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PETITIONER: HARSHAD SHANTILAL MEHTA

       Vs.

RESPONDENT: CUSTODIAN & ORS.

DATE OF JUDGMENT:       13/05/1998

BENCH: SUJATA V. MANOHAR, S.P. KURDUKAR, D.P. WADHWA

ACT:

HEADNOTE:

JUDGMENT: [With C.A.  Nos. 5147/1995, 5225/1995, 5325/1995, 6080/1995, 12574/1996, T.C. (Civil) No.5/1998]                       J U D G M E N T Mrs. Sujata V.Manohar, J.      The  Special   Court  (Trial   of  Offenders   Relating 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  a  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 Section 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 dated 23.2.1995.  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 Offences Relating  to   Transactions   in   Securities)   Act,   1992 (hereinafter referred  to as  the ’Special  Court Act’) from the same  judgment and  order of  the Special Court Judge. A writ petition  challenging the  constitutional  validity  of Section 11  of the  Special Court  Act pending  in the Delhi High Court  has also  been transferred  to  this  Court  for consideration along  with these appeals, as common questions of law  arise. All  these appeals along with the transferred case have  been heard  together. We  have also heard various intervenors in these appeals.      The  Special  Court  has  observed  that  it  has  been functioning since  June 1992.  In respect  of  two  notified parties, namely,  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  Act,   1992.  In   view  of  the  different  possible

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interpretations of the provisions of Section 11, the Special Court has raised certain questions of law. After hearing all concerned parties,  the Special  Court  has  answered  these questions in  the impugned judgment, somewhat in the fashion of an  Originating Summons. The Custodian has raised certain additional  questions   which  arise   in  interpreting  and implementing Section  11  of  the  Special  Court  Act.  The questions raised by the Special Court are as follows:      "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."      To appreciate  the points  at issue, it is necessary to look briefly at the provisions of the Special Court Act. The Statement of Objects and Reasons relating to the Act states, "In the  course of the investigations by the Reserve Bank of India, large  scale  irregularities  and  malpractices  were noticed in  transactions in  both the  Government and  other securities, indulged  in by  some brokers  in collusion with 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 (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 Section 3 of the Special Court Act sub-sections (1), (2), (3) and (4) are as follows :      "3.   Appointment and  functions of      Custodian  --   (1)   The   Central      Government may  appoint one or more      Custodian as  it may  deem fir  for      the purposes of this Act.      (2)   The Custodian  may, on  being      satisfied on  information  received      that any  person has  been involved

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    in any securities after the 1st day      of April,  1991 and  one 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  has, therefore, the power to notify the names of persons  involved in any offence relating to transactions in securities  after the  1st day  of April,  1991 and on or before  6th   of  June,   1992.  On  such  notification  all properties of  the notified  person  stand  attached.  Under Section 4,  the Custodian  is given  the  power,  if  he  is satisfied that any contract or agreement entered into at any time after  1st of April, 1991 and on or before 6th of June, 1992 in  relation to any property of the person notified has been entered  into fraudulently  or to defeat the provisions of this  Act, to  cancel such contract or agreement. On such cancellation the property shall stand attached. Both Section 2  and  4,  therefore,  deal  with  the  Custodian’s  powers relating to transactions in securities entered into during a very specific  period, namely,  1st of April, 1991 and on or before 6th  of June,  1992   (hereinafter referred to as the statutory period).      Under Section  7 and  8 the jurisdiction of the Special Court in  respect of  prosecution of offences is confined to offences  referred  to  in  Section  3(2)  i.e.  during  the statutory period.  Section 9-A  which has been introduced by the Amending  Act  24  or  1994,  deals  with  jurisdiction, powers, authority  and procedure  of the  Special  Court  in civil matters.  Under sub-section  (1)  it  is  provided  as follows :-      "(1)   On and from the commencement      of  the  Special  Court  (Trial  of      Offences Relating  to  Transactions      in Securities) Amendment Act, 1994,      the Special  Court  shall  exercise      all such  jurisdiction  powers  and      authority  as   were   exercisable,      immediately       before       such      commencement, by any civil court in      relation to any matter of claim -           (a)   relating to any property      attached under  sub-section (3)  or      Sec. 3;           (b)       arising    out    of      transactions in  securities entered      into after  the 1st  day  of  April      1991, and  on or before the 6th day      of June,  1992 in  which  a  person      notified under  sub-section (2)  of

