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Karnataka State Industrial Investment & Development Corporation Limited v/s The Secretary Government of India & Others

Company & Directors' Information:- INDUSTRIAL DEVELOPMENT AND INVESTMENT CO PVT LTD [Active] CIN = U65990MH1941PTC003300

Company & Directors' Information:- THE INDIA COMPANY PRIVATE LIMITED [Active] CIN = U74999TN1919PTC000911

Company & Directors' Information:- K V DEVELOPMENT AND INVESTMENT CO PVT LTD [Active] CIN = U65922MH1979PTC021155

Company & Directors' Information:- INDIA CORPORATION PRIVATE LIMITED [Active] CIN = U65990MH1941PTC003461

Company & Directors' Information:- R N B J INVESTMENT AND DEVELOPMENT PVT LTD [Strike Off] CIN = U65990MH1982PTC028451

Company & Directors' Information:- S P INVESTMENT AND DEVELOPMENT COMPANY PVT LTD [Strike Off] CIN = U67121ML1988PTC003133

Company & Directors' Information:- KARNATAKA INDUSTRIAL PRIVATE LIMITED [Strike Off] CIN = U29222KA1974PTC002711

Company & Directors' Information:- KARNATAKA INDUSTRIAL COMPANY LIMITED [Strike Off] CIN = U33130KA1916PLC000063

    Writ Petition Nos. 17111, 37583, 32950, 23586 of 2001 (T-TAR)

    Decided On, 07 June 2005

    At, High Court of Karnataka


    For the Petitioner: D.S. Joshi, T.S. Mahesh Murthy, Advocates. For the Respondents: R1 & R2, B. Papegowda, CGSC, N.R. Bhaskar, CGSC, R4, M.T. Nanaiah and Assts Advocate.

Judgment Text

Anand Byrareddy, J.

These petitions are heard together and are disposed of by this common order as the issues that arise for consideration are common to all cases.

2. The Petitioner in all the petitions is Karnataka State Industrial Investment and Development Corporation Limited (hereinafter referred to as 'the KSIIDC'), it is a financial Corporation as defined under the State Financial Corporations Act, 1951 (hereinafter referred to as 'the Act').

3. The common Respondents represent the Government of India and the Department of customs.

4. The other Respondents are entities whose units have been taken over by the Petitioner and certain third parties who intend to purchase assets brought to sale in terms of Section 29 of the Act, by the Petitioner.

5. The facts in each petition -are briefly stated here before considering the issues that arise;

In Writ Petition No.17111/2001. the facts are as follows

Respondent No.3, a private limited company obtained financial assistance from the Petitioner to set up an Industry to manufacture electronic toys. The said company obtained an import licence as a 100% export oriented unit (EOU). The Petitioner had granted to Respondent No.3 a term loan of Rs.134.85 lakh on the security of hypothecation of movable assets including machinery which the said Respondent intended to import. The unit failed and defaulted in repaying the loan, from inception. Consequently, the Petitioner, in exercise of powers under Section 29 of the Act, took over the assets as on 18-4-1998.

6. The aforesaid Respondent had, as an 100% Export Oriented Unit, availed of the benefit of a scheme envisaged by the Department of Customs. The unit was exempt from payment of customs duty on imported machinery subject to the condition that the unit was to carry on manufacture within a bonded area and to export its entire production for a fixed period of ten years. The unit had executed a bond in favour of the Customs Department that if it failed to fulfill the obligations it would be liable to pay the applicable duty and penalty on such imported machinery. The machinery imported by the said Respondent Company was valued on Rs.1.05 Crore attracting a duty of over Rs.87.00 1akh. Since, the unit failed to meet its export obligation the Deputy Commissioner of Customs, Bangalore had raised a demand for Rs.87.53 lakhs as duty and had duly confirmed the same by an order dated 26-11-1999.

7. The Customs Department duly intimated the Petitioner that it seeks to recover the duty payable in respect of the said machinery, vide letter dated 14-2-2001.

8. The Petitioner, on the other hand, claims that the defaulting Respondent was due a total sum of Rs.2.62 Crore and since, the unit was taken over by the Petitioner and hence the Customs Department could not claim any priority on the sale proceeds of the said machinery. The Customs Department contends that an obligation having been created in respect of the goods, even if the Petitioner claims to have taken over the goods, the same cannot be sold or otherwise dealt with without discharing the liability of duty and penalty.

