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PETITIONER:

HARSHAD SHANTILAL MEHTA

Vs.

RESPONDENT:

CUSTODIAN & ORS.

DATE OF JUDGMENT: 13/05/1998

BENCH:

SUJATA V. MANOHAR, S.P. KURDUKAR, D.P. WADHWA

ACT:

HEADNOTE:

JUDGMENT:

[With C.A. Nos. 5147/1995, 5225/1995, 5325/1995, 6080/1995,

12574/1996, T.C. (Civil) No.5/1998]

J U D G M E N T

Mrs. Sujata V.Manohar, J.

The Special Court (Trial of Offenders Relating

Transactions in Securities) Act, 1992 is a special Act with

its own special problems. The offences it deals with involve

amounts of unusual magnitude procured by brokers from banks

and financial institutions. Unfortunately, the proceedings

before the Special Court, which was set up for a quick

prosecution or adjudication of claims have been trapped in

unusual legal and interpretational difficulties generated by

the casual drafting of the Act that leaves much to the

skills and good sense of the courts. The present appeals

before us relate to the interpretation of Section 11 of the

Act.

Civil Appeal No. 5225 of 1995 is filed by the Custodian

appointed under the provisions of the Special Court (Trial

of Offences Relating to Transactions in Securities) Act,

1992 against a judgment and order of the Special Court Judge

dated 23.2.1995. The appeal is filed by the Custodian

pursuant to directions contained in the impugned judgment

itself. The other appeals have been filed by various

notified persons under the Special Court (Trial of Offences

Relating to Transactions in Securities) Act, 1992

(hereinafter referred to as the 'Special Court Act') from

the same judgment and order of the Special Court Judge. A

writ petition challenging the constitutional validity of

Section 11 of the Special Court Act pending in the Delhi

High Court has also been transferred to this Court for

consideration along with these appeals, as common questions

of law arise. All these appeals along with the transferred

case have been heard together. We have also heard various

intervenors in these appeals.

The Special Court has observed that it has been

functioning since June 1992. In respect of two notified

parties, namely, the Harshad Mehta Group and Fairgrowth

Financial Services Ltd., the time is approaching for

distribution of their assets under Section 11 of the Special

Court Act, 1992. In view of the different possible

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interpretations of the provisions of Section 11, the Special

Court has raised certain questions of law. After hearing all

concerned parties, the Special Court has answered these

questions in the impugned judgment, somewhat in the fashion

of an Originating Summons. The Custodian has raised certain

additional questions which arise in interpreting and

implementing Section 11 of the Special Court Act. The

questions raised by the Special Court are as follows:

"1. Whether the priority created by

section 11 of the Special Court

(Trial of Offences Relating to

Transactions in Securities) Act,

1992 is only in respect of amounts

due prior to the date of

Notification and/or whether the

priority would also apply to

amounts due after the date of the

Notification.

2. Whether the phrase 'taxes' as

used in Section 11 of the Special

Court (Trial of Offences Relating

to Transactions in Securities) Act,

1992 can only mean amounts due as

and by way of taxes or whether it

would also include penalties and

interest, if any.

3. Whether penalty and/or interest

can be levied on or charged to

Notified Parties after the date of

Notification."

To appreciate the points at issue, it is necessary to

look briefly at the provisions of the Special Court Act. The

Statement of Objects and Reasons relating to the Act states,

"In the course of the investigations by the Reserve Bank of

India, large scale irregularities and malpractices were

noticed in transactions in both the Government and other

securities, indulged in by some brokers in collusion with

the employees of various banks and financial institutions.

The said irregularities and malpractices led to the

diversion of funds from banks and financial institutions to

the individual accounts of certain brokers, (2) To deal with

the situation and in particular to ensure speedy recovery of

the huge amount involved, to punish the guilty and restore

confidence in and maintain the basic integrity and

credibility of the banks and financial institutions, the

Special (Trial of Offences Relating to Transactions in

Securities) Ordinance, 1992, was promulgated on 6th June,

1992. The Ordinance provides for the establishment of a

Special Court with a sitting Judge of a High Court for

speedy trial of offences relating to transactions in

securities and disposal of properties attached. It also

provides for appointment of one or more custodians for

attaching the property of the offenders with a view to

prevent diversion of such properties by the offenders." The

Ordinance was replaced by the Act.

