9911796707
TMI Blog1995 (2) TMI 301X X X X Extracts X X X X X X X X Extracts X X X X ..... has filed before this Court a large number of applications, for payment in priority, of tax, interest and penalty. There are approximately 24 such applications. Out of these approximately 17 applications are against the Harshad Mehta Group. By these 17 applications, a sum of approximately Rs. 1,380 crores has been claimed. I am also informed that the Income-tax Department is also in the process of reopening assessment of various notified parties. Undoubtedly this will take some time. Further by reason of the fact that many notified parties have not paid advance tax or filed income-tax returns, penalties and interest are also sought to be levied by the Income- tax Department under the various provisions of the Income-tax Act. 3. As is well known large amounts are due to Banks and Financial Institutions. Many-of these Banks and Financial Institutions are making claims under various documents in their favour. Some of these claims are by way of mortgages, hypothecations, pledges, assignments of debts and even by way of bankers lien, set off and/or right to adjust accounts. Many of the Banks and Financial Institutions are claiming interest including in some cases penal interest. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions of Dr. Balasubramanian should not be taken to be on behalf of the Income-tax Department. Dr. Balasubramanian then claimed that he was merely assisting the Court on a question of law. Similarly on behalf of the various members of the Harshad Mehta Group various counsels appear in various Applications. They also desired to be heard. The Court has heard them all. Thus Mr. S.B. Jaisinghani made submissions on behalf of Mr. Harshad Mehta and M/s. Harshad Mehta. Mr. M.R. Jethmalani made submissions on behalf of Mr. Ashwin Mehta and M/s. Ashwin Mehta, Mr. J. Mistry made submissions on behalf of Mrs. Jyoti Mehta and M/s. Jyoti Mehta. 8. At this stage itself it must be mentioned that in 1992-93 a number of Banks and Financial Institutions had claimed rights in properties stand- ing attached. At that stage, the custodian had contended that notwith-standing the special rights claimed by Banks and Financial Institutions, distribution could only take place under section 11 of the Special Court Act. The Custodian had submitted that even secured creditors have now to stand in line and be paid only at the time of distribution under section 11 of the Special Court Act. On 22nd July, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . This is because monies taken out of one Bank or Financial Institution would have been placed first into an account of the notified party with another Bank or utilised to pay off debts of other Banks or financial institutions. Also properties and assets purchased out of monies taken out of one Bank/ Financial Institution may have been pledged or hypothecated with another. The Financial Institutions or Banks were most likely to have documents in their favour or make claims on the basis of Bankers' Rights of Lien, set off or adjustment. In my view, by this Act, the Legislature therefore sought to provide : (1) for a speedy trial of offences; (2) immediate attachment and thus freezing of all assets of parties suspected to be involved and thus preventing any further transfers or alienations; (3) a reasonable, rational and equitable distribution of the property by this Court as it would have the total picture. This last would ensure a much speedier return of monies than under the present legal system. That these were the objectives is clear from the provisions of the said Act. The first object is clear on a plain reading of the Act. The second object is achieved by the provisions reg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of this Act shall have effect notwithstanding anything inconsistent therewith in any other law or in any instrument having effect by virtue of any law or in any Decree or Order of any Court, Tribunal or Authority. The provision regarding distribution would be the only provision against the absolute claims and rights under prior contracts. This only if the interpretation of the Custodian is accepted. If Mr. Mehta's, Mr. Kapadia's, Mr. Doctor's and Mr. Tulzapurkar's interpretations are to be accepted, then there is no provision in this Act which would be inconsistent with any contract. This interpretation would render ineffective and virtually nugatory the words "inconsistent therewith contained. . . . or in any instrument having effect by virtue of any law". Further secured creditors and persons having special interests may get Decrees or Orders of Courts in their favour. Section 13 provides that provisions of this Act prevail even over any Decree and Order of any Court, Tribunal or Authority. This would include even Decrees and Orders obtained by secured creditors or persons having a special interest in property. If secured creditors and persons having special interests were m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssible be paid out of unencumbered property