# DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1147

- **Citation:** [2008] 16 S.C.R. 1146
- **Court:** Supreme Court of India
- **Decided:** 2008-12-03
- **Case number:** Civil Appeal No. 32945 of 2007
- **Bench:** TARUN CHATiERJEE, Dr. Mukundakam Sharma
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/dy-commissioner-of-income-tax-v-state-bank-1147-23866
- **Pages:** 30

## Headnote

Special Court (Trial of Offences relating to transactions
c in Securities) Act, 1992 - s.11(2)(a) and (b) - Discharge of
tax liabilities under - Of notified person - Priority claim of
Revenue . -- Creditor Banks seeking scaling down the claim
of Revenue - ·Allowed by Special Court - On appeal, plea of
Banks that the amount for which decree was passed in their
p favour against the notified person prior to issuance of
Notification uls.3 could not have been assessed as the
income of the notified person without showing nexus between
_.,
the decreed amount and the amount included in income for
statutory period - Duplication of amount in the order of scaling
E down also disputed - Held: Priority in payment of tax liability
is only for statutory period and not beyond that - Question of
nexus required to be decided - Issue of nexus and issue of
duplication, since not decided by Special Court, the matter
is remitted to Special Court for finding on these issues - If
F nexus is found, the amount shall be disbursed to the Banks.
Income Tax Officer passed assessment order in
,,.
respect of the assessment years 1992-93 and 1993-94 at
Rs.2014 crores and Rs.1396 crores respectively in
respect of person notified u/s. 3 of Special Court (Trial of
G Offences Relating to Transactions in Securities) Act, 1992.
CIT (Appeals) confirmed the assessment order. The •
appeals against the order are pending with Income Tax
Appellate Tribunal. In terms of s.11 (2) (a) of the Act,
Income Tax Department was having first right on
H
1146
•
)
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1147
OF INDIA AND ORS.
appropriation of assets of the notified persons. The
A
1 custodian released a sum of Rs.686.22 crores to the
Department,· pursuant to various orders-passed by
Special Court confirmed by Supreme Court.
In Harshad S. Mehta vs Custodian & Ors. (1998) 5 SCC
B
1, this Court held that priority could be restricted to the
tax component of the demand for priority period relevant
1 to Assessment Years 1992-1993 and 1993-1994; tnat
Special Court could not sit in appeal over the order of tax
assessment, but 1n case of any fraud, collusion or
miscarriage of justice in assessment proceedings where
C
tax assessed is disproportionately high in relation to
funds available, Special Court could scale down the tax
liability to be paid in priority.
Respondent-Banks filed applications before Special
D
Court seeking direction to scale down the priority
demand of the appellate-Department on the ground that
there was gross miscarriage of justice in making an order
of assessment in the case of the notified person. They
contended that decree passed in their· favour against the
E
notified person, proved that the money in question which
was assessed as income of the notified person was, in
fact, money of the Banks and hence could not have been
assessed as income of the notified person; that
miscarriage of justice also crept iri, in r~spect of,
F
additions on account of oversold securities, unexplained
stock and unexplained deposits in Banks etc. Special
Court accepting the plea of the Banl<s, scaled down the
priority demand. It directed the appellant-Department to
refund Rs.546.22 crores out of the already received G
amount of Rs.686.22 crores to the custodian, because in
view of the plea of the Banks, the tax liability of ttle
notified person was only Rs.140 crores. It further oirected
the custodian to disburse the available amount to tfle
Banks in respect of the principal amount against their
H
SUPREME 'COURT REPORTS
.
\
(2008] 16 S.C.R.
A decrees. Hence, the present appeals.
. -. ·
The question for CQO$ideration J;>efore this Court was
whether the Special Court w~~ ri~~t in scaling down the
priority tax demand by delving intg th~ merits of the
\
8 assessment orders and by deciding th~ m~tter ~s an
appellate authority which directions according tg the
appellant were in violation of the decision of the CQurt in
Harshad Mehta's case. Revenue contended inter alia that
'
there was dupli

## Text

_Characters 0–39,926 of 58,949. This is a partial read: ask again with offset=39926 for what follows._

[2008) 16 S.C.R. 1146
·A
DY. COMMISSIONER OF INCOME TAX
\I.
STATE BANK OF INDIA AND ORS:
(Civil Appeal No. 32945 of 2007 etc.)
