Dy. Commr. of Income
Tax Vs. State Bank of India & Ors. [2008] INSC 2072 (3 December 2008)
Judgment
IN THE SUPREME COURT
OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL D.NO. 32945 OF 2007 Dy.
Commissioner of Income Tax .... Appellant Versus State Bank of India & Ors.
.... Respondents With CIVIL APPEAL Nos. 326-329 of 2008 And CIVIL APPEAL No.
D-1537 of 2008
Dr. MUKUNDAKAM
SHARMA, J.
1.
The
present appeals were filed against the judgment and order of the Special Court
constituted under the Special Court (Trial of Offences Relating to Transactions
in Securities) Act, 1992 (hereinafter referred to as `Act') for conducting
trial of offences related to transactions in securities. By the impugned
judgment and order the Special Court allowed the application filed by the
respondent No. 1, the State Bank of India and directed the appellant to deposit
an amount of Rs. 546.22 crores with the Custodian alongwith interest at 9% per
annum. The Special Court while issuing the said direction held that the income
tax liability for the statutory period of the notified party, namely, Mr.
Harshad S. Mehta under Section 11 (2)(a) did not at that stage appear 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 orders and directions were
made subject to the condition of the Custodian seeking clarification from this
Court and releasing such payment in favour of the concerned parties, only if,
permitted by this Court.
3.
The
issue which is particularly sought to be raised by the appellant, Income Tax
Department by filing the present appeal is whether the Special Court
constituted under the aforesaid Act was right in scaling down the priority tax
demand by delving into the merits of the assessment orders and by deciding the
matter as an appellate authority which directions according to the appellant
are in violation of the decision of this Court in the case of Harshad S. Mehta
v. Custodian & Ors. [(1998) 5 SCC 1].
4.
The
subject matter of the present appeal relates to the security scam of Harshad S.
Mehta and the period relevant to the said scam relates to assessment years
1992-1993 and 1993-1994. The Assessing Officer completed the assessment
proceedings for both the aforesaid years in respect of Harshad S. Mehta after
gathering information from many sources and after giving an opportunity to the
assessee to furnish details/explanations on the same. The Income Tax Officer
passed an assessment order assessing the income for the assessment year 1992-
1993 at Rs. 2014 crores and for the assessment year 1993-1994 at Rs. 1396
crores. The assessment orders were challenged before CIT (Appeals) by the
assessee and were largely confirmed. Cross appeals have been filed by the
Revenue as also by the assessee for the assessment year 1992-1993, which are
pending with the Income Tax Appellate Tribunal, whereas for assessment year
1993-1994 appeal filed by the assessee is pending for admission. The orders of
assessment largely confirmed by CIT (Appeals) resulted in raising a tax demand
of Rs. 1743 crores by the Income Tax Department.
5.
In
terms of the provisions of Section 11 (2) (a) of the Act the Income Tax
Department has first right on appropriation of the assets of Harshad S. Mehta
lying in the custody of the Custodian against his tax demand for the assessment
year 1992-1993 and assessment year 1993-1994 as tax component. Therefore the
Income Tax Department is required to be paid in priority over the liabilities
payable to the banks, financial institutions and other creditors particularly
for the aforesaid relevant two years which were considered as statutory period.
6.
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 State Bank of India (hereinafter referred to as `SBI') and
also by other banks including Standard Chartered Bank (hereinafter referred to
as `SCB') before the Special Court seeking for direction to scale down the
priority demand on the ground that there was gross miscarriage of justice in
making an order of assessment in the case of the notified party, namely,
Harshad Mehta. In the said applications reference was also made to the decrees
on admission passed in favour of the banks against Harshad S. Mehta which
according to the banks have become final and binding. Relying on the said
decrees it was contended on behalf of the banks that passing of decrees prove
that the concerned money which are assessed as income in the hands of Harshad
S. Mehta as his income was, in fact, money belonging to the banks and therefore
there is a miscarriage of justice as the Income Tax Department has considered
the said amount/sum to be the income of Harshad Mehta. It was also submitted
that miscarriage of justice also crept in, in respect of, additions on account
of oversold securities, unexplained stock and unexplained deposits in banks
etc. The aforesaid applications were heard by the Special Court wherein the
Income Tax Department refuted the aforesaid submissions that there has been any
miscarriage of justice in making the order of assessment in the case of Harshad
Mehta.
