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1995 Supreme(Bom) 115
IN THE HIGH COURT OF BOMBAY
S.N. Variava, J.
Assistant Commissioner of Income Tax .... Applicant.
Versus
A.K. Menon, Custodian and others.... Respondents.
Misc. Application Nos. 194, 215, 107, 188, 103 182 of 1993 and 332, 371, 372, 231, 331, 444, 431, 230, 301, 342 of 1994 and 443 of 1991 and 76, 77, 78, 23 110 of 1992, decided on 20-2-1995.
Advocates appeared :
T.R. Andhyarujina, Advocate General, with M.S. Doctor, as Amicus Curie.
A.M. Setalvad with G.R. Joshi i/b P. M. Mithi Co., for the Custodian
A.K. Bobde with S.G. Mandrekar, and B. Chatterjee, for the Income Tax Department, Misc. Application Nos. 194 of 1993 and 215 of 1993.
L.S. Vyas, for the Income tax Department, in Misc. Application Nos. 332 of 1994, 371 of 1994, 172 of 1994, 331 of 1994, 231 of 1994 443 of 1991 and 444 of 1994.
Dr. Balasubramanian, for the Income Tax Department, in Misc. Application Nos. 194 of 1993, 107 of 1993, 188 of 1993, 76 of 1992, 77 of 1992, 78 of 1992, 103 of 1993, 23 of 1992 and 182 of 1993.
E.P. Bharucha with Z. Kamdin and Rubens, i/b Gagrat Co., for Standrad Chartered Bank.
S.D. Parekh i/b Malvi Ranchoddas Co. for Dhanraj Mills Ltd. T.B. Ruia in M.A. No. 431 of 1994.
S.D. Parekhi i/b Dhru Co., for Fairgrowth Financial Services Ltd., in M.A. Nos 110 of 1992, 230 of 1994, 301 of 1994 and 342 of 1994.
S.B. Jaisinghani, with K.G. Desai i/b Mahimtura Co., for M/s. Harshad S. Mehta Harshad S. Metha, in M.A. No. 187 of 1993.
Jehangir Mistry with A.D. Chaugule i/b Mahimtura Co., for M/s. Jyoti H. Mehta Jyoti H. Mehta, M.A. No. 187 of 1993.
Mahesh R. Jethmalani with A.D. Chaugule i/b Mahimtura Co., for M/S. Ashwin S. Metha Ashwin S. Mehta, in M.A. No. 187 of 1993.
Virag Tulzapurkar with V.Dhond and P. B. Palkhiwalla i/b Little Co., for BOI Finance State Bank of Saurashtra.
K.V.M. Pai, Commissioner of Income Tax, II Circle present.
Headnote:
The Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 (hereinafter referred to as the "Special Courts Act") was enacted to address the unprecedented situation wherein large amounts of public monies had been siphoned off into private pockets. The Act provided for a speedy trial of offences, immediate attachment and freezing of assets, and a reasonable, rational, and equitable distribution of the property belonging to a Notified Party.
Fact of the Case:
The Income Tax Department filed numerous applications before the Special Court seeking payment in priority of tax, interest, and penalty. The Court had to determine whether the priority created by section 11 of the Special Courts Act was only in respect of amounts due prior to the date of Notification and/or whether the priority would also apply to amounts due after the date of the Notification. The Court also had to consider whether the phrase 'taxes' as used in section 11 of the Special Courts Act could only mean amounts due as and by way of taxes or whether it would also include penalties and interest, if any. Further, the Court had to decide whether penalty and/or interest could be levied on or charged to Notified Parties after the date of Notification.
Finding of the Court:
The Court held that the priority created by section 11 of the Special Courts Act was in respect of amounts due on the date of Notification and not for amounts due after the date of Notification. The Court further held that the term 'taxes' as used in section 11 of the Special Courts Act included penalties and interest. However, the Court held that penalty and/or interest could not be levied on or charged to Notified Parties after the date of Notification.
Issues: 1. Whether the priority created by section 11 of the Special Courts Act was only in respect of amounts due prior to the date of Notification and/or whether the priority would also apply to amounts due after the date of the Notification. 2. Whether the phrase 'taxes' as used in section 11 of the Special Courts Act could only mean amounts due as and by way of taxes or whether it would also include penalties and interest, if any. 3. Whether penalty and/or interest could be levied on or charged to Notified Parties after the date of Notification.
