2012 (10) TMI 873 - HC - Customs

Whether central excise and customs duty arrears have priority and precedence over the claims made by public sector Banks - either under the decree/recovery certificate granted by the Debts Recovery Tribunal (DRT) under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 or while enforcing the security interest under the provisions of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 - interim measure restrained the first respondent from confirming the sale in favour of the highest bidder but allowed the auction sale Held that - For the first time the Parliament created first charge on the property of the assessee in relation to duty, penalty and interest payable under the Central Excise Act or Customs Act as the case may be. But these provisions themselves exclude from their operational field, the recovery or withholding of monies under Section 529 A of the Companies Act, DRT Act and the SARFAESI Act - two provisions would do not support the Dept. - When they were about to conduct auction or about to confirm auction sale, the Assistant Commissioner intervened objecting Bank sale. So also the auction initiated under the SARFAESI Act in all these matters, is not yet completed. These are, therefore, saved by Section 11E of the Central Excise Act and Section 142A of the Customs Act, and the Dept., cannot claim first charge or priority in recovery

Issues Involved:
1. Whether the Department of Customs, Central Excise, and Service Tax has priority over public sector banks' claims in recovering excise/customs duty arrears.
2. The validity of the auction notice issued by the Central Excise Department.
3. The impact of the Recovery of Debts Due to Banks and Financial Institutions Act (DRT Act) and the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI Act) on the recovery of government dues.
4. The principle of priority of government debts.
5. The recovery mechanisms under revenue laws.
6. The impact of new provisions under the Finance Act, 2011.

Detailed Analysis:

1. Priority of Government Debts:
The court examined whether the Department of Customs, Central Excise, and Service Tax could claim priority over public sector banks in recovering excise/customs duty arrears. The principle of priority of government debts is based on public policy and has been upheld by the Supreme Court in various cases. However, the court noted that this principle must yield to statutory provisions, and it does not apply to secured debts contracted by parties in relation to commercial activities. The court concluded that the Central Excise Department could not claim priority over bank loans in common law.

2. Validity of Auction Notice:
The court reviewed the case where the Industrial Development Bank of India (IDBI) challenged the auction notice issued by the Central Excise Department for recovering excise dues. The court found that the department's auction notice was issued without considering the dues of IDBI and the proceedings before the DRT. The court held that the auction conducted by the Deputy Commissioner (Arrears Recovery Cell), Hyderabad, was illegal and directed the department to return any amount recovered from the auction purchaser with interest.

3. Impact of DRT Act and SARFAESI Act:
The court analyzed the provisions of the DRT Act and the SARFAESI Act, noting that these acts provide special mechanisms for the recovery of bank loans and have overriding effects over other laws. The court held that the officers empowered under the Central Excise Act or the Customs Act could not claim priority over the recovery of bank loans. The court emphasized that the SARFAESI Act confers absolute and exclusive powers on banks to recover loans, and the Central Excise Department could not claim any priority in recovery over the claims of banks.

4. Principle of Priority of Government Debts:
The court reiterated the principle that the priority of government debts is subject to statutory provisions. The court referred to various Supreme Court judgments, including Builders Supply Corpn., Dena Bank, and SICOM, to emphasize that the common law principle of priority of government debt must yield to statutory provisions. The court concluded that the Central Excise Department could not claim priority in recovering excise dues over the claims of banks.

5. Recovery Mechanisms Under Revenue Laws:
The court examined the recovery mechanisms under the Central Excise Act and the Customs Act. It noted that Section 11 of the Central Excise Act provides for recovery of excise dues by deducting the amount payable, attaching and selling excisable goods, or recovering the amount as arrears of land revenue. The court also considered the applicability of Section 142(1)(c)(ii) of the Customs Act to the Central Excise Act through Notification No. 68/63. The court expressed doubts about the vires of the notification but proceeded on the assumption that it enabled the recovery of excise dues by attaching and selling immovable property.

6. Impact of New Provisions Under the Finance Act, 2011:
The court discussed the new provisions introduced by the Finance Act, 2011, namely Section 11E of the Central Excise Act and Section 142A of the Customs Act, which created a first charge on the property of the assessee for duty, penalty, and interest payable under these acts. However, these provisions explicitly excluded the DRT Act and the SARFAESI Act from their operational field. The court concluded that the new provisions did not support the Central Excise Department's claim for priority in recovery over the claims of banks.

Conclusion:
The court allowed W.P. Nos. 17742 of 2005 and 27102 of 2008, filed by the banks, and dismissed W.P. Nos. 10515 and 10516 of 2011 and W.P. No. 5993 of 2012, filed by the Assistant Commissioner, Tirupati. The court held that the Central Excise Department could not claim priority over the recovery of bank loans and directed the department to return any amount recovered from the auction purchaser with interest.

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