However, the Special
Court under the impugned order dated 29.09.2007 accepted the pleas raised by
the SBI and other banks in part with a direction to scale down the priority
demand in the case of Harshad S.
Mehta in the
following terms and on following grounds:
Amount in Added in
Income Ground on which deducted by the Crores under the Head Special Court 1688
Decreed Amount in favour of banks.
1080 Over-sold
Securities As the assessing officer stated that the securities have been
delivered by the notified party, therefore, only the difference in purchase and
sale price can be taken and not the entire amount.
253 Unexplained
Stocks Consent decrees passed by the Supreme Court were not challenged by the
appellant.
101 Unexplained
money/ For an amount of Rs. 18.75 crores Deposits in Banks decree of Special
Court in favour 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.
10.In
the light of the aforesaid facts and issues we now proceed to deal with the
various contentions raised on behalf of the parties who in support of their
contention have referred to various documents on record.
11.
11.During
the course of hearing our attention was drawn to two pending applications which
were for the deletion of the name of respondent No. 7, namely, State Bank of
Saurashtra from array of parties as the said bank was acquired by respondent
No. 1, State Bank of India under Notification No. G.S.R. 589 (E) dated
13.08.2008. In view of the aforesaid position, both the applications which were
filed for deletion of the name of respondent No. 7 in the appeals are allowed.
Ordered accordingly.
12.
12.Mr.
G.E. Vahanvati, the Solicitor General of India appearing for the Income Tax
Department submitted that the order of the Special Court is perverse as the
Special Court while scaling down the figures of Rs. 1688 crores, with respect
to the decreed amount in favour of the banks, has failed to even consider the
fact that whether or not the said amounts which have been decreed in favour of
the bank were actually included in the income of the assessee/notified person
for the Statutory period. It was further submitted that unless it was
demonstrated and established by the banks that there is a nexus between the
amounts which have been decreed in their favour and the amount which has been
included in the income of the assessee/notified person for the statutory
period, the said amount cannot be scale down. Elaborating the argument it was
submitted that as the banks have failed to prove and establish that the amounts
have been wrongly assumed to be the income of the assessee as per the decrees,
the Special Courts was neither justified nor legal in assuming that the said
amounts were part and parcel of the assessment for the statutory period and
thereby directing for the scaling down of the said amounts.
The learned Solicitor
General further submitted that the impugned judgment is erroneous not only to
the aforesaid extent but also on account of the fact that there has been
duplication of amount while scaling down the figures of Rs. 1688 and Rs. 1080
crores. The amount of Rs. 1080 crores was scaled down by the Special court on
account of oversold securities and the said amount is arrived at after
deducting an amount of Rs. 601.22 crores credited to SBI from an amount of Rs.
1681.79 crores. With regard to the said amount it was submitted that the said
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. Custodian & Ors. (Supra) wherein it was held by this
Court that before the amounts can be paid to the banks or financial institutions
under Section 11(2)(b), the liabilities under Section 11(2)(a) are required to
be discharged.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
On
the other hand, Mr. K.K. Venugopal, the learned senior counsel appearing for
the respondent No. 9, SCB supported the judgment and order of the Special
Court. Negating the abovesaid claims of the appellant, it was submitted by the
learned senior counsel that the decrees in the favour of the banks were with
respect to siphoning of funds from the bank and not on account of the oversold
securities. As per the learned senior counsel the assessing officer has placed
reliance on Annexure - M2 as comprising a list containing such oversold securities
and accordingly added the amount into the income of Harshad Mehta. It was
further submitted that the department, merely on the fact that the assessing
officer has credited an amount of Rs. 601.22 crores in favour of SBI while
arriving at the figure of 1080 crores, has come to the conclusion that the
decrees for the entire amount of Rs. 1688 crores are on account of over sold
securities, which is ex-facie wrong and misconceived and thus the entire
contention that there is an duplication is fanciful. In support to the said
submission it was submitted that a bare perusal of the said Annexure M-2, which
is neither a trading account nor an account which show the purchases and sales
effected by the assessee, would make it abundantly clear that the entries reflected
therein have nothing to do with any of the claims made by the banks in any of
the suit filed by the banks.