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    Sec.3  is   involved  as  a  party,      broker, intermediary  or  in  other      manner.      (2)...................      (3)...................      (4)...................      (5)...................      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 Section 3(2), or any matter or claim  arising out  of transactions in securities entered into during the "statutory period".      Under Section 9-B the jurisdiction of the Special Court in arbitration  matters is  also  with  reference  to  those matters or claims which are covered by Section 9-A (1).      Therefore, the  jurisdiction of  the Special  Court  in civil  as   well  as  criminal  matters  is  in  respect  of transactions during  t he  statutory period of 1st of April, 1991 to 6th of June, 1993; 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.      Section 11  deals with  discharge  of  liabilities  and distribution  of  the  property  attached.  It  provides  as follows :-      "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  Sec.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    of    financial      institution or mutual fund; and      (c)   any other liability as may be      specified by the Special Court from      time to time."      This  Section  obviously  deals  with  disbursement  of properties attached  under Section  3(3). Since the property (movable 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  of mutual fund.      Before the  Special Court makes any order under Section 11(1) the  Special Court must be satisfied that the property which is  attached and is being disposed of, is the property belonging to  the notified persons. 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

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notification under  Section 3,  that right  of a third party cannot be extinguished. There is no provision in the Special Court Act  which extinguishes  the right, title and interest of a  third party  in any  property which  is attached  as a consequence of  a notification  under Section  3.  The  only right which  the Custodian  has, in respect of the rights of third parties  in such properties, is conferred by Section 4 under which, if the Custodian is satisfied that any contract or agreement  which was  entered into  by the notified party within the   "statutory  period" in  relation to an attached property, is  fraudulent or  entered into for the purpose of defeating the  provisions of  the Special  Court Act, he can cancel  such  contract  or  agreement,  There  is  no  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 v.  Union of  India and Ors. (1993 (1) SCC 78 at page 105 to  110). dealings ins securities belonging to banks and financial institutions  during the  relevant  period  and/or that there  are no  claims or  liabilities which  have to be satisfied by  attachment and  sale or  such property, in our view, the  Special court  would have the power to direct the Custodian to release such property from attachment". Hence a property not  having any  nexus with the illegal dealings in securities can  be released  from attachment  by the Special Court in an appropriate case.      The question of distribution of attached property under Section 11(2)  has to be considered thereafter. Before going into the  questions raised  in  that  connection,  one  must examine whether  Section 11(2)  lays  down  any  priorities. Although  it   was  contended  before  us  by  some  of  the appellants  that   Section  11(2)  does  not  lay  down  any priorities, the  language of  Section 11(2)  is quite clear. The words, "in order as under" in Section 11(2) lay down the properties for  distribution. In  fact, it  has been so held by this  Court while  interpreting Section 11 in the case of B.O.I. Finance  Ltd. v.  Custodian & Ors. (1997 (10) SCC 488 at page  497). Referring  to Section  11(2) of the Act, this Court has  said that  sub-section (2) of Section 11 provides for the  priorities in which the liabilities of the notified person are  to  be  discharged  from  out  of  the  attached properties. Considering that the Act has been passed because of the  diversion of  funds from  the  banks  and  financial institutions to  the individual accounts or certain brokers, the implication of Section 11 (2) (b) clearly is, that after the discharge of the liabilities under Section 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 malpractice in  the security  transactions. However,  before the amounts  can be  paid to banks or financial institutions under  Section   11(2)(b)  the   liabilities  under  Section 11(2)(a) are required to be discharged.      The Special Court has raised three questions pertaining to distribution under Section 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