Under Section 3 of the Special Court Act sub-sections (1),

(2), (3) and (4) are as follows :

"3. Appointment and functions of

Custodian -- (1) The Central

Government may appoint one or more

Custodian as it may deem fir for

the purposes of this Act.

(2) The Custodian may, on being

satisfied on information received

that any person has been involved

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in any securities after the 1st day

of April, 1991 and one and before

6th June 1992, notify the name of

such person in the Official

Gazette.

(3) Notwithstanding anything

contained in the Code and any other

law for the time being in force, on

and from the date of notification

under sub-section (2), any

property, movable or immovable, or

both, belonging to any person

notified under that sub-section

shall stand attached simultaneously

with the issue of the notification.

(4) The property attached under

sub-section (3) shall be dealt with

by the Custodian in such manner as

the Special Court may direct.

(5)................................

........................"

The Custodian has, therefore, the power to notify the names

of persons involved in any offence relating to transactions

in securities after the 1st day of April, 1991 and on or

before 6th of June, 1992. On such notification all

properties of the notified person stand attached. Under

Section 4, the Custodian is given the power, if he is

satisfied that any contract or agreement entered into at any

time after 1st of April, 1991 and on or before 6th of June,

1992 in relation to any property of the person notified has

been entered into fraudulently or to defeat the provisions

of this Act, to cancel such contract or agreement. On such

cancellation the property shall stand attached. Both Section

2 and 4, therefore, deal with the Custodian's powers

relating to transactions in securities entered into during a

very specific period, namely, 1st of April, 1991 and on or

before 6th of June, 1992 (hereinafter referred to as the

statutory period).

Under Section 7 and 8 the jurisdiction of the Special

Court in respect of prosecution of offences is confined to

offences referred to in Section 3(2) i.e. during the

statutory period. Section 9-A which has been introduced by

the Amending Act 24 or 1994, deals with jurisdiction,

powers, authority and procedure of the Special Court in

civil matters. Under sub-section (1) it is provided as

follows :-

"(1) On and from the commencement

of the Special Court (Trial of

Offences Relating to Transactions

in Securities) Amendment Act, 1994,

the Special Court shall exercise

all such jurisdiction powers and

authority as were exercisable,

immediately before such

commencement, by any civil court in

relation to any matter of claim -

(a) relating to any property

attached under sub-section (3) or

Sec. 3;

(b) arising out of

transactions in securities entered

into after the 1st day of April

1991, and on or before the 6th day

of June, 1992 in which a person

notified under sub-section (2) of

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Sec.3 is involved as a party,

broker, intermediary or in other

manner.

(2)...................

(3)...................

(4)...................

(5)...................

Jurisdiction of the Special Court in civil matters is,

therefore, in respect of any matter or claim relating to any

property which is attached under Section 3(2), or any matter

or claim arising out of transactions in securities entered

into during the "statutory period".

Under Section 9-B the jurisdiction of the Special Court

in arbitration matters is also with reference to those

matters or claims which are covered by Section 9-A (1).

Therefore, the jurisdiction of the Special Court in

civil as well as criminal matters is in respect of

transactions during t he statutory period of 1st of April,

1991 to 6th of June, 1993; and in relation to the properties

attached, of a notified person. The entire operation of the

said Act, therefore, revolves around the transactions in

securities during this statutory period.

Section 11 deals with discharge of liabilities and

distribution of the property attached. It provides as

follows :-

"11. Discharge of liabilities -

(1) Notwithstanding anything

contained in the Code and any other

law for the time being in force,

the Special Court may make such

order as it may deem fit directing

the Custodian for the disposal of

the property under attachment.

(2) The following liabilities

shall be paid or discharged in

full, as far as may be, in the

order as under :-

(a) all revenues, taxes, cesses

and rates due from the persons

notified by the Custodian under

sub-section (2) of Sec.3 to the

Central Government or any State

Government or any local authority

(b) all amounts due from the

person so notified by the Custodian

to any bank of financial

institution or mutual fund; and

(c) any other liability as may be

specified by the Special Court from

time to time."

This Section obviously deals with disbursement of

properties attached under Section 3(3). Since the property

(movable or immovable or both) which is attached is of the

person notified, the liabilities which are to be paid or

discharged under Section 11(2) are also liabilities of the

person notified - whether these liabilities be in respect of

payment of revenues, taxes, cesses or rates, or whether they

be the liabilities to any bank, financial institution of

mutual fund.