In response to the
contention of the appellant department that there is no nexus between the
amounts which have been decreed in favour of the banks and the amount which has
been included in the income of the assessee/notified person, it was submitted
that it is not the case of the bank that there is a direct nexus between the
amount of the decrees and the individual items added to the income of the
notified party but what is submitted is that the decretal amount represents the
liability which ought to have been deducted whilst arriving at a conclusion of
the tax liability of the notified party.
14.
Mr.
C. A. Sundaram, learned senior counsel appearing for the respondent No. 1, SBI
while concurring with the above said submissions 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 Special Court with regard to scaling down both
the learned senior counsel submitted that though the Special Court cannot sit
in appeal over the assessment of tax authorities and that there can be no
question of reopening of any tax assessment before the Special Court as the
same has to be determined under the mechanism provided under the relevant tax
law, but that it is within the authority and jurisdiction of the Special Court
to decide as to how much of the liability would and could be discharged out of
the funds in the hands of the Custodian and that in coming to the said decision
it will also be within the authority and jurisdiction of the Special Court to
direct for making payment either in full or in part. It was further submitted
that for this purpose the Special Court can examine whether there is any fraud,
collusion or miscarriage of justice in assessment proceedings and that since in
the present case the revenue has raised a fanciful claim of an alleged income
of the assessee, to the tune of Rs. 3400 crores, on the basis of "Best
Judgment" assessment without disclosing material thereof there has been
miscarriage of justice. The learned counsel in support of their contention
placed reliance on the observations made by this Court in paragraph 35 of the
abovementioned decision of this Court in Harshad S. Mehta v. Custodian &
Ors. (Supra) wherein it was held that where the assessment is based on proper
material and pertains to the "statutory period", the Special Court
may not reduce the tax claimed and pay it out in full. It was also held that if
the assessment is a "best judgment" assessment, the Special Court
may examine whether, for example, the income which is so assessed to tax bears
comparison to the amounts attached by the Custodian, or whether the taxes so assessed
are grossly disproportionate to the properties of the assessee in the hands of
the Custodian, applying the Wednesbury Principle of Proportionality. In such
cases it was held that, the Special Court may, scale down the tax liability to
be paid out of the funds in the hands of the Custodian.
Reference was also
made to paragraph 36 wherein it is held that although the liability of the
assessee for the balance tax would subsist, and the taxing authorities would be
entitled to realise the remaining liability from the assessee, the same will
not be paid in priority over the claims of everybody 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
and from the date of notification under sub-section (2), any property, movable
or immovable, or both, belonging to any person notified under that sub-section
shall stand attached simultaneously with the issue of the notification.
(4) The property
attached under sub-section (3) shall be dealt with by the Custodian in such
manner as the Special Court may direct.
(5) The Custodian may
take assistance of any person while exercising his powers or for discharging
his duties under this section and Sec. 4."
The Special Court has
jurisdiction, under Section 7 of the Act, exclu- sively to hear and decide
prosecutions in respect of offences under the said Act, that is to say,
offences relating to transactions in securities after 1-4- 1991 and on or
before 6-6-1992. By reason of the amendment of the said Act and the inclusion
of Sections 9-A and 9-B, the Special Court is invested with civil jurisdiction
in regard to such transactions. Section 11 of the Act provides the manner in
which the liabilities are required to be discharged.
The said section
reads as under:
"Section 11.
Discharge of liabilities. -- (1) Notwithstanding anything contained in the Code
and any other law for the time being in force, the Special Court may make such
order as it may deem fit directing the Custodian for the disposal of the
property under attachment.
(2) The following
liabilities shall be paid or discharged in full, as far as may be, in the order
as under:
(a) all revenues,
taxes, cesses and rates due from the persons notified by the Custodian under
sub-section (2) of Section 3 to the Central Government or any State Government
or any local authority;
(b) all amounts due
from the person so notified by the Custodian to any bank or financial
institution or mutual fund;
and (c) any other
liability as may be specified by the Special Court from time to time."