in the first instance. So far as private persons are concerned, there appears to be rational as to why they are put last. As is known, almost all the monies were siphoned off into private pockets from Financial Institutions and/or Banks. It has then been diverted into shares and stocks, various private companies, partnerships and their businesses, or given as loans, etc. Thus, the notified party has in most cases purchased the property or asset out of public money. The money was not his property. It belonged to the Financial Institution/Bank from whose pocket it came. The object is to collect public money and return it to the Financial Institutions and/or Banks from where it came in the first instance. This is clear because what is to be distributed is "property belonging to a Notified Party". This Court has under section 4(2) the power to see whether a person is correctly notified. It is only after the Court is so satisfied that the distribution would arise. Thus even when private rights/special interests are created, it is out of public monies or assets acquired out of public monies. As stated above in most cases, the notified party wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in their favour must approach this Court for distribution. The distribution can only be as laid down in section 11. In my view, the classification is a reasonable, rational, equitable and logical. They have been incorporated to meet the objective and have a clear nexus with the objective. In my view the section provides for the distribution of the property in an orderly fashion. In my view, such an interpretation is not subject to any attack either under article 14 or article 19. In my view, therefore, it will have to be held that even though the contractual and special rights in property have not been abrogated or done away with, they can only be enforced subject to the order of payments laid down under section 11 of the said Act. All such parties, whether decree holders or otherwise, must come before this Court and put their case before this Court. They may make their claim directly before this Court or enforce their claim in normal Civil Courts and then approach this Court on the basis of Decrees or Orders obtained from any Court or Tribunal. Even when parties elect to make their claim in the normal Civil Court, in my view, it would be preferable and advisable that the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be paid. The Learned Advocate General submitted that there is significance in use of the word "due" in section 11(2)( a ) and ( b ) . He submitted that the word "due" must have reference to a point of time. He fairly pointed out that in the Act, words to the effect "presently due" or "due in future" or "contingent liability" have not been used. He points out that similarly words to the effect "due from time to time" or "periodically due" have not been used. He submits that the Legislature was well aware that the liabilities under section 11(2)( a ) would arise periodically and from time to time. He submitted that the intention of the Legislature must, therefore, be ascertained from the objects/scheme of the Special Courts Act. 11. The Learned Advocate General referred to Black's Legal Dictionary wherein it is stated as follows : "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. It may mean that the debt or claim in question is now (presently or immediately) matured and e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and of the latter that it is a debt due'. This passage indicates that when there is an obligation to pay a sum of money at a future date, it is a debt owing but when the obligation is to pay a sum of money in praesentiit is a debt due. A sum due would, therefore, mean a sum for which there is an existing obligation to pay in praesenti or in other words, which is presently payable...." Thus, in this case, the Supreme Court is laying down that the sum would be due when there is an existing obligation to pay the same now or in future. 12. The Learned Advocate General also referred to section 530 of the Companies Act, 1956. He pointed out that even under the Companies Act, all revenues, taxes, cesses and rates due at the relevant date and having become due and payable within 12 months next before the relevant date get a priority. He submitted that even under the Companies Act, priority is given to revenues, taxes, cesses and rates only up to the relevant date and for a period of 12 months prior thereto. 13. The Learned Advocate General submitted that even though under section 11 does not specify the period of time when the liabilities are deemed to be due, some period ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned authorities could then legitimately claim that, nothing should be distributed, as the future dues are not yet satisfied. He submitted that this could never be the intention of the Legislature. 