Holding

Section 11(2) mandates payment of only ascertained tax liabilities finally assessed for the statutory period, excludes penalty and interest, preserves third‑party rights, and allows the Special Court limited discretion to scale down tax payments but not to reopen assessments.

Summary

The Supreme Court examined the interpretation of Section 11 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, which governs the discharge of liabilities and distribution of attached property of notified persons such as Harshad Mehta. It held that only taxes finally assessed for the statutory period (1 April 1991 to 6 June 1992) are payable under Section 11(2)(a), and that penalty or interest are excluded. The Court clarified that the rights of third parties in attached property are not extinguished and that the Custodian’s power is limited to cancelling fraudulent contracts, not to vest ownership. The Special Court may exercise discretion to scale down tax payments in cases of disproportionate assessments but cannot reopen tax assessments. Consequently, the challenge to the constitutional validity of Section 11 read with Section 3(3) was rejected and the appeals were dismissed.

Issues considered

The scope and priority of liabilities under Section 11(2) of the Special Court Act
Whether "taxes due" includes only finally assessed tax liabilities or also penalties and interest
The temporal extent of tax liability covered (statutory period vs. post‑notification period)
The point in time at which tax liability must be ascertained for payment
The extent of the Special Court's discretion to reduce tax payments
The effect of attachment on third‑party rights and on mortgaged/pledged property
The power of the Custodian under Section 4 to cancel contracts
The constitutional validity of Section 11 read with Section 3(3)

Legislation cited

Companies Acts. 530(1)(a)
Income Tax Act, 1961s. 157, s. 2(43)
Provincial Insolvency Act, 1920s. 61(1)(a)
Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992s. 11(2), s. 3(3), s. 4, s. 9-A

Subjects

Special Court Actattachment of propertydistribution of assetstax liabilitythird‑party rightspenalty and intereststatutory periodcustodian powersconstitutional validity

Judgment

HARSHAD SHANTILAL MEHTA A
v.
CUSTODIAN AND OTHERS

MAY 13, 1998

[SUJATA V. MANOHAR, S.P. KURDUKAR AND B
D.P. WADHWA, JJ.]

The Special Court (Trial of Offences Relating to Transactions in
Securities) Act, I 992:
c
Sections I 1(2) and 3(3)-Disbursemen/ of properties r:tached under
Section 3(3)-Liabilities to be paid or discharged under Section JI (2) are
of the person notified-If any person other then the notified person has any
share, right, Ii/le or interest in the attached property on the date of notification
under Section 3(3), right of third party cannot be extinguished-Any D
application of third party has to be decided by the Special Court before
proceeding under Section I I.

Section I I-Disbursement of attached properties-Jn case ofproperties
of the notified persons already mortgaged/pledged to banks or financial
institutions on the date of attachment-Held, the liabilities mentioned in E
Section I I (2)of the Act which were to be paid from the proceeds of the sale
of the attached property, would only refer to proceeds of the sale of the right,
title and interest of the notified person in the attached property and not the
entire property itself

Section I I (2)(a)-'Tax due'-Meaning-Unascertained and unassessed F
tax which is not legally binding on the assessee not covered by Section I I
(2)(a)-Discharge of tax liability of notified person-Do not include penalty
or interest under Income Tax Act-Remedy of notified person assessed to
penalty or interest would be to approach the tax authorities under the taxing
statute-Income Tax Act, 1961-S. 2(43). G

Words and phrases-"Tax due"-Meaning of-In the context of the
Special Court (Trial of Offences Relating to Transaction in Securities) Act,
1992.

Section 11(2)(a) & 9-A-Tax liability-When it becomes due-Date of H
389
390 SUPREME COURT REPORTS [1998] 3 S.C.R.

A distribution-When the Special Court completes the examination of claims
under Section 9-A-lf on this date any liability for the statutory period is
legally assessed and the assessment is final and binding on the notified
persons-Held, that liability will be considered for payment under Section
11(2)(a).

B The Special Court (Trial of Offences Relating to Transactions in
Securities) Act~ 1992 deals with offences involving amounts of unusual
magnitude procured by brokers from banks and financial institutions. The
Special Court which was set up for a quick prosecution or adjudication of
claims in respect of two notified parties, and the time was approaching for
C the distribution of their assets under Section 11 of the Act which was
attached under Section 3(3) of the Act. In this case there were interpretational
difficulties generated by the casual drafting of the Act and the Special Court
had raised three questions pertaining to distribution of assets under Section
11(2) of the Act.

D Disposing of the appeal, this Court

HELD : 1.1. Since the property (movable and immovable or both) which .- -1.
is attached is of the person notified, the liabilities to be paid or discharged
under Section 11(2) of the Special Court (Trial of Offences Relating to
Transaction in Securities) Act, are also liabilities of the person notified-
E 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. Before the Special Court makes any order under Section
• 11(1), the Special Court must be satisfied that the property which· is attached
and is being disposed of, is the property belonging to the notified persons.
F 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, the right of the third party cannot be extinguished. The only right which
the Custodian has, in respect of the right of the third parties in such·
properties, is conferred by Section 4 under which, if the Custodian is satisfied
that any contract or agreement which was entered into by the notified party
G within the "statutory period" in relation to an attached property is fraudulent
or entered into for the purpose of defeating the provisions of the Special
Court Act, he can cancel such contract or agreement. There is no other
provision under the Special Court Act which affects the existing rights of
a third party on the date of attachment, in the property attached. The attached
property also does not vest in the Custodian. In this regard the position of
H a Custodian is different from that of an official liquidator or a company in
H.S. MEHTA v. CUSTODIAN AND ORS. 391
winding up. Had the Act provided of the extinguishment of any subsisting A
~ ii rights of other persons in the attached property, the Act could well have been
considered as arbitrary or unconstitutional. (400-D-Hl

1.2. Directions 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 notified person. The directions for disposal B
can 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 C
Section 11. [401-A-B)

