The liability Special Court (Trial of offences relating to Transaction in Securities) Act, 1992. Has precedence over other liability u/s.11(2)(a) — Scope of powers under the Act.
[DCIT v. State Bank of India & Ors., (2009) 308 ITR 1 (SC)]
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 ‘the 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 Respondent No. 1, the State Bank of India and directed the appellant to deposit an amount of Rs. 546.22 crores with the Custodian along with 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 u/s. 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 amount 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.
The issue sought to be raised by the appellant, Income-tax Department by filing the present appeal was 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 were in violation of the decision of the Supreme Court in the case of Harshad Shantilal Mehta v. Custodian, (1998) 5 SCC 1.
The Supreme Court noted that the subject-matter of the appeal related to the security scam of Harshad S. Mehta and the period relevant to the said scam related to the A.Ys. 1992-93 and 1993-94. 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 A.Y. 1992-93 at Rs.2,014 crores and for the A.Y. 1993-94 at Rs. 1,396 crores. The assessment orders were challenged before the Commissioner of Income-tax (Appeals) by the assessee and were largely confirmed. Cross-appeals have been filed by the Revenue as also by the assessee for the A.Y. 1992-93, which are pending with the Income-tax Appellate Tribunal, whereas for the A.Y. 1993-94 appeal filed by the assessee is pending for admission. The orders of assessment were largely confirmed by the Commissioner of Income-tax (Appeals) resulting in raising a tax demand of Rs.1,743 crores by the Income-tax Department.
The Supreme Court observed that in terms of the provisions of S. 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 its tax demand for the A.Y. 1992-93 and the A.Y. 1993-94 as tax component. Therefore, the Income-tax Department is required to be paid in priority over the liabilities payable to the banks, financial institutions and other creditors, particularly for the aforesaid relevant two years which were considered as statutory period.
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 the Supreme Court. The said interim release of funds of Rs.686.22 crores to the Department was subject to filing of an affidavit/undertaking by the Secretary (Revenue), Government of India that the amount would be brought back to the Court/custodian along with interest within a period of four weeks, if so directed by the Special Court.
In Harshad Shantilal Mehta v. Custodian, (1998) 5 SCC 1 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 the A.Y. 1992-93 and the A.Y. 1993-94. The Supreme Court also held that the Special Court cannot sit in appeal over the order of tax assessment but in case of any fraud, collusion or miscarriage of justice in the assessment proceedings where tax assessed is disproportionately high in relation to funds available, the Special Court could scale down the tax liability to be paid in priority.
Applications were filed by the State Bank of India (hereafter referred to as ‘the SBI’) and also by other banks including Standard Chartered Bank (herein-after referred to as ‘the SCB’) before the Special Court seeking 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 S. 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 had become final and binding. Relying on the said decrees it was contended on behalf of the banks that passing of decrees prove tha t the concerned money which is assessed as income in the hands of Harshad S. Mehta as his income was, in fact, money belonging to the banks and, therefore, there was a miscarriage of justice as the Income-tax Department had considered the said amount/sum to be the income of Harshad S. Mehta. It was also submitted that miscarriage of justice also crept in, in respect of, additions on account of over-sold 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 S. Mehta. However, the Special Court under the impugned order dated September 29, 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 the following grounds:
Consequently, it was held that if the above amounts were excluded from the 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 u/s.ll(2)(a) of the Act in no case would exceed Rs.149 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 along with other amount lying deposited with the Custodian would be released in favour of the banks in terms of observations made in the impugned order.
