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CASE NO.: Appeal (civil)  6316-23 of 2005

PETITIONER: Tax Recovery Officer,Central Range-1

RESPONDENT: Custodian the Special Court( T.O.R.T.S) Act, 1992 & ors.

DATE OF JUDGMENT: 17/08/2007

BENCH: G.P. Mathur & P.K. Balasubramanyan

JUDGMENT: J U D G M E N T

G.P. Mathur, J.

       These appeals have been filed by Tax Recovery Officer,  Central Range-1, under Section 10 of the Special Courts (Trial Of  Offences Relating To Transactions In Securities) Act, 1992  (hereinafter referred to as the \021Special Courts Act\022) against the  order dated 24.2.2005 of the Special Court passed on Intervention  Application Nos. 458 to 465 of 2004 in Execution Application  Nos. 98 to 105 of 2001 in Miscellaneous Petition Nos. 189/95,  92/96, 102/95, 188/95, 103/95, 251/95 and 252/95.   

2.      The custodian exercising powers under Section 3(2) of the  Special Courts Act published the name of M/s. Dhanraj Mills Pvt.  Ltd. in gazette as a notified person. In view of Section 3(3) of the  Special Courts Act all the assets belonging to the notified party  stands attached to the Special Court.  Thus, the assets of M/s.  Dhanraj Mills Pvt. Ltd. stood attached to the Special Court.  It was  found that M/s. Killick Nixon Pvt. Ltd. and its 13 group companies  owed substantial amount of money to M/s. Dhanraj Mills Pvt. Ltd.  and M/s. Killick Nixon Pvt. Ltd. also stood as guarantor for the  repayment of the money. The custodian on behalf of M/s. Dhanraj  Mills Pvt. Ltd. filed suits for recovery of its dues against M/s.  Killick Nixon Pvt. Ltd. and its 13 group companies.  The Special  Court passed decrees against M/s. Killick Nixon Pvt. Ltd. and its  group companies on 18.9.1997. The custodian then filed Executing  Applications bearing Nos. 98 to 105 of 2001 before the Special  Court for recovery of the decretal amount on behalf of M/s.  Dhanraj Mills Pvt. Ltd.  The Special Court on 14.2.2003 appointed  a receiver for taking charge of certain assets and properties of M/s.  Killick Nixon Pvt. Ltd. and the other group companies which were  sufficient to satisfy the entire decretal amount.  Subsequently  thereto the properties of M/s. Killick Nixon Pvt. Ltd. were put to  auction and money was realized.   It appears that a certified  demand of Rs.25.88 crores against M/s. Killick Nixon Pvt. Ltd.  was pending for recovery by the Tax Recovery Officer, Central  Range-1, Mumbai.  On 25/30.8.2004 the Tax Recovery Officer  filed Intervention Application Nos. 450 to 465 of 2004 before the  Special Court with a prayer that the custodian be directed to  consider the claim of recovery of arrears of income tax from M/s.  Killick Nixon Pvt. Ltd. on a priority basis before distribution of  sale proceeds to any other creditor.  A further prayer was made that  the custodian be restrained from distributing the sale proceeds  without first satisfying the claim of the income tax department.  On  1.9.2004 the Special Court passed an order directing the custodian  to submit a report which was complied with by the custodian on

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19.6.2004.  On 24.11.2004 the Special Court passed an order  confirming the sale of the property of M/s. Killick Nixon Pvt. Ltd.  to the highest bidder M/s. Gama Constructions for Rs.30 crores.   The Intervention Applications filed by the Tax Recovery Officer  were, however, rejected by the Special Court on 24.2.2005 by the  following order: - \023By these applications, recovery orders against a third  party which is not a notified party, are sought.  These  applications are not maintainable before this court.   Applications disposed of.\024

It is this order which is subject matter of challenge in the present  appeal.  

3.      Before adverting to the submissions made by the learned  counsel for the parties it will be convenient to set out the relevant  provisions of the Special Courts (Trial Of Offences Relating To  Transactions In Securities) Act, 1992 which have a bearing on the  controversy in hand.  Section 3, sub-sections (1), (2) and (3) of  Section 9A, Sections 11 and 13 of the Special Courts Act read as  under: - \0233. Appointment and functions of Custodian. (1)  The Central Government may appoint one or more  Custodians 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 the 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 section 4.\024 \0239A. Jurisdiction, powers, authority and procedure  of Special Court in civil matters. (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 or claim-  (a)     relating to any property standing attached under  sub-section (3) of section 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 section  3 is involved as a party, broker, intermediary or  in any other manner.  (2)     Every suit, claim or other legal proceeding  (other than an appeal) pending before any court  immediately before the commencement of the Special  Court (Trial of Offences Relating to Transactions in