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
In
the case of CIT v. A.K. Menon, [(1995) 5 SCC 200] this Court discussed the
jurisdiction of the Special Court with respect to tax liability of the notified
persons. In paragraph 4 of the judgment it was held as under:
"It is clear
that the Special Court has no power to sit in appeal over or overrule the
orders of the tax authorities, the Income Tax Appellate Tribunal or the courts
in regard to the tax liabili- ties of notified persons. The only power of the
Special Court is to determine the priorities in which claims upon the property
under attachment shall be paid. The claims relating to the tax li- abilities 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 liabilities be in respect of payment of revenues, taxes, cesses or rates,
or whether they be the liabilities to any bank, financial institution or mutual
fund."
In paragraph 12,
however, this Court held that before the Special Court proceeds to make an
order under Section 11 (1), the said court must be fully satisfied that the
property which is attached and is being disposed of is the property belonging
to the notified person. If any person other than the notified person has any
share, or any right, title or interest in the attached property on the date of
notification under Section 3 of the Act that right of a third party cannot be
extinguished. After having held thus this Court proceeds to observe as follows
in paragraph 13:
"13. The
directions, therefore, for disposal under Section 11(1) can be given only after
the Special Court has satisfied itself that the property under attachment is
the 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, the Special Court will have to decide the application before
proceeding under Section 11."
This Court thereafter
proceeded to interpret the phrase "taxes due" as used in Section 11
(2) (a) and after analyzing the same held as follows in paragraph 23 and 24 :-
"23. "Tax due" usually refers to an ascertained liability. How-
ever, the meaning of the words "taxes due" will ultimately de- pend
upon the context in which these words are used.
24. 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 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"."
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 transac-
tions during the said period. Under Section 3(2), it is the prop- erty of such
offenders which is attached by the Custodian and which is disbursed under the
directions of the Special Court un- der 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 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, inter 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 distribu- tion of funds. However,
before the liabilities of a notified per- son to banks and financial
institutions can be discharged, Sec- tion 11(2)(a) requires the tax liability
of the notified person to be paid. In this context the tax liability can
properly be con- strued as tax liability of the notified person arising out of
trans- actions 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 per- son in respect of
transactions in security during the "statutory period", that
liability will have to be paid before the funds are made available to the banks
and financial institutions. Similar- ly, in respect of any property which is
attached, if any rates or taxes are payable for the "statutory
period" those rates and tax- es will have to be paid before the proceeds
of the property are distributed to banks and financial institutions. In the
same man- ner, the liabilities to banks and financial institutions in Section
11(2)(b) are also liabilities pertaining to the statutory period. ...
......."
What will be the fate
of the tax liability of the notified person for any other period was mentioned
in para 26, which is as under:
"26. Every kind
of tax liability of the notified person for any other period is not covered by
Section 11(2)(a), although the li- ability 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
Section 11(2)(c), or the taxing au- thority may recover the same from any
subsequently acquired property of a notified person (vide Tejkumar Balakrishna
Ruia v. A.K. Menon [(1997) 9 SCC 123]) or in any other manner from the notified
person in accordance with law. The priority, however, which is given under
Section 11(2)(a) to such tax lia- bility only covers such liability for the
period 1-4-1991 to 6-6- 1992."
After having held
thus, this Court proceeded to determine the juris- diction 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 quali- fied 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 lia- bility, examine whether there is
any fraud, collusion or miscarriage of jus- tice 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 Spe- cial Court cannot sit in
appeal over the assessment of taxes by the tax authorities, we would like to
qualify the Court's subse- quent 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 Court. The liability of the notified person to pay the tax will have to
be determined under the machinery provid- ed by the relevant tax law. The
extent of liability, therefore, cannot be examined by the Special Court.
35. But the Special
Court can decide how much of that liability will be discharged out of the funds
in the hands of the Custodi- an. This is because the tax liability of a
notified person having priority under Section 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 cir- cumstances.