16. The Learned Advocate General fairly submitted that the point of time could also be the date of distribution. He however submitted that this would create a number of difficulties. He submitted that that would not be reasonable and harmonious construction. He pointed out by way of an example that the Income-tax Department could now re-assess, make larger demands and levy penalties and interest. He submitted that this Court would not be sitting in Appeal over the assessment orders by the Income-tax Department. He submitted that that could only be done by the Tribunal or the Tax or Writ Bench of the High Court or the Supreme Court. He submitted that thus by reason of re-assessment, levy of penalty/interest the Income-tax Department may have very large claims. He submitted that notified parties may be challenging those claims. Yet this Court could not distribute the assets until the disputed claims are finally settled at the stage of the Supreme Court. He submitted that it is wel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers exploit needy agriculturists and impose upon them harsh and onerous terms while granting loans to them. But that charge does not hold true in the case of representative institutions, like banks and banking companies. They are governed by their rules and regulations which do not change from debtor to debtor and which, if anything, are intended to benefit the weaker sections of society. It is for this reason that debts owing to such creditors are excepted from the operation of the Act. 18. A necessary implication and an inevitable consequence of the Attorney- General's argument is that in order to attract the application of clause (1) of section 2(4), it is enough to show that the debt was, at some time before the commencement of the Act, owed to banking company; it does not matter whether it was in its inception owed to private money-lender and, equally so, whether it was owed to such money-lender on the date of the commencement of the Act. This argument, if accepted, will defeat the very object of the Act. The sole test which assumes relevance according to that argument is whether the debt was owed, at any time before the commencement of the Act, to a banking company. It mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... object of the Act. 20. There is one more aspect of the matter which needs to be amplified and it is this : When clause (1) speaks of a debt due before the commencement of the Act, what it truly means to convey is not that the debt should have been due to a banking company at some point of time before the commencement of the Act, but that it must be a debt which was incurred from a banking company before the commencement of the Act. 21. Thus, the application of clause (1) is subject to these conditions: ( i ) the debt must have been incurred from a banking company; ( ii ) the debt must have been so incurred before the commencement of the Act; and ( iii ) the debt must be due to a banking company on the date of the commencement of the Act. There are cumulative conditions and unless each one of them is satisfied, clause (1) will not be attracted and the exclusion provided for therein will not be attracted and the exclusion provided for therein will not be available as an answer to the relief sought by the debtor in terms of the Act." Thus, the Supreme Court read the words into the statute. In its own words, the Supreme Court restructured the clause in order to further the objec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rged with the specific purpose of tracing the funds involved in the problem exposure of Banks/Financial Institutions. The Inter-Disciplinary Group was able to reconcile the total problem exposure figures at Rs. 3,729.48 crores on account of amounts outstanding against Harshad Mehta Group - Rs. 1,559.74 crores, the Dalai Group - Rs. 1,886.68 crores and Fairgrowth Financial Services Ltd. - Rs. 283.06 crores. 29. The Custodian has Notified 41 persons and has attached assets worth around Rs. 2910 crores based on November 1994 valuation. Out of the assets attached by the Custodian, the value of attached assets of HSM group is about Rs. 2034 crores as against problem exposure of Rs. 1559.74 crores and in case of FFSL it is Rs. 456 crores as against problem exposure of Rs. 283.06 crores. Only in case of Dalai Group there is a shortfall of Rs. 1466.77 crores against problem exposure of Rs. 1886.68 crores." 20. Mr. Setalvad also relied on the case of Government of India v. Taylor [1955] AC 491. In this case, the question was whether in a winding-up of an English Company trading in India, the liabilities payable by the Official Liquidator included claims for Indian tax. The House o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th in valuing the shares of the Company for Estate Duty purposes at the deceased's death on the ground that such charge had been a "contingent liability" at the date of death. Whilst considering this question, the Court held as follows (p. 247): "No doubt the words 'liability' and 'contingent liability' are more often used in connection with obligations arising from contract than with statutory obligations. But I cannot doubt that if a statute says that a person who has done something must pay tax, that tax is a 'liability' of that person. If the amount of tax has been ascertained and it is immediately payable it is clearly a liability; if it is only payable on a certain future date 'it must be a liability which has' not matured at the date of 'death' within the meaning of section 50(1). If it is not yet certain whether or when tax will be payable, or how much will be payable, why should it not be a contingent liability under the same section ?" 