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Securities) Amendment Act, 1994, being a suit, claim  or proceeding, the cause of action whereon it is based  is such that it would have been, if it had arisen after  such commencement, within the jurisdiction of the  Special Court under sub-section (1), shall stand  transferred on such commencement to the Special  Court and the Special Court may, on receipt of the  records of such suit, claim or other legal proceeding  proceed to deal with it, so far as may be, in the same  manner as a suit, claim or legal proceeding from the  stage which was reached before such transfer or from  any earlier stage or de novo as the Special Court may  deem fit.  (3)     On and from the commencement of the Special  Court (Trial of Offences Relating to Transactions in  Securities) Amendment Act, 1994, no court other than  the Special Court shall have, or be entitled to exercise,  any jurisdiction, power or authority in relation to any  matter or claim referred to in sub-section (1).\024 \02311. 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.\024 \02313. Act to have overriding effect - The provisions  of this Act shall have effect notwithstanding anything  inconsistent therewith contained in any other law for  the time being in force or in any instrument having  effect by virtue of any law, other than this Act, or in  any decree or order of any court, tribunal or other  authority.\024 Sub-section (2) of Section 3 empowers the custodian, on being  satisfied on information received that any person has been involved  in any offence relating to transaction in securities after the first day  of April, 1991 and on or before 6th June, 1992 to notify the name of  such person in the official Gazette.  Sub-section (3) of Section 3  provides that on and from the date of notification under sub-section  (2), any property, moveable or immovable, or both belonging to  any person notified under sub-section (2) shall stand attached  simultaneously with the issue of the notification.  Sub-section (4)  of Section 3 provides that the property attached under sub-section  (3) shall be dealt with by the custodian in such manner as the  Special Court may direct.  Section 9A deals with the jurisdiction,  powers, authority and procedure of Special Court in civil matters.   Clause (a) of sub-section (1) of Section 9A provides that on and  from the commencement of the Special Courts (Trial Of Offences  Relating To Transactions In Securities) Amendment Act, 1994, the  Special Court shall exercise all such jurisdiction, power and  authority as were exercisable immediately before such  commencement by any civil court in relation to any matter or claim  relating to any property standing attached under sub-section (3) of  Section 3.  The words \023in relation to any matter or claim\024

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occurring at the end of sub-section (1) of Section 9A are important  and they clearly indicate that the Special Court shall have power  and authority in relation to any matter or claim relating to any  property standing attached under sub-section (3) of Section 3.   Therefore, the jurisdiction of the Special Court is confined to the  property of the notified person which stands attached under sub- section (3) of Section 3 of the Special Courts Act.  Sub-section (1)  of Section 11 of the Special Courts Act empowers the Special  Court to pass such orders as it may deem fit directing the custodian  for the disposal of the property under attachment.  Sub-section (2)  of Section 11 enumerates the liabilities which have to be paid or  discharged and also the priority which has to be followed in  discharging the liability.  Section 13 of the Special Courts Act  gives an overriding effect to the Special Courts (Trial Of Offences  Relating To Transactions In Securities) Act, 1992. 4.      Dr. R.G. Padia, learned senior counsel for the appellant, has  submitted that there were dues of the Income Tax Department as  against M/s. Killick Nixon Pvt. Ltd. and it was only after issuance  of the public notice for auction of the properties that the Income  Tax Department came to know of the impending auction of the  assets of the assessee company.  At the time of the auction notice a  certified demand of Rs.25.88 crores was pending for collection by  the Tax Recovery Officer.  It was under these circumstances that  the Tax Recovery Officer filed Intervention Applications before the  Special Court praying that the custodian may be restrained from  distributing the sale proceeds without first satisfying the claim of  the Income Tax Department and that the said claim should be  considered on a priority basis.  Learned counsel has submitted that  even after the sale of the property of M/s. Killick Nixon Pvt. Ltd.,  until the money had been distributed to the creditors it was the  money of M/s. Killick Nixon Pvt. Ltd. and, therefore, under  Section 226(4) of the Income Tax Act the Tax Recovery Officer  could apply to the Special Court for payment of the money to  discharge the income tax liability of M/s. Killick Nixon Pvt. Ltd.   In support of this submission Dr. Padia has placed reliance upon  several decisions of this Court and notably on Manmohan Lal and  others vs. Income-Tax Officer 168 ITR 616, wherein it was held as  under: - \023..............................When an assessee is in default,  there are two modes of recovery open to an Income- tax Officer.  The first mode is provided under section  222 of the Income-tax Act.  Under that section when  an assessee is in default in making a payment of tax,  the Income-tax Officer may forward to the Tax  Recovery Officer a certificate specifying the amount  of arrears due from the assessee, and on such  certificate, the Tax Recovery Officer shall proceed to  recover from the assessee the said amount by one or  more of the modes set out in section 222.  The other  modes of recovery are specified in section 226.  Sub- section (4) of section 226 provides that the Income-tax  Officer may apply to the court in whose custody there  is money belonging to the assessee for payment to him  of the entire amount of such money, or, if it is more  than the tax due an amount sufficient to discharge the  tax.         A perusal of these provisions clearly shows that  the Tax Recovery Officer has nothing to do with an  application under section 226(4) made by the Income- tax Officer to a court in which there is money lying to  the credit of the assessee in default.  If such an  application is made, it is certainly open to the court to  determine as to whether there has been a proper notice  of demand served on the decree-holder (assessee in  default) according to law.  It is only after the court is