9. In Writ Petition No. 23586 of 2001, Respondent No.3 therein had established a 100% Export Oriented Unit engaged in the manufacturing of watch straps and bracelets. It had obtained term loans totaling to Rs.90 lakh for the Petitioner. To secure the due repayment, land and buildings were mortgaged and movable assets hypothecated in favour of the Petitioner as per the deed dated 11-3-1988. The loan amount was to be utilized for purchase of imported machinery. The unit failed and was closed down in the year 1993. In September 1994 though the unit was taken over by Respondent No.4 and sought to be revived, the unit did not function. The Petitioner was thus compelled to take over the unit on 24-1-1997. The Petitioner thereafter found a third party purchaser who was willing to purchase the entire unit comprising of land, building and machinery. This was to the knowledge of the Respondent-Customs Department, whose consent was sought in this regard. After exchange of correspondence regarding the proposed sale, the Customs Department issued a show cause notice dated 8-1-2001 calling upon Respondents 3 and 4 to show cause as to why customs duty amounting to Rs.3,15,198.52 ps which was foregone on imported capital goods should not be recovered, with interest, and a copy was marked to the petitioner. The same is under challenge.

10. In Writ Petition No.32950/2001, Respondent No.4 had obtained term loan totaling Rs.140 lakh from the Petitioner and to secure the due repayment had hypothecated imported and other machinery. The said Respondent failed to commence its business and defaulted in repayment of the loan. The Petitioner had therefore taken over the assets of the defaulting Respondent on 19-1-1999. The Petitioner having brought the machinery to sale and Respondent No.3 having successfully bid for the same, the Customs Department has resisted the sale, this action is under challenge.

11. In Writ Petition No. 37583/2001, the Petitioner had furnished term loans aggregating to Rs.58.15 lakh to M/s Sabson Freight Containers Private Limited and to secure the same the said company had executed mortgage and hypothecation deeds in favour of the Petitioner in respect of immovable and movable assets, respectively, of its unit. The said company defaulted and the assets were taken over by the Petitioner. The defaulting company was due Rs.1.95 Crore as on 30-6-1996. It also transpires that the said company had imported capital goods and raw materials worth Rs.4.24 Crore and had availed exemption from customs duty amounting to Rs.5.92 Crore. This was on the condition of exporting 100% of its manufactured products. The unit had failed to commence commercial production and hence failed to comply with the condition. The Customs Department initiated action for recovery of duty and penalty.

12. The Customs Department passed an order of attachment in respect of movable assets on 5-2-2001. The Petitioner also issued an order of attachment under Section 29 of the Act, as on 16-3-2001. The Customs Department, however, did bring the movable assets to sale. When the petitioner obstructed the removal of the movables by the third party purchaser, the Customs Department and the Petitioner had agreed to refer the matter, as regards priority of entitlement to the assets, to the Ministry of Law, Government of India. It was opined by the Ministry that recovery of customs-dues took priority. The Petitioner has approached this Court that stage.

13. Heard Sri. D.S. Joshi, for Petitioners and Sri Paee Gowda, Central Government Standing Counsel, for the Respondents.

14. Sri D.S. Joshi, Learned Counsel led the arguments for the Petitioners. His contentions are as follows:

The Petitioner was seeking - monies due to it from the defaulting borrower and such monies having been lent upon hypothecation of movables and mortgage of immovable properties, the Petitioner was a secured creditor and therefore, the dues, if any, from the defaulting borrowers payable to the Customs Department would not accord the Customs Department a preferential right to recover all its dues over the mortgage of immovable properties and pledge of goods in favour of the Petitioner, who is a secured creditor. He would also submit that the Petitioner itself is a wholly owned undertaking of the State of Karnataka and would fall within the definition of a Government Company as defined under Section 617 of the Companies Act, 1956 and further that the employees of the Petitioner are public servants and hence the dues of the petitioner could be safely termed as public dues or crown debts. In this regard he drew my attention to the expression "public servant" as defined under Section 21 of the Indian Penal Code.

15. He then drew my attention to Sections 172 & 173 of the Contract Act. And elaborating on the rights of a pawnee, relied upon the judgment rendered in the case of Bank Of Bihar Vs State Of Bihar AIR 1971 SC 1210, wherein it has been authoritatively laid down as follows:

"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 goods being lawfully seized 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 bound 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 sale of the goods pledged with it on the pawnor making a default in payment of debt."

