act concerning properties mortgaged to secured creditors - The priority of secured creditors over the dues of the Excise Department was affirmed. (Paras 47 and 48)
(B) Legal principles concerning the jurisdiction of authorities to invoke rules post-omission and the precedence of secured creditors in cases of confiscation were thoroughly discussed. (Paras 11-19 and 39-40)
Facts of the case:
The case arose from confiscation orders against Rathi Ispat Ltd. issued by the Customs Commissioner for excise duty evasion. The appellant bank had bills secured against the same properties involving substantial dues tied to loans. The High Court dismissed the bank's writ petition, ruling it had no standing against agricultural duties once confiscated.
Findings of Court:
The Supreme Court concluded that confiscation orders were legally invalid and emphasized the secured creditor's priority over Excise dues.
Issues: Whether the Commissioner had jurisdiction under the omitted rule and the priority of Excise dues over secured creditor's claims.
Ratio Decidendi: The court ruled that authorities exceeded jurisdiction by invoking an obsolete rule for confiscation and established that secured creditors hold priority in recovering dues over the Excise Department.
Result: Appeal allowed, quashing confiscation orders.
(B) Legal principles concerning the jurisdiction of authorities to invoke rules post-omission and the precedence of secured creditors in cases of confiscation were thoroughly discussed. (Paras 11-19 and 39-40)
Facts of the case:
The case arose from confiscation orders against Rathi Ispat Ltd. issued by the Customs Commissioner for excise duty evasion. The appellant bank had bills secured against the same properties involving substantial dues tied to loans. The High Court dismissed the bank's writ petition, ruling it had no standing against agricultural duties once confiscated.
Findings of Court:
The Supreme Court concluded that confiscation orders were legally invalid and emphasized the secured creditor's priority over Excise dues.
Issues: Whether the Commissioner had jurisdiction under the omitted rule and the priority of Excise dues over secured creditor's claims.
Ratio Decidendi: The court ruled that authorities exceeded jurisdiction by invoking an obsolete rule for confiscation and established that secured creditors hold priority in recovering dues over the Excise Department.
Result: Appeal allowed, quashing confiscation orders.
Legal Category Hierarchy
- taxation
- banking and finance
- administrative law
Advocates appeared:
For the Appellant(s) : Mr. Dhruv Mehta, Sr. Adv. Mr. Rajesh Kumar-I, Adv. Mr. Anant Gautam, Adv. Mr. Nipun Sharma, Adv. Mr. Shanshank Shekar, Adv. M/S. Mitter & Mitter Co., AOR
For the Respondent(s): Mr. K.M. Nataraj, ASG Mr. Sharath Nambiar, Adv. Mr. Vatsal Joshi, Adv. Mr. Vinayak Sharma, Adv. Ms. Indira B., Adv. Mr. Shailesh Madiyal, Adv. Mr. Mukesh Kumar Maroria, AOR Ms. Manjula Gupta, AOR Mr. A. V. Rangam, AOR Mr. Budd., A. Ranganadhan, Adv.
For the Appellant(s) : Mr. Dhruv Mehta, Sr. Adv. Mr. Rajesh Kumar-I, Adv. Mr. Anant Gautam, Adv. Mr. Nipun Sharma, Adv. Mr. Shanshank Shekar, Adv. M/S. Mitter & Mitter Co., AOR
For the Respondent(s): Mr. K.M. Nataraj, ASG Mr. Sharath Nambiar, Adv. Mr. Vatsal Joshi, Adv. Mr. Vinayak Sharma, Adv. Ms. Indira B., Adv. Mr. Shailesh Madiyal, Adv. Mr. Mukesh Kumar Maroria, AOR Ms. Manjula Gupta, AOR Mr. A. V. Rangam, AOR Mr. Budd., A. Ranganadhan, Adv.
Table of Contents
2. Validity of confiscation orders under omitted rules — Priority of secured creditor's dues over unsecured Crown debts. (Para 11 , 12 , 13 , 14 , 15 , 16 , 17 , 18 , 19 , 20 , 21 , 22 , 23 , 24 , 25 , 26 , 27 , 28 , 29 )
3. Omission of rules without saving clauses terminates proceedings — SARFAESI Act's overriding effect ensures secured creditors' priority over unsecured government dues. (Para 32 , 33 , 34 , 35 , 36 , 37 , 38 , 39 , 40 , 41 , 42 , 43 , 44 , 45 , 46 )
4. Pending proceedings under an omitted rule lapse absent a saving clause — Secured creditors prevail over unsecured Crown debts unless a statutory first charge exists. (Para 34 , 36 , 43 , 44 )
5. Appeal allowed — Confiscation orders quashed. (Para 47 , 48 )
6. Does the omission of a rule affect pending legal proceedings?
Yes. If a rule is omitted without a saving clause in the new rule or statute, pending proceedings lapse. Section 6 of the General Clauses Act is not applicable to the omission of a Rule. (Para 33 , 34 , 36 )
7. Do secured creditors under the SARFAESI Act have priority over Central Excise dues?
Yes. Crown debts are generally unsecured. In the absence of a specific statutory first charge in the Central Excise Act, the claims of a secured creditor under the SARFAESI Act prevail over government dues. (Para 38 , 39 , 40 , 41 , 42 , 43 )
8. Does the SARFAESI Act override other laws regarding the recovery of secured debts?
Yes. Section 35 of the SARFAESI Act provides that its provisions have an overriding effect over any inconsistent law or instrument, including the Central Excise Act, even after the insertion of Section 11E in the latter. (Para 43 , 44 )
JUDGMENT :
VINEET SARAN, J.
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 and 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 dated 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 sub-judice. 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 and Excise Department that in view of the fact that that all the movable and immovable properties of RIL
