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TMI Blog1998 (5) TMI 25X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3-5-1998 - Judge(s) : SUJATA V. MANOHAR., S. P. KURDUKAR., D. P. WADHWA MRS. SUJATA V. MANOHAR, J. : The Special Court (Trial of Offences Relating to 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 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 s. 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 dt. 20th Feb., 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 O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 Court (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 s. 3 of the Special Court Act sub-ss. (1), (2), (3) and (4) are as follows : "3. Appointment and functions of Custodian.-(1) The Central Government may appoint one or more Custodians a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, by any civil Court in relation to any matter or claim - (a) relating to any property standing attached under sub-s. (3) of s. 3; (b) arising out of transactions in securities entered into after the 1st April, 1991, and on or before the 6th June, 1992, in which a person notified under sub-s. (2) of s. 3 is involved as a party, broker, intermediary or in other manner . . ." The 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 s. 3(2), or any matter or claim arising out of transactions in securities entered into during the "statutory period". Under s. 9B the jurisdiction of the Special Court in arbitration matters is also with reference to those matters or claims which are covered by s. 9A(1). Therefore, the jurisdiction of the Special Court in civil as well as criminal matters is in respect of transactions during the statutory period of 1st April, 1991 to 6th June, 1992; 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. Sec. 11 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 vs. Union of India (1992) 108 CTR (SC) 304 : r/w (1993) 110 CTR (SC) 179 : (1993) 199 ITR 530 (SC) : TC 3PS.87]. The directions, therefore, for disposal under s. 11(1) can be given only after the Special Court has satisfied itself that the property under attachment is property which belongs to the notified person. The directions for disposal can only be in respect of the right, title and interest of the notified person in the attached property. If, therefore, any application is filed before the Special Court by a third party claiming the property so attached and/or for releasing the right, title and interest of a third party in the property from attachment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 malpractices in the security transactions. However, before the amounts can be paid to banks or financial institutions under s. 11(2)(b) the liabilities under s. 11(2)(a) are required to be discharged. The Special Court has raised three questions pertaining to distribution under s. 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 pay such taxes, etc., or does it refer to a liability which has crystallised into a legally ascertained sum immediately payable ? (2) 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 ? (3) At what point of 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 s. 11(2)(a) from out of the attached funds/property? ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s. 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 s. 11(2)(a). Black's Law Dictionary at p. 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 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 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". Jowitt's Dictionary of English Law, vol. I, 2nd Edn., p. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntarily pay". [See in this connection, Kalwa Devadattam vs. Union of India (1963) 49 ITR 165 (SC) : TC 37R.710/70R.799; Doorga Prosad vs. Secretary of State (1945) 13 ITR 285 (PC) : TC 52R.552 and Raymond Synthetics Ltd. vs. Union of India (1992) 73 Comp Cases 762 : (1992) 2 SCC 255]. "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 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 words, taxes as assessed which are presently payable by the notified person are taxes which have to be taken into account under s. 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 s. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted to banks and financial institutions. In the same manner, the liabilities to banks and financial institutions in s. 11(2)(b) are also liabilities pertaining to the statutory period. However, the extent to which liability under s. 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 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 [vide Tejkumar Balakrishna Ruia vs. A.K. Menon (1996) 87 Comp Cases 539] 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. Question No. 3. At what point of time should this tax liability have become quantified by a legal assessment which is final and binding on the notified person concerned ? It is contended before us by some of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 s. 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 vs. A.K. Menon (1996) 87 Comp Cases 539, where the Court said that if two interpretations are possible, a 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e same is the position of a company in winding up because the rules of insolvency apply to winding up proceedings as well. In relation, however, to claims for taxes which are assessed in accordance with law by the taxing authorities, a question arose whether the Court in the winding up of an insolvent company, could go behind an income-tax assessment if there are suspicious circumstances. In 1943, the Lahore High Court, (Bench of three judges) in Governor-General in Council vs. Sargodha Trading Co. Ltd. (1943) 11 ITR 368 : TC 24R.961, held, differing from the view taken by the English Court in Re Calvert (1899) 2 QBD 145, that a Court in liquidation can examine even a claim based on an income-tax assessment if there are suspicious circumstances. This view, however, was subsequently overruled by the Lahore High Court in Pakistan in Ravi Paint Colour and Varnish Works Ltd. vs. Federation of Pakistan (1955) 27 ITR 475 : TC 24R.960. The Court held that in matters relating to assessment of income-tax, the machinery that can be brought into action is the one provided by the IT Act which is a complete code by itself. The jurisdiction of the civil Court is impliedly barred. When a company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 s. 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 s. 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 s. 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 11(2)(a) would include interest or penalty as well ? We are concerned in the present case with penalty and interest under the IT Act. Tax, penalty and interest are different concepts under the IT Act. The definition of "tax" under s. 2(43) does not include penalty or interest. 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. 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 s. 11(2)(a) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gment and decide whether any amount paid to the IT 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 dt. 11th March, 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 forward the scheme for the approval of the Union of India. Pursuant to these directions, the Custodian forwarded a draft scheme for approval to the Union of India. The Ministry of Finance, Department of 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 Court in respect of the scheme so submitted. In view of the interpretation which we have put on s. 11 of the Special Court Act and s. 3(3) of the Special Court Act, the challenge to the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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