16. Nextly, he would contend that -the Act is a self contained code in itself and that it is a special enactment. He would draw my attention to Sections 29(4), 32, 32-G and 46-B of the Act. Sections 46-B and 29(4) of the Act, which are relevant to this case read as follows:

Section 46-B:

"Effect of Act on other laws.- The provisions of this Act and of any rules or orders made there under shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in the memorandum or- articles of association of an Industrial concern or in any other instrument having effect by virtue of any law other than this Act, but save as aforesaid, the provisions of this Act shall be in addition to, and not in derogation of, any other law for the time being applicable to an industrial concern."

Section 29(4):-

"Where any action has been taken against an Industrial concern under the provisions of sub-section (1), all costs, charges and expenses which in the opinion of the Financial Corporation have been properly incurred by it as incidental thereto shall be recoverable from the industrial concern and the money which is received by it shall, in the absence of any contract to the contrary, be held by it in trust to be applied firstly, in payment of such costs, charges and expenses and, secondly, in discharge of the debt due to the Financial Corporation, and the residue of the money so received shall be paid to be person entitled thereto. "

From the tenor of these provisions, the Petitioner's counsel would urge that, the Customs Act being a general enactment, the Petitioner could still claim the amounts due to it, in precedence over the amounts due to the Respondent-Customs Department.

17. He further relied upon the decision in Isha Marbles Vs Bihar State Electricity Board (1995) 2 SCC 648. This was a case where the previous owners of a unit had the benefit of electricity supply and were borrowers from a secured creditor, the electricity arrears in respect of the premises had fallen due and the borrower had neglected to pay the same. The power had been disconnected in terms of Section 24 of the Electricity Act. For recovery of the loans, the properties of the borrower were brought to sale. The Appellants were the auction purchasers. The dispute was whether the auction purchaser was liable to meet the liability of the previous consumer of the electricity supply to the premises purchased through the Finance Corporation. The Court held that as there is no charge over the property, the liability of the party would have to be determined in terms of the contract between the Electricity Board and the consumer and that the Board could not seek enforcement of contractual liability against a third party and accordingly upheld the contention of the auction purchasers. But, it is now noticed that a larger Bench of the Supreme Court in the case of Ahmedabad Electricity Company Vs Gujarath Inns Private Limited (2004) 3 SCC 587, has doubted the correctness of the law laid down in Isha Marbles's case, supra.

18. He has further relied upon a judgment of Andhra Pradesh High Court in Sitani Textiles And Fabrics (P) Ltd Vs. Assistant Collector Of Customs And Central Excise 1998 Company Cases 165, wherein it has been held that in the case of a secured debtor, the rights of a secured creditor prevail over the excise dues of the Excise Department and that the secured creditor will have a preferential claim even against the demand of the Central Excise dues of the against the demand of the Central Excise dues of the Government. The Court has further held that the Act is a special enactment, whereas the Central Excise and Salt Act, 1944 is a general enactment and that the Act prevails over the general enactments.

19. He has further relied upon the case of Vijayalakshmi Enterprises Vs Assistant General Manager, Andhra Pradesh Financial Corporation, Hyderabad 1(2002) BC 744, which pertains to whether the properties which were bought in auction sale under Section 29 of the Act could be subject to any charge under the Customs Act, 1962. The Court has held that the provisions laid down in the Customs Act do not indicate that a statutory charge is created over the properties in question and that having regard to the non obstinate clause contained in Section 46-B of the Act, the same would prevail over other enactments.

20. Further, Sri Mahesh Murthy, T.S., Learned Counsel for Petitioner-KSIIDC, in Writ Petition No.3 7583 of 2001, adopts the arguments of Sri Joshi, and he would further place a Judgment rendered in the case of Karnataka State Industrial Investment And Development Corporation Limited Vs Assistant Commissioner Of Commercial Taxes ILR 2000 KAR 3399, to support the arguments advanced by Sri Joshi.