C.B. Gautam v. Union of India, (1993) I SCC 78; Hitesh Shanti/al
Mehta v. Union of India, (1992) 3 Born. C.R. 716 and B.0.1. Finance Ltd. v.
Custodian, (1997) IO SCC 488, relied on.
D
2. If in the property :'belonging to" a notified person, another person
has a share or interest, that share or interest is not extinguished. Of course,
if the interest of the notified person in the property is not a severable
interest, the entire property may be attached. But the proceeds from which
distribution will be made under Section 11(2) can only be the proceeds in E
relation to the right, title and interest of the notified person in that property.
The interest of a third party in the attached property can not be sold or
distributed to discharge the liabilities of the notified person. This would also
be the position when the property is already mortgaged or pledged on the date
of attachment to a bank or any third party. This, however, subject to the right
of the Custodian under Section 4 to set· aside the transaction of mortgage F
, "\. or pledge. Unless the Custodian exercises his power under Section 4, the
right acquired by a third party in the attached property prior to attachment
does not get extinguished nor does the property vest in the Custodian whether
free from encumbrances or otherwise. The ownership of the property remains
as it was. (403-C-El G

3. The words "taxes due" occur in Section 11(2)(a) dealing with
distribution of property. At this stage the taxes "due" have to be actually paid
;. out. Therefore, the phrase "taxts 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 H
~

392 SUPREME COURT REPORTS [1998) 3 S.C.R.

A· with law. 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". (405-C-DJ •
B State of Rajasthan v. Ghasilal, (1965) 2 SCR 805; Associated Cement
Co. Ltd. v. Commercial Tax Officer, (1981) 48 STC 466; Chatturam v. CIT,
(1947) 15 ITR 302; Whitney v. IRC, (1926) AC 37; Kalwa Devaduttam v.
Union of India, (1963) 49 ITR 165; Doorga Prasad v. Secy. of State, 13 ITR )'
285 and Raymond Synthetics Ltd. v. Union of India, (1992] 2 SCC 255, relied
c on.

Black's Dictionary, p.499; Jowitt's Dictionary of English Law, Vol.I.
2nd Edn; 669; Wharton's Law Lexicon, 14th End., p.365, referred to.
4. As the Special court is empowered to examine all transactions in
securities during the period 1.4.1991to6.6.1992, as also all claims relating
D 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. .,j

As the purpose of the special Court Act, inter alia, is as far as practicable,
to safeguard the funds too which the banks and financial institutions may
be entitled, and to ensure that these funds are not done away with, there are
E 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, Section l 1(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 any
F income tax is required to be paid in connection with the income accruing to 7 .
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 or taxes are payable for the "statutory period"
those rates and taxes will have to be paid before the proceeds of the property
G
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 to the statutory period. 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.
H )--
I
H.S. MEHTA v. CUSTODIAN AND ORS. 393
Such tax liability may be discharged either under the directions of the A
""'>.- Special Court under Section l 1(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. 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. B
(405-G-H; 406-A-EJ
Tejkumar Balakrishan Ruia v. A.K. Menon, (1997) 9 SCC 123, relied

•, on.

5.1. Tax liability under Section 11(2)(a) refers to such liability for the
period 1.4.1991 to 6.6.1992. It would not be correct to hold that the liabilities c
arising during this period should also be finally assessed before 6.6.1992
(the date of the Act) or the date of notification. It must refer to the date of
distribution. The date of distribution arrives when the Special Court completes
the examination of claims under Section 9-A. If on that date, any tax liability
for the statutory period is legally assessed, and the assessment is final and
binding on the notified person, that liability will be considered for payment D
under Section 11(2)(a). (406-H; 407-A-B]
>" 5.2. The Special Court cannot sit in appeal for the assessment of taxes
by the tax authorities. There is undoubtedly no question of 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 E
Special Court Act for examination of claims are under Section 9-A. A claim
in respect of tax assessed, therefore, cannot be reopended by the Special
Court. The liability of the notified person to pay the tax will have to be
determined under the machinery provided by the relevant tax law. The extent
of liability, therefore, can not be examined by the Special Court.[410-C-DJ
F
5.3. But the Special Court can decide how much of that liability will
be discharged out of the funds in the hands of the Custodian. 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 not be made by the Special Court depending upon various
circumstances. The Special Court can, for this purpose, examine whether
G
there is any fraud, collusion or miscarriage of justice in assessment
proceedings. The assessee who is before the Special Court, is a person liable
}- to be charged with an offence relating to transactions in securities. He, may
not, in these circumstances, explain transaction before the Income tax
authorities, in case his position is prejudicially affected in defending criminal H
~
394 SUPREME COURT REPORTS [1998] 3 S.C.R.

A 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 proet!edings ., ;.-
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
B examine whether, for example, the income which is so assessed to tax bears
comparison to the amounts attached by the Custodian, or whether the tax 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
,•
c out of the funds in the hands of the Custodian. [410-E-H; 411-A)

5.4. 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
D decides, it may direct payment of balance liability under Section 11(2)(c).
Otherwise the taxing authorities may recover the same from any other
subsequently acquired property of the assessee or in any other manner in
,,, -1.
accordance with law. 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 hands of
E 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 have strong reasons for doing so. In fact, the Income Tax
authorities have also accepted that exorbitant tax demands can be ignored,
applying the Wednesbury Principles. [411-B-D)
F
Tejkumar Balakrishna Ruia v. A.K. Menon, [1997) 9 SCC 123; State
of Punjab v. Rattan Singh, [1964) 5 SCR 1098; S. V Kondeaskar v. VM
Deshpande, [1972) l SCC 438 and C/Tv. A.K. Menon, [1995) 5 SCC 200,
relied on.

