REPORTABLE

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

JUDGMENT

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.  

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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

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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

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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

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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,

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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 Crores

Added in Income  under the Head

Ground  on  which  deducted  by  the 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/ Deposits in Banks

For  an  amount  of  Rs.  18.75  crores 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.  

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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.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.   

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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.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

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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

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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.   

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

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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.

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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

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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

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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.

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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,

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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

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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.”

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

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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:

Page 19 of 34

“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”.”

Page 20 of 34

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. … …….”

Page 21 of 34

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

Page 22 of 34

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 oth-

Page 23 of 34

er 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.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

Page 24 of 34

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.   

Page 25 of 34

(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.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.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

Page 26 of 34

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.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 27 of 34

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

Page 28 of 34

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.   

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.  

Page 29 of 34

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

Page 30 of 34

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.  

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

Page 31 of 34

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.  

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

Page 32 of 34

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

Page 33 of 34

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;   December 3, 2008

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