22. Mr. Setalvad also relied upon Black's Law Dictionary, 6th Edition, p. 499 wherein the word "due" has been defined as meaning "presently payable". 23. Mr. Setalvad also relied upon the case of Stockton Malleable Iron Co., In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch taxes where an assessment order is already passed and demand made prior to the date of the Notification. 26. Mr. Setalvad submitted that the provisions of the Special Courts Act would prevail over the Income-tax Act. Before me nobody has disputed this proposition. However, as Mr. Setalvad has cited authorities, it may only be mentioned that in support of this contention, he relied upon the case of Union of India v. India Fisheries (P.) Ltd AIR 1966 SC 35. In this case, the Supreme Court was considering the provisions of the Income- tax Act and the Companies Act. The Supreme Court held that section 49E of the Income-tax Act which entitled the Tax Authorities to adjust the refund amount due against any other tax due did not apply when the provisions of the Companies Act were attracted. Mr. Setalvad also relied upon the authority in the case of S. V. Kondaskar, Official Liquidator v. V.M. Deshpande, ITO AIR 1972 SC 878. In this case also, the Supreme Court held that while the Company Court could not determine what tax was due once the Tax Authorities determined the tax due, it was for the Company Court to decide whether the claim was a lawful liability and also to d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at if the Court holds that the term 'liabilities due' does not mean merely those liabilities which were crystallised by way of assessment orders, then the question would also arise as to what would be the liability for the broken period up to the date of Notification in assessment year 1993-94. He submitted that that would create the problem of ascertaining how tax for that period was to be computed. 30. Mr. Parekh also submitted that normally owners are free to deal with their assets, even if they are debtors for large amounts to several Banks and Financial Institutions. He submitted that as a normal rule, Banks and Financial Institutions have security on the assets of debtors which over- ride tax claims of the State. He submitted that under normal circum- stances, any normal Civil Court would have taken a long time before all claims were settled and all disputes adjudicated upon. He submitted that the Parliament was aware that the Scam took place because of collusion of public servants, bank officials and brokers who diverted the funds into the hands of private parties. He submitted that the Parliament intended to provide a quick remedy for recovery by the Banks and Financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court whilst considering this question in the context of section 530(1)( a ) of the Companies Act, held that the priority was in respect of such debts which were born within the time frame of those twelve months and as such due and becoming due and payable within those twelve months next before the relevant date, ascertainable if necessary later, if not already ascertained. The Supreme Court has thus interpreted the word "due" as meaning "due and payable but hot necessarily ascertained". 34. Mr. Jaisinghani further submitted that if the interpretation of Mr. Setalvad is accepted, then it would mean that most notified parties would in effect have no tax liabilities which are to be paid in priority. This submission has been dealt with in greater detail by Mr. Mistry and is set out hereafter. 35. Mr. Mistry supported Mr. Jaisinghani. He submitted that interpreta- tion of Mr. Setalvad cannot be accepted. He submitted that if it is held that only those tax liabilities which were assessed and in respect of which demands were made fall under section 11(2)( a ), then in effect and in practical terms only tax liabilities for the year ending 31st March, 1990 would be payable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssment order made by the assessing authority specifies the assessed income, wealth or value of the gifts, and on that corresponding tax liability is computed, followed by a notice of demand. The assessment order may be subjected to consideration in appeal before the A.A.C. and thereafter the case may be carried in second appeal to the Appellate Tribunal, in reference to the High Court and ultimately in appeal before this Court. At every stage, the endeavour of the authority. Tribunal or court is to adjudicate on questions which will lead in the final result to a true determination of the tax liability. There may be cases where the assessment finally made may be re-opened in accordance with the procedure and subject to the conditions stated in the relevant statute. There may also be cases where a rectification of apparent errors is effected pursuant to jurisdiction granted by the relevant statute. Both these proceedings are similarly intended for the true quantification of the tax liability...." 