1998 (5) TMI 25 - SC - Income Tax

What is meant by revenues, taxes, cesses and rates due ? Does the word due refer merely to the liability to pay such taxes, etc., or does it refer to a liability which has crystallised into a legally ascertained sum immediately payable ? Do the taxes (in clause (a) of s. 11(2)) refer only to taxes relating to a specific period or to all taxes due from the notified person ? At what point of time should the taxes have become due ? Does the Special Court have any discretion relating to the extent of payments to be made under s. 11(2)(a) from out of the attached funds/property? Whether taxes include penalty or interest ? 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 s. 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? Held that - In the present case, the words taxes due occur in a section dealing with distribution of property. Taxes which are not legally assessed or assessments which have not become final and binding on the assessee, are not covered under s. 11(2)(a) because unless it is an ascertained and quantified liability, disbursement cannot be made. In the context of s. 11(2), therefore, the taxes due refer to taxes as finally assessed . Every kind of tax liability of the notified person for any other period is not covered by s. 11(2)(a), although the liability may continue to be the liability of the notified person. Such tax liability may be discharged either under the directions of the Special Court, under s. 11(2)(c) or the taxing authority may recover the same from any subsequently acquired property of a notified person or in any other manner from the notified person in accordance with law. The priority, however, which is given under s. 11 (2)(a) to such tax liability only covers such liability for the period 1st April, 1991 to 6th June, 1992. Since we have held that tax liability under s. 11(2)(a) refers only to such liability for the period 1st April, 1991 to 6th June, 1992, it would not be correct to hold that the liabilities arising during this period should also be finally assessed before 6th June, 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 s. 9A. If 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 considered for payment under s. 11(2)(a), subject to what follows. 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 s. 11(2)(a). If the Special Court so decides, it may direct payment of the balance liability under s. 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. The Special Court must have strong reasons for doing so. In fact, the IT authorities have also accepted that exorbitant tax demands can be ignored, applying the Wednesbury principle. Similarly, under s. 156, it is provided that when any tax, interest, penalty, fine or any of other sum is payable in consequence of any order passed under this Act, the AO shall serve upon the assessee a notice of demand as prescribed. The provisions for imposition of penalty and interest are distinct from the provisions for imposition of tax. The learned Special Court judge, after examining various authorities in paras 51 to 70 of his judgment, has come to the conclusion that neither penalty nor interest can be considered as tax under s. 11(2)(a). We agree with the reasoning and conclusion drawn by the Special Court in this connection. 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 ss. 11(2)(a) and 11(2) (b). The Special Court has full discretion under s. 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.

Issues Involved
1. Interpretation of Section 11 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.
2. Priority of amounts due before and after the date of notification.
3. Definition of "taxes" under Section 11, including penalties and interest.
4. Levy of penalty and interest on notified parties after the date of notification.
5. Jurisdiction of the Special Court in civil and criminal matters.
6. Rights of third parties in attached properties.
7. Discretion of the Special Court in discharging liabilities under Section 11(2)(a).

Issue-wise Detailed Analysis

1. Interpretation of Section 11 of the Special Court Act:
The Supreme Court examined the interpretation of Section 11, which deals with the discharge of liabilities and distribution of attached properties. The Court emphasized that the section lays down priorities for distribution, as indicated by the words "in the order as under" in Section 11(2). The liabilities to be discharged include revenues, taxes, cesses, rates, amounts due to banks or financial institutions, and any other liabilities specified by the Special Court.

2. Priority of Amounts Due Before and After Notification:
The Court clarified that the priority created by Section 11 applies to amounts due both before and after the date of notification. The term "taxes due" refers to an ascertained liability for payment of taxes quantified in accordance with law, meaning taxes as finally assessed and presently payable by the notified person.

3. Definition of "Taxes" Under Section 11:
The Court held that the term "taxes" in Section 11(2)(a) does not include penalties and interest. The definition of "tax" under the Income Tax Act does not encompass penalty or interest, and the provisions for imposition of penalty and interest are distinct from those for tax.

4. Levy of Penalty and Interest on Notified Parties:
The Court ruled that the Special Court does not have the power to absolve a notified person from payment of penalty or interest for a period subsequent to the date of notification. However, the Special Court has discretion under Section 11(2)(c) to decide whether such claims should be paid out of any surplus funds in the hands of the Custodian.

5. Jurisdiction of the Special Court:
The jurisdiction of the Special Court in civil and criminal matters is confined to transactions in securities during the statutory period (1st April 1991 to 6th June 1992) and properties attached of a notified person. The Special Court can only deal with the right, title, and interest of the notified person in the attached property.

6. Rights of Third Parties in Attached Properties:
The Court emphasized that the rights of third parties in attached properties are not extinguished by the notification. The Custodian's power under Section 4 to cancel fraudulent contracts or agreements is the only provision affecting third-party rights. The Special Court must decide any third-party claims before proceeding under Section 11.

7. Discretion of the Special Court in Discharging Liabilities:
The Court held that the Special Court has discretion regarding the extent of payment to be made under Section 11(2)(a). While the tax liability of a notified person must be paid, the Special Court can scale down the tax liability in cases of fraud, collusion, or where the tax assessed is disproportionately high in relation to the funds in the hands of the Custodian.

Conclusion
The Supreme Court provided a detailed interpretation of Section 11 of the Special Court Act, clarifying the priorities for distribution of attached properties and the scope of liabilities to be discharged. The Court also emphasized the rights of third parties and the discretion of the Special Court in dealing with tax liabilities. The challenge to the constitutional validity of Section 11 read with Section 3(3) was dismissed, and the appeals were disposed of accordingly.

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