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Petitioner: HARSHAD SHANTILAL MEHTA VS Respondent: CUSTODIAN and others
Court Name: Supreme Court of India Judge(s): S. P. Kurdukar, D. P. Wadhwa, Mrs. Sujata V. Manohar Title: HARSHAD SHANTILAL MEHTA vs CUSTODIAN and others Case No.:Civil Appeal No,5326 of 1995 with Civil Appeals Nos.5147, 5225, 5325, 6080 of
JUDGMENT
Reported As: 1998 PTD 3678 Result: Order accordingly Judgment JUDGMENT ' MRS. SUJATA V. MANOHAR, J.---The Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, is a special Act with its own special problems. The offences it deals with involve amounts of unusual magnitude procured by brokers from banks and financial institutions. Unfortunately, the proceedings before the Special Court, which was set up for 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 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 the judgment and order of the. Special Court Judge, dated February 20, 1995. The appeal is filed by the, Custodian pursuant to 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 transferred to this Court for consideration alongwith 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 interveners 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 Fair growth Financial Services Ltd., the time
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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 raised certain additional questions which arise in interpreting and implementing section 11 of the Special Court Act. The questions raised by the Special Court are as follows: "(1) 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 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? (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 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 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 Court (Trial of Offences Relating to Transactions in Securities) Ordinance, 1992, was promulgated on June 6, 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. ' Under section 3 of the Special Court Act subsections (1), (2) (3) and (4) are as follows: "3. Appointment and functions of Custodian.---(1) The Central Government may appoint one or more Custodians as it may deem fit for the purposes of this Act. (2) The Custodian may, on being satisfied on information received that any person has been involved in any offence relating to transactions in securities after the 1st day of April, 1991, and on and before the 6th June, 1992, notify the name of such person in the official Gazette. (3) Notwithstanding anything contained in the Code and any other law for the time being in force, on and from the date of notification under subsection (2), any property, movable or immovable, or both, belonging to any person notified under that subsection shall stand attached simultaneously with the issue of the notification. (4) The property attached under subsection (3) shall be dealt with by the Custodian in such manner as the Special Court may direct..." ' The Custodian has, therefore, the power to notify the names of persons 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 the 1st of April, 1991, and on or before the 6th of June, 1992, in relation to any property of the person notified has been entered into fraudulently or to defeat the provisions of this Act, to
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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 specified period, namely, 1st of April, 1991, and on or before 6th of June, 1992 (hereinafter referred to 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 the amending Act 24 of 1994, deals with jurisdiction, powers, authority and procedure of the Special Court in civil matters. Under subsection (I) 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, 1994, the Special Court shall exercise all such jurisdiction, powers and authority as were exercisable, immediately before such commencement, by any Civil Court in relation to any matter or claim--- (a) relating to any property standing attached under subsection (3) of section 3; (b) arising out of transactions in securities entered into after the 1st day of April, 1991, and on or before the 6th day of June, 1992, in which a person notified under subsection (2) of section 3 is involved as a party, broker, intermediary or in other manner...." ' The jurisdiction of the Special Court in civil matters is, therefore, in respect 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 by section 9-A(1). ' Therefore, the jurisdiction of the Special Court in civil as well as criminal matters is in respect of transactions during the statutory period of April 1, 1991 to June 6, 1992; and in relation to the properties attached, of a notified person. The entire operation of the said Act, therefore, revolves around the transactions in securities during this statutory period. ' Section 1 l deals with discharge of liabilities and distribution of the property attached. It provides as follows: "11. Discharge of liabilities.---(1) Notwithstanding anything contained in the Code and any other law for the time being in force, the Special Court may 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 he, in the order as under:--- (a) all revenues, taxes, cases and rates due from the persons notified by the Custodian under subsection (2) of section 3 to the Central Government or any State Government or any local Authority. (b) all amounts due from the person so notified by the Custodian to any bank or financial institution or mutual fund; and (c) any other liability as may be specified by the Special Court from time to time." ' This section obviously deals with disbursement of properties attached under section 3(3). Since the property (movable or immovable or both) which is attached is of the person notified, the liabilities which are to be paid or discharged under section 11(2) are also liabilities of the person notified---whether these liabilities be in respect of payment of revenues, taxes, cesses or rates, or whether they be the liabilities to any bank, financial institution or mutual fund. ' 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 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, that right of a third party cannot be extinguished. There is no provision in the Special Court Act which extinguishes the right, title and