38. Mr. Jethmalani supported Mr. Jaisinghani and Mr. Mistry, in support of his submissions, he relied upon the authority in the case of Chatturam v. CIT [1947] 15 ITR 302 (FC), where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly pay'. In W.H. Cockerline Co. v. Commissioner of Inland Revenue [1930] 16 Tax Cas. 1, Lord Hanworth, M.R., after accepting the passage from Lord Dunedin's judgment quoted above, observed as follows: 'Lord Dunedin, speaking, of course, with accuracy as to these taxes, was not unmindful of the fact that it is the duty of the subject to whom a notice is given to render a return in order to enable the Crown to make an assessment upon him; but the charge is made in consequence of the Act, upon the subject; an assessment is only for the purpose of quantifying it'. He quoted with approval the following passage from the judgment of Sargant, L.J., in the case of Williams (not reported): 'I cannot see that non-assessment prevents the incidence of the liability, though the amount of the deduction is not ascertained until assessment. The liability is imposed by the charging section, namely, section 38 (of the English Act) the words of which are clear. The subsequent provisions as to assessment and so on are machinery only. They enable the liability to be quantified, and then quantified to be enforced against the subject, but the liability is definitely and finally created by the char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e wording of an Act are clear, unambiguous and do not defeat the object of the Act, then the plain meaning must be given effect to. The Court has to interpret, not on the basis of what happens subse-quently, but on the basis of what the intention of the Legislature was at the time of enactment. 44. In my view, it is clear that when the Legislature gave a first priority to revenues, taxes, cesses and rates, it did so anticipating that there would be enough left over to pay the Banks and Financial Institutions. The Legislature was aware that liabilities like revenues, taxes, would have priority over unsecured creditors. The Legislature was aware that most of the money which has been siphoned out was in transactions in securities. Banks and Financial Institutions who had lost monies under securities transactions would, in most cases be unsecured creditors. The fact that a priority is given to revenue, taxes, cesses and rates clearly indicates that, even though the object was to return monies lost by the Banks and/or Financial Institutions, it was not to be at the cost of revenue, taxes, cesses and rates. The priority normally available to these claims over unsecured creditors is m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all liabilities up to date of distribution, which the Court has specified from time to time are to be discharged. Under section 11(2)( a ) and 11(2)( b ), the Legislature has knowingly used the word 'due'. The intention is clear. It was to have reference to some point of time other than the point of time of distribution. The only other point of time, under the Special Courts Act, is the date of Notification. 46. However, the question still arises whether the taxes, which are to be paid in priority, are only those where an assessment has taken place and demand made prior to date of Notification. The Legislature was well aware that it normally takes 2 to 3 years before final assessment is completed and demands made. Thus in practical terms only assessments and demands for the years 1989-90 or at the most 1990-91 would have been made. In practical terms assessments for the year of the scam would not have been made. To accept the arguments of Mr. Setalvad, Mr. Parikh and Mr. Bharucha would mean that under section 11(2)( b ) amounts due up to date of Notification are to be paid, but under section 11(2)( a ) taxes due up to assessment year 1989-90 and/or at the most 1990-91 would be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssments up to assessment year 1992-93 would be completed before distribution took place. However if assessment was not completed before distribution the Court was not to wait for the assessment and demand. Court can only distribute ascer- tained amounts and/or liabilities. Whilst distributing Court will only take into consideration such liabilities as have been ascertained, quantified and crystallised. Thus if assessments are not completed Court will not have before it any ascertained and/or quantified amount. The priority would then be lost. Similarly if assessment for any year has been reopened and the reassessment proceedings are in progress the Court whilst distributing will only take into account figures as per the earlier assessments. This will be so unless and until the re-assessment proceed- ings are completed and an order passed. This, in my view, will also have the effect of encouraging the Income-tax Department to proceed expedi-tiously and not in its usual slow manner. 