Case BriefsSupreme Court

Supreme Court: The Division Bench of L. Nageswara Rao and Vineet Saran*, JJ., quashed the confiscation order of Customs and Central Excise Commission confiscating land, building, plant and machinery of Rathi Ispat Ltd. for lacking statutory backing. The Bench observed that the existing law only permit confiscation of goods and no land, building can be confiscated under the Central Excise Rules, 2017.

Chronology of Events

  • The Commissioner, Customs and Central Excise, Ghaziabad (Commissioner) had imposed a penalty of Rs.7,98,03,000 and confiscated the land, building, plant and machinery of Rathi Ispat Ltd. (RIL) under Rule 173Q(2) of the Central Excise Rules, 1944 on 25-11-1997.
  • However, the said order was set aside by the Customs, Excise & Gold (Control) Appellate Tribunal (now CESTAT) for being contrary to principles of natural justice, and the matter was remanded back for de novo proceedings.
  • Subsequently, subrule 2 of Rule 173Q of the Central Excise Rules, 1944, came to be omitted by a notification dated 12-05-2000.
  • In 2005, RIL availed credit from the consortium of banks with the Appellant/Punjab National Bank being the lead bank, and mortgaged all its movable and immovable properties for securing the loan.
  • By the order dated 26-03-2007, the Commissioner 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.
  • Similarly, the Central Excise Commissioner, vide 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 and also imposed a penalty of Rs.3,41,24,68 and further, under rule 173Q(2) of the 1944 Rules, ordered confiscation of land, building, plant, machinery, material, conveyance etc.

RIL’s Default in Clearing the Loan

Since RIL defaulted in clearing the loan amount and had failed to liquidate outstanding dues, the Appellant bank issued notice to RIL under section 13(2) of the SARFAESI Act, 2002, however, Commissioner, Customs and Central Excise had already confiscated the property by virtue of Rule 173Q(2) of Rules, 1944. Aggrieved, the appellant bank approached the Allahabad High Court with its grievances, however dismissing the petition, the High Court held that if any property has been confiscated it vests in the state and no person can claim any right, title, or interest over it, further the High Court opined that the bank had no locus standi to challenge the order as RIL had already preferred an appeal against confiscation.

Question of Law

  1. Whether the Commissioner could have invoked the powers under Rule 173(Q)(2) of Central Excise Rules, 1944 on 26-03-2007 and 29-03-2007 when on such date, the rule 173Q(2) was not on the Statue Book having been omitted w.e.f. 17-05-2000?
  2. Whether in the absence of any provisions providing for First Charge in relation to Central Excise dues in the Central Excise Act, 1944, the dues of the Excise department would have priority over the dues of the Secured Creditors or not?

Validity of Confiscation Order

The Bench noted that in the impugned order, the High Court had not considered that on the date of the confiscation orders Rule 173Q(2) stood omitted from the statute books. Rejecting the contention of the respondent that notwithstanding the omission of Section 173Q(2) from the 1944 Rules the proceedings were entitled to continue on account of Section 38A(c) and Section 38A(e) of the Central Excise Act, 1944, read along with Section 6 of the General Clauses Act, 1897 as misplaced and lacking statutory backing, the Bench opined that the proceedings initiated under the erstwhile Rule 173Q(2) would come to an end on the repeal of the said Rule 173Q(2).

The Bench followed the decision of Kolhapur Canesugar Works Ltd. v. Union of India, (2000) 2 SCC 536, wherein it had been held that Section 6 of the General Clauses Act, 1897 is applicable where any Central Act or Regulation made after commencement of the General Clauses Act repeals any enactment. It is not applicable in the case of omission of a “Rule”. Secondly, Section 38A(c) and 38A(e) of the Central Excise Act, 1944, are attracted only when “unless a different intention appears”.

Noticeably, in the instant case the legislature had clarified its intent to not restore/revive the power of confiscation of any land, building, plant machinery etc., after omission of the provisions which could be inferred from the fact that power to confiscate any land, building, plant, machinery etc. after omission had not been introduced in the subsequent Central Excise Rules, 2001, Central Excise Rules, 2002 and Central Excise Rules, 2017.

Additionally, this intent was also fortified by the fact that the newly enacted Rule 28 of the Rules of 2001, Rule 28 of the Rules of 2002 and Rule 28 of the Rules of 2017, did not provide for confiscation of any land, building, plant, machinery etc. and their consequent vesting in the Central Government, as Rule 28 only provided for vesting in the Central Government of the “Goods” confiscated by the Central Excise Authorities under the Excise Act, 1944.

Whether the dues of the Excise department create a First Charge?

In UTI Bank Ltd. v. Commissioner Central Excise, 2006 SCC Online Madras 1182, it had been held that since there is no specific provision claiming “first charge” in the Central Excise Act and the Customs Act, the claim of the Central Excise Department cannot have precedence over the claim of secured creditor, viz., the petitioner Bank. Similarly, in Union of India v. SICOM Ltd., (2009) 2 SCC 121, it was observed that prior to insertion of Section 11E in the Central Excise Act, 1944 w.e.f. 08-04-2011, there was no provision in the Act inter alia, providing for First Charge on the property of the assessee or any person under the Act of 1944.