Before the Special Court makes any order under Section

11(1) the Special Court must be satisfied that the property

which is attached and is being disposed of, is the property

belonging to the notified persons. If any person other than

the notified person has any share, or any right, title or

interest in the attached property on the date of

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notification under Section 3, that right of a third party

cannot be extinguished. There is no provision in the Special

Court Act which extinguishes the right, title and interest

of a third party in any property which is attached as a

consequence of a notification under Section 3. The only

right which the Custodian has, in respect of the rights of

third parties in such properties, is conferred by Section 4

under which, if the Custodian is satisfied that any contract

or agreement which was entered into by the notified party

within the "statutory period" in relation to an attached

property, is fraudulent or entered into for the purpose of

defeating the provisions of the Special Court Act, he can

cancel such contract or agreement, There is no other

provision under the Special Court Act which affects the

existing rights of a third party on the date of attachment,

in the property attached. The attached property also does

not vest in the Custodian. In this regard, the position of a

Custodian is different from that of an official liquidator

of a company in winding up. Had the Act provided for the

extinguishment of any subsisting rights of other persons in

the attached property, the Act could well have been

considered as arbitrary or unconstitutional (Vide C.B.

Gautam v. Union of India and Ors. (1993 (1) SCC 78 at page

105 to 110). dealings ins securities belonging to banks and

financial institutions during the relevant period and/or

that there are no claims or liabilities which have to be

satisfied by attachment and sale or such property, in our

view, the Special court would have the power to direct the

Custodian to release such property from attachment". Hence a

property not having any nexus with the illegal dealings in

securities can be released from attachment by the Special

Court in an appropriate case.

The question of distribution of attached property under

Section 11(2) has to be considered thereafter. Before going

into the questions raised in that connection, one must

examine whether Section 11(2) lays down any priorities.

Although it was contended before us by some of the

appellants that Section 11(2) does not lay down any

priorities, the language of Section 11(2) is quite clear.

The words, "in order as under" in Section 11(2) lay down the

properties for distribution. In fact, it has been so held

by this Court while interpreting Section 11 in the case of

B.O.I. Finance Ltd. v. Custodian & Ors. (1997 (10) SCC 488

at page 497). Referring to Section 11(2) of the Act, this

Court has said that sub-section (2) of Section 11 provides

for the priorities in which the liabilities of the notified

person are to be discharged from out of the attached

properties. Considering that the Act has been passed because

of the diversion of funds from the banks and financial

institutions to the individual accounts or certain brokers,

the implication of Section 11 (2) (b) clearly is, that after

the discharge of the liabilities under Section 11(2)(a), the

amounts which are paid to the banks would probably be those

funds which were diverted from the banks by reason of

malpractice in the security transactions. However, before

the amounts can be paid to banks or financial institutions

under Section 11(2)(b) the liabilities under Section

11(2)(a) are required to be discharged.

The Special Court has raised three questions pertaining

to distribution under Section 11(2). We would, however, like

to expand the three questions in order to bring out the

points at issue which have been argued before us. The

questions can be reframed as follows :

(1) What is meant by revenues, taxes, cesses and rates due?

Does the word "due" refer merely to the liability to

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pay such taxes etc., or does it refer to a liability

which has crystalised into a legally ascertained sum

immediately payable?

(2) Do the taxes (in clause (a) of Section 11(2) refer only

to taxes relating to a specific period or to all taxes

due from the notified person?

(3) At what point or time should the taxes have become due?

(4) Does the Special Court have any discretion relating to

the extent of payments to be made under Section

11(2)(a) from out of the attached funds/property?

(5) Whether taxes include penalty or interest?

(6) Whether the Special Court has the power to absolve a

notified person from payment of penalty or interest for

a period subsequent to the date of his notification

under Section 3. In the alternative, is a notified

person liable to payment of penalty or interest arising

from his inability to pay taxes after his notification?

The Custodian has raised certain further questions. We

propose to consider one such question which has a bearing on

the questions which have been framed by the Special Court.

The question is whether in the case of mortgaged/pledged

properties of the notified persons already

mortagaged/pledged to the banks or financial institutions on

the date of attachment, the words of Section 3 (3) "any

property movable or immovable or both belonging to any

person notified" would refer only to the right, title or

interest of the notified person in the mortgaged/pledged

property and not the entire property itself. It so, the

liabilities mentioned in Section 11(2) which are to be paid

from the proceeds of the sale of the attached property,

would only refer to proceeds of the sale of the right, title

and interest of the notified person in the attached

property.

