1998 Supreme(SC) 623

1998(4) Supreme 537
Supreme Court of India
(From Special Court, Bombay)
Sujata V. Manohar, S.P. Kurdukar and D.P. Wadhwa, JJ.
Harshad Shantilal Mehta -Appellant
versus
Custodian & Ors. etc. -Respondents
Civil Appeal No. 5326 of 1995
With
C.A. Nos. 5147/1995, 5225/1995, 5325/1995, 6080/1995, 12574/1996, T.C. (Civil) No. 5/1998
Decided on 13-5-1998
Counsel for the Parties :
For the Appearing Parties : Ram Jethmalani, Atul Setelwad, Harish N. Salve, F.S. Nariman, Arun Jaitely, Dipankar Gupta, Dr. V. Gauri Shankar, S.D. Parekh, Bhimrao Naik, Sr. Advocates, S.B. Jaisinghani, Mahesh Jethmalani, Ms. Lata Krishnamurti, A. Subba Rao, A.T. Rao, Rajiv Kapur, Sanjay Kapur, Ms. Shubhra Kapur, Subhash Sharma, Ms. Nina Gupta, Neeraj Sharma, Ms. Vaishali Deshpande, Ms. Arpita Roy Choudhary, Sanjay Katyal, Vineet Kumar, Tushar K. Cooper, S. Rajappa, C. Radhakrishna, B.K. Prasad, S.N. Terdol, S.K. Dwivedi, A.K. Sharma, Ms. Vijay Lakshmi Menon, Ms. Anuradha Dutt, B.V. Desai, N.K. Niraj, P.J. Mehta, Janakalyan Das, ­Advocates.

Very Important Point
Liabilities covered under Section 11(2)(a) of Special Court (Trial of offences Relating Transactions in Securities) Act, 1992 are only liabilities arising during the statutory period 1.4.1991 to 6.6.1992 and liability of “Tax due” refers to finally assessed tax liability for that statutory period and does not cover penalty and interest. The challenge to the constitutional validity of Section 11 r/w Section 3(3) does not survive in view of said interpretation of Section 11.

Headnote:(i) Special Court (Trial of Offen­ces Relating Transactions in Securities) Act, 1992-Section 11-Discharge of liabilities of notified person and distribution of property attached-Property of the notified person already mortgaged or pledg­ed on the date of attachment to a Bank or to any third party-Whether the words of Section 3(3) “any property movable or immovable or both belonging to any person notified”, refers only to the right, title or interest of the notified person in the mortgaged/ pledged property and not the entire property itself/ (Yes).

       Held : As stated above, Section 3(3) clearly provides that the properties attached are properties which belong to the person notified. The words “belong to” have a reference only to the right, title and interest of the notified person in that property. If in the property “belong­ing to” a notified person, another person has a share or interest, that share or interest is not extin­guished. Of course, if the interest of the notified person in the property is not a severable interest, the entire property may be attached. But the proceeds from which distribution will be made under Section 11(2) can only be the proceeds in relation to the right, title and interest of the notified person in that pro­perty. The inter­est of third party in the attached property cannot be sold or distrib­uted to discharge the liabilities of the notified person. This would also be the position when the property is already mortgaged or pledged on the date of attachment to a bank or to any third party. This, however, is subject to the right of the Custodian under Section 4 to set aside the transaction of mortgage or pledge. Unless the Custodian exercises his power under Section 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. (Para 18)

       (ii) Words and Phrases-Word “tax due” appearing in Section 11(2)(a), Special Court (Trial of Offen­ces Relating Transactions in Securities) Act, 1992-Meaning of.

       Held : “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. (Para 22)

       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 assessed which are presently payable by the notified person are taxes which have to be taken into account under Section 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 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”. (Para 23)

       (iii) Special Court (Trial of Offen­ces Relating Transactions in Securities) Act, 1992-Section 11 (2)(a)-Discharge of liabilities of notified person-Discharge of “Tax due”-Do these taxes relate to any particular period or do they cover all assessed taxes of the notified person? (They relate only to such liability for the statutory period 1.4.1991 to 6.6.1992). (Paras 24 & 25)

       (iv) Special Court (Trial of Offen­ces Relating Transactions in Securities) Act, 1992-Section 11 (2)(a)-Discharge of liabilities-Dis­charge of tax due-At what point of time should the taxes have become due? (Assessed tax liability for the statutory period).