G Lahore High Court (Bench of three Judges) in Governor-General Jn ti
Council v. Sargodha Trading Co. Ltd., 11 /TR 368; Jn re Calvert, [1899) 2
QBD 145 and Ravi Paint Colour and Varnish Works Ltd. v. Federation of
Pakistan, [1955) 27 ITR 475, referred to.
~
6.1. Neither penalty nor interest can be considered as tax under Section
H 11(2)(a). Provisions for imposition of penalty and interest are distinct from
H.S. MEHTA v. CUSTODIAN AND ORS. 395
the provisions for imposition of tax. [411-F-G] A
6.2. Since the liabilities covered under Section l 1(2)(a) are only
liabilities arising during the period 1.4.1991 to 6.6.1992, and do not cover
penalty and interest, the question whether the Special Court can absolve a
notified person from imposition of penalty or interest after the date of the
notification does not really arise. In any case, interest or penalty for any B
action or default after the date of notification, are not covered by the Act.
... However, a taxing statute is a code in itself for imposition of tax, penalty or
\
interest. The remedy of a notified person who is assessed to penalty or
interest, after the notified period, would be to move the appropriate authority
under the taxing statute in that connection. If it is open to.him under the
relevant taxing statute to contend that he was unable to pay his taxes on C
account of the attachment of all his properties under the Special Court Act,
and that there is a valid reason why penalty or interest should not be imposed
upon him after the date of notification, the authorities concerned under the
taxing statute can take notice of these circumstances in accordance with law
for the purpose of deciding whether penalty or interest can be imposed on
the notified person. The Special Court is required to consider this question D'
only from the point of view of distributing any part of the surplus assets in
the hands of the Custodian after the discharge of liabilities under Sections
11(2)(a) and l1(2)(b). The Special Court has full discretion under Section
l 1(2)(c) to decide whether such claim for penalty or interest should be paid
out of any surplus funds in the hands of the Custodian. (412-B-E)
E
7. In view of the interpretation put on Section 11 and Section 3(3), the
challenge to the constitutional validity of Section 11 read with Section 3(3)
does not survive. If, according to the bank or financial institutions, any of
the properties attached belongs to the banks or financial institution concerned,
it is open to the bank or financial institution to file a claim before the Special
Court in accordance with law. Obviously, until such a claim is determined, F
the property attached cannot be sold or distributed under Section 11.
[413-D]
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5326of1995
Etc.
G
From the Judgment and Order dated 20.2.95 of the Special Court, Bombay
in M.A. No. 107of1993.

Ram Jethmalani, Atul Setelwad, Harish N. Salve, F. S. Nariman, Arun
Jaitely, Dipankar Gupta, Dr. V. Gauri Shankar, S.D. Parekh, Bhimrao Naik, S.B.
Jaisinghani, Mahesh Jethmalani, Ms. Lata Krishnamurti, A. Subba Rao, A.T. H
396 SUPREME COURT REPORTS [1998] 3 S.C.R.

A Rao, Rajiv Kapur, Sanjay Kapur, Ms. Shubhra Kapur, Subhash Sharma, Ms.
Nina Gupta, Neeraj Sharma, Ms. Vaishali Deshpande, Ms. Arpita Roy
Choudhary, Sanjay Katyal, Vineet Kumar, Tushar K. Cooper, S. Rajappa, C.
Radhakishna, B.K. Prasad, S.N. Terdol, S.K. Dwivedi, A.K. Sharma, Ms. Vijay
Lakshmi Menon, Ms. Anuradha Dutt, B.V. Desai, N.K. Niraj, P.J. Mehta and
B Janakalyan Das for the Appearing parties.

The Judgment of the Court was delivered by

MRS. SUJATA V. MANO HAR, J. The Special Court (Trial of Offenders
Relating Transactions in Securities) Act, 1992 is a special Act with its own
special problems. The offences it deals with involve amounts of unusual
C magnitude procured by brokers from banks and financial institutions.
Unfortunately, the proceedings before the Special Court, which was set up for
a quick prosecution or adjudication of claims have been trapped in unusual
legal and interpretational difficulties generated by the casual drafting of the
Act that leaves much to the skills and good sense of the courts. The present
· D appeals before us relate to the interpretation of Section 11 of the Act.

Civil Appeal No. 5225 of 1995 is filed by the Custodian appointed under
the provisions of the Special Court (Trial of Offences Relating to Transactions
in Securities) Act, 1992 against a judgment and order of the Special Court
Judge dated 20.2.1995. The appeal is filed by the Custodian pursuant to
E directions contained in the impugned judgment itself. The other appeals have
been filed by various notified persons under the Special Court (Trial of
Offences Relating to Transactions in Securities) Act, 1992 (hereinafter referred
to as the 'Special Court Act') from the same judgment and order of the Special
Court Judge. A writ petition challenging the constitutional validity of Section
11 of the Special Court Act pending in the Delhi High Court has also been
F transferred to this Court for consideration along with these appeals, as common
questions of law arise. All these appeals along with the transferred case have
been heard together. We have also heard various intervenors in these appeals.

The Special Court has observed that it has been functioning since June
1992. In respect of two notified parties, namely, the Harshad Mehta Group and
·G Fairgrowth Financial Services Ltd., the time is approaching for distribution of
their assets under Section 11 of the Special Court Act, 1992. In view of the
different possible interpretations of the provisions of Section 11, the Special
Court has raised certain questions of law. After hearing all concerned parties,
the Special Court has answered these questions in the impugned judgment,
somewhat in the fashion of an Originating Summons. The Custodian has
H raised certain additional questions which arise in interpreting and implementing
H.S.MEHTAv.CUSTODJAN AND ORS. [SUJATA V. MANOHAR,J.] 397
Section 11 of the Special Court Act. The questions raised by the Special Court A
are as follows:

"I. Whether the priority created by section 11 of the Special Court
(Trial of Offences Relating to Transactions in Securities) Act, 1992 is
only in respect of amounts due prior to the date of Notification and/
or whether the priority would also apply to amounts due after the date B
of the Notification.

2. Whether the phrase 'taxes' as used in Section 11 of the Special
\
Court (Trial of Offences Relating to Transactions in Securities) Act,
1992 can only mean amounts due as and by way of taxes or whether
it would also include penalties and interest, if any. C
3. Whether penalty and/or interest can be levied on or charged to
Notified Parties after the date of Notification."