The last question can be answered first. As stated

above, Section 3(3) clearly provides that the properties

attached are properties which belong to the person notified.

The words "belong to" have a reverence only to the right,

title and interest of the notified person in that property.

It in the property "belonging to" a notified person, another

person has a share or interest, that share or interest is

not extinguished. Of course, if the interest of the notified

person in the property is not a severable interest, the

entire property may be attached. But the proceeds from which

distribution will be made under Section 11(2) can only be

the proceeds in relation to the right, title and interest of

the notified person in that property. The interest of a

third party in the attached property cannot be sold or

distributed to discharge the liabilities of the notified

person. This would also be the position when the property is

already mortgaged or pledged on the date of attachment to a

bank or to any third party. This, however, is subject to the

right of the Custodian under Section 4 to set aside the

transaction of mortgage or pledge. Unless the Custodian

exercises his power under Section 4, the right acquired by a

third party in the attached property prior to attachment

does not get extinguished nor does the property vest in the

Custodian whether free from encumbrances or otherwise. The

ownership of the property remains as it was.

Question No. 1

The first question on which the arguments have been

advanced, relates to the meaning of the phrase "tax due"

used in Section 11(2)(a). Block's Law Dictionary at page 499

defines the word `due', inter alia, as, "owing; payable;

justly owed............... Owed or owing as distinguished

from payable. A debt is often said to be due from a person

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where he is the party owing it, or primarily bound to pay,

whether the time for payment has or has not

arrived...........The word `due' always imports a fixed and

settled obligation or liability, but with reference to the

time for its payment there is considerable ambiguity in the

use of the term, the precise signification being determined

in each case from the context." (underlining ours) Jowitt's

Dictionary of English Law Vol. I, 2nd Edn. at page 669

defines `due' as, "anything owing, that which one contracts

to pay or perform to another........... As applied to a sum

of money, 'due' means either that it is owing or that it is

payable; in other words, it may mean that the debt is

payable at once or at a future time. It is a question of

construction which of these two meanings the word 'due' has

in a given case".

Wharton's Law Lexicon, 14th Edn. at page 365 defines

'due' as anything owing. It has the following comment, "It

should be observed that a debt is said to be due the instant

that it has existence as a debt; it may be payable at a

future time".

Our attention has been drawn to Section 530(1)(a) of

the Companies Act where the language used in "taxes. cesses

and rates due and payable" and Section 61(1)(a) of the

Provincial Insolvency Act, 1920 which refers to all debts

due to the Crown. In the State of Rajasthan & Ors. v.

Ghasilal (1965 (2) SCR 805), this Court considered the

provisions of the Rajasthan Sales Tax Act, 1955. It

observed, that Section 3 which is the charging section of

the Rajasthan Sales Tax Act, read with Section 1, makes tax

payable i.e. creates a liability to pay the tax. That is the

normal function of a charging section in a taxing statute.

But till the tax payable is ascertained by the Assessing

Authority under Section 10 or by the assessee under Section

7(2), no tax can be said to be due. For till then there is

only a liability to be assessed to tax. A similar view was

taken by this Court in its later decision in Associated

Cement Co. Ltd. v. Commercial Tax Officer, Kota & Ors. (1981

(48) S.T.C. 466 at page 480) holding that until the tax

payable is ascertained by the Assessing Authority or by the

assessee, no tax can be said to be due; for till then there

is only a liability to be assessed to tax.

The Federal Court in the case of Chatturam and Ors. v.

Commissioner of Income-Tax, Bihar (1947 (15) ITR 302 at page

308) held that the liability to pay the tax is founded on

Sections 3 and 4 of the Income Tax Act which are the

charging sections. Section 22 etc. are the machinery

sections to determine the amount of tax. It cited the

observations of Lord Dunedin in Whitney v. Commissioners of

Inland Revenue (1926 AC 37) as follows :- "Now, there are

three stages in the imposition of a tax. There is the

declaration of liability, that is the part of the stature

which determines what persons in respect of what property

are liable. Next, there is the assessment. Liability does

not depend on assessment, that ex hypothesi has already been

fixed. But assessment particularizes that exact sum which a

person liable has to pay. Lastly, come the methods of

recovery if the person taxed does not voluntarily pay." (See

in this connection, Kalwa Devadattam and Ors. v. Union of

India and Ors. (1963 (49) ITR 165, 171); Doorga Prosad v.