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satisfied of this that the court can proceed to pay over  the amount demanded to the Income-tax Officer.         It is settled by authority long accepted that tax  can be recovered from an assessee only when it  becomes a debt due from him and that it becomes a  debt due when a notice of demand calling for payment  of the tax has been served on the assessee.  If an  assessee objects to the recovery proceedings taken  under section 226(4) on the ground that there has been  no valid service of a notice of demand and that,  therefore, no debt is due, the court must decide the  objection, and if it upholds the objection, it cannot  permit recovery of the tax claimed.\024

The next decision relied upon by Dr. Padia is Lakshman Swarup  Om Prakash vs. Union of India 229 ITR 662, wherein it was held  that under Section 226(4) of the Income-tax Act the Assessing  Officer or the Tax Recovery Officer can move the court having  custody of money belonging to the assessee for payment to him of  such money for discharging the tax liability of the assessee.  What  is necessary is that on the date when the application is made the  court should have custody of money belonging to the assessee.  In  that case reference was made to the following observations made in  Union of India vs. Somasundaram Mills (P) Ltd. 152 ITR 420: -         \023It is a general principle of law that debts due to  the State are entitled to priority over all other debts.  If  a decree-holder brings a judgment-debtor\022s property to  sale and the sale proceeds are lying in deposit in court,  the State may, even without prior attachment, exercise  its right to priority by making an application to the  executing court for payment of its dues.  If, however,  the State does not choose to apply to the court for  payment of its dues from the amount lying in deposit  in the court but allows the amount to be taken away by  some other attaching decree-holder, the State cannot  thereafter make an application for payment of its dues  from the sale proceeds, since there is no amount left  with the court to be paid to the State............\024

Learned senior counsel has also referred to decision of this Court in  Dena Bank vs. Bhikhabhai Prabhudas Parekh and Co. 247 ITR  165, wherein it was held that the State of Karnataka had a  preferential claim to recover arrears of sales tax including penalty  from a firm over that of the appellant bank in relation to debts due  to the bank from the firm for the payment of which the partners of  the firm had mortgaged properties belonging to them, and the High  Court was right in directing that, even though the bank had  obtained a decree (in 1992) and was authorized to bring the  mortgaged property to sale, the arrears due to the State had to be  paid to the State first and only thereafter the bank could adjust the  remaining amount towards the amount due to it under the decree. 5.      Learned counsel has thus submitted that it is a settled  proposition of law that if money is realized by sale of the properties  of the judgment-debtor in execution of the decrees obtained by the  decree-holders, until the money is actually paid over to the decree- holders it is the property of the judgment-debtor and the Income  Tax Department will have a priority to recover its dues from the  judgment-debtor out of the money so realized.  According to  learned senior counsel the Intervention Applications moved by the  Tax Recovery Officer should, therefore, have been entertained by  the Special Court as the Income Tax Department had a certified  demand against M/s. Killick Nixon Pvt. Ltd. and the money  realized by auction of its property was still lying with the Special  Court and had not been distributed to the custodian or anybody  else.  The summary rejection of the Intervention Applications by