To appreciate the points at issue, it is necessary to look briefly at the
provisions of the Special Court Act. The Statement of Objects and Reasons D
relating to the Act states, "In the course of the investigations by the Reserve
)•.... Bank of India, large scale irregularities and malpractices were noticed in
transactions in both the Government and other securities, indulged in by
some brokers in collusion with the employees of various banks and financial
institutions. The said irregularities and malpractices led to the diversion of
funds from banks and financial institutions to the individual accounts of E
certain brokers, (2) To deal with the situation and in particular to ensure
speedy recovery of the huge amount involved, to punish the guilty and
restore confidence in and maintain the basic integrity and credibility of the
banks and financial institutions, the Special (Trial of Offences Relating to
Transactions in Securities) Ordinance, 1992, was promulgated on 6th June, F
1992. The Ordinance provides for the establishment of a Special Court with
a sitting Judge of a High Court for speedy trial of offences relating to
transactions in securities and disposal of properties attached_ It also provides
for appointment of one or more custodians for attaching the property of the
offenders with a view to prevent diversion of such properties by the offenders."
The Ordinance was replaced by the Act. G
Under Section 3 of the Special Court Act sub-sections (1), (2), (3) and
(4) are as follows :

"3. Appointment and functions of Custodian-( I) The Central
Government may appoint one or more Custodian as it may deem fit H
398 SUPREME COURT REPORTS (1998] 3 S.C.R.

A for the purposes of th.is Act.

(2) The Custodian may, on being satisfied on information received that ~
any person has been involved in any offence relating to transactions W
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 has, therefore, the power to notify the names of persons
D involved in any offence relating to transactions in securities after the 1st day
of April, 1991 and on or before 6th of June, 1992. On such notification all
properties of the notified person stand attached. Under Section 4, the Custodian
is given the power, if he is satisfied that any contract or agreement entered
into at any time after 1st of April, 1991 and on or before 6th of June, 1992
E in relation to any property of the person notified has been entered into
fraudulently or to defeat the provisions of this Act, to cancel such contract
or agreement. On such cancellation the property shall stand attached. Both
Sections 3 and 4, therefore, deal with the Custodian's powers relating to
transactions in securities entered into during a very specific period, namely,
1st of April, 1991 and on or before 6th of June, 1992 (hereinafter referred to
F as the statutory period).

Under Sections 7 and 8 the jurisdiction of the Special Court in respect
of prosecution of offences is confined to offences referred to in Section 3(2)
i.e. during the statutory period. Section 9-A which has been introduced by
G the Amending Act 24 of 1994, deals with jurisdiction, powers, authority and
procedure of the Special Court in civil matters. Under sub-section (1) it is
provided as follows :-

"( 1) On and from the commencement of the Special Court (Trial of
Offences Relating to Transactions in Securities) Amendment Act,
H 1994, the Special Court shall exercise all such jurisdiction powers and
H.S. MEHTA v. CUSTODIAN AND ORS. [SUJA TA V. MANOHAR, J.] 399
authority as were exercisable, immediately before such commencement, A
by any civil court in relation to any matter or claim -

(a) relating to any property attached under sub-section (3) or Sec.
3·,

(b) arising out of transactions in securities entered into after the B
!st day of April 1991, and on or before the 6th day of June, 1992 in
which a person notified under sub-section (2) of Sec.3 is involved as
a party, broker, intermediary or in other manner.

(2) .................. .

(3) .................. . c
(4) .................. .

(5) ..................."

Jurisdiction of the Special Court in civil matters is, therefore, in respect D
of any matter or claim relating to any property which is attached under
Section 3(2), or any matter or claim arising out of transactions in securities
entered into during the "statutory period".

Under Section 9-B the jurisdiction of the Special Court in arbitration
matters is also with reference to those matters or claims which are covered E
by Section 9-A (!).

Therefore, the jurisdiction of the Special Court in civil as well as criminal
matters is in respect of transactions during the statutory period of I st of
April, 1991 to 6th of June, 1992; and in relation to the properties attached, of
a notified person. The entire operation of the said Act, therefore, revolves F
around the transactions in securities during this statutory period.

·- Section 11 deals with discharge of liabilities and distribution of the
property attached. It provides as follows :-

" 11. Discharge of liabilities-( I) Notwithstanding anything contained G
in the Code and any other law for the time being in force, the Special
Court may make such order as it may deem fit directing the Custodian
for the disposal of the property under attachment.

(2) The following liabilities shall be paid or discharged in full, as far
as may be, in the order as under :- H
400 SUPREME COURT REPORTS (1998) 3 S.C.R.

A (a) all revenues, taxes, cesses and rates due from the persons notified
by the Custodian under sub-section (2) of Sec.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
B
(c) any other liability as may be specified by the Special Court from
time to time."

This Section obviously deals with disbursement of properties attached
under Section 3(3). Since the property (movable or immovable or both) which
C 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.

D Before the Special Court makes any order under Section 11 (I) the
Special Court must be satisfied that the property which is attached and is
being disposed of, is the property belonging to the notified person. If any ,,...c_
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,
E that right of a third party cannot be extinguished. There is no provision in
the Special Court Act which extinguishes the right, title and interest of a third
party in any property which is attached as a consequence of a notification
under Section 3. The only right which the Custodian has, in respect of the'
rights of third· parties in such properties, is conferred by Section 4 under
which, if the Custodian is satisfied that any contract or agreement which was
F entered into by the notified party within the "statutory period" in relation to
an attached property, is fraudulent or entered into for the purpose of defeating
the provisions of the Special Court Act, he can cancel such contract or
agreement. There is no other provision under the Special Court Act which
affects the existing rights of a third party on the date of attachment, in the
property attached. The attached property also does not vest in the Custodian.
G In this regard, the position of a Custodian is different from that of an official
liquidator of a company in winding up. Had the Act provided for the
extinguishment of any subsisting rights of other persons in the attached
property, the Act could well have been considered as arbitrary or
unconstitutional (Vide C.B. Gautam v. Union ofIndia and Ors., [1993] I SCC
H 78 at page 105 to 110).
H.S.MEHTAv.CUSTODIANANDORS.[SUJATAV.MANOHAR,J.) 401

The directions, therefore, for disposal under Section I !(I) can be given A
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 B
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.

It has also been submitted before us by one of the notified parties
(Dhanraj Mills v. Custodian) that properties belonging to notified persons C
which have no nexus with the transactions in securities ofthe notified person
during the "statutory period", also cannot be attached under Section 3.
. Reliance is placed on the decision of the Bombay High Court in the case of
Hitesh Shanti/al Metha v. Union of India & Anr. (1992) 3 Born. C.R. 716 (to
which one of us was a party) in this connection. Our attention is drawn to
the following passage in the High Court's judgment (at page 719), "If the D
person ....... approaches theSpecial Court and makes out, for example, a case
that the property which is attached has no nexus of any sort with the illegal
dealings in securities belonging to banks and financial institutions during the
relevant period and/or that there are no claims or liabilities which have to be
satisfied by attachment and sale of such property, in our view, the Special E
court would have the power to direct the Custodian to release such property
from attachment". Hence a property not having any nexus with the illegal
dealings in securities can be relea~ed from attachment by the Special Court
in an appropriate case.