The Secretary of State (13 ITR 285, 289) and Ramyond

Synthetics Ltd. and Ors. v. Union of India and Ors. (1992

(2) SCC 255 at 286-288).

"Tax due" usually refers to an ascertained liability.

However, the meaning of the words 'taxes due' will

ultimately depend upon the context in which these words are

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used.

In the present case, the words 'taxes due' occur in a

section dealing with distribution of property. At this stage

the taxes 'due' have to be actually paid out. Therefore, the

phrase 'taxes due' cannot refer merely to a liability

created by the charging section to pay the tax under the

relevant law. It must refer to an ascertained liability for

payment of taxes quantified in accordance with law. In other

word, taxes as assessed which are presently payable by the

notified person are taxes which have to be taken into

account under Section 11(2)(a) while distributing the

property of the notified person. Taxes which are not legally

assessed or assessments which have not become final and

binding on the assessee, are not covered under Section

11(2)(a) because unless it is an ascertained and quantified

liability, disbursement cannot be made. In the context of

Section 11(2), therefore, "the taxes due" refer to "taxes as

finally assessed".

Question No. 2

Do these taxes relate to any particular period or do

they cover all assessed taxes of the notified person? The

Special Court Act is quite clear in its intent. It seeks to

cover all criminal and civil proceeding relating to

transactions in securities of a notified person between 1st

of April, 1991 and 6th of June, 1992. The Special Court is

empowered to examine all civil claims and to try all

offences pertaining to such transactions during the said

period. Under Section 3(2) it is the property of such

offenders which is attached by the Custodian and which is

disbursed under the directions of the Special Court under

Section 11(2). Clearly, therefore, as the Special Court is

empowered to examine all transactions in securities during

the period 1.4.1991 to 6.61992, as also all claims relating

to the property attached, the Special Court will also have

to the property attached, the Special Court will also have

to examine the tax liability of the notified person arising

during the period 1.4.1991 to 6.61992. As the purpose of the

Special Court Act, inter alia, is as far as practicable, to

safeguard the funds to which the banks and financial

institutions may be entitled, and to ensure that these funds

are not done away with, there are provisions for attachment,

ascertainment of claims and distribution of funds. However,

before the liabilities of a notified person to banks and

financial institutions can be discharged, Section 11(2)(a)

requires the tax liability of the notified person to be

paid. In this context the tax liability can properly be

construed as tax liability of the notified person arising

out of transactions in securities during the "statutory

period" of 1.4.1991 to 6.6.1992. If, for example, any

income-tax is required to be paid in connection with the

income accruing to a notified person in respect of

transactions in security during the "statutory period", that

liability will have to the banks and financial institution.

Similarly, in respect of any property which is attached, if

any rates or taxes are payable for the "statutory period"

those rates and taxes will have to be paid before the

proceeds of the property are distributed to banks and

financial institutions. In the same manner, the liabilities

to banks and financial institutions in Section 11(2)(b) are

also liabilities pertaining to the statutory period.

However, the extent to which liability under Section

11(2)(a) is to be discharged is dealt with a little later.

Every kind of tax liability of the notified person for

any other period is not covered by Section 11(2)(a),

although the liability may continue to be the liability of

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the notified person. Such tax liability may be discharged

either under the directions of the Special Court, under

Section 11(2)(c) or the taxing authority may recover the

same from any subsequently acquired property of a notified

person (vide 1997 (9) SCC 123) or in any other manner from

the notified person in accordance with law. The priority,

however, which is given under Section 11(2)(a) to such tax

liability only covers such liability for the period 1.4.1991

t 6.61992.

Questions No.3

At what point of time should this tax liability have

become quantified by a large assessment which is final and

binding on the notified person concerned? It is contended

before us by some of the parties that only that liability

which has become ascertained by final assessment on the date

of the Act coming into force should be paid under Section

11(2)(a). Others contended that it should have been so

ascertained on the date of the notification. The third

contention is that it should have been so ascertained on the

date of distribution. Since we have held that tax liability

under Section 12(2)(a) refers only to such liability for the

period 1.4.1991 to 6.6.1992, it would not be correct t hold

that the liabilities arising during this period should also

be finally assessed before 6.6.1992 (the date of the Act) or

the date of the notification. It must refer to the date of

distribution. The date of distribution arrives when the

Special Court completes the examination of claims under

Section 9A. It on that date, any tax liability for the

statutory period is legally assessed, and the assessment is

final and binding on the notified person, that liability

will be considered for payment under Section 11(2)(a),

subject to what follows.