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    pay such  taxes etc.,  or does  it refer to a liability      which has  crystalised into  a legally  ascertained sum      immediately payable? (2)  Do the taxes (in clause (a) of Section 11(2) refer only      to taxes  relating to a specific period or to all taxes      due from the notified person? (3)  At what point or 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  Section      11(2)(a) from out of the attached funds/property? (5)  Whether taxes include penalty or interest? (6)  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      under Section  3. In  the alternative,  is  a  notified      person liable to payment of penalty or interest arising      from his inability to pay taxes after his notification?      The Custodian  has raised certain further questions. We propose to consider one such question which has a bearing on the questions  which have  been framed by the Special Court. The question  is whether  in the  case of  mortgaged/pledged properties    of     the    notified     persons     already mortagaged/pledged to the banks or financial institutions on the date  of attachment,  the words  of Section   3 (3) "any property movable  or immovable  or  both  belonging  to  any person notified"  would refer  only to  the right,  title or interest of  the notified  person in  the  mortgaged/pledged property and  not the  entire property  itself. It  so,  the liabilities mentioned  in Section 11(2) which are to be paid from the  proceeds of  the sale  of the  attached  property, would only refer to proceeds of the sale of the right, title and  interest   of  the  notified  person  in  the  attached property.      The last  question can  be answered  first.  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  reverence only to the right, title and  interest of the notified person in that property. It 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  a 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. Question No. 1      The first  question on  which the  arguments have  been advanced, relates  to the  meaning of  the phrase  "tax due" used in Section 11(2)(a). Block’s Law Dictionary at page 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

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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 and 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."  (underlining ours) Jowitt’s Dictionary of  English Law  Vol. I,  2nd Edn.  at  page  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 is payable; in  other words,  it may  mean  that  the  debt  is payable at  once or  at a  future time.  It is a question of construction which  of these two meanings the word ’due’ has in a given case".      Wharton’s Law  Lexicon, 14th  Edn. at  page 365 defines ’due’ as  anything owing.  It has the following comment, "It should be observed that a debt is said to be due the instant that it  has existence  as a  debt; it  may be  payable at a future time".      Our attention  has been  drawn to  Section 530(1)(a) of the Companies  Act where the language used in "taxes. cesses and rates  due and  payable" and  Section  61(1)(a)  of  the Provincial Insolvency  Act, 1920  which refers  to all debts due to  the Crown.  In the  State of  Rajasthan  &  Ors.  v. Ghasilal (1965  (2) SCR  805),  this  Court  considered  the provisions  of   the  Rajasthan  Sales  Tax  Act,  1955.  It observed, that  Section 3  which is  the charging section of the Rajasthan  Sales Tax Act, read with Section 1, makes tax payable i.e. creates a liability to pay the tax. That is the normal function  of a  charging section in a taxing statute. But till  the tax  payable is  ascertained by  the Assessing Authority under  Section 10 or by the assessee under Section 7(2), no  tax can  be said to be due. For till then there is only a  liability to  be assessed to tax. A similar view was taken by  this Court  in its  later decision  in  Associated Cement Co. Ltd. v. Commercial Tax Officer, Kota & Ors. (1981 (48) S.T.C.  466 at  page 480)  holding that  until the  tax payable is  ascertained by the Assessing Authority or by the assessee, no  tax can be said to be due; for till then there is only a liability to be assessed to tax.      The Federal  Court in the case of Chatturam and Ors. v. Commissioner of Income-Tax, Bihar (1947 (15) ITR 302 at page 308) held  that the  liability to  pay the tax is founded on Sections 3  and 4  of the  Income  Tax  Act  which  are  the charging  sections.   Section  22  etc.  are  the  machinery sections to  determine the  amount  of  tax.  It  cited  the observations of  Lord Dunedin in Whitney v. Commissioners of Inland Revenue  (1926 AC  37) as  follows :- "Now, there are three stages  in the  imposition of  a  tax.  There  is  the declaration of  liability, that  is the  part of the stature which determines  what persons  in respect  of what property are liable.  Next, there  is the  assessment. Liability does not depend on assessment, that ex hypothesi has already been fixed. But  assessment particularizes that exact sum which a person liable  has to  pay.  Lastly,  come  the  methods  of recovery if the person taxed does not voluntarily pay." (See in this  connection, Kalwa  Devadattam and  Ors. v. Union of India and  Ors. (1963  (49) ITR  165, 171); Doorga Prosad v. The Secretary  of  State  (13  ITR  285,  289)  and  Ramyond Synthetics Ltd.  and Ors.  v. Union  of India and Ors. (1992 (2) SCC 255 at 286-288).      "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