49. This, so far as question No. 1 is concerned. 50. As set out above, the second question is : "Whether the phrase 'taxes' as used in section 11 of the Special Court (Trial of Offences Relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cept of the tax and penalty are two different concepts. 53. He also relied upon the authority of the Supreme Court in the case of Bhikaji Dadabhai Co. ( supra ) . In this case, the Supreme Court held that penalty has been regarded as additional tax. The Supreme Court, how- ever, held that there are distinct provisions made for recovery of tax and penalty. The Supreme Court held that this did not alter the true character of penalty imposed. The Supreme Court held that imposition of penalty is a necessary concomitant or incident of the process of assessment, levy and collection of tax. 54. The Learned Advocate General also relied upon the authority in the case of CIT v. Express Newspapers (P.) Ltd. [1978] 111 ITR 347. In this case, after considering various authorities, the Madras High Court has held that penalty is not an additional tax. 55. Mr. Andhyarujina also referred to Law of Income-tax by Sampat and Iyer, 8th Edition, wherein on pages 4524-5 and 5919-20 it is observed as follows : "6. Tax, penalty, interest, fine or any other sum. - These different expressions denote different things. The expression 'tax' has been defined in section 2 (43) to mean inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f treating penalty as an additional tax is only for certain purposes and cannot be extended beyond its scope (99 ITR 507; 96 ITR 175; 106 ITR 384; 106 ITR 682; 98 ITR 540). The Income-tax Act carries within it a dichotomy in this regard and this dichotomy would be destroyed if penalty is construed as only a part of the tax (122 ITR 1014)." 57. The Learned Advocate General submitted that interest is also a different concept from tax. In support of this, he relied upon the authority in the case of Bhor Industries Ltd. v. CIT AIR 1961 SC 1100 wherein the Supreme Court held that interest is not to be treated as tax even though it is recoverable along with tax. 58. Mr. Andhyarujina also relied upon the authority in the case of P.S. Subramanyan, ITO v. Simplex Mills Ltd. [1963] 48 ITR 182 wherein the Supreme Court rejected the contention that interest was part of tax. The Supreme Court held that it cannot obviously be suggested that interest is tax paid by the assessee. 59. The Learned Advocate General also relied on the authority in the case of CIT v. Nonshi Devshi Kattawala (P.) Ltd. [1962] 45 ITR 47 (Ker.). In this case, the Kerala High Court has held that tax, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts to Banks and Financial Institutions, if a wider meaning is given, then that object would be frustrated. 64. Mr. Parekh, Mr. Jaisinghani, Mr. Bharucha, Mr. Mistry and Mr. Tulzapurkar all supported the submissions of the Learned Advocate General and Mr. Setalvad. 65. Mr. Mistry and Mr. Bharucha also pointed out the provisions of sections 219, 220, 221, 229, 234A, 234B and 234C of the Income-tax Act. They pointed out that all these sections make a distinction between tax, interest and penalty. They pointed out that under section 229 of the Income-tax Act, interest, fine and penalty are to be recovered as tax. They pointed out that if interest, penalty and fine were tax, then there would be no need for a section like section 229. They pointed out that section 229 had to be incorporated because interest, penalty and fine are not tax. They also relied upon the authority of the Supreme Court in the case of Associated Cement Co. Ltd v. CTO AIR 1981 SC 1887. In this case, the Supreme Court has held that tax, interest and penalty are three different concepts. 66. They also relied upon the authority in the case of Bhor Industries Ltd ( supra ) . Here again it has been h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as used in section 11(2)( a ) of the Special Courts Act should have the same meaning as in the Constitution. 69. Dr. Balasubramanian also submitted that penalty, interest and fine are also under the same statute, viz., the Income-tax Act. He submitted that the statute refers to income-tax, dividend tax, surcharge, etc. He submitted that as various terms have been used in the statute, they must all be deemed to be tax. He submitted that on this basis even penalty and interest should be construed to be tax. He submitted that whatever is part of process of assessment must be deemed to be tax. 70. I have considered the rival submissions. In my view, the question of interpretation of statute only comes in if there is any ambiguity in the statute. In my view, so far as this question is concerned, the provisions of the Special Courts Act are very clear. Under the Special Courts Act, what is given priority to is only 'revenue, tax, cess and rates'. The term "tax" has been defined under the Income-tax Act itself. Under