Question N. 4

The next question is, whether the assessed tax

liability for the statutory period requires to be discharged

in full under Section 11(2)(a) or whether the Special Court

has any discretion in relation to the extent of payment to

be made under Section 11(2)(a)? The banks who have large

claims against the notified persons have strenuously urged

that the Special Court is not required to pay the tax

liability in full, but has some discretion as to the extent

to which such liability will be paid. They have emphasised

the words `shall be paid or discharged in full as far as may

be' in Section 11(2) as indicating some discretion in the

Special Court regarding payment of liabilities under Section

11(2)(a). They point out that at the time when the said Act

was enacted or when the Ordinance which it replaced was

promulgated, the full extent of the funds involved in

malpractices leading to the diversion of funds from banks

and financial institutions to the pockets of the brokers,

was not known. Even after the submission of report by the

Janakiraman Committee, a special group known as an inter-

disciplinary group was required to be set up to trace the

end use of funds involved in this fraud. Auditors were

appointed to check instances of differences where the

attached assets were short of problem exposure. It was,

therefore, expected that the available funds from attached

assets would be speedily restored to the banks and

financial institutions. It was also expected that even after

the discharge of tax liabilities for the relevant period,

substantial funds would be left over for being paid to the

banks and financial institutions concerned.

It is submitted that the Act was not intended to secure

taxes and, therefore, if the Special Court finds that the

tax liabilities are such, and their manner of assessment is

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such, that it would result in the entire funds being paid

over to the taxing authorities, the Special Court would have

discretion in deciding how much should be paid over to the

taxing authority and how much should come to the banks and

financial institutions. It is submitted with some

justification that Section 11 should be construed in the

context of the purpose for which it was framed; as was done

by this Court in the case of Tejkumar Balakrishna Ruia v.

A.K. Menon & Anr. (1997 (9) SCC 123) where the Court said

that if two interpretations are possible, purposive

interpretation should be resorted to. The Court in that case

held that the income or property obtained by a notified

person after the date of the notification could not be

attached under Section 3(3). The purposive interpretation in

the present case is to be resorted to for the purpose of

ensuring that amounts realised from the properties attached

come back to the banks and financial institutions.

Our attention was drawn to the provisions relating to

examination of claims in insolvency or of a company in

winding up. Debts have to be proved in insolvency before

they can be considered for payment either in part of in

full. Explaining the powers of the insolvency court, this

Court in The State of Punjab v. S. Rattan Singh (1964 (5)

SCR 1098 at page 1109) said, "It is well-settled that the

Insolvency Court can, both at the time of hearing t he

petition for adjudication of a person as an insolvent and

subsequently at the stage of the proof of debts, re-open the

transaction on the basis of which the creditor had secured

the judgment of a court against the debtor. This is based on

the principle that it is for the Insolvency Court to

determine at the time of the hearing of the petition for

Insolvency whether the alleged debtor does owe the debts

mentioned by the creditor in the petition, and whether, if

he owes them, what is the extent of those debts. A debtor is

not to be adjudged an insolvent unless he owes the debts

equal to or more than a certain amount, and has also

committed an act of insolvency. It is the duty of the

Insolvency Court, therefore, to determine itself the alleged

debts owed by debtor irrespective of whether those debts are

based on a contract or under a decree of court. At the stage

of the proof of the debts, the debts to be proved by the

creditor are scrutinised by the Official Receiver or by the

Court in order to determine the amount of all the debts

which the insolvent owes as his total assets will be

utilised for the payment of his total debts and if any debt

is wrongly included in his total debts that will adversely

affect the interest of the creditors other than the judgment

creditor in respect of that particular debt as they were not

parties to the suit in which the judgment debt was decreed.

The decree is not binding on them and it is right that they

be in a position to question the correctness of the judgment

debt."