B
DECEMBER 03, 2008
[TARUN CHATiERJEE AND DR. MUKUNDAKAM
SHARMA, JJ.]
Special Court (Trial of Offences relating to transactions
c in Securities) Act, 1992 - s.11(2)(a) and (b) - Discharge of
tax liabilities under - Of notified person - Priority claim of
Revenue . -- Creditor Banks seeking scaling down the claim
of Revenue - ·Allowed by Special Court - On appeal, plea of
Banks that the amount for which decree was passed in their
p favour against the notified person prior to issuance of
Notification uls.3 could not have been assessed as the
income of the notified person without showing nexus between
_.,
the decreed amount and the amount included in income for
statutory period - Duplication of amount in the order of scaling
E down also disputed - Held: Priority in payment of tax liability
is only for statutory period and not beyond that - Question of
nexus required to be decided - Issue of nexus and issue of
duplication, since not decided by Special Court, the matter
is remitted to Special Court for finding on these issues - If
F nexus is found, the amount shall be disbursed to the Banks.
Income Tax Officer passed assessment order in
,,.
respect of the assessment years 1992-93 and 1993-94 at
Rs.2014 crores and Rs.1396 crores respectively in
respect of person notified u/s. 3 of Special Court (Trial of
G Offences Relating to Transactions in Securities) Act, 1992.
CIT (Appeals) confirmed the assessment order. The •
appeals against the order are pending with Income Tax
Appellate Tribunal. In terms of s.11 (2) (a) of the Act,
Income Tax Department was having first right on
H
1146
•
)
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1147
OF INDIA AND ORS.
appropriation of assets of the notified persons. The
A
1 custodian released a sum of Rs.686.22 crores to the
Department,· pursuant to various orders-passed by
Special Court confirmed by Supreme Court.
In Harshad S. Mehta vs Custodian & Ors. (1998) 5 SCC
B
1, this Court held that priority could be restricted to the
tax component of the demand for priority period relevant
1 to Assessment Years 1992-1993 and 1993-1994; tnat
Special Court could not sit in appeal over the order of tax
assessment, but 1n case of any fraud, collusion or
miscarriage of justice in assessment proceedings where
C
tax assessed is disproportionately high in relation to
funds available, Special Court could scale down the tax
liability to be paid in priority.
Respondent-Banks filed applications before Special
D
Court seeking direction to scale down the priority
demand of the appellate-Department on the ground that
there was gross miscarriage of justice in making an order
of assessment in the case of the notified person. They
contended that decree passed in their· favour against the
E
notified person, proved that the money in question which
was assessed as income of the notified person was, in
fact, money of the Banks and hence could not have been
assessed as income of the notified person; that
miscarriage of justice also crept iri, in r~spect of,
F
additions on account of oversold securities, unexplained
stock and unexplained deposits in Banks etc. Special
Court accepting the plea of the Banl<s, scaled down the
priority demand. It directed the appellant-Department to
refund Rs.546.22 crores out of the already received G
amount of Rs.686.22 crores to the custodian, because in
view of the plea of the Banks, the tax liability of ttle
notified person was only Rs.140 crores. It further oirected
the custodian to disburse the available amount to tfle
Banks in respect of the principal amount against their
H
SUPREME 'COURT REPORTS
.
\
(2008] 16 S.C.R.
A decrees. Hence, the present appeals.
. -. ·
The question for CQO$ideration J;>efore this Court was
whether the Special Court w~~ ri~~t in scaling down the
priority tax demand by delving intg th~ merits of the
\
8 assessment orders and by deciding th~ m~tter ~s an
appellate authority which directions according tg the
appellant were in violation of the decision of the CQurt in
Harshad Mehta's case. Revenue contended inter alia that
'
there was duplication of two amounts which were scaled
C down, as both the amounts were with rn~pe~t ~<? the
oversold securities and were one and the same~ .