After considering the legislative provisions of the Act and the judicial interpretation in the decision of Harshad Shantilal Mehta v. Custodian, (1998) 5 SCC I, the Supreme Court held that the following general principles regarding the powers of Special Court while discharging the tax liability emerge:
i) The Special Court has no jurisdiction to sit in appeal over the assessment of 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 re-opened by the Special Court and the extent of liability, therefore, cannot be examined by the Special Court.
ii) The claims relating to the tax liabilities of a notified person are, along with revenues, cesses and rates entitled for the statutory period, to be paid first in the order of priority and in full, as far as may be, depending upon various circumstances.
iii) The ‘taxes due’ refer to ‘tax as finally assessed’. The tax liability can properly be construed as tax liability of the notified person arising out of transaction in securities during the ‘statutory period’ of April I, 1991 to June 6, 1992.
iv) The priority, however, which is given u!s. 11(2)(a) to such tax liability only covers such liability for the period April I, 1991 to June 6, 1992. Every kind of tax liability of the notified person for any other period is not covered by S. 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 Courtu /s.11(2)(c), or the taxing authority may recover the same from any subsequently acquired property of a notified person or in any other manner from the ‘notified ‘person in accordance with law.
v) The Special Court can decide how much of the tax liability will be discharged out of the funds in the hands of the Custodian and the Special Court can, for the purpose of disbursing the tax liability, examine whether there is any fraud, collusion or miscarriage of justice in assessment proceedings.
vi) Where the assessment is based on proper material and pertains to the ‘statutory period’, the Special Court may not reduce the tax claimed and pay it out in full, but if the assessment is a ‘best judgment’ assessment, the Special Court may examine whether the taxes so assessed are grossly disproportionate to the properties of the assessee in the hands of the Custodian, applying the Wednesbury Principle of Proportionality and other issues of the said nature. The Special Court may in these cases, scale down the tax liability to be paid out of the funds in the hands of 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.
In the light of the above, the Supreme Court observed that the fact that decrees have been obtained by the banks in respect of certain dues of Harshad S. Mehta could not be disputed by the Income-tax Department. It also could 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 u/s.11(2)(a) is only for the statutory period and not any other period, the Supreme Court found that the appellant was justified while contending that if the banks had a right, title or interest in the attached property on the date of the Notification u!s.3 of the Act for which decrees had been obtained and if the banks were claiming that the said amount had wrongly been included in the income of the notified party for the statutory period, then the banks were required to show the nexus between the said decreed amount and the amount which was included in the income of the notified party for the statutory period.
Secondly with respect to the issue of duplication of a sum of Rs. 601.22 crores it was contended by the appellant that the same was correlated to the first issue and a finding on the said issue could be given only once the finding with respect to the first issue is arrived at. According to the Supreme Court there was 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 was 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 done.
The Supreme Court was of the view that for the adjudication of the disputes which were raised in the present appeal, a finding on the said issues and questions would be mandatory and the same could not be dispensed with under any circumstances.
The Supreme Court observed that in the absence of relevant documents, neither it would be possible nor would it be appropriate for it to give a finding on the said issues and questions. Therefore in the opinion of the Supreme Court all such disputed questions were required to be decided by the Special Court after giving an opportunity to the parties to place all the relevant documents before it so as to enable it to come to a proper and considered finding.
However, while remanding the matter for a finding on the said issues and questions, the Supreme Court held 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. It also held that on account of over-sold securities if the delivery was given by Harshad S. Mehta and the transaction was complete, only the difference between the payable and receivable would be taken and not the gross amount. How-ever, the issue as to whether the decrees were on account of oversold securities and, if so, was there any duplication or whether the decrees were on account of siphoning of the funds, was required to be adjudicated by the Special Court on appreciation of the relevant documents.
The Supreme Court, however, clarified that so far as the amounts of Rs.253 crores and Rs. 101 crores are concerned, the appellants had not stated that the said amounts were not included in the income of the notified party for the statutory period. The consent decrees obtained in respect of Rs.2S3 crores were not challenged by the appellant, which led the Special Court to believe that the appellant had accepted the settlement and accordingly scaled down the said amount from the income of Harshad S. Mehta. Similar was the case with the amount of Rs.101 crores. Thus, the scaling down of the said amount was upheld and would not be disturbed.