It is on behalf of all these creditors that the

Insolvency Court or the Official Receiver scrutinises the

debts, whether claimed under a decree or otherwise. The same

is the position of a company in winding up because the rules

of insolvency apply to winding up proceedings

In the case of S.V. Kondaskar v. V.M. Deshpande and

Anr. (1972 (1) SCC 438 at page 449) this Court examined the

question whether under the Income Tax Act before commencing

re-assessment proceedings, leave was required to be taken by

the income tax authority of the Company Court under Section

446 of the Companies Act, when the assessee-company was in

winding up. This Court said that the Income Tax Act is a

complete code with respect to assessment and re-assessment

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of income tax. The proceedings under the Income Tax Act

would not fall within the meaning of the expression `other

legal proceedings' in Section 446 and, therefore, leave

would not be required of the Company Court for commencing

such proceedings. This Court, however, went on to observe,

(in paragraph 18) "We have not been shown any principle on

which the liquidation court should be vested with the power

to stop assessment proceedings for determining the amount of

tax payable by the company which is being wound up. The

liquidation court would have full power to scrutinise the

claim of the Revenue after income tax has been determined

and its payment demanded from the liquidator. It would be

open to the liquidation court then, to decide how far, under

the law, the amount of income tax determined by the

department should b e accepted as a lawful liability on the

funds of the company in liquidation. At that stage the

winding up court can full safeguard the interests of the

company and its creditors under the Act".

Explaining this decision, this Court (a bench of two

judges) in the case of Assistant Commissioner of Income Tax

v. A.K. Menon & Ors. (1995 (5) SCC 200) held that the

Special Court under the present Act has no power to sit in

appeal over the orders of Tax Authorities, Tribunals or

Courts. The claims relating to tax liabilities of a notified

person are, along with revenues, cesses and rates, entitled

to be paid first in the order of priority and in full as far

as may be.

While we respectfully agree with the finding that the

Special Court cannot sit in appeal over the assessment of

taxes by the Tax Authorities, we would like to qualify the

Court's subsequent observations relating to payment in full

of all assessed taxes under Section 11(2)(a). There is

undoubtedly no question of any reopening of tax assessments

before the Special Court. There is also no provision under

the Special Court Act for proof of debts as in Insolvency.

The provisions in the Special Court Act for examination of

claims are under Section 9A. A claim in respect of tax

assessed, therefore, cannot be reopened by the Special

Court. The liability of the notified person to pay the tax

will have to be determined under the machinery provided by

the relevant tax law. The extent of liability, therefore,

cannot be examined by the Special Court.

But the Special Court can decide how much of that

liability will be discharged out of the funds in the hands

of the Custodian. This is because the tax liability of a

notified person having priority under Section 11(2)(a) is

only tax liability pertaining to the "statutory period".

Secondly payment in full may or may not be made by the

Special Court depending upon various circumstances. The

Special Court can, for this purpose examine whether there is

any fraud, collusion or miscarriage of justice in assessment

proceedings. The assessee who is before the Special Court,

is a person liable to be charged with an offence relating to

transactions in Securities. He may not, in these

circumstances, explain transactions before t he income-tax

authorities, in case his position is prejudicially affected

in defending criminal charges. Then, on account of his

property being attached, he may not be in a position to

deposit the tax assessed or file appeals or further

proceedings under the relevant tax law which he could have

otherwise done. Where the assessment is based on proper

material and pertains to the "statutory period", the Special

Court may not reduce the tax claimed and pay it out in full.

But if the assessment is a "best judgment" assessment, the

Special Court may examine whether, for example, the income

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which is so assessed to tax bears comparison to the amounts

attached by the Custodian, or whether the taxes so assessed

are grossly disproportionate to t he properties of the

assessee in the hands of the Custodian, applying the

Wednesbury principle of proportionality. The Special Court

may in these cases, scale down the tax liability to be paid

out of the funds in the hands of the Custodian.

Although the liability of the assessee for the balance

tax would subsist, and the Taxing Authorities would be

entitled to realise the remaining liability from the

assessee, the same will not be paid in priority over the

claims of everybody else under Section 11(2)(a). If the

Special Court so decides, it may direct payment of the

balance liability under Section 11(2)(c). Otherwise the

taxing authorities may recover the same from any other

subsequently acquired property of the assessee or in any

other manner in accordance with law. Such scaling down,

however, should be done only in serious cases of miscarriage

of justice, fraud or collusion, or where tax assessed is so

disproportionately high in relation to the funds in the

hands of the Custodian as to require scaling down in the

interest of the claims of the banks and financial

institutions and to further the purpose of the Act. The

Special Court must have strong reasons for doing so. In

fact, the Income Tax Authorities have also accepted that

exorbitant tax demands can be ignored, applying the

Wednesbury Principles.