The question of distribution of attached property under Section 11 (2) F
has to be considered thereafter. Before going into the questions raised in that
connection, one must examine whether Section 11(2) lays down any priorities.
Although it was contended before us by some of the appellants that Section
11 (2) does not lay down any priorities, the language of Section 11 (2) is quite
clear. The words, "in order as under" in Section 11 (2) lay down the properties
for distribution. Jn fact, it has been so held by this Court while interpreting G
Section 11 in the case of B.O.I. Finance Ltd. v. Custodian & Ors., [1997] IO
SCC 488 at page 497. Referring to Section 11(2) of the Act, this Court has said
that sub-section (2) of Section 11 provides for the priorities in which the
liabilities of the notified person are to be discharged from out of the attached
properties. Considering that the Act has been passed because of the diversion H
402 SUPREME COURT REPORTS (1998] 3 S.C.R .

.A of funds from the banks and financial institutions to the individual accounts
of certain brokers, the implication of Section 11 (2) (b) clearly is, that after the
discharge of the liabilities under Section I 1(2)(a), the amounts which are paid
to the banks would ]Jrobably be those funds which were diverted from the
banks by reason of malpractice in the security transactions. However, before
the amounts can be paid to banks or financial institutions under Section
B l 1(2)(b) the liabilities under Section l 1(2)(a) are required to be discharged.

The Special Court has raised three questions pertaining to distribution I
under Section 11(2). We would, however, like to expand the three questions
in order to bring out the points at issue which have been argued before us.
c The questions can be reframed as follows :

(!) What is meant by revenues, taxes, cesses and rates due? Does
the word "due" refer merely to the liability to pay such taxes etc.,
or does it refer to a liability which has crystalised into a legally
ascertained sum immediately payable?
D (2) Do the taxes (in clause (a) of Section 11(2)) refer only to taxes
relating to a specific period or to all taxes due from the notified ,, ....
person?
(3) At what point of time should the taxes have become due?
(4) Does the Special Court have any discretion relating to the extent
E of payments to be made under Section 11(2)(a) from out of the
attached funds/property?

(5) Whether taxes include penalty or interest?

(6) Whether the Special Court has the power to absolve a notified
f
F person from payment of penalty or interest for a period
subsequent to the date of his notification under Section 3. In the
alternative, is a notified person liable to payment of penalty or
interest arising from his inability to pay taxes after his
notification?

G The Custodian has raised certain further questions. We propose to
consider one such question which has a bearing on the questions which have
been framed by the Special Court. The question is whether in the case of ..\
mortgaged/pledged properties of the notified persons already mortagaged/
pledged to the banks or financial institutions on the date of attachment, the
H words of Section 3 (3) "any property movable or immovable or both belonging
H.S. MEHTA v. CUSTODIAN AND ORS. [SUJA TA V. MANO HAR, J.] 403
to any person notified" would refer only to the right, title or interest of the A
notified person in the mortgaged/pledged property and not the entire property
itself. If so, the liabilities mentioned in Section 11 (2) which are to be paid from
..,·
. the proceeds of the sale of the attached property, would only refer to proceeds
of the. sale of the right, title and interest of the notified person in the attached
property.
B
The last question can be answered first. As stated above, Section 3(3)
clearly provides that the properties attached are properties which belong to
the person notified. The words "belong to" have a reference only to the right,
title and interest of the notified person in that property. If in the property
"belonging to" a notified person, another person has a share or interest, that C
share or interest is not extinguished. Of course, if the interest of the notified
person in the property is not a severable interest, the entire property may be
attached. But the proceeds from which distribution will be made under Section
11 (2) can only be the proceeds in relation to the right, title and interest of the
notified person in that property. The interest of a third party in the attached
property cannot be sold or distributed to discharge the liabilities of the D
notified person. This would also be the position when the property is already
mortgaged or pledged on the date of attachment to a bank or to any third
party. This, however, is subject to the right of the Custodian under Section
4 to set aside the transaction of mortgage or pledge. Unless the Custodian
exercises his power under Section 4, the right acquired by a third party in the E
attached property prior to attachment does not get extinguished nor does the
property vest in the Custodian whether free from encumbrances or otherwise.
The ownership of the property remains as it was.

Question No. I

The first question on which the arguments have been advanced, relates
F
to the meaning of the phrase "tax due" used in Section I 1(2)(a). Black's Law
Dictionary at page 499 defines the word 'due', inter alia, as, "owing; payable;
justly owed ............... Owed or owing as distinguished from payable. A debt
is often said to be due from a person where he is the party owing it, or
primarily bound to pay, whether the time for payment has or has not G
arrived .......... .The word 'due' always imports a fixed and settled obligation or
liability, but with reference to the time for its payment there is considerable
i. ambiguity in the use of the term, the precise signification being determined
in each case from the context." (underlining ours) Jowitt's Dictionary of
English Law Vol. I, 2nd Edn. at page 669 defines 'due' as, "anything owing, H
404 SUPREME COURT REPORTS [1998] 3 S.C.R.

A that which one contracts to pay or perform t.o another. .......... As applied to
a sum of money, 'due' means either that it is owing or that it is payable; in
other words, it may mean that the debt is payable at once or at a future time.
It is a question of construction which of these two meanings the word 'due'
has in a given case".