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the Special Court, it is urged, is wholly illegal. 6.      Shri Subramonium Prasad, learned counsel for the custodian,  has, on the other hand, submitted that it was M/s. Dhanraj Mills  Pvt. Ltd. which had been notified as a party under sub-section (2)  of Section 3 of the Special Courts Act and the property, both  moveable and immoveable, or both of the notified party stood  attached simultaneously with the issue of the notification under  sub-section (2) of Section 3 of the Special Courts Act.  Thus the  attached property also became property of the notified party.  M/s.  Killick Nixon Pvt. Ltd. had not been notified as a party under sub- section (2) of Section 3 of the Special Courts Act.  The money  realized by the auction sale of the property of M/s. Killick Nixon  Pvt. Ltd. in the execution proceedings initiated after decrees had  been passed in favour of M/s. Dhanraj Mills Pvt. Ltd. was the  property of the notified party, viz., M/s. Dhanraj Mills Pvt. Ltd.  and as such the Income Tax Department could not claim any right  under Section 226(4) of the Income-tax Act to recover its income  tax dues from M/s. Killick Nixon Pvt. Ltd. out of the money so  realized.  Learned counsel has further submitted that Section 11 of  the Special Courts Act lays down the manner in which the  liabilities of the notified party has to be discharged and under  clause (a) of sub-section (2) thereof all taxes due from the notified  party to the Government have to be discharged first.  Learned  counsel has also submitted that in view of Section 13, the Special  Courts Act shall have an overriding effect over the provisions of  the Income-tax Act.  Learned counsel has referred to the decision  of this Court in Solidaire India Ltd. vs. Fairgrowth Financial  Services Ltd. (2001) 3 SCC 71, wherein it was observed as under  at page 74 of the reports: -         \023Under Section 3 of the 1992 Act, all property  of notified persons is to stand attached.  Under Section  3(4), it is only the Special Court which can give  directions to the Custodian in respect of property of  the notified party.  Similarly, under Section 11(1), the  Special Court can give directions regarding property  of a notified party.  Under Section 11(2), the Special  Court is to distribute the assets of the notified party in  the manner set out thereunder.  Monies payable to the  notified parties are assets of the notified party and are,  therefore, assets which stand attached.  These are  assets which have to be collected by the Special Court  for the purposes of distribution under Section 11(2).   The distribution can only take place provided the  assets are first collected.  The whole aim of these  provisions is to ensure that monies which are siphoned  off from banks and financial institutions into private  pockets are returned to the banks and financial  institutions.  The time and manner of distribution is to  be decided by the Special Court only..........\024

7.      The language employed in Section 13 of the Special Courts  Act is clear and explicit when it says that the provisions of the Act  shall have effect notwithstanding anything inconsistent therewith  contained in any other law for the time being in force.  Section 32  of the Sick Industrial Companies (Special Provisions) Act, 1985  also contains a similar clause that the provisions of the said Act  and of any rules or schemes made thereunder shall have effect  notwithstanding anything inconsistent therewith contained in any  other law except the provisions of the Foreign Exchange  Regulation Act, 1973 and the Urban Land (Ceiling and Regulation)  Act, 1976.  In Solidair India Ltd. (supra) the provisions of Section  13 of the Special Courts (Trial Of Offences Relating To  Transactions In Securities) Act, 1992 and Section 32 of the Sick  Industrial Companies (Special Provisions) Act, 1985 were  examined and it was held that both these Acts are special Acts and

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in such an event it is the later Act, namely, the Special Courts  (Trial Of Offences Relating To Transactions In Securities) Act,  1992 which must prevail.  Thus there can be no manner of doubt  that the provisions of the Special Courts Act, wherever they are  applicable, shall prevail over the provisions of the Income-tax Act.   8.      In view of Section 9A of the Special Courts Act the  jurisdiction of the Special Court is in relation to any matter or  claim relating to any property standing attached under sub-section  (3) of Section 3 of the Special Courts Act.  What is attached under  sub-section (3) of Section 3 of the Special Courts Act is the  property, moveable or immoveable, or both belonging to any  person notified under sub-section (2) of Section 3 of the Special  Courts Act.  As already mentioned it was M/s. Dhanraj Mills Pvt.  Ltd. which had been notified as a party under sub-section (2) of  Section 3 of the Special Courts Act and not M/s. Killick Nixon Pvt.  Ltd.  M/s. Killick Nixon Pvt. Ltd. had not been notified as a party.   M/s. Dhanraj Mills Pvt. Ltd. owed money from M/s Killick Nixon  Pvt. Ltd. and its 9 subsidiary companies of which the former stood  as guarantor and it was in execution of the decrees passed in favour  of M/s. Dhanraj Mills Pvt. Ltd. that the property of M/s. Killick  Nixon Pvt. Ltd. was put to auction.  Thus the Special Court could  not have entertained the application moved by the Income Tax  Department under Section 226(4) of the Income Tax Act for  realization of its income tax dues from M/s. Killick Nixon Pvt. Ltd.   The application moved by the Income Tax Department was,  therefore, rightly rejected by the Special Court. 9.      Learned counsel for the appellant has also submitted that  having regard to Section 10 of the Special Courts Act which  provides appeal against the order of the Special Court to this Court  both on facts and law, the Special Courts ought to have examined  the matter in detail and has erred in rejecting the Intervention  Applications by passing a short and cryptic order of 4 or 5 lines.  In  our opinion, the Special Court having noted the relevant legal  provision for rejecting the applications, no exception can be taken  to the order passed by it.  At any rate we have examined the matter  on merits and have arrived at a conclusion that the Intervention  Applications were not maintainable before the Special Court. 10.     For the reasons discussed above there is no merit in these  appeals, which are hereby dismissed.

11.     No costs.