Question No. 5

One other connected question remains: whether "taxes"

under Section 11(2)(a) would include interest or penalty as

well? We are concerned in the present case with penalty and

interest under the Income Tax Act. Tax, penalty and interest

are different concepts under the Income Tax Act. The

definition of "tax" under Section 2(43) does not include

penalty or interest. Similarly, under Section 157, it is

provided that when any tax, interest, penalty, fine or any

other sum is payable in consequence of any order passed

under this Act, the Assessing Officer shall serve upon the

assessee a notice of demand as prescribed. Provisions for

imposition of penalty and interest are distinct from the

provisions for imposition of tax. Learned Special Court

judge, after examining various authorities in paragraphs 61

to 70 of his judgment, has come to the conclusion that

neither penalty nor interest can be considered as tax under

Section 11(2)(a). We agree with the reasoning and conclusion

drawn by the Special Court in this connection.

Question No. 6

The Special Court has, in the impugned judgment, also

dwelt at some length on the question whether it can absolve

a notified person from imposition of penalty or interest

after the date of the notification. Since the liabilities

covered under Section 11(2)(a) are only liabilities arising

during the period 1.4.1991 to 6.6.1992. and do not cover

penalty and interest, this question does not really arise.

In any case, interest or penalty for any action or default

after the date of the notification, are not covered by the

Act. However, we must reiterate that a taking statute is a

code in itself for imposition of tax, penalty or interest.

The remedy of a notified person who is assessed to penalty

or interest, after the notified period, would be to move the

appropriate authority under the taxing statute in that

connection. If it is open to him under the relevant taxing

statute to contend that he was unable to pay his taxes on

account of the attachment of all his properties under the

Special Court Act, and that there is a valid reason why

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penalty or interest should not be imposed upon him after the

date of notification, the concerned authorities under the

Taxing Statute can take notice of these circumstances in

accordance with law for the purpose of deciding whether

penalty or interest can be imposed on the notified person.

The Special Court is required to consider this question only

from the point of view of distributing any part of the

surplus assets in the hands of the Custodian after the

discharge of liabilities under Section 11(2)(a) and

11(2)(b). The Special Court has full discretion under

Section 11(2)(c) to decide whether such claim for penalty or

interest should be paid out of any surplus funds in the

hands of the Custodian.

This, we hope, answers all questions which arise for

determination in the present appeals. Pursuant to an interim

order dated 26.8.1996, certain payments have been made to

Income Tax Authorities. The Income Tax Authorities, however,

have given an undertaking which is filed by the Secretary

(Revenue) in the Ministry of Finance, Union of India, that

the Union of India shall, within four weeks f being called

upon so to do, either by this Court or by the Special Court

in this or any other proceeding under the Special Curt Act,

bring back to Court the moneys s paid r part r parts thereof

as directed, and pay thereon interest at a rate not less

than 18% per annum as this Court or the Special Court may

direct from the date of receipt until the date of return

thereof. The Special Court shall examine the claim of the

Income Tax Authorities for taxes due under Section 11(2)(a)

in the light of our judgment and decide whether any amount

paid to the Income Tax Authorities under the interim orders

of this Court requires to be returned. The Special Court

shall pass appropriate orders thereon in the light of the

undertaking given.

This Court, by an order dated 11.3.1996, had also

directed the Custodian to draft a scheme in respect of the

shares held by the Custodian whereby such shares can be sold

from time to time. The Custodian was also directed to

forwarded the scheme for the approval of the Union of India.

Pursuant to these directions, then Custodian forwarded a

draft scheme` for approval to the Union of India. The

Ministry of Finance, Department f Economic Affairs (Banking

Division) approved the draft scheme sent by the Custodian

with certain modifications. The final scheme incorporating

the modifications by the Union of India has been filed in

this Court. This scheme, with further modifications, if any,

shall be considered by the Special Court and appropriate

orders may be passed by the Special Curt in respect of the

scheme so submitted.

In view of the interpretation which we have put on

Section 11 of the Special Court Act and Section 3(3) of the

Special Court Act, the challenge to the constitutional

validity of Section 11 read with Section 3(3) does not

survive. If, according to any of the banks or financial

institutions, any of the properties attached belongs to the

bank or financial institution concerned, it is open to that

bank or financial institution to file a claim before the

Special Court in that connection and establish its right to

the property attached or any part thereof in accordance with

law. Obviously, until such a claim is determined, the

property attached cannot be sold or distributed under

Section 11. Transfer Case No. 5 of 1998 is, therefore,

dismissed.

All the appeals are disposed of as above with no order

as to costs.

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