Ratio Decidendi: 1. The Court interpreted section 11 of the Special Courts Act and held that the priority created by the section was only in respect of amounts due on the date of Notification. The Court reasoned that the object of the Act was to recover and return public monies to Banks and Financial Institutions. The Court held that it would be unreasonable and inequitable to give priority to amounts due after the date of Notification, as this would defeat the object of the Act. 2. The Court interpreted the term 'taxes' as used in section 11 of the Special Courts Act and held that it included penalties and interest. The Court reasoned that the term 'taxes' had a wide meaning and that it was not restricted to tax alone. The Court also held that penalties and interest were part of the process of assessment and that they were, therefore, included in the term 'taxes'. 3. The Court held that penalty and/or interest could not be levied on or charged to Notified Parties after the date of Notification. The Court reasoned that the Notification had the effect of attaching all the properties of the Notified Party. The Court held that this attachment prevented the Notified Party from dealing with its properties and that it would be unfair to levy penalty and/or interest on the Notified Party for not doing something that it was prevented from doing.
Final Decision: The Court held that the priority created by section 11 of the Special Courts Act was in respect of amounts due on the date of Notification and not for amounts due after the date of Notification. The Court further held that the term 'taxes' as used in section 11 of the Special Courts Act included penalties and interest. However, the Court held that penalty and/or interest could not be levied on or charged to Notified Parties after the date of Notification.
S.N. VARIAVA, J.:---This Court has been functioning since June 1992. Now so far as two Notified Parties are concerned, viz., the Harshad Mehta Group and Fairgrowth Financial Services Ltd., the time is approaching for distribution of their assets under section 11 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 (hereinafter for brevity's referred to as "the Special Court Act"). For this purpose, the Court has already appointed Auditors who are looking into and preparing accounts including list of assets and liabilities of these parties. In case of Fairgrowth Financial Services Ltd., under directions of Court, the Custodian has also issued a Public Notice calling upon the parties to lodge their claims, if any. The Custodian has also received claims, from some parties.
2. In the meantime, the Income Tax Department 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. 1,300 crores has been claimed. I am also informed that the Income Tax Department is also in the process of re-opening assessment of various Notified parties. Undoubtedly this will take some time. Further by reason of the fact that many Notified 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 are making claims under various documents in their favour. Some of these claims are by way of mortgages, hypothecations, pledges, assignment 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.
4. As the time for distribution has come closer, some questions of law have arisen for consideration. These must be answered in order to enable distribution. The Court had, therefore, framed the following questions:
"1. Whether the priority created by section 11 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 is only in respect of amounts due prior to the date of Notification and/or whether the priority would also apply to amounts due after the date of the Notification.
2. Whether the phrase 'taxes' as used in section 11 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 can only mean amounts due as and by way of taxes or whether it would also include penalties and interest, if any.
3. Whether penalty and/or interest can be levied on or charged to Notified Parties after the date of Notification."
5. The Court had put up a Notice that all parties interested in making submissions on these questions would be heard. The Court had also requested the Learned Advocate General Mr. T.R. Amdhyarujina, to act as an amicus curie and assist the Court. Pursuant to this Notice, the Court heard all parties on 24th , 25th, 27th and 30th January 1995.
6. The learned Advocate General and his junior Mr. M.S. Doctor have been of great assistance to Court. The Court expresses its appreciation for the efforts put in by them and the assistance rendered by them.
7. On behalf of the Custodian, Mr. A.M. Setalvad appeared with Mr. G.R. Joshi. Mr. E.P. Bharucha made submissions on behalf of Standard Chartered Bank. Mr. Virag Tulzapurkar made submissions on behalf of B.O.I. Finance and State Bank of Saurashtra. Mr. S.D. Parekh made submissions on behalf of Fairgrowth Financial Services Ltd., Dhanraj Mills Ltd. and Mr. T.B. Ruia. On behalf of the Income Tax Department, in various applications, various Counsel are appearing. All of them desired to make submissions. The Court permitted all of them to make submissions. Thus on behalf of the Income Tax Departmen