B Wharton's Law Lexicon, 14th Edn. at page 365 defines 'due' as anything
owing. It has the following comment, "It should be observed that a debt is
said to be due the instant that it has existence as a debt; it may be payable
at a future time". J
Our attention has been drawn to Section 530(1)(a) of the Companies Act
C where the language used in "taxes, cesses and rates due and payable" and
Section 61(1)(a) of the Provincial Insolvency Act, 1920 which refers to all
debts due to the Crown. In the State of Rajasthan & Ors. v. Ghasilal, [1965]
2 SCR 805, this Court considered the provisions of the Rajasthan Sales Tax
Act, 1955. It observed, that Section 3 which is the charging section of the
D Rajasthan Sales Tax Act, read with Section I, makes tax payable i.e. creates
a liability to pay the tax. That is the normal function of a charging section
in a taxing statute. But till the tax payable is ascertained by the Assessing _,.-< •
Autho~ity under Section IO or by the assessee under Section 7(2), no tax can
be said to be due. For till then there is only a liability to be assessed to tax.
A similar view was taken by this Court in its later decision in Associated
E Cement Co. Ltd v. Commercial Tax Officer, Kata & Ors., (1981) 48 S.T.C. 466
at page 480 holding that until the tax payable is ascertained by the Assessing
Authority or by the assessee, no tax can be said to be due; for till then there
is only a liability to be assessed to tax.

The Federal Court in the case of Chatturam and Ors. v. Commissioner
F
ofIncome-Tax, Bihar, (1947) 15 !TR 302 at page 308 held that the liability to
pay the tax is founded on Sections 3 and 4 of the Income Tax Act which are
the charging sections. Section 22 etc. are the machinery sections to determine
the amount of tax. It cited the observations of Lord Dunedin in Whitney v.
Commissioners ofInland Revenue, (1926) AC 37 as follows :- "Now, there are
G three stages in the imposition of a tax. There is the declaration ofliability, that
is the part of the statue which determines what persons in respect of what
property are liable. Next, there is the assessment. Liability does not depend
on assessment, that ex hypothesi has already been fixed. But assessment
particularizes that exact sum which a person liable has to pay. Lastly, come
H the methods of recovery if the person taxed does not voluntarily pay." (See
H.S.MEHTAv.CUSTODIAN AND ORS. [SUJATA V. MANOHAR,J.] 405
in this connection, Kalwa Devadattam and Ors. v. Union of India.and Ors., A
(1963) 49 ITR 165, 171; Doorga Prasad v. The Secretary of State 13 !TR 285,
,,,... 289 and Ramyond Synthetics Ltd. and Ors. v. Union of India and Ors., [1992]
2 sec 255 at 286-288.

"Tax due" usually refers to an ascertained liability. However, the meaning
of the words 'taxes due' will ultimately depend upon the context in which B
these words are used.

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 C
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 l 1(2)(a) while distributing the property of the notified person. Taxes
which are not legally assessed or assessments which have not become final D
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".

Question No. 2 E

Do these taxes relate to any particular period or do they cover all
assessed taxes of the notified person? The Special Court Act is quite clear
in its intent. It seeks to cover all criminal and civil proceeding relating to
transactions in securities of a notified person between 1st of April, 1991 and F
6th of June, 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 3(2) it is the property of such offenders which is attached 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 1.4.1991to6.61992, G
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 1.4.1991to6.61992. 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 H
406 SUPREME COURT REPORTS [1998] 3 S.C.R.

A 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, 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 ...
B 6.6.1992. If, for example, any income-tax is required to be paid in connection
with the 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 thr banks and financial institution. Similarly,
in respect of any property which is attached, if any rates or taxes are payable
I
C 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 to the statutory period. However, the
extent to which liability under Section 11(2)(a) is to be discharged is dealt with
a little later.
..
D
Every kind of tax liability of the notified person for any other period is
. not covered by Section l 1(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 I 1(2)(c) or the taxing
E authority may recover the same from any subsequently acquired property of
a notified person (vide 1997 (9) sec 123) or in any other manner from the
notified person in accordance with law. The priority, however, which is given
under Section I 1(2)(a) to such tax liability only covers such liability for the
period 1.4.1991to6.61992.

F Questions No. 3

At what point of time should this tax liability have become quantified
by a legal assessment which is final and binding on the notified person
concerned? It is contended before us by some of the parties that only that
liability which has become ascertained by final assessment on the date of the
G Act coming into force should be paid under Section I 1(2)(a). Others contended
-
that it should have been so ascertained on the date of the notification. The
third contention is that it should have been so ascertained on the date of
distribution. Since we have held that tax liability under Section l 1(2)(a) refers
only to such liability for the period 1.4.1991to6.6.1992, it would not be correct
H to hold that the liabilities arising during this period should also be finally
H.S. MEHTA v. CUSTODIAN AND ORS. [SUJATA V. MANOHAR, J.] 407

assessed before 6.6.1992 (the date of the Act) or the date of the notification. A
~ :. It must refer to the date of distribution. The date of distribution arrives when
the Special Court completes the examination of claims under Section 9A. If
on that date, any tax liability for the statutory period is legally assessed, and
the assessment is final and binding on the notified person, that liability will
be considered for payment under Section I 1(2)(a), subject to what follows. B

Question No. 4

The next question is, whether the assessed tax liability for the statutory
period requires to be discharged in full under Section I 1(2)(a) or whether the
Special Court has any discretion in relation to the extent of payment to be C
made under Section I 1(2)(a)? The banks who have large claims against the
notified persons have strenuously urged that the Special Court is not required
to pay the tax liability in full, but has some discretion as to the extent to which
such liability will be paid. They have emphasised the words 'shall be paid or
discharged in full as far as may be' in Section 11 (2) as indicating some
discretion in the Special Court regarding payment of liabilities under Section D
J 1(2)(a). They point out that at the time when the said Act was enacted or
when the Ordinance which it replaced was promulgated, the full extent of the
funds involved in malpractices leading to the diversion of funds from banks
and financial institutions to the pockets.of the brokers, was not known. Even
after the submission of report by the Janakiraman Committee, a special group
known as an inter-disciplinary group was required to be set up to trace the E
end use of funds involved in this fraud. Auditors were appointed to check
instances of differences where the attached assets were short of problem
exposure. It was, therefore, expected that the available funds from attached
assets would be speedily restored to the banks and financial institutions. It
was also expected that even after the discharge of tax liabilities for the p
relevant period, substantial funds would be left over for being paid to the
banks and financial institutions concerned.