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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 word, 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". Question No. 2      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  proceeding  relating  to transactions in  securities of a notified person between 1st of April,  1991 and  6th of June, 1992. The Special Court is empowered to  examine  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 in securities during the period  1.4.1991 to 6.61992, as also all claims relating to the  property attached,  the Special Court will also have 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 6.61992. 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 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 the banks and financial institution. 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 in Section 11(2)(b) are also  liabilities   pertaining  to   the  statutory  period. However,  the   extent  to  which  liability  under  Section 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  Section  11(2)(a), although the  liability may  continue to be the liability of

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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 (vide  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 liability only covers such liability for the period 1.4.1991 t 6.61992. Questions No.3      At what  point of  time should  this tax liability have become quantified  by a  large 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 12(2)(a) refers only to such liability for the period 1.4.1991  to 6.6.1992, it would not be correct t 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.   It  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. Question N. 4      The  next   question  is,   whether  the  assessed  tax liability for the statutory period requires to be discharged in full  under Section 11(2)(a) or whether the Special Court has any  discretion in  relation to the extent of payment to be made  under Section  11(2)(a)? The  banks who  have large claims against  the notified  persons have strenuously urged that the  Special Court  is not  required  to  pay  the  tax liability in  full, but has some discretion as to the extent to which  such liability  will be paid. They have emphasised the words ‘shall be paid or discharged in full as far as may be’ in  Section 11(2)  as indicating  some discretion in the Special Court regarding payment of liabilities under Section 11(2)(a). They  point out that at the time when the said Act was enacted  or when  the Ordinance  which it  replaced  was promulgated, the  full  extent  of  the  funds  involved  in malpractices leading  to the  diversion of  funds from banks and financial  institutions to  the pockets  of the brokers, was not  known. Even  after the  submission of report by the Janakiraman Committee,  a special  group known  as an inter- disciplinary group  was required  to be  set up to trace the end use  of funds  involved in  this  fraud.  Auditors  were appointed  to  check  instances  of  differences  where  the attached assets  were short  of problem  exposure.  It  was, therefore, expected  that 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