. Disposing of the appeals, and remitting the matter to
the Special Court, the Court
. 0
f:IELO: 1.1. There could be no dispute with r~gFtrcl to
.the priority clai.m of the Income Tax Department in
releasing the tax due. At the same time ther~ coMld ~l~o
be no di,spute with regard to the fact that if any party
other than .the l'.IQtified person has any right, title or
E interest. in the attached property on the date of the.
notification u/s. 3 of.Special Court (Trial of Offences
relating to Transactions in Securities) Act; 1992, the said
right of the third party did not and could not have been
held to be extinguished. [Para 22] [1170-D·E]
F
1.2. There could be no <;lisagreenient with regard to
the fact that if any amount is found due and payable by
the Sanks towards_, amount advanced by it as loan to the
notified person in that event the right of the Ba.nk to the
extent of the said amount,_ must be held to be the existing
· G right of the bank on the property which is attached. It also
carll'.lof be ignored that the said amount could not have
been asses$ed in the hands of the notified person as his
Income, for the Banks continued to have an existing right
on the aforesaid amount which is required to be released
H
.
r
~
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1149
( .
-{
'
(
...
OF INDIA AND ORS.
t
• in terms of the decrees which are obtained by the Banks A
and the non-relee\~e of the said amount would amount to
miscarriag@ of h4stice. [Para 24) (1170-H; 1171-A-B]
1.3. As the priority in payment of tax liability u/s.
11 (2)(a) 1$ only for the statutory period and not for any 8
ather period, 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 u/s. 3 of
. the Act, for which decrees have been obtained and if the ·.
Banks are claiming that the said amount has wrongly C
been included in the income of the notified party for the
statutory period, then the banks are required to show the
nexus between the said decreed amount and the amount
wflich is Included in the income of the notified party for
the statutory period. [Para 24] ~1171-E-G]
1.4 . .The issue with respect to duplictation is
correlated to the first is~ue and a finding on the said issue
D
. 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 E
Special Court in the impugned judgment. All the 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. If the nexus is shown by the F
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
the notified person by the Department, the same will have
to be disbursed to the banks by the Special Court. On
account of oversold securities if the delivery has been G ·
given by the notified person 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
H
1150
$UPREME COURT REPORTS
[2008] 16 S.C.R.
A account of oversold securities and, if so, is there any
duplication or whether the decrees ar~ on ~ccount of
siphoning of the funds, is required to be adjudicated by
the special Court on appreciation of the releyan!
documents. [Paras 26 and 29) [1173-D-G]
B
. 2. So far as the amounts of Rs. 253 crores and Rs;
101 crores are concerned, the appellants have not staied
th~t the said amount were not included in the in.come of
the notified party for the statutory period. The. consent
decrees obtained. in respect of Rs. 253 crores were not
C 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 the notified person. Similar is the cas.e with the
.amount of Rs. 101 crores. Thus the scaling down of the
D said amount is upheld and will not be disturbed. [Para 31)
[1174-C:_!:]
E
Harshad S. Mehta vs. Custodian and Ors. ·19~8 (5) SCC
1, relied on.
Case· Law Reference:
1998· (5) ·sec 1
Relied on,
Para 20
CIVIL APPELLATE JURISDICTION : Civil Appeal D.No.
F
32945 of 2007.
G
From the Judgment and Order dated 29.9.2007 of the
Special Court (Trial of Offences Relating To Transactions In
Securities) at Bombay in Report of the C.ustodian No.· 15 of
2006 with Misc. Application Nos. 210, 51 and 365 of 2003.
WITH
Ci.vii Appeal Nos. 326-329 of 2008 ~nd Civil Appeal No. 0:-
1537 of 2008.
H
G.E. Vahanwati, S.G. Mohan Parasaran, A.S.G., K.K.
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1151
OF INDIA AND ORS.
Venugopal, Janak Dwarka Das, Jaideep Gupta, Daryus
A
Khambatta, C.A. Sundaram, Beni Chatterjee, Raghavendra
Rao, Benu Chatterjee, Arijit Prasad, D.D. Karnath, Rahul
Kaushik, T.A. Khan, D.L. Chidanand, B.V. Balaram Das, Vijaya
Lakshmi Menon, Shashi Kapila, Priya Bansal, Gopal
Sankaranarayanan, Tushad Cooper, Rohini Musa, Rohma s
Hameed, Mahesh Agarwal, E.C. Agrawala, Rishi Agrawala,
Abhishek Gupta, Zafar lnayat, Kamini Jaiswal, Shomila Bakshi
Abhimanue Shreshta, Subramonium Prasad, Ranjeeta Rohtagi,
Sumit Goel and Nitin Thukral (for M/s. Parekh & Co.) for the
appearing parties.
