9911796707
TMI Blog2008 (12) TMI 2X X X X Extracts X X X X X X X X Extracts X X X X ..... r to be in excess of Rs. 140 crores approximately, subject to further orders that the Court might pass at a later stage. In the impugned judgment and order a further direction was issued that no useful purpose would be served by keeping the amount lying deposited with the Custodian and, therefore, a direction was also issued to the Custodian to pay to the banks, namely, the State Bank of India and the Standard Chartered Bank against their decrees the principal amount, from the amounts in deposit with the Custodian as also from the amount that was likely to be coming back from the Income Tax Department. As the said amount was inadequate to fully satisfy the claims of the Banks with respect to the principal amount it was further held that the same would be disbursed by the Custodian on pro-rata basis and after receiving an undertaking from the banks to the Court that they would bring back the amount, if so required, on such terms and conditions as may be directed by the Court. 2. As this Court in an order in an interim application recorded the directions of the committee of the Union of India regarding the State Bank of India not requesting for any interim payment, the aforesaid ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . In terms of the aforesaid provisions and at the request of the Income Tax Department, the Custodian had earlier released a sum of Rs. 686.22 crores to the Department pursuant to various orders passed by the Special Court which were confirmed by this Court. The said interim release of funds of Rs. 686.22 crores to the Department was subject to filing of an affidavit/undertaking by Secretary (Revenue), Government of India that the amount would be brought back to the Court/Custodian alongwith interest within a period of four weeks, if so directed by the Special Court. 7. In Harshad S. Mehta v. Custodian & Ors. (Supra) it was held by the Supreme Court that such priority would be restricted to the tax component of the demand for priority period relevant to assessment year 1992-1993 and assessment year 1993-1994. This Court also held that Special Court cannot sit in appeal over the order of tax assessment but in case of any fraud, collusion or miscarriage of justice in the assessment proceedings where tax assessed is disproportionately high in relation to funds available, the Special Court could scale down the tax liability to be paid in priority. 8. Applications were filed by the St ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of SBI, w.r.t 64.94 and 17.77 crores Bank filing affidavit stating that the amount never transferred into the account of Harshad S. Mehta. 9. Consequently, it was held that if the above amounts are excluded from total assessed income of the statutory period, the total income would be reduced to approximately Rs. 277 crores, and therefore, it was held by the Special Court that the tax liability of Harshad S. Mehta for the aforesaid two assessment years payable under Section 11 (2) (a) of the Act in no case would exceed Rs. 140 crores. In terms of the aforesaid findings and conclusions arrived at by the Special Court directions were issued directing the Income Tax Department to deposit with the Custodian an amount of Rs. 546.22 crores with interest at 9% per annum from the date of receipt of the amounts amounting Rs. 686.22 crores, with a further direction that the said amount which is to be deposited by the Income Tax Department alongwith other amount lying deposited with the Custodian would be released in favour of the banks in terms of observations made in the impugned order. 10. In the light of the aforesaid facts and issues we now proceed to deal with the various conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d amount is arrived at by the assessing officer after taking note of various suits filed by the banks with respect to oversold securities, but he agreed that as at that point of time the suits were pending and there was no decree the claims of the banks were declined by the assessing officer, except the amount of Rs. 601.22 crores for which the credit was given to the SBI. Thus, according the learned Solicitor General the figure of Rs. 1080 crores is an integral part of Rs. 1688 crores which is the alleged suit amount claimed by the banks. On the question of refund and disbursement it was submitted that the application of Section 11(2)(a) can arise only at the stage of final distribution of assets and an order under the said section can be passed only after examining the claims by the Special Court under Section 9(a) of the Act. It was further submitted that even otherwise as per Section 11(2)(a) of the Act the claim of the Income Tax Department on account of taxes due will have priority over the claims of the bank. In order to support the said contention the learned Solicitor General has referred to paragraph 15 of the abovementioned decision of this Court in Harshad S. Mehta v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the learned senior counsel for respondent No. 1 submitted that the amount of Rs. 1681.78 crores, i.e. 1080 crores plus 601.22 crores credited to SBI, was against the oversold securities delivery of which was made by Harshad Mehta, the fact which has been accepted by the assessing officer in the Assessment order. It was submitted that as the assessing officer has included the gross amount without deducting the payable from the receivable, thus, the entire addition per se is wrong and invalid and therefore the same is liable to be deducted from the assessment. On the question of duplication he submitted that the entire contention is frivolous and misconceived as the decrees for an amount of Rs. 1688 crores were in regard to the transactions which were not complete or concluded whereas the amount of Rs. 1080 crores was in respect of the transactions which were satisfied, concluded and complete and in which case the deliveries were made. It was also submitted that the issue of duplication is an after thought as the Income Tax Department never raised the same before the Special Court and it is raised for the first time before this Court. 15. On the issue of jurisdiction of the Spec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y else under Section 11(2)(a). 16. In order to arrive at a finding it would be essential for us to extract the relevant provisions of the Act and the judicial interpretation of the said provisions. 