section 2 (43) , "tax" only means in relation to an assessment year the income-tax chargeable under the provisions of this Act. There cannot be the slightest dou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etter illustrated by way of examples. Under section 234B of the Income-tax Act, a notified party is liable to pay advance tax. If he fails to pay such advance tax or if the tax paid is less than 90% of the assessed tax, he becomes liable to pay interest at 2% per month. Similarly under section 220(2), if a demand has been made to pay any tax, interest or penalty and a Notice of Demand is served on the party and if within 30 days of such service, the amount is not paid, interest is leviable at the rate of 1.596 per month. Similarly there are provisions for imposing penalty under the Income-tax Act. Also Banks and Financial Institutions continue to charge interest and in some cases even penal interest on unpaid amounts. A notified party may have enough assets to pay advance tax and/or the amount of the demand notice, yet the notified party is unable to do so as all his assets are attached and the time for distribution has not yet arisen. Similarly a notified party having sufficient assets may have opted to pay off some Bank or Financial Institution. This so that interest would stop running. Yet now the provisions of the Special Courts Act prevent the notified party from making any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Based on this, Mr. Setalvad submitted that after the date of the Notification, no interest or penalty could be claimed. Mr. Setalvad submitted that this is so because of properties of notified parties stand attached and it cannot be said that such persons were at fault. 78. Mr. Parekh has submitted that the statute is drastic. He submitted that all activities of notified parties have come to a standstill and there is in effect a legal disability akin to bankruptcy. He submitted that by virtue of attachment of all properties, all profit-making activities have come to an end. He submitted that any interpretation which would lead to an unreasonable result must be disregarded. He submitted that the Court must adopt an interpretation which must be reasonable and practical. He submitted that, after the legal disabilities in which the notified party is placed, if the Court were to still hold that the notified parties continue to remain liable to pay interest and/or penalty, then it would lead to very unfair results. He submitted that in most cases it would make the notified party bankrupt or insolvent. He submitted that for this reason, the Court must hold that the notified party is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Court to then decide how far under the law the amount of income-tax determined by the department should be accepted as a lawful liability on the funds of the Company in liquidation. The Supreme Court held that at that stage the winding-up Court can fully safeguard the interests of the Company and its creditors. 81. Dr. Balasubramanian submitted that the Notification did not make notified parties physically extinct. He submitted that the notified party continued to be an assessee and that the Special Courts Act made no change to the Tax Laws. He submitted that by virtue of the Special Courts Act, no exemption was granted to the notified party. He submitted that a notified party continued to remain bound by the provisions of the Income-tax Act. He submitted that if a contrary view was taken, then there would be exercise of discretion in favour of notified/guilty parties which discretion would not exist in favour of an ordinary/good citizen of the country. 82. Dr. Balasubramanian also submitted that by virtue of sections 2 and 11 of the Special Courts Act, in effect a notified party was put into a civil death. He submitted that the notified party had an absolute disability ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 4 of the Special Courts Act, wherein the Custodian could cancel any contract entered into fraudulently or with a view to defeat the provisions of this Act. He submitted that this makes it clear that all contracts, unless cancelled by the Custodian under section 4, remain binding and in force even against notified parties. 86. Mr. Tulzapurkar submitted that a pending contract could be dis- charged only under the Doctrine of Impossibility of Performance. He submitted that the enactment of the Special Courts Act has not resulted in impossibility of performance, such as to free the notified party from his obligation to perform a contract as a whole or to perform his obligation as regarding payment of interest. Mr. Tulzapurkar submitted that the only disability contemplated by law is under section 56 of the Contract Act. He submitted that the Special Courts Act does not frustrate any contracts. Mr. Tulzapurkar submitted that the effect of frustration under section 56 would be that the other party would also stand discharged of the contract. He submitted that almost all the notified parties have in fact approached this Court for fulfilment of contracts by way of Applications f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay the amount advanced together with interest thereon. The Court held that the liability would include liability to pay interest until such time as the loan is repaid in full. 90. Relying upon this judgment, Mr. Tulzapurkar submitted that the liabilities would necessarily include the liabilities to pay the sum with interest. He submitted that as the liability is to pay the principal amount along with interest, the Court should not interfere and/or abrogate substantive rights of a party particularly when the statute does not either by express or necessary inference abrogate such rights. 