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'Encumbrances' defined - SC

Central Excise – Liability of new owner of property

The Supreme Court, recently, set aside the judgment of the Allahabad High Court and ruled that the buyer of an industrial unit in auction "free from all encumbrances" is not bound to pay the excise duty arrears of the previous owner. The sale deed in this case included a clause which said that "all these statutory liabilities arising out of the land shall be borne by purchaser". The Supreme Court stated that it was only that statutory liability arising out of the land, building and machinery which is to be discharged by the purchaser.

Fact:

One M/s. P.J. Steels Pvt. Ltd. (borrower) had taken loans/financial accommodation from the Uttar Pradesh Financial Corporation (UPFC). Because of the consistent default on the part of the said borrower in re-paying the loans, the UPFC took possession of the land and building of the borrower which were mortgaged/kept as security with the UPFC. This action was taken under Section 29 of the State Financial Corporation Act. After taking physical possession of the unit, the UPFC held public auction on pursuant to advertisement which was issued on 8th January 2002. In the said public auction conducted by UPFC, the appellant herein (appellant which was known as M/s. Sarju Steels Pvt.Ltd. at that time and has now converted into a Public Limited Company known as M/s. Rana Girders Pvt. Ltd. Dated 20th March 2002 was the highest and thus, successful bidder in respect of land and building as well as plant and machinery. Sale Deed dated 8.3.2002 was executed in favour of the appellant qua the land and building. Likewise, Agreement dated 14.3.2002 was executed in favour of the appellant conveying the ownership of the plant and machinery.

With the aforesaid Sale Deed and Agreement, the appellant became the owner, both of the land and building and also plant and machinery. The borrower has not questioned the validity of the said auction which has attained finality. It appears that the borrower had also to discharge the liability qua excise duty which had amounted to Rs.1,00,72,442/-. To recover that amount, the Commissioner of Customs and Central Excise, Meerut-I (respondent No.2 herein) is now pressing the appellant to discharge this liability as purchaser and successor-in-interest of the land and building plus plant and
machinery of the borrower. The appellant is resisting the demand with the posture that since the aforesaid properties have been purchased by the appellant in an open auction from the UPFC, free from all encumbrances, it is not the liability of the purchaser to make payment of the dues of excise department.

Held:

Excise dues are not statutory liabilities that arise from the land. Statutory liabilities arising from the land and building could be in the form of the property tax or other types of cess relating to property, etc. Likewise, statutory liability arising out of the plant and machinery could be sales tax, etc, payable on the said machinery. As far as dues of the central excise are concerned, they were not related to the property, the court said in the case, Rana Girders Ltd. vs Union of India.

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