21. Per contra, Sri Pape Gowda, Learned Counsel for Respondent - Customs Department, would draw my attention to the amendment brought to Section 142 of the Customs Act, whereby the following proviso has been inserted by Act No.23 of 2004, which is as follows:

"Provided that where the person (hereafter referred to as predecessor), by whom any sum payable under this Act including the amount required to be paid to the credit of the Central Government under section 28B is not paid, transfers or otherwise disposes of his business or trade in whole or in part, or effects any change in the ownership thereof, in consequence of which he is succeeded in such business or trade by any other person, all 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 the proper officer, after obtaining written approval from the Commissioner of Customs, for the purposes of recovering the amount so payable by such predecessor at the time of such transfer or otherwise disposal or change."

and he would point out that it is in pari materia with Rule 230(2) of the Central Excise Rules, 1944 which lays down the mode of recovery from assets owned by the predecessor and on his liability being assessed, could be recovered even from the successor and submits that in the case of Macson Marbles Private Limited Vs Union Of India 2003 (158) ELT 424 (SC), the Supreme Court while considering the question whether any industrial unit if sold in terms of Section 29 of the Act would be a sale made by the owner of the property and whether Rule 230(2) of the erstwhile Central Excise Rules, 1944, would be attracted, held, that when the sale made in favour of the Corporation is deemed to be a sale made by the owner of the property, necessarily Rule 230(2) of the Central Excise Rules would be attracted. The Court also further held that the Act and the Central Excise Act are both special enactments and that unless in the operation of the same any conflict arises, it would not be necessary to examine which of them would prevail as there was no conflict in that particular case.

22. Sri Pape Gowda, would further argue that the borrower of the loans from the Petitioner, had imported machinery as a 100% export oriented unit and had availed of exemption from the Customs Department in terms of notification issued by the Department and that in terms of the conditions imposed in the said notification such units were required to export their entire production or such other percentage fixed by the Department, failing which the imported goods would become liable to Customs duty as applicable. In the present set of cases, the Petitioners having taken over goods which are liable to customs duty by virtue of the importer having violated the conditions under which exemption had been provided, the Petitioner or any purchaser of goods would be liable in terms of sub-clause (ii) of Clause-c of Section 142(1) of the Customs Act read with Attachment of Property of Defaulters for Recovery of Government Dues Rules, 1995 and the present proviso to Section 142 of the Customs Act.

23. On these rival contentions, the short points for consideration would be;

1) Whether in respect of properties brought to sale by the Petitioner Corporation under Section 29 of the Act, the Petitioner and its nominees are liable as successors of the person who was liable to pay the customs dues?

2) Whether the Act is a special enactment prevailing over the Customs Act, 1962 in terms of Section 46-B of the Act?

24. Having regard to the law laid down by the Supreme Court in the case Of Bank Of Bihar Vs State Of Bihar, (supra), under the general law the pawnee has a special property over the goods secured by the pledge of the goods to it and its right could be secured even as against the Government which may have seized the goods to recover other dues. This is more explicitly laid down while considering the doctrine of priority or precedence of crown debts in Dena Bank Vs Bhikhabhai Prabhudas Parekh AIR 2000 SC 3654, case and it is laid down that the Crown's preferential right to recovery of debts over other creditors is confined to ordinary or unsecured creditors. Government debts are not entitle

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d to precedence over secured debts. Applying this settled principle, it may be safely said that the Petitioner being a secured creditor would be in a position to claim priority over the claim of the Customs Department for recovery of its dues. But, however, it would be necessary to consider whether such priority would extend over all properties including those properties which were imported by the defaulting borrower by availing the exemption from payment of customs duty in order to answer the first issue framed hereinabove. The particular capital goods which are clearly identified, had been permitted to be imported, while exempting the same from customs duty subject to satisfaction of the condition that the unit which has imported the same shall export all of its production or such percentage of the same as may be prescribed by the Customs Department. On the failure of such condition the goods become liable for customs duty and in terms of proviso now inserted by Act No. 23 of 2004, the successor of such defaulter would be held liable. 25. Therefore, in my opinion, such of those goods which have been imported, as aforesaid, are the only goods in respect of which the Customs Department could claim a priority of recovery of dues and not in respect of other goods over which the Petitioner claims as a secured creditor. Applying the principle laid down in Macson Marbles case, supra, the Petitioner would be liable to meet the customs dues as a successor of the defaulting importer. The first issue is answered accordingly. 26. The proposition that the Act is a special enactment and it prevails over the Customs Act, 1962 in terms of Section 46-B of the Act, is not acceptable. A plain comparative reading of the objects and the scheme of the two Acts with regard to their provisions would indicate that they are both special enactments and in the absence of a conflict in the enforcement of the same, the question of considering the second issue would not arise. 27. In the result, the petitions are partly allowed. Parties to bear their own costs.