It is submitted that the Act was not intended to secure taxes and,
therefore, if the Special Court finds that the tax liabilities are such, and their
manner of assessment is such, that it would result in the entire funds being G
paid over to the taxing authorities, the Special Court would have discretion
in deciding ·how much should be paid over to the taxing authority and how
much should come to the banks and financial institutions. It is submitted with
some justification that Section 11 should be construed in the context of the
purpose for which it was framed; as was done by this Court in the case of
Tejkumar Balakrishna Ruia v. A.K. Menon & Anr., [1997] 9 SCC 123 where H
408 SUPREME COURT REPORTS (1998] 3 S.C.R.

A the Court said that if two interpretations are possible, purposive interpretation
should be resorted to. The Court in that case held that the income or property
obtained by a notified person after the date of the notification could not be
attached under Section 3(3). The purposive interpretation in the present case
is to be resorted to for the purpo~e of ensuring that amounts realised from
B the properties attached come back to the banks and financial institutions.

Our attention was drawn to the provisions relating to examination of
claims in insolvency or of a company in winding up. Debts have to be proved
in insolvency before they can be considered for payment either in part or in
full. Explaining the powers of the insolvency court, this Court in The State
C ofPunjab v. S. Rattan Singh, [1964) 5 SCR 1098 at page 1109 said, "It is well-
settled that the Insolvency Court can, both at the time of hearing the petition
for adjudication of a person as an insolvent and subsequently at the stage
of the proof of debts, re-open the transaction on the basis of which the
creditor had secured the judgment of a court against the debtor. This is based
on the principle that it is for the Insolvency Court to determine at the time
D of the hearing of the petition for Insolvency whether the alleged debtor does
owe the debts mentioned by the creditor in the petition, and whether, if he
owes them, what is the extent of those debts. A debtor is not to be adjudged
an insolvent unless he owes the debts equal to or more than a certain amount,
and has also committed an act of insolvency. It is the duty of the Insolvency
E Court, therefore, to determine itself the alleged debts owed by debtor
irrespective of whether those debts are based on a contract or under a decree
of court. At the stage of the proof of the debts, the debts to be proved by
the creditor are scrutinised by the Official Receiver or by the Court in order
to determine the amount of all the debts which the insolvent owes as his total
assets will be utilised for the payment of his total debts and if any debt is
F wrongly included in his total debts that will adversely affect the interest of
the creditors other than the judgment creditor in respect of that particular debt f
as they were not parties to the suit in which the judgment debt was decreed.
That decree is not binding on them and it is right that they be in a position
to question the correctness of the judgment debt. "

G It is on behalf of all these creditors that the Insolvency Court or the
Official Receiver scrutinises the debts, whether claimed under a decree or
otherwise. The same is the position of a company in winding up because the
rules of insolvency apply to winding up proceedings as well. In relation,
however, to claims for taxes which are assessed in accordance with law by
H the taxing authorities, a question arose whether the court in winding up of
H.S. MEHTA v. CUST6DIAN ANDO RS. [SUJATA V. MANO HAR, J.] 409
an insolvent company,could go behind an income tax assessment if there are A
suspicious circumstances. In 1943 the Lahore High Court, Bench of three
Judges) in Governor-General In Council v. Sargodha Trading Company
Ltd., 11 ITR 368 held, differing fromthe view taken by the English Court In
Re Calvert (1899) 2 Q.B.D. 145, that a court in liquidation can examine even
a claim based on income-tax assessment if there are suspicious B
circumstances.This view, however, was subsequently overruled by the Lahore
High Court in Pakistan in Ravi Paint Colour and Varnish Works Ltd. v.
Federation of Pakistan, (1955) 27 ITR 475. The Court held that in maters
relating to asessment of income tax, the machinery that can be brought into
action is the one provided by the Income Tax Act which is a complete code
by itself. The jurisidiction of the civil court is impliedly barred. When a C
company is under liquidation, the Income Tax Authorities can pr.ove their
claim against the company by the production of the assessment order made
by them. A company under liquidation is still an assessee and subject to
Income Tax law; and if the liquidator feels aggrieved by the assessment he
must pursue the same remedies as are open to any other assessee.
D
·In the case of S. V Kondaskar v. VM Deshpande and Anr., (1972] l SCC
438 at page 449 this Court examined the question whether under the Income
Tax Act before commencing re-assessment proceedings, leave was required
to be taken by the income tax authority of the Company Court under Section
446 of the Companies Act, when the assessee-company was in winding up. E
This Court said that the Income Tax Act is a complete code with respect to
assessment and re-assessment of income tax. The proceedings under the
Income Tax Act would not fall within the meaning of the expression ·other
legal proceedings' in Section 446 and, therefore, leave would not be required
of the Company Court for com!T'encing such proceedings. This Court, however, F
went on to observe, (in paragraph 18) "We have not been shown any principle
on which the liquidation court should be vested with the power to stop
assessment proceedings for determining the amount of tax payable by the
company which is being wound up. The liquidation court would have full
power to scrutinise the claim of the Revenue after income tax has been
determined and its payment demanded from the liquidator. It would be open G
to the liquidation court then, to decide how far, under the law, the amount of
income tax determined by the department should be accepted as a lawful
liability on the funds of the company in liquidation. At that stage the winding
up court can full safeguard the interests of the company and its creditors
under the Act". H
410 SUPREME COURT REPORTS [1998] 3 S.C.R.

A Explaining this decision, this Court (a bench of two judges) in the case
of Assistant Commissioner ofIncome Ta;c v. A.K. Menon & Ors., (1995] 5 SCC
200, held that the Special Court under the present Act has no power to sit
in appeal over the orders of Tax Authorities, Tribunals or Courts. The claims
relating to tax liabilities of a notified person are, along with revenues, cesses
and rates, entitled to be paid first in the order of priority and in full as. far as
B may be.

While we respectfully agree with the finding that the Special Court
cannot sit in appeal over the assessment of taxes by the Tax Authorities, we
would like to qualify the Court's subsequent observations relating to payment
C in full of all assessed taxes under Section I 1(2)(a). There is undoubtedly no
question 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 9A. A claim in respect of tax assessed, therefore, cannot
be reopened by the Special Court. The liability of the notified person to pay
D the tax will have to be determined under the machinery provided by the
relevant tax law. The extent of liability, therefore, cannot be examined by the
Special Court.