17. The Special Court (TORTS) Act, 1992 was enacted to provide for the establishment of a Special Court for the trial of offences relating to transactions in securities and for matters connected therewith or incidental thereto. Section 3 of the Act requires the appointment of a Custodian thereunder who is, inter alia, required to deal with the properties of the persons notified in such manner as the Special Court may direct. The said section reads as under: "3. Appointment and functions of Custodian - (1) The Central Government may appoint one or more Custodian as it may deem fit for the purposes of this Act. (2) The Custodian may, on being satisfied on information received that any person has been involved in any offence relating to transactions in securities after the 1st day of April, 1991 and on 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty under attachment shall be paid. The claims relating to the 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. In relation to a claim for payment of the tax liability of a notified person, the Special Court has, there-fore, only the limited power to determine what, having regard to the funds available, can be paid; that is to say, whether the claim can be satisfied in full or only in part. If a particular tax claim cannot at any time be paid in full, provision would have to be made for the balance, so far as may be, so that it is not jeopardized." 19. Subsequently, the aforesaid section of the Act was discussed in detail by this Court in the case of Harshad S. Mehta v. Custodian & Ors. (supra). In paragraph 11 of the said judgment it was held as follows: "11. This section obviously deals with disbursement of properties attached under Section 3(3). Since the property (moveable 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessments 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"." In paragraphs 25 the Court dealt with the question that whether the taxes relate to a specific period or to all the taxes due from the notified party. The said question was answered in the following manner: "25. .........The Special Court Act is quite clear in its intent. It seeks to cover all criminal and civil proceedings relating to transactions in securities of a notified person between 1-4-1991 and 6-6-1992. 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 6-6-1992, as also all claims relating to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... having held thus, this Court proceeded to determine the jurisdiction of the Special Court with respect to discharge of tax liability out of the funds in the hands of the Custodian. In para 34 and 35 the Court qualified the observation of this Court in the case of CIT v. A.K. Menon (Supra) and held that the Special Court can, for the purpose of discharging tax liability, examine whether there is any fraud, collusion or miscarriage of justice in assessment proceedings. The said aspect was further elaborated in para 36. The said paras are as under: "34. 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 9-A. A claim in respect of tax assessed, therefore, cannot be reopened by the Special Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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." 20. From the above mentioned legislative provisions and judicial interpretation in the decision of Harshad S. Mehta v. Custodian & Ors.(supra), in our considered opinion, the following general principles regarding the powers of the Special Court while discharging the tax liability emerge: (i) Special Court has no jurisdiction to sit in appeal over the assessment of the tax liability of a notified person by the authority or tribunal or court authorised to perform that function by the statute under which the tax is levied. A claim in respect of tax assessed cannot be reop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 21. In the light of the abovementioned general principles which are culled out from the legislative provision and the decisions referred to above regarding the powers of the Special Court while discharging the tax liability we proceed to analyse the merit of the contentions. 22. So far as the claims are concerned, there could be no dispute with regard to the priority claim of the Income Tax Department in releasing the tax due. At the same time there could also be no dispute with regard to the fact that if any party other than the notified person has any right, title or interest in the attached property on the date of the notification under Section 3 of the Act the said right of the third party did not and could not have been held to be extinguished. 23. The banks on the basis of the decrees in their favour have contented that there right, title and interest respectively in the attached property on the date of the notification has been extinguished, as the said amount has been included in the income of the notif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res. It was contended by the Department that both the aforesaid amounts are with respect to the oversold securities and are one and the same. As mentioned earlier the amount of Rs. 1080 crores was arrived at after taking out the amount of Rs. 601.22 crores from the amount of Rs. 1681.79 crores. The said amount of Rs. 601.22 crores appears to have been recognised as a claim under a pending suit filed by SBI. Consequently, the said amount was credited in favour of the SBI by the Assessing Officer while making the order of assessment. On the other hand it was submitted by the learned counsel for the respondents that the said contention is untenable in law as the reliance on Annexure M-2 is itself erroneous. 26. The said second issue with respect to duplication is correlated to the first issue and a finding on the said issue can be given, only once the finding with respect to the first issue is arrived at. There is no finding either on the issue of nexus or on the issue of duplication by the Special Court in the impugned judgment. Probably the reason for the same as also mentioned by Mr. Sundaram is that the said issues were not raised before the Special Court and even if they ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and, if so, is there any duplication or whether the decrees are on account of siphoning of the funds, is required to be adjudicated by the special Court on appreciation of the relevant documents. 30. To be specific, the Special Court will give its finding on the two below mentioned issues in addition to the other issues, if any : 1. Whether there is any nexus between the decretal amount and the income included in the assessment of the notified person for the statutory period. 2. Whether the decrees are with regard to the Oversold Securities, and if so, whether there is any duplication of amount while scaling down the tax liability. 31. After giving its finding on the said issues, the Special Court will dispose of the matter in the light of the observations made herein above. We may however clarify that so far as the amounts of Rs. 253 crores and Rs.101 crores are concerned, the appellants have not stated that the said amount were not included in the income of the notified party for the statutory period. The consent decrees obtained in respect of Rs. 253 crores were not challenged by the appellant which led the Special Court to believe that the appellant has accepted the settl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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