. c
The Judgment of the Court was delivered by
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 D
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 dfrected the
E
appellant to deposit an amount of Rs. 546.22 crores with the
Cl_Jstodian alongwith interest at 9% per annum. The Special
Court while issuing the said direction held that the income tax
liaqility for the statutory period of the notified party, namely, Mr.
Harshad S. Mehta under Section 11 (2)(a) did not at that stage
F
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,
G
a direction was also issued to the Custodian to pay to the
banks, namely, the State Bank of
1lndia 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
H
I
~'
1152
SUPREME COURT REPORTS
:[2008] 16 S.C.R.
A Tax Department. As the said amount was in~dequate to fully
satisfy the claims of the Banks wit~ respect to the principal
amount it was further held that the same wquld be disbursed
by the Custodian on pro.,rata basis and after receiving an
undertaking from the banks to the Court that they would bring
8 back the amount; if so required, on such terms and conditions
as may be directed. by the Court.
2. As this Court in an order i!l 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 ·
C 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 9f the
concerned parties, only if, permitted by this Court.
o
3. The issue which is particularly sought to be raised by
the appellant, Income Tax Department by filing the prese!lt
appeal is whether the Special Court constituted under the
aforesaid Act was right in scaling down thepriority.·tax d~mand
by delving into the merits of the asses§ment orders and by
E deciding the matter as an aP,pellate authority which directions
according to the appellant are in violation of the decision of this
Court in the case of Harshad S. M~hta v. Custodian & Ors .
. [(1998) s sec 11.
4. The subject matter of the present appeal relates to the
F security scam of Harshad S. Mehta and the perioq relevant to
the said scam relates to assessment yea.rs 1992-1993 and
1993-19~4. 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
G after giving an opportunity to the assessee to furnish details/
explanations on the same. The Income Tax Officer pass~d 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
H
...
. ;
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1153
OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]
were challenged before CIT (Appeals) by the assessee and
A
were largely confirmed. Cross appeals have been filed by the
Revenue as also by the assessee for the assessment year
1992-1'993, which are pending with the lncom·e\Tax Appellate
Tribunal, whereas for assessment year 1993-1994 appeal file~
by the a,ssessee is pending for admission. The orders of
B
assess~ent. largely confirmed by CIT (Appeals) resulted in
raising ~ax demand of Rs. 1743 crores by the Income Tax
Departm~t.
5. In terms of the provisions of Section 11 (2) (a) of th~
Act the Income Tax Department has first right on appropriation
C
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
component. Therefore the Income Tax Department is required
to be paid in priority over the liabilities payable to the banks,,
D
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,
E
of the Income Tax Department, the Custodian had earlier
released a sum of Rs. 686.22 crores to the Departmenf
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 F
an affidavit/undertaking by Secretary (Revenue), Government,
of India that the amount would be brought back to the Court/
Cu~todian 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
G
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 19931994. This Court also held that Special Court cannot sit in
H
1154
SUPREME COURT REPORTS
[2008] 16 S.C.R.
A
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.
B
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 tc;> scale
down the priority demand on the ground that there was gross
C
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
D
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
E
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, additions on
account of oversold securities, unexplained stock and
unexplained deposits in banks etc. The aforesaid applications
F
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
G
accepted the pleas raised by the SBI and other ban.ks 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:
H
·'
,
!
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1155
OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]
Amount
Added in Income Ground on which deducted by
in Crores under the Head
the Special Court
1688
Decreed Amount in favour of banks.
1080
Over-sold
As the assessing .officer stated that
Securities
the securities have been delivered
by the notified party, therefore, only
the difference in purchase and SC!lle
price can be taken and not the
entire amount.
253
Unexplained
Consent decrees passed by the ,
Stocks
Supreme Court were not challenged
by the appellant.
101
Unexplained
For an amount of Rs. 18. 75 crores
money /Deposits decree of Special Court in favour of
in Banks
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.
9. Consequently, it was held that if the above amounts a~e
excluded from total assessed income of the statutory perio~,
A
B
c
D
the total income would be reduced to approximately Rs. 277
E
crores, arid therefore, it was held by the Special Court that th,e
tax liability of Harshad S. ·Mehta for the aforesaid twp
assessment years payable under Section 11 (2) (a) of the A<;:t
in no case would exceed Rs. 140 crores. In terms of the
aforesaid findings and conclusions arrived at by the Special
F
Court directions were issued directing the Income Tax
Department to deposit with the Custodian an amount of Rs,.