91. In support of this last submission, Mr. Tulzapurkar relied upon the case of China Venkataraju v. Pulavarthi Lakshmanaswami AIR 1931 Mad. 729. 92. Mr. Tulzapurkar also referred to the provisions of the Insolvency Act and the Companies Act. He pointed out that under section 49 of the Presidency-Towns Insolvency Act, 1909 as well as under section 61(6) of the Provincial Insolvency Act, 1920, even in cases of insolvency, interest is payable. He submitted that a notified party should not be put on a higher footing. 93. Mr. Tulzapurkar relied upon the authority in the case of Dehr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. However the law is clear. No rights can be abrogated unless the statute does so expressly or by necessary implication. At the same time law cannot be such that it prevents a party or puts restraint on him but does not absolve him from adverse consequences of such restraint. In my view, the Court will have to make a distinction between different types of cases. The following are just by way of example. They are not exhaustive. Each case would have to be decided on its own merit. Just by reason of Notification interest and/or penalty would not automatically stop running under contracts. However if the Court finds that a notified party would have been able to pay off his debt, but could not do so only because of the Notification, the Court can at that stage absolve him from the liability to pay interest or reduce the interest. In such cases Court would not permit penalty to be levied. However if the notified party did not have assets enough to meet his liability, then merely because he is notified will not absolve him from liability to pay interest and/or penalty. This because even if he had not been notified he would still have been at default and been liable to pay interest and/o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m. The law has prevented him from paying advance tax. In my view, in such cases, i.e., where there is a conflict between the provisions of the Special Courts Act and some other Act/contract, the contrary provision must necessary- ily give way. If there is this legal disability, then there is no question of the notified party being foisted with the liability to pay interest and/or penalty. Similarly under section 220(2) of the Income-tax Act, a demand notice may have been served on a party. That demand notice may be for tax, interest and/or penalty. Under the income-tax law, the sum specified in the notices must be paid within 30 days. Under the Income-tax Act, if the same is not paid within 30 days, the assessee is liable to pay interest at 1.5% per month. Here again by reason of the legal disability, imposed by the Special Courts Act, the notified party is not in a position to pay the amounts demanded by that demand notice. If that is so, then the notified party cannot be said to be in default. Then there is no question of the notified party becoming liable to pay interest under section 220(2). The same would apply in respect of penalty under the Income-tax Act. Thus, in cases w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould result in a notified party becoming insolvent. He submitted that this would be most inequitable. In my view, there is no reason for presuming that normal Civil Courts would not take into consideration the fact that there was a legal disability. If a party had sufficient assets to pay, but could not pay/perform an obligation only by reason of Notification, I am quite sure not only this Court but the normal Civil Courts will also take that into consideration and not grant interest or penalty or reduce the interest. It must not be forgotten that this Court would have already refused to release monies towards interest/penalty and given its reasons for doing so. This can be no reason for holding otherwise. 100. This answers all questions. To this Court it is clear that these are vital questions. These answers vitally affect Banks/Financial Institutions, Revenue and notified parties. In the not too, distant future, distribution of the assets of Harshad Mehta group and of Fairgrowth Financial Services Pvt. Ltd. is to take place. It would be advisable that these questions get settled by the Supreme Court. The Court has noticed that in all matters the Custodian has, correctly, been ..... X X X X Extracts X X X X X X X X Extracts X X X X
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