Bombay High Court
Harshad Shantilal Mehta
Versus
Custodian
Decided On:

Headnote:Section 11(2)(a)- Tax liability notified person-Its discharge Whether it includes penalty or interest for any action or default-No. Whether "taxes" under Section 11(2)(a) would include interest or penalty as well? Court is concerned in the present case with penalty and interest under the Income Tax Act. Tax, penalty and interest are different concepts under the Income Tax Act. The definition of "tax" under Section 2(43) does not include penalty or interest. Similarly, under Section 157, it is provided that when any tax, interest, penalty, fine or any other sum is payable in consequence of any order passed under this Act, the Assessing Officer shall serve upon the assesse a notice of demand as prescribed. Provisions for imposition of penalty and interest are distinct from the provisions for imposition of tax. Learned Special Court Judge, after examinating various authorities in paras 51 to 70 of his judgment, has come to the conclusion that neither penalty nor interest can be considered at tax under Section 11(2)(a).

       Section 11(2)(a)-Disbursement of tax liability of notified person-Tax liability means only ascertained and assessed tax due relating only to statutory period from 1.4.1991 to 6.6.1992 as already quantified finally-Thus only such quantified amount of tax are payable under Section 11(2)(a) of Act.-Do these taxes relate to any particular period or do they cover all assessed taxes of the notified person? 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 0.6.1992. The Special Court is empowered to exan1ine 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 is securities during the period 1.4.1991 to 6,6,1992, as also all claims relating to the property attached, the Special Court will also have to examine the tax liability of the notified person arising during the period 1.4,1991 to 6.6.1992. As the purpose of the Special Court Act, infer alia, is as far as practicable, to safeguard the funds to which the banks and financial institutions may be entitled, and to ensure that these funds are not done away with, there are provisions for attachment, ascertainment of claims and distribution of funds. However, before the liabilities of a notified person to banks and financial institutions can be discharged. Section 11(2)(a) requires the tax liability of the notified person to be paid. In this context the tax liability can properly be construed as tax liability of the notified person arising out of transactions in securities during the "statutory period" of 1.4.1991 to 6.6.1992. If, for example, any income tax is required to be paid in connection with the income accruing to a notified person in respect of transactions in security during the "statutory period", that liability will have to be paid before tile funds are made available to the banks and financial institutions, Similarly, in respect of any property which is attached, if any rates or taxes are payable for the "statutory period" those rates and taxes will have to be paid before the proceeds of the property are distributed to banks and financial institutions. In the same manner, the liabilities to banks and financial institutions is Section 11(2)(b) are also liabilities pertaining to the statutory period.

       Sections 3(3) and 11-Attachment of properties under Section 3(3) of Act-Disbursement of liabilities under Section 11(2)-Liabilities of only notified person to be paid or discharged out of sale proceeds of attached property and not of any other person-Thus only right, title and interest of notified property to be attached and sold and not the entire property.-Section 3(3) dearly 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 on the right, title and interest of the notified person in that property. The interest of a third party in the attached property cannot be sold or distributed or discharge the liabilities of the notified person. This would also be the position when the property is already mortgaged or pleaded 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.

       For Citation : 1999 MCR 196 (SC)