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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 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. 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 of India (1993) 199 ITR 530; (1993) 1 SCC 78, at pages 105 to 110). ' 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 property which belongs to the notified person. The directions for disposal can only be in respect of the right, title and interest of the notified person in the attached property. If, therefore, any application is filed before the Special Court by a third party claiming the property so attached and/or for releasing the right, title and interest of a third party in the property from attachment, the Special Court will have to decide the application before proceeding under section 11. ' It has also been submitted before us by one of the notified parties (Dhanraj Mills v. Custodian) that properties belonging to notified persons which have no nexus with the transactions in securities of the 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 Shantilal Mehta v. Union of India (1992) 3 Bom. 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 person... Approaches the Special 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 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 released from attachment by the Special Court in an appropriate case. ' The question of distribution of attached property under section 11(2) 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 the order as under" in section 11(2) lay down the priorities for distribution. In fact, it has been so held by this Court while interpreting section 11 in the case of B.O.I. Finance Ltd. v. Custodian (1997) 89 Comp. Cas. 74, 81-82; (1997) 10 SCC 488, at page 497. Referring to section 11(2) of the Act, this Court has said that subsection (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 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 11(2)(a), the amounts which are paid to the banks would probably be those funds which were diverted from the banks by reason of malpractices in the security transactions. However, before the amounts can be paid to banks or financial institutions under section 11(2)(b) the liabilities under section 11(2)(a) are required to be discharged.
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' The Special Court has raised three questions pertaining to distribution 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. The questions can be reframed as follows: (1) 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 crystallized into a legally ascertained sum immediately payable? (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 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 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? ' 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 mortgaged/pledged to the banks or financial institutions on the date of attachment, the words of section 3(3) "any property movable or immovable, or both, belonging to any person notified" would refer only to the right, title or interest of the 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. ' 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 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 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 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,1: ' The first question on which the arguments have been advanced, relates to the meaning of the phrase "tax due" used in section 11(2)(a) Blacks 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 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 ambiguity in the use of the term, the precise signification being determined in each case from the
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context." (underlining ours) Jowitt's Dictionary of English Law, Vol.!, 2nd Edn. At page 669, defines "due" as, "anything owing, that which one contracts to pay or perform to 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". ' 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". ' Our attention has been drawn to section 530(1)(a) of the Companies Act where the language used is "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 v. Ghasilal (1965) 16 STC 318; (1965) 2 SCR 805, this Court considered the provisions of the Rajasthan Sales Tax Act, 1954. It observed that section 3 which is the charging section of the Rajasthan Sales Tax Act, read with section 5, 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 Authority under section 10 or by the assessee under section 7(2), no tax can he 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 Cement Co. Ltd. v. C.T.O. (1981) 48 STC 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 v. C.I.T. (1947) 15 TIR 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. IRC (1925) 10 TC 88; 110; (1926) AC 37 as follows:--- "Now, there are three stages in the imposition of a tax: there is the declaration of liability, that is the part of the statute which determines what persons in respect of what property are liable. Next, there is the assessm ent. Liability does not depend on assessment, that, ex hypothesis, has already been fixed. But assessm ent particularizes the exact sum which a person liable has to pay. Lastly, come the methods of recovery, if the person taxed does not voluntarily pay." (See in this connection, Kalwa Devadattam v. Union of India (1963) 49 ITR (SC) 165, 171; Doorga Prosad v. Secretary of State (1945) 13 ITR 285 (PC), 289 and Raymond Synthetics Ltd. v. Union of India (1992) 73 Comp. Cas 762; (1992) 2 SCC 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 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 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". ' Question No,2.---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 proceedings relating to transactions in securities of a notified person between April 1, 1991, and June 6, 1992. The Special Court is empowered to examine all civil claims and to try all offences
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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 on April 1, 1991 to June 6, 1992, as also all claims relating to the property attached. The Special Court will also have to examine the tax liability of the notified person arising during the period April 1, 1991 to June 6, 1992. As the purpose of the Special Court Act, inter alia, is as far as practicable, to safeguard the funds to which the banks and financial institutions may be entitled, and to ensure that these funds are not done away with, there are provisions for attachment, ascertainment of claims and distribution of funds.…
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