546.22 cror~s 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
G
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 H
1156
SUPREME COURT REPORTS
(2008] 16 s.C.R.
A proceed to deal with the various contentions raised on behalf
of the parties who in support of theit contention have referred
to various documents on record.
11 ·. DL!ring the course of hearing our attention was drawn
B to tWo pending applications which were for the deletion of the
name of respondent No. 11 namely, State Bank of Saurashtra
from array of parti:es 8$ .the said bank was liioC1uired by
respondent No. 1, State Barik of India undet Notification No.
G.S .. R. 589 (E) d~ted 13.08.2008. In view of the aforesaid
c
position, both the applications which were filed for deletion of
the name of respondent No. 7 in the aJ)peals are allowed.
· Ordered accordingly.
12. Mr. G.E. Vahanvati; the Solicitor General of India
appearing for the Income Tax Department submitted that the
D - order of the Special Court is perverse as the Special Court
while scaling down the figures of Rs. 1688 ~rores, with respect
to the decreed amount in favour .of the banks\h~s failed .to even
_consider the_ fact that whether or not the said ameunts which
have been decreed in favour of the batik were ~c~ually included
E 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 vyhich have been decreed in their favour and the
amount which has been included in the income of the
F
assessee/notified person for the statutory period, the said
amount cannot be scale down. Elaborating the. argument it was
submitted that as the banks have failed to prove an~ 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 am?unts
-G
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
H extent but also on account of the fact that there has been
~
1
...
)-"
>
)
L
.•
-~
tf~
~
)-r
+-
-OY. COMMISSIONER OF INCOME iAX v. STATE BANK 1157
- OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]
'>
_duplication of amount while scaling down the figures of R$.
A
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 a11
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
B
submitted that the said amount is arrived at by the assessing
•
officer after taking note of various suits flied 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, c
except the amount of Rs. 601.22 crores for which the credit was
given to the SBI. Thus, acc~rding the learned _Solicitor General -
the figure of Rs; 1080 crores is an integral part of Rs. 16_88
crores which is the alleged suit amount claimed by the banks.
On the question of refund and disbursement it was
D
submitted that the application of Section 11 (2)(a) can arise only
..
at the stage of final distribution. of assets and ari order under,
the said section can be passed orjty after examining the claims:
by the S~cial Court under Section 9(a) ofthe Act. It.was further
1
submitted th-at even otherwise as per Section 11 (2)(a) of the.
E
Act the claim of the Income Tax Department on account of taxes
due will have priority over ihe claims of the bank. In order to'
support the said contention the learned Solicitor General has,
referred to paragraph 15 of the above mentioned decision of
this Court in Harshad S. Mehta v. Custodian & Ors. (Supra)' F
"
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 r~quired to
be discharged.
13. On the other hand, Mr. K.K. Venugopal, the learned
G
-<
senior counsel appearing for. the respondent No. 9, SCB
supported the judgment and order of the Special Court.
Negating the abovesaid claims of the appellant, it was
submitted by the learned senior counsel that the· decrees in the
H
1158
SUPREME COURT REPORTS
[2008] 16 S.C.R.
A favour of the banks were with respect to siphoning of funds from
--1
the bank and not on account of the oversold securities. As per
the learn.ad ·senior counsel the assessing officer has placed
reliance on Annexi.Jre - M2 as comprising a list containing such
oversold seci.Jritie·s and accordingly added the amount into the
B income of Harshad Mehta. It was further submitted that the
· department, merely on the fact that the assessing officer has
credited an amouht of Rs. 601.22 crores in favour of SBI while
t
arri'.ting at the· figure of 1080 crores, has come to the conclusion
that the decrees for the entire amount of Rs. 1688 crores are
c on account of over sold securities, which is ex-faci~ 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
0
purchases and sales effected by the assessee, would make it
~bundantly clear that the entries reflected therein have nothing
·to· do with any of the claims made by the banks in any of the
sui.t filed by the b_anks.
·
· In response to the contention of the appellant department
E that there is no nexus between the am·ounts which have been
decreed in.favour of the banks and the amount which has been
included in the inconie 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
F 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.
G
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
H
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1159
OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]
Mehta, the fact which has been accepted by the assessing
A
officer in the Assessment order. It was submitted that as the
assessing officer has included the gross amount ·with6.ut
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 question of . B
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, c
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
D
no question of reopening of any tax assessment before the
E
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
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th~t in coming to the said decision it will also be within the
authority and jurisdiction of the Special Court to direct. for
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
G
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
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SUPREME COURT REPORTS
[2008] 16 S.C.R.