The Special Court can, for this purpose, examine whether there is any fraud,
collusion or miscarriage of justice in assessment proceedings. The assessee who
is before the Spe- cial Court, is a person liable to be charged with an offence
re- lating to transactions in securities. He may not, in these circum- stances,
explain transactions before the Income Tax authorities, in case his position is
prejudicially affected in defending crimi- nal charges. Then, on account of his
property being attached, he may not be in a position to deposit the tax
assessed or file appeals or further proceedings under the relevant tax law
which he could have otherwise done. Where the assessment is based on proper
material and pertains to the "statutory period", the Special Court
may not reduce the tax claimed and pay it out in full. But if the assessment is
a "best judgment" assessment, the Special Court may examine whether,
for example, the income which is so assessed to tax bears comparison to the
amounts at- tached by the Custodian, or whether the taxes so assessed are
grossly disproportionate to the properties of the assessee in the hands of the
Custodian, applying the Wednesbury Principle of Proportionality. The Special
Court may in these cases, scale down the tax liability to be paid out of the funds
in the hands of the Custodian.
36. Although the
liability of the assessee for the balance tax would subsist, and the taxing
authorities would be entitled to realise the remaining liability from the
assessee, the same will not be paid in priority over the claims of everybody
else under Section 11(2)(a). If the Special Court so decides, it may direct
payment of the balance liability under Section 11(2)(c). Other- wise the taxing
authorities may recover the same from any other subsequently acquired property
of the assessee or in any oth- er manner in accordance with law. Such scaling
down, howev- er, should be done only in serious cases of miscarriage of jus-
tice, fraud or collusion, or where tax assessed is so dispropor- tionately high
in relation to the funds in the hands of the Custo- dian 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 do- ing so. In fact, the Income Tax authorities have also accepted that
exorbitant tax demands can be ignored, applying the Wednesbury
Principles."
20.
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 reopened by the Special Court and the extent of
liability, therefore, cannot be examined by the Special Court.
(ii) The claims
relating to the tax liabilities of a notified person are, along with revenues,
cesses and rates entitled, for the statutory period, to be paid first in the
order of priority and in full, as far as may be, depending upon various
circumstances.
(iii) The `taxes due'
refer to `taxes as finally assessed'. 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.
(iv) The priority,
however, which is given under Section 11(2)(a) to such tax liability only
covers such liability for the period 1-4- 1991 to 6-6-1992. Every kind of tax
liability of the notified person for any other period is not covered by Section
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 Section 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.
(v) The Special Court
can decide how much of the tax liability will be discharged out of the funds in
the hands of the Custodian and the Special Court can, for the purpose of
disbursing the tax liability, examine whether there is any fraud, collusion or
miscarriage of justice in assessment proceedings.
(vi) Where the
assessment is based on proper material and pertains to the "statutory
period", the Special Court may not reduce the tax claimed and pay it out
in full, but if the assessment is a "best judgment" assessment, the
Special Court may examine whether the taxes so assessed are grossly disproportionate
to the properties of the assessee in the hands of the Custodian, applying the
Wednesbury Principle of Proportionality and other issues of the said nature.
The Special Court may in these cases, scale down the tax liability to be paid
out of the funds in the hands of the Custodian. 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.
21.
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.
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.
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 notified party for the statutory period and the payment of
the same is claimed in priority over the claims of the banks.
24.
There
could be no disagreement with regard to the fact that if any amount is found
due and payable by the banks towards amount advanced by it as loan to Mr.
Harshad Mehta, in that event the right of the bank to the extent of the said
amount, must be held to be the existing right of the bank on the property which
is attached. It also cannot be ignored that the said amount could not have been
assessed in the hands of Harshad S.
Mehta as his income,
for the banks continued to have an existing right on Page the aforesaid amount
which is required to be released in terms of the decrees which are obtained by
the banks and the non-release of the said amount would amount to miscarriage of
justice.
