SUCCESSION TO BUSINESS

[Mr. M. GOVINDARAJAN]

Sec.11 of the Central Excise Act deals with the recovery of sums due to Government. Under Sec.11D of the Act the officer is empower by the Central Board of Excise and Customs to levy such duty or require the payment of such sums and if the amount payable is not 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 or receipt of such certificate, shall proceed to recover from the said person the amount specified therein as if were an arrear of land revenue. Proviso to Sec. 11 provides the procedure for the attachment of the property. It provides where the person from whom the duty or any other sums of any kind is recoverable or due, transfers or otherwise disposes of his business or trade in whole or in part, or effect any change in the ownership thereof, in consequence of which he is succeeded in such business or trade by any other person, all excisable goods, materials, preparations, plants, machineries, vessels, utensils, implements and articles in the custody or possession of the person so succeeding may also be attached and sold by such officer empower by the Central Board of Excise, for the purposes of recovering such duty or other sums recoverable or due from such predecessor at the time of such transfer or otherwise disposal or change.

SUCCESSION:

It can be inferred from the proviso to Sec. 11 of the Central Excise Act that in case of a change in the ownership thereof, in consequence of which he is succeeded in such business or trade by any other person then he is liable for the payment of the dues of the original owner to the department. For this purpose the meaning of 'succession to business' is to be clarified.  

The Supreme Court in 'Commissioner of Income Tax V. K.H. Chambers' - 1964 -TMI - 49353 - (SUPREME Court) laid down the tests for considering the term 'succession':

* There should be a change of ownership;

* The integrity of the business should remain - the whole business should remain devolve upon the successor;

* The identity and continuity of the business should be substantially preserved - the same business should be carried by the person succeeding.

The Supreme Court further held that in order to constitute succession there must be broadly speaking, a taking over of the whole of the business concerned. But if a business is taken over as a whole, the fact that minor assets of the business are omitted from the transfer will not prevent there being a succession. The fact that the petitioner already has a similar business is not a material fact in establishing succession. The purchase of a business with a view to closing down would not appear to constitute success.

The Supreme Court further observed -"This is an authority for the position that if a business was taken over as a going concern the mere fact that some assets, which were not required by the successor for carrying on of the business, were not transferred to him would not make it any less a succession in law. It is not necessary to multiply decisions. Succession involves change of ownership; that is, the transferor goes out and the transferee comes in. It connotes that the whole business is transferred. It also implies that substantially the identity and the continuity of the business are preserved. If there is a transfer of a business, any arrangement between the transferor and the transferee in respect of some of the assets and liabilities not with a view to enable the transferor to run a part of the business transferred but to enable the transferee to run the business unhampered by the load of debts or for any other appropriate collateral purpose cannot detract from the totality of succession."

In 'Industrial Development & Investments Co. Ltd., V. Commissioner of Excess Profits Tax' - (1957) 31 ITR 688 the High Court considered as to what would constitute a succession to business. Whether there is a succession to a business two factors have to be considered. One obviously is the identity of the two businesses. If the two businesses are not identical, no question of succession can arise and even if the two businesses are identical, no question of succession can arise and even if the two businesses are identical, another factor has also got to be taken into consideration. The other factor is the continuity of the two businesses. In other words, the successor business must be in continuation of the original business. If the original business has come to an end or has been discontinued, then the subsequent business even though it may be identical with the first business, cannot be looked upon as its successor, because a successor should not only do the same business but also must continue the business to which it has succeeded.

In 'Kalaria Oil Mills Ltd., V. The State of Gujarat and others' - 1968 Sales Tax Cases 477 the Gujarat High Court held that the goodwill of the business, the other assets and liabilities of the business and the tenancy rights of the premises where the Company was conducting its business were not transferred to the petitioner. In those circumstances, held that there was only a sale of the machinery and not the sale of the whole business. 

Relevant case law:

In 'Krishna Lifestyle Technologies Ltd., V. Union of India' - 2008 -TMI - 2968 - HIGH COURT, BOMBAY   the Central Excise Department attached the moveable properties of the appellants for the outstanding due of M/s Rotex Textile Mills Ltd., The appellants purchased the said properties from a secured creditor under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2005. The contention of the department is the appellant being the successor to M/s Rotex Textile Mills Ltd., the appellants are bound to pay the dues of M/s Rotex Textile Mills Ltd., under Sec. 11 of the Central Excise Act. One of the issues taken for consideration by the High Court is 'Does the mere purchase of immovable/movable assets of a tax defaulter amount to transfer or disposal of business or trade in whole or in part or result in effecting change in ownership thereof in such business or trade by any other person, consequence of which, such person is succeeded in such business or trade by any other person.  The appellants contended the following:

* On the reading of the proviso to Section 11 of Central Excise Act, 1944, the following three conditions must be cumulatively satisfied:

· the person from whom duty is recoverable/due, transfers or otherwise disposes or effects any change in ownership;

· of business or trade, either in whole or in part;

· in consequence of which he is succeeded in such business of trade;

* The Revenue fails to prove any of the conditions then the proviso would not apply;

* The sale of assets would not amount to sale of business as held by Supreme Court in 'State of Karnataka V. Shreyas papers Private Ltd.,'- 2006 (1) SCC 615;

The Revenue submitted that what Revenue has to establish is that a person who is in arrears, if such person, transfers or otherwise disposes of his business or trade in whole or part or effects any change in ownership in consequence of which he is succeeded in any business or trade by any other then the movables as set out therein can be sold and attached for the recovery of dues. It is therefore not necessary to dispose of the whole of the business. It is sufficient that if the transfer or disposal is whole or in part and to that extent that the judgment in 'Shreyas papers Private Ltd., (supra) would not apply.

The High Court after considering the arguments put forth by the parties observed the following:

* Succession has a recognized connotation;

* The tests of change of ownership, integrity, identity and continuity of a business have to be satisfied before it can be said that a person succeeded to the business;

* The business carried on by the transferee must be the same business and further it must be continuation of the original business either wholly or in part;

* It would thus be clear from the above, that these tests will have to be met, before it can be said that a person has succeeded to a business;

* In this case though assets were sold, sale of assets by itself would not be transfer of business in whole or in part;

* There must be material on record to show that the business has been transferred to the petitioner and consequent thereto the petitioner has succeeded in said business;

* The Department in its reply nowhere is it alleged that the business has been sold in whole or part or that the petitioner has succeeded in the business.

The Court held that considering the proviso in the absence of the petitioner succeeding in the business or part of the business, the issue of the petitioner being liable for the arrears of Central Excise dues will not arise.