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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  Section 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 v. A.K. Menon  & Anr.  (1997 (9)  SCC 123) where the Court said that  if   two  interpretations   are  possible,   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  notification  could  not  be attached under Section 3(3). The purposive interpretation in the present  case is  to be  resorted to  for the purpose of ensuring that  amounts realised from the properties attached come back to the banks and financial institutions.      Our attention  was drawn  to the provisions relating to examination of  claims in  insolvency or  of  a  company  in winding up.  Debts have  to be  proved in  insolvency before they can  be considered  for payment  either in  part of  in full. Explaining  the powers  of the  insolvency court, this Court in  The State  of Punjab  v. S. Rattan Singh (1964 (5) SCR 1098  at page  1109) said,  "It is well-settled that the Insolvency Court  can, both  at the  time of  hearing  t  he petition for  adjudication of  a person  as an insolvent and subsequently at the stage of the proof of debts, re-open the transaction on  the basis  of which the creditor had secured the judgment of a court against the debtor. This is based on the principle  that  it  is  for  the  Insolvency  Court  to determine at  the time  of the  hearing of  the petition for Insolvency whether  the alleged  debtor does  owe the  debts mentioned by  the creditor  in the petition, and whether, if he owes them, what is the extent of those debts. A debtor is not to  be adjudged  an insolvent  unless he  owes the debts equal to  or more  than  a  certain  amount,  and  has  also committed an  act of  insolvency. It  is  the  duty  of  the Insolvency Court, therefore, to determine itself the alleged debts owed by debtor irrespective of whether those debts are based on a contract or under a decree of court. At the stage of the  proof of  the debts,  the debts  to be proved by the creditor are  scrutinised by the Official Receiver or by the Court in  order to  determine the  amount of  all the  debts which the  insolvent  owes  as  his  total  assets  will  be utilised for  the payment of his total debts and if any debt is wrongly  included in  his total debts that will adversely affect the interest of the creditors other than the judgment creditor in respect of that particular debt as they were not parties to  the suit in which the judgment debt was decreed. The decree  is not binding on them and it is right that they be in a position to question the correctness of the judgment debt."      It is  on  behalf  of  all  these  creditors  that  the Insolvency Court  or the  Official Receiver  scrutinises the debts, whether claimed under a decree or otherwise. The same is the position of a company in winding up because the rules of insolvency apply to winding up proceedings      In the  case of  S.V. Kondaskar  v. V.M.  Deshpande and Anr. (1972  (1) SCC 438 at page 449) this Court examined the question whether  under the Income Tax Act before commencing re-assessment proceedings, leave was required to be taken by the income  tax authority of the Company Court under Section 446 of  the Companies  Act, when the assessee-company was in winding up.  This Court  said that  the Income  Tax Act is a complete code  with respect  to assessment and re-assessment

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of income  tax. The  proceedings under  the Income  Tax  Act would not  fall within  the meaning of the expression ‘other legal proceedings’  in Section  446  and,  therefore,  leave would not   be  required of the Company Court for commencing such proceedings.  This Court,  however, went on to observe, (in paragraph  18) "We  have not been shown any principle on which the  liquidation court should be vested with the power to stop assessment proceedings for determining the amount of tax payable  by the  company which  is being  wound up.  The liquidation court  would   have full power to scrutinise the claim of  the Revenue  after income  tax has been determined and its  payment demanded  from the  liquidator. It would be open to the liquidation court then, to decide how far, under the  law,  the  amount  of  income  tax  determined  by  the department should  b e accepted as a lawful liability on the funds of  the company  in liquidation.  At  that  stage  the winding up  court can  full safeguard  the interests  of the company and its creditors under the Act".      Explaining this  decision, this  Court (a  bench of two judges) in  the case of Assistant Commissioner of Income Tax v. A.K.  Menon &  Ors. (1995  (5) SCC  200)  held  that  the Special Court  under the  present Act has no power to sit in appeal over  the orders  of Tax  Authorities,  Tribunals  or Courts. The claims relating to tax liabilities 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.      While we  respectfully agree  with the finding that the Special Court  cannot sit  in appeal  over 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  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  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 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  circumstances.  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 Special Court, is a person liable to be charged with an offence relating to transactions  in   Securities.  He   may   not,   in   these circumstances, explain  transactions before  t he income-tax authorities, in  case his position is prejudicially affected in defending  criminal 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

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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  t  he  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.      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).  Otherwise  the taxing authorities  may recover  the  same  from  any  other subsequently acquired  property of  the assessee  or in  any other manner  in accordance  with law.  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. Question No. 5      One other  connected question  remains: whether "taxes" under Section  11(2)(a) would include interest or penalty as well? We  are 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 assessee 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  examining various authorities in paragraphs 61 to 70  of his  judgment, has  come to  the  conclusion  that neither penalty  nor interest can be considered as tax under Section 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  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 taking 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

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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.      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 f being called upon so  to do, either by this Court or by the Special Court in this  or any other proceeding under the Special Curt Act, bring back to Court the moneys s paid r part r 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.      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 forwarded the scheme for the approval of the Union of India. Pursuant to  these directions,  then Custodian  forwarded  a draft scheme‘  for approval  to  the  Union  of  India.  The Ministry of  Finance, Department f 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 Curt in respect of the scheme so submitted.      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.      All the  appeals are disposed of as above with no order as to costs.

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