Further, section 35 of the SARFAESI Act, 2002 inter alia, provides that the provisions of the SARFAESI Act shall have overriding effect on all other laws. Therefore, the provisions of Section 11E of the Central Excise Act, 1944 are subject to the provisions contained in the SARFAESI Act, 2002. Therefore, the Bench held that the Secured Creditor-Bank would have a First Charge on the Secured Assets.

Verdict

In the light of above, the Bench concluded that the Commissioner of Customs and Central Excise could not have invoked the powers under Rule 173Q(2) of the Central Excise Rules, 1944 on 26-03-2007 and 29-03-2007 for confiscation of land, buildings etc., when on such date, the said Rule 173Q(2) was not in the Statute books, having been omitted by a notification dated 12-05-2000. Secondly, the dues of the secured creditor, i.e. the bank, would have priority over the dues of the Central Excise Department. Accordingly, the appeal was allowed and the confiscation orders were quashed.

[Punjab National Bank v. Union of India, 2022 SCC OnLine SC 227, decided on 24-02-2022]


*Judgment by: Justice Vineet Saran 


Appearance by:

For the Appellant: Dhruv Mehta, Senior Counsel

For Union of India: K.M. Nataraj, Additional Solicitor General


Kamini Sharma, Editorial Assistant has put this report together

Case BriefsHigh Courts

Delhi High Court: Suresh Kumar Kait, J., addressed an appeal under Section 37(2)(b) of the Arbitration and Conciliation Act, 1996 against the interim order passed by Arbitrator was preferred.

Factual Background

Vide the Interim order, an application filed by the appellant under the provisions of Section 17 of the Arbitration and Conciliation Act, 1996 to restrain respondent 9 (Zee Entertainment Enterprises Ltd) from going ahead with its Scheme of Arrangement with Sony Pictures Networks India Pvt. Limited and Bangla Entertainment Private Limited was rejected.

An appeal was instituted based upon four agreements executed between the appellant and respondents 1,3,4 and 5 along with respondent 2 as co-borrower for the loan amount of Rs 726,00,000.

As per the Loan Agreement, it was obligatory upon the Borrowing Respondents to create security in favour of appellant/lender to its satisfaction and in complete contradiction and defiance of terms of Loan Agreement, the borrowing respondents failed to create adequate security.

Analysis and Decision

As per Clause 20 of the Declaration and Acknowledgment, on return of the title deed, the mortgage stood released and appellant issued a “No objection for release of the title deeds” to respondents 1 to 8 in respect of the title deeds of the property situated in Hyderabad over the original title deeds in terms of Declaration and Acknowledgement for a consideration of Rs 225 crores.

Thus, the declaration and acknowledgement got terminated and respondent 9 had no further or other obligation towards the appellant.

Therefore, respondent 9, who was not a party or signatory to the loan agreements, is not bound by the terms of the loan agreement.

Bench stated that the involvement of respondent 9 as obligator was only to the extent that it was a mortgagor of its Hyderabad property which was offered by the borrowers as security cover.

Once, upon receipt of Rs. 225 crores by appellant in terms of NOC dated 01.06.2020, title deeds of property of respondent no.9 have been released, the mortgage does not subsist anymore.

In view of the above facts and circumstances, High Court opined that there was no illegality and perversity in the impugned order. [Indiabulls Housing Finance Ltd. v. GNEX Projects (P) Ltd., 2022 SCC OnLine Del 753, decided on 14-3-2022]


Advocates before the Court:

For the Appellant:

Mr. Vineet Malhotra, Ms. Sonali Jaitley Bakhshi, Mr. Jaiyesh Bakhshi, Ms. Rini Badoni, Ms. Sanjana Bakshi, Mr. Chirag Sharma, Mr. Daman Popli, Mr. Siddharth Dey, Mr.Amreen Qureshi & Mr. Vishal Gohri, Advocates

For the Respondents:

Mr. Arvind Nayar, Senior Advocate with Ms. Ritwika Nanda, Ms. Petal Chandhok & Ms. Akshita Salampuria, Advocates for all respondents 1 to 17 (except respondent No. 9)

Mr. Parag P. Tripathi, Senior Advocate with Ms. Ritwika Nanda, Ms. Petal Chandhok, Ms. Akshita Salampuria & Ms. Mishika Bajpai, Advocates for respondent No. 9.

Case BriefsSupreme Court

Supreme Court: In a case where it was argued before the Court that an offence under Section 138 of the Negotiable Instruments Act was not made out as the dishonourment alleged is of the cheques which were issued by way of ‘security’ and not towards discharge of any debt, the bench of MR Shah and AS Bopanna*, JJ has held that a cheque issued as security pursuant to a financial transaction cannot be considered as a worthless piece of paper under every circumstance and that there cannot be a hard and fast rule that a cheque which is issued as security can never be presented by the drawee of the cheque.

The Court explained that ‘security’ in its true sense is the state of being safe and the security given for a loan is something given as a pledge of payment. It is given, deposited or pledged to make certain the fulfilment of an obligation to which the parties to the transaction are bound.

