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PETITIONER: ASSISTANT COMMISSIONER OF INCOME TAX

       Vs.

RESPONDENT: A.K. MENON & ORS.

DATE OF JUDGMENT18/07/1995

BENCH: AHMADI A.M. (CJ) BENCH: AHMADI A.M. (CJ) BHARUCHA S.P. (J)

CITATION:  1995 AIR 2322            1995 SCC  (5) 200  1995 SCALE  (4)525

ACT:

HEADNOTE:

JUDGMENT:           O R D E R      Special leave granted.      This appeal  is filed  against an  order of the Special Court appointed  under the  provisions of  the Special Court (Trial of  Offences Relating  To Transactions in Securities) Act, 1992.  The  appellant,  an  Assistant  Commissioner  of Income Tax,  sought release  of the  sum of Rs.80,80,198.34, being the  tax  liabilities  of  the  respondents,  who  are notified  persons   under  the  said  Act,  from  the  funds available with  the Custodian appointed under the provisions thereof.  Learned   counsel  appearing  for  some  of  these notified persons  submitted to  the learned  Judge  that  he wished to  show that  the  demands  of  the  appellant  were unreasonable and  unjustified and,  if satisfied,  he should not order  release of  the  amounts  claimed.  Having  heard counsel, the  learned Judge  passed the  impugned order.  It said that  while the  Special Court  could not sit in appeal over orders  of the  tax authorities.  It was entrusted with the task  of distributing  the funds in the manner laid down under section  11 of  the said  Act and  the priorities laid down thereunder  had to  be  observed.  The  priorities  and objects of  the said  Act could and would be defeated if the Special Court  could not  "go into the bonafides of a claim. In that  case a  party, like  the Income Tax Department, may make a  claim in  an absurdly large amount." Whether a claim was "justified or enforceable can only be decided by looking into that  claim". Counsel  for the  notified  parties  was, therefore, "entitled to try and show to court that the claim is   unreasonable    and   unjustified".   The   appellant’s application was  adjourned  for  the  purpose,  and  he  has appealed.      The  said   Act  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. The Act requires

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the appointment  of a  Custodian thereunder  who  is,  inter alia, required to deal with the property of persons notified in such  manner as the Special Court may direct. The Special Court  has   jurisdiction,  under  section  7  of  the  Act, exclusively to  hear and  decide prosecutions  in respect of offences under  the said  Act,  that  is  to  say,  offences relating to transactions in securities after 1st April, 1991 and on  or before 6th June, 1992. By reason of the amendment of the said Act and the inclusion of sections 9A and 9B, the Special Court  is invested with civil jurisdiction in regard to  such  transactions.  Section  11  is  relevant  for  our purpose. Sub-section  (1) states that the "Special Court may make such  order as  it may deem fit directing the Custodian for the  disposal of  the property  under attachment".  Sub- section (2)  states that "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)       xxx       xxx       xxx"      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 liabilities  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 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. In relation to a claim for payment of the tax liability of a notified person, the Special  Court has, therefore, 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.      Our attention  was drawn  by Mr.A.M.  Setalvad, learned counsel for  the Custodian, to the judgment of this Court in S.V. Kondaskar vs. V.M. Deshpande, AIR 1972 S.C. 878, and to the observation thereunder that 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  be accepted  as a lawful liability on the funds of the company in liquidation. At that  stage the  winding up court can fully safeguard the interests of  the company  and its creditors under the Act." The question  that this  Court had to decide in the case was whether it  was necessary  for  the  income-tax  officer  to obtain the  leave of the liquidation court when he wanted to re-assess the  company in  liquidation for escaped income in respect of past years. This Court said: <SLS>      "The Income-tax Act is, in our opinion, a complete code      and  it   is  particularly   so  with  respect  to  the      assessment and  re-assessment of  income-tax with which      alone we  are concerned  in the  present case. The fact      that after the amount of tax payable by an assessee has

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    been determined  or quanitified  its realisation from a      company in  liquidation is  governed by the Act because      the income-tax  payable also  being a  debt has to rank      pari passu  with other  debts due from the company does      not mean  that the assessment proceedings for computing      the amount  of tax  must be held to be such other legal      proceedings as  can only  be started  or continued with      the leave of the liquidation court under Section 446 of      the Act.  The liquidation court, in our opinion, cannot      perform the  functions of the Income-tax Officers while      assessing the  amount of  tax payable  by the assessess      even if  the assessee  be the  company which  is  being      wound up  by the  Court. The orders made by the Income-      tax  Officer   in  the  course  of  assessment  or  re-      assessment proceedings  are subject  to appeal  to  the      higher hierarchy  under the  Income-tax Act.  There are      also provisions for reference to the High Court and for      appeals from  the decisions  of the  High Court  to the      Supreme  Court   and  then  there  are  provisions  for      revision by  the Commissioner  of Income-tax.  It would      lead to  anomalous consequences if the winding up court      were to  be held  empowered to  transfer the assessment      proceedings to itself and assess the company to income-      tax.      xxx                              xxx      "The language  of S.446  must be  so  construed  as  to      eliminate such  startling consequences as investing the      winding up  court with  the  powers  of  an  Income-tax      Officer conferred on him by the Income-tax Act, because      in our  view the  legislature could  not have  intended      such a result." It is  after these  observations that  the  court  made  the observation to  which Mr. Setalved drew our attention. It is perfectly clear, in the circumstances, that this observation referred only  to the obligation or the liquidation court to decide, having  regard  to  the  fact  that  the  income-tax payable by the company in liquidation had to rank pari passu with other  debts due  by it.  How far the amount determined could be  paid while still safeguarding the interests of the other creditors of the company in liquidation. We are of the view, therefore,  that this  judgment does  not assist us in upholding the view taken by the Special Court.      The 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. The Special Court has, therefore, no jurisdiction to determine whether or not any assessment of the tax liability of a  notified person  by the  appropriate authority is bona fide or reasonable or justified or enforceable.      The appeal  is allowed.  The order  under appeal is set aside insofar  as it  requires the  appellant to produce the records and  permits the  notified persons  to  satisfy  the Special Court  that the  claims made  in regard to their tax liability  were   not  bonafide,   or   were   unreasonable, unjustified or un-enforceable.      There shall be no order as to costs.