2008 (12) TMI 2 - SC - Income Tax

Security scam - Recovery of tax arrears - priority - bank dues - whether the Special Court constituted under the aforesaid Act was right in scaling down the priority tax demand by delving into the merits of the assessment orders and by deciding the matter as an appellate authority which directions according to the appellant are in violation of the decision of Supreme Court reported in (1998 - TMI - 40214 - SUPREME Court) - Held that - There could be no disagreement with regard to the fact that if any amount is found due and payable by the banks towards amount advanced by it as loan to Mr. Harshad Mehta in that event the right of the bank to the extent of the said amount must be held to be the existing right of the bank on the property which is attached. - It also cannot be ignored that the said amount could not have been assessed in the hands of Harshad S. Mehta as his income for the banks continued to have an existing right on the aforesaid amount which is required to be released in terms of the decrees which are obtained by the banks and the non-release of the said amount would amount to miscarriage of justice. - However the fact that decrees have been obtained by the banks in respect of the certain dues of Harshad S. Mehta could not be disputed by the Income Tax Department. It also could not be disputed by the Income Tax Department that the amounts for which decrees have been obtained by the banks have become final and binding. Appellant (revenue) is justified while contending that if the banks have a right title or interest in the attached property on the date of the notification under Section 3 of the Act for which decrees have been obtained and if the banks are claiming that the said amount has wrongly been included in the income of the notified party for the statutory period then the banks are required to show the nexus between the said decreed amount and the amount which is included in the income of the notified party for the statutory period. Since this is a case of finding of facts and issues matter remitted back to special court to decide the issues after giving an opportunity to the parties to place all the relevant documents so as to enable it to come to a proper and considered finding.

Summary

Issues Involved:
1. Jurisdiction of the Special Court to scale down tax liability.
2. Priority of tax demands over claims by banks.
3. Nexus between decreed amounts and income assessed for the statutory period.
4. Allegation of duplication in the scaled-down amounts.

Issue-Wise Detailed Analysis:

1. Jurisdiction of the Special Court to Scale Down Tax Liability:
The Supreme Court examined whether the Special Court had the authority to scale down the priority tax demand by delving into the merits of the assessment orders. The Court referred to the decision in Harshad S. Mehta v. Custodian & Ors., which held that the Special Court cannot sit in appeal over tax assessments but can examine whether there is any fraud, collusion, or miscarriage of justice in the assessment proceedings. The Special Court can scale down the tax liability if the assessment is grossly disproportionate to the funds available, applying the Wednesbury Principle of Proportionality. The Court reiterated that the Special Court could only scale down tax liabilities in cases of serious miscarriage of justice, fraud, or collusion.

2. Priority of Tax Demands Over Claims by Banks:
The Court affirmed that, under Section 11(2)(a) of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, the Income Tax Department's claim for taxes due from Harshad S. Mehta for the statutory period (1-4-1991 to 6-6-1992) has priority over the claims of banks. The Court emphasized that taxes due refer to taxes as finally assessed and payable. However, the Special Court can determine how much of this liability will be discharged from the funds in the Custodian's hands.

3. Nexus Between Decreed Amounts and Income Assessed for the Statutory Period:
The banks contended that the decrees in their favor were for amounts that should not have been included in Harshad S. Mehta's income for the statutory period. The Special Court partially accepted these claims and scaled down the tax liability. The Supreme Court held that the banks must show a clear nexus between the decreed amounts and the income assessed for the statutory period. The Court remanded the matter to the Special Court to determine whether such a nexus exists.

4. Allegation of Duplication in the Scaled-Down Amounts:
The Income Tax Department argued that there was duplication in the amounts scaled down by the Special Court, particularly concerning oversold securities. The Department claimed that the amounts of Rs. 1688 crores and Rs. 1080 crores were both related to oversold securities and were essentially the same. The Supreme Court noted that there was no clear finding on this issue by the Special Court and remanded the matter for further examination. The Special Court was directed to determine whether there was any duplication in the amounts scaled down.

Conclusion:
The Supreme Court set aside the Special Court's directions, except for the scaling down of Rs. 253 crores and Rs. 101 crores, which were not contested by the Income Tax Department. The matter was remanded to the Special Court to determine the nexus between the decreed amounts and the income assessed for the statutory period and to address the issue of duplication. The Special Court was instructed to decide the matter expeditiously within three months, allowing the parties to file relevant documents. The Court clarified that interim disbursements made during the pendency of the disputes would not be final and would be subject to the final adjudication of the disputes.