But the Special Court can decide how much of that liability will be
E discharged out of the funds in the hands of the Custodian. This is because
the tax liability of a notified person having priority under Section ! 1(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 dependi.ng upon various
circumstances. The Special Court can, for this purpose examine whether there
is any fraud, collusion or miscarriage of justice in assessment proceedings.
F The assessee who is before the Special Court, is a person liable to be charged
with an offence relating to transactions in Securities. He may not, in these
circumstances, explain transactions before the income-tax authorities, in case
his position is prejudicially affected in defending criminal charges. Then, on
account of his property being attached, he may not be in a position to deposit
G 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 redu.ce 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
H amounts attached by the Custodian, or whether the taxes so assessed are
H.S.MEHTA v.CUSTODIAN AND ORS. [SUJATA V. MANOHAR,J.] 411
~ grossly disproportionate to the properties of the assessee in the hands of the A
• 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.

Although the liability of the assessee for the balance tax would subsist,
and the Taxing Authorities would be entitled to realise the remaining liability B
from the assessee, the same will not be paid in priority over the claims of
everybody else under Section l 1(2)(a). If the Special Court so decides, it may
direct payment of the balance liability under Section l 1(2)(c). Otherwise the
taxing authorities may recover the same from any other subsequently acquired
property of the asses see or in any other manner in accordance with law. Such
scaling down, however, should be done only in serious cases of miscarriage
c
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 fact, the Income Tax Authorities have also accepted D
that exorbitant tax demands can be ignored, applying the Wednesbury
>-
Principles.

Question No. 5

One other connected question remains: whether "taxes" under Section E
l 1(2)(a) would include interest or penalty as well? We are concerned in the
present case with penalty and interest under the Income Tax Act. Tax, penalty
and interest are different concepts under the Income Tax Act. The definition
of "tax" under Section 2(43) does not include penalty or interest. Similarly,
under Section 157, it is provided that when any tax, interest, penalty, fine or
any other sum is payable in consequence of any order passed under this Act,
F
the Assessing Officer shall serve upon the assessee a notice of demand as
prescribed. Provisions for imposition of penalty and interest are distinct from
the provisions for imposition of tax. Learned Special Court judge, after
examining various authorities in paragraphs 51 to 70 of his judgment, has
come to the conclusion that neither penalty nor interest can be considered G
as tax under Section I 1(2)(a). We agree with the reasoning and conclusion
drawn by the Special Court in this connection .
•
.._
Question No. 6

The Special Court has, in the impugned judgment, also dwelt at some H
412 SUPREME COURT REPORTS (1998) 3 S.C.R.

A length on the question whether it can absolve a notified person from imposition
of penalty or interest after the date of the notification. Since the liabilities
covered under Section 11(2)(a) are only liabilities arising during the period
1.4.1991 to 6.6.1992, and do not cover penalty and interest, this question does
not really arise. In any case, interest or penalty for any action or default after
B the date of the notification, are not covered by the Act. However, we must
reiterate that a taxing statute is a code in itself for imposition of tax, penalty
or interest. The remedy of a notified person who is assessed to penalty or
interest, after the notified period, would be to move the appropriate authority
under the taxing statute in that connection. If it is open to him under the
relevant taxing statute to contend that he was unable to pay his taxes on
C account of the attachment of all his properties under the Special Court Act,
and that there is a valid reason why penalty or interest should not be imposed
upon him after the date of notification, the concerned authorities under the
Taxing Statute can take notice of these circumstances in accordance with law
for the purpose of deciding whether penalty or interest can be imposed on
the notified person. The Special Court is required to consider this question
D only from the point of view of distributing any part of the surplus assets in
the hands of the Custodian after the discharge of liabiiities under Se1.,. Jn
l 1(2)(a) and l 1(2)(b). The Special Court has full discretion under Section
11 (2)( c) to decide whether such claim for penalty or interest should be paid
out of any surplus funds in the hands of the Custodian.
E This, we hope, answers all questions which arise for determination in
the present appeals. Pursuant to an interim order dated 26.8. 1996, certain
payments have been made to Income Tax Authorities. The Income Tax
Authorities, however, have given an undertaking which is filed by the Secretary
(Revenue) in the Ministry of Finance, Union oflndia, that the Union of India
F shall, within four weeks of being called upon so to do, either by this Court
or by the Special Court in this or any other proceeding under the Special
Court Act, bring back to Court the moneys so paid or part or parts thereof
as directed, and pay thereon interest at a rate not less than 18% per annum
as this Court or the Special Court may direct from the date of receipt until the
G date of return thereof. The Special Court shall examine the claim of the Income
Tax Authorities for taxes due under Section l 1(2)(a) in the light of our
judgment and decide whether any amount paid to the Income Tax Authorities
under the interim orders of this Court requires to be returned. The Special
Court shall pass appropriate orders thereon in the light of the undertaking
H given.
H.S. MEHTA v. CUSTODIAN AND ORS. [SUJA TA V. MANO HAR, J.) 4 \3
-' .. This Court, by an order dated 11.3 .1996, had also directed the Custodian A
to draft a scheme in respect of the shares held by the Custodian whereby
such shares can be sold from time to time. The Custodian was also directed
to forward the scheme for the approval of the Union of India. Pursuant to
these directions, the Custodian forwarded a draft scheme' for approval to the
Union of India. The Ministry of Finance, Department of Economic Affairs
(Banking Division) approved the draft scheme sent by the Custodian with B
certain modifications. The final scheme incorporating the modifications by the
Union of India has been filed in this Court. This scheme, with further
modifications, if any, shall be considered by the Special Court and appropriate
orders may be passed by the Special Court in respect of the scheme so
submitted. C

In view of the interpretation which we have put on Section 11 of the
Special Court Act and Section 3(3) of the Special Court Act, the challenge to
the constitutional validity of Section 11 read with Section 3(3) does not
survive. If, according to any of the banks or financial institutions, any of the
properties attached belongs to the bank or financial institution concerned, it D
>-.._ is open to that bank or financial institution to file a claim before the Special
Court in that connection and establish its right to the property attached or
any part thereof in accordance with law. Obviously, until such a claim is
determined, the property attached cannot be sold or distributed under Section
11. Transfer Case No. 5 of 1998 is, therefore, dismissed.
E
All the appeals are disposed of as above with no order as to costs.

R.K.S. Appeals disposed of.