“If in a transaction, a loan is advanced and the borrower agrees to repay the amount in a specified timeframe and issues a cheque as security to secure such repayment; if the loan amount is not repaid in any other form before the due date or if there is no other understanding or agreement between the parties to defer the payment of amount, the cheque which   is   issued   as   security   would   mature   for presentation and the drawee of the cheque would be entitled to present the same. On such presentation, if the same is dishonoured, the consequences contemplated under Section 138 and the other provisions of N.I. Act would flow.”

When a cheque is issued and is treated as ‘security’ towards repayment of an amount with a time period being stipulated for repayment, all that it ensures is that such cheque which is issued as ‘security’ cannot be presented prior to the loan or the instalment maturing for repayment towards which such cheque is issued as security.

Further, the borrower would have the option of repaying the loan amount or such financial liability in any other form and in that manner if the amount of loan due and payable has been discharged within the agreed period, the cheque issued as security cannot thereafter be presented. Therefore, the prior discharge of the loan or there being an altered situation due to which there would be understanding between the parties is a sine qua non to not present the cheque which was issued as security. These are only the defences that would be available to the drawer of the cheque in a proceedings initiated under Section 138 of the N.I. Act. Therefore, there cannot be a hard and fast rule that a cheque which is issued as security can never be presented by the drawee of the cheque. If such is the understanding a cheque would also be reduced to an ‘on demand promissory note’ and in all circumstances, it would only be a civil litigation to recover the amount, which is not the intention of the statute.

“When a cheque is issued even though as ‘security’ the consequence flowing therefrom is also known to the drawer of the cheque and in the circumstance stated above if the cheque is presented and dishonoured, the holder of the cheque/drawee would have the option of initiating the civil proceedings for recovery or the criminal proceedings for punishment in the fact situation, but in any event, it is not for the drawer of the cheque to dictate terms with regard to the nature of litigation.”

[Sripati Singh v. State of Jharkhand, 2021 SCC OnLine SC 1002, decided on 28.10.2021]


Counsels

For appellant: Advocate M.C. Dhingra

For respondents: Advocate Raj Kishor Choudhary and Keshav Murthy


*Judgment by: Justice AS Bopanna

Know Thy Judge | Justice A. S. Bopanna

Kerala High Court
Case BriefsHigh Courts

Kerala High Court: P.V. Asha, J. allowed the writ petition questioning status of IDBI Bank as “State” under Article 12 of the Constitution and further stated that the acts of public sector undertakings arising out of contractual transactions between the parties will not fall under the term “public duty” to attract the Court’s jurisdiction.

Brief facts of the case are such that the petitioner challenged the demand of Rs 11,00,000 as a processing fee of a credit facility and retaining of original property documents as security against such facility as arbitrary and illegal, hence, being violative of his fundamental rights. The petitioner, while relying on R.D.Shetty v. International Airport Authority, (1979) 3 SCC 489, contended that as per the order passed by the RBI, IDBI would be treated as a private bank only for regulatory purposes and it would continue to be a public sector bank for all other purposes. It was further argued that IDBI is controlled by the Central Government and it is always under the watch of Central Vigilance Commission.

Counsel for the respondent challenged the maintainability of Petition stating that respondent bank does not perform any public or statutory or sovereign function and it does not enjoy any monopoly in the banking. It was argued that its function is confined to commercial activities and the Central Government does not have any deep or pervasive control over its functioning.

The court dismissed the petition, holding that providing of credit facility or loan on the strength of title deeds given against security cannot be said to be done in discharge of any public function. Hence, even when the bank is a public sector bank, demand for a processing fee or withholding of title deeds towards security cannot be said to be one involving any element of public duty. Therefore, IDBI is not amenable to writ jurisdiction. [Unimoni Financial Services Ltd. v. IDBI Bank Ltd., 2020 SCC OnLine Ker 7347, decided on 16-12-2020]

Case BriefsHigh Courts

Manipur High Court: A writ petition filed against the order of detention passed by the District Magistrate was allowed by the Division Bench comprising of N. Kotiswar Singh, ACJ and Kh. Nobin Singh. J.

The petition was filed against the detention order passed against appellant who was a member of Kuki National Front- President (KNF-P). The petitioner along with others, was charged for kidnapping and killing of members of another organisation. Detention Orders were passed against the appellants in furtherance of the said charges. The petitioner challenged the Detention Order contending that the provisions of Section 10 of the National Security Act, 1980 were not complied with.

The High Court perused the record as well as Section 10 of the National Security Act and found that the provisions and requirements of the said section need to be strictly complied with. Section 10 provides that the Government shall place the grounds of detention along with the representation presented by the detenu, if any, before the Advisory Board, within three weeks from the date of detention. However, in the present case, the Court found that the said provision was not complied with within three weeks of the date of detention of the petitioner. The Court held that violation of the provisions of Section 10 has prejudiced the right of the petitioner. Hence, the order of detention was liable to be quashed which was ordered accordingly. [Lalkhosem Kipgen v. District Magistrate, 2018 SCC OnLine Mani 38, dated 07-05-2018]