A 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
B "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
t
Court may examine whether, for example, the income which is
so assessed to tax bears comparison to the amounts.attached
c 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. hi such cases it was held that, the Special Court
~-
may, scale down the tax liability to be paid out of the funds in
D the hands of the Custodian. 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
autho,rities would be entitled_to real.ise the remaining liability
'f
fr()m the assessee, the same will not be paid in priority· over
E
th~ claims of everybody else under Section 11 (2)(a).
16. ·111 ·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.
F
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,
G 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) lhe
r
··Central Government may appoint one or more Custodian
H
as it may deem fit for the purposes of this Act.
1·
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1161
OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]
(2) The Custodian may, on being satisfied on information
A
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 6th June, 1992, notify the
name of such person in the Official Gazette.
B
(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.
C
(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 disGharging his duties
under this section and Sec. 4."
D
The Special Court has jurisdiction, under Section 7 of the
Act, exclusively to hear and decide prosecutions in respect of E
offences under the said Act, that is to say, offences relating to
transactions in securities after 1-4-1991 and on or before 6-61992. 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
F
of the Act provides the manner in which the liabilities are
. required to be discharged. The said section reads as under:
1
"Section 11. Discharge of liabilities. - (1) Notwithstanding
anything contained in the Code and any other law for the
G
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 attachm~nt.
(2) The following liabilities shall be paid or
H
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F
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1162
· SUPREME COURT REPORTS
[2008] 16 S.C.R
. · discharged ih full, as far as may be, in the order as under:
~-
, .·
(a).~11,revenues, taxe~. cesses_ and rates due from
: the persons· notified by the Custodian· under sub.,section
· (2) of Section· 3 to the Central .(3overnment 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 speci~ed by the
Special Gourt from time to time."··
18. In the case of CIT v. A.K. Menon, L\ 1995) 5 sec 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 cle.ar that the Special Court has no power to sit in
'
'
appeal over or overrule the orden~ 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 Cqurt 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.1 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 notifi~d person, the Special Court has, therefore, only the.
limited power to determine what; having regard to the funds
availaole, 'can be pa.id; 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."
·19. Subsequently, the aforesaid section of the Act was
-r
+-
~~
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1163
· OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]
• discussed in detail by this Court in the case of Harshad S;
A
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
8
(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 C
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
D
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
E
held thus this Court proceeds to observe as follows in
paragraph 13:
"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
F
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
G
attached and/or for releasing the right, title and interest of
a third party in the property from attachment, the Special
Court wit! have to decide the application before proceeding
under Section 11." •
H
1164
SUPREME COURT REPORTS
[2008] 16 S.C.R.
A
This Court thereafter proceeded to interpret the phrase
B
c
D
E
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"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.
However, the meaning of the words "taxes due" will
ultimately depend 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 sta·ge
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"."
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 q·uite clear in its intent.
It seeks to cover all criminal and civil proceedings rela~ing
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 transactions during the said period. Under Section
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1165
OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]
3(2), it is the property of such offenders which is attached
A
by the Custodian and which is disbursed under the
directions of the Special Court under Section 11 (2).
Clearly, therefore, as the Special Court is empowered to
examine all transactions in securities during the period 14-1991 to 6-6-1992, as also all claims relating ~o the
B '.
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 c
institutions may be entitled, and to ensure that these funds
are not done away with, there are provisions for
attachment, ascertainment of claims and distribution of
funds. However, before the liabilities of a notified person
to banks and financial institutions can be discharged,
0
Section 11 (2)(a) requires the tax liability of the notified
person to be paid. In this context the tax liability can
properly be construed as tax liability of the notified person
arising out of transactions in securities during the "statutory
period" of 1-4-1991 to 6-6-1992. If, for example, any
income tax is required to be paid in connection with the
E
income accruing to a notified person 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. Similarly,
in respect of any property which is attached, if any rates
F
or taxes are payable for the "statutory period" those rates
and· taxes will have to be paid before the proceeds of the
property are distributed to banks and financial institutions.
In the same manner, the liabilities to banks and financial
institutions in Section 11 (2)(b) are also liabilities pertaining
G
to the statutory period ...........