       Held : 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 the parties that only that liability which has become ascertained by final assess­ment on the date of the Act coming into force should be paid under Section 11(2)(a). Others contended that it should have been so ascer­tained on the date of the notification. The third contention is that it should have been so ascertained on the date of distribution. Since we have held that tax liability under Section 11(2)(a) refers only to such liability for the period 1.4.1991 to 6.6.1992, it would not be correct to hold that the liabilities arising during this period should also be finally assessed before 6.6.1992 (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 Section 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 be considered for payment under Section 11(2)(a), subject to what follows. (Para 26)

       (v) Special Court (Trial of Offen­ces Relating Transactions in Securities) Act, 1992-Section 11 (2)(a) - Discharge of liabilities-Assessed tax liability for statutory period-Whether required to be discharged in full or Special Court has any discretion in rela­tion to extent of payment?

       Held : 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. (Para 33)

       But the Special Court can decide how much of that liability will be discharged out of the funds in the hands of the Custodian. (Para 34)

       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. (Para 35)

       (vi) Special Court (Trial of Offences Relating Transactions in Securities) Act, 1992-Section 11 (2)(a)-Discharge of liabilities-Dis­charge of tax due - Whether it would include inter­est or penalty as well? (No). (Para 36)

       (vii) Special Court (Trial of Offences Relating Transactions in Securities) Act, 1992-Section 3 r/w Section 11(2)(a)-Discharge of liabilities - 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 u/s. 3? (Does not arise).

       Held : 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 Section 11(2)(a) are only liabili­ties arising during the period 1.4.1991 to 6.6.1992, and do not cover penalty and interest, this question does not really arise. In any case, interest or penalty for any action or default after the date of the notification, are not covered by the Act. However, we must reiter­ate that a taxing statute is a code in itself for imposition of tax, penalty or interest. The remedy of a notified person who is assessed to penalty or interest, after the notified period, would be to move the appropriate authority under the taxing statute in that connection. If it is open to him under the relevant taxing statute to contend that he was unable to pay his taxes on account of the attachment of all his properties under the Special Court Act, and that there is a valid reason why penalty or interest should not be imposed upon him after the date of notification, the concerned authorities under the Taxing Statute can take notice of these circumstances in accordance with law for the purpose of deciding whether penalty or interest can be imposed on the notified person. 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 Section 11(2)(a) and 11(2)(b). The Special Court has full discretion under Section 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. (Para 37)

       Held further : This, we hope, answers all questions which arise for determination in the present appeals. Pursuant to an interim order dated 26.8.1996, certain payments have been made to Income Tax Authorities. The Income Tax Authorities, however, have given an undertaking which is filed by the Secretary (Revenue) in the Ministry of Finance, Union of India, that the Union of India shall, within four weeks of being called upon so to do, either by this Court or by the Special Court in this or any other proceeding under the Special Court Act, bring back to Court the moneys so paid or part or parts thereof as directed, and pay thereon interest at a rate not less than 18 per annum as this Court or the Special Court may direct from the date of receipt until the date of return thereof. The Special Court shall examine the claim of the Income Tax Authorities for taxes due under Section 11(2)(a) in the light of our judgment and decide whether any amount paid to the Income Tax 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. (Para 38)

       Held also : This Court, by an order dated 11.3.1996, 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. (Para 39)

       (viii) Constitution of India-Constitutional validity of Section 11 of Special Court Act r/w Section 3(3)-Does not survive now-Trans­ferred case dismissed.

       Held : In view of the interpretation which we have put on Section 11 of the Special Court Act and Section 3(3) of the Special Court Act, the challenge to the constitutional validity of Section 11 read with Section 3(3) does not survive. If, according to any of the banks or financial institutions, any of the properties attached belongs to the bank or financial institution concerned, it is open to that bank or financial institution to file a claim before the Special Court in that connection and establish its right to the property attached or any part thereof in accordance with law. Obviously, until such a claim is determined, the property attached cannot be sold or distributed under Section 11. Transfer Case No. 5 of 1998 is, therefore, dismissed. (Para 40)

       All the appeals are disposed of as above with no order as to costs. (Para 41)