However, the fact
that decrees have been obtained by the banks in respect of the certain dues of
Harshad S. Mehta could not be disputed by the Income Tax Department. It also
could not be disputed by the Income Tax Department that the amounts for which
decrees have been obtained by the banks have become final and binding. But
then, it was submitted that the taxes due have been ascertained and arrived at
in terms of the provisions of the Act and that the banks have failed to
establish by producing the relevant documents on record that the said amount,
which is decreed in favour of the bank, has been wrongly included in the income
of the notified party for the statutory period. As the priority in payment of
tax liability under Section 11 (2)(a) is only for the statutory period and not
for any other period, we find that the appellant is justified while contending
that if the banks have a right, title or interest in the attached property on
the date of the notification under Section 3 of the Act for which decrees have
been obtained and if the banks are claiming that the said amount has wrongly
been included in the income of the notified party for the statutory period,
then the banks are required to show the nexus between the said decreed amount
and the amount which is included in the income of the notified party for the
statutory period.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
The
second disputed question of fact which is also sought to be raised by the
Income Tax Department is with regard to the duplication of amount while order
for scaling down the amount of Rs. 1688 crores and Rs. 1080 crores. 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 were raised before the Special Court the same were not addressed
or considered in the manner in which they should have been so done.
27.
For
the adjudication of the disputes which are raised in the present appeal a
finding on the said issues and questions would be mandatory and the same cannot
be dispensed with under any circumstances. It was submitted by the learned
senior counsel appearing for the respondents that at this point the matter
should not be remanded back to the Special Court for a finding on the said
issues and questions and the said finding should also be given by this Court.
We considered the said submission.
But we find that it
would not be possible for us to give any finding on such disputed questions of
fact without the same having been looked into by the Special Court after giving
opportunity to the parties to file all relevant documents and papers in support
of their contention relating to the aforesaid two issues. Even otherwise,
neither the decrees in favour of the banks nor the documents with respect to
the suits filed by the banks which indicate the claims of the banks in the
suits have been placed before us. Therefore we are not in a position to give
any conclusive finding at this stage.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
In
the absence of the relevant documents neither would it be possible nor would it
be appropriate for us to give a finding on the said issues and questions.
Therefore as a Hobson's choice we are of the opinion that all such disputed
questions are required to be decided by the Special Court after giving an
opportunity to the parties to place all the relevant documents so as to enable
it to come to a proper and considered finding.
29.
However,
while remanding the matter for a finding on the said issues and questions we
decide the issue that if the nexus is shown by the banks between the amounts
for which decrees have been obtained, which have become final and binding and
the amount which is included in the income in the hands of Harshad S. Mehta by
the Department, the same will have to be disbursed to the banks by the Special
Court. We also hold that on account of oversold securities if the delivery has
been given by Harshad S. Mehta and the transaction is complete, only the
difference between the payable and receivable will be taken and not the gross
amount. However the issue as to whether the decrees are on account of oversold
securities 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.
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
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 settlement and accordingly scaled down the said amount from the
income of Harshad Mehta.
Similar is the case
with the amount of Rs. 101 crores. Thus the scaling down of the said amount is
upheld and will not be disturbed.
32.
It
is needless to say that the orders of disbursement made during the pendency of
the disputes between the parties cannot be said to be final and the same will
have to be interim in nature and would finally get settled and take shape on
the determination of the final liability after final adjudication of the
disputes by the appropriate forums.
33.
In
the light of the aforesaid observations and directions and till a decision is
taken with regard to the aforesaid issues which are remanded back to the
Special Court we direct that the said amount which was directed to be deposited
by the Income Tax Department with the Custodian may not be refunded. We
therefore set aside the directions of the Special Court, except to the extent
mentioned in para 31 and remit the entire matter and claims of the parties to
be decided afresh in terms of the observations made in this order. We also make
it clear that none of the observations made in this order would be construed as
any observations made by this Court on the merit of the claims. We request the
Special Court to decide the aforesaid issues as expeditiously as possible
preferably within a period of three months from today and while doing so give
an opportunity to the parties to file such documents which are required or
desired to be filed in support of the appeals.
34.
Accordingly,
all the appeals stand disposed in terms of the aforesaid observations and
directions.
.................................J.
(Tarun Chatterjee)
.................................J.
(Dr. Mukundakam Sharma)
New
Delhi;
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