Case Background
It was in June 1992 that a massive income tax raid was conducted at the numerous premises of Harshad Mehta and family. Tonnes of shares, securities, books of account and documents were seized indiscriminately. This income tax raid on Harshad Mehta was in tandem with the JPC enquiry, CBI investigation and that by other agencies too, that had probed the Harshad Mehta scam. Harshad Mehta was primarily guilty of violating capital markets and securities laws, with the active collusion of senior bankers.

It was banks that provided him with the thousands of crores that he used to become the Big Bull of the Indian stock markets, as was evident from the several investigations conducted. There was thus no unaccounted or black money that was involved in his share market transactions, since it was bank money that he misused. Moreover, the tons of documents seized from him, meant that his transactions were well documented and evidenced and so was the genuineness of the sources of funds that he deployed, for funding his share purchases.

The Income Tax Department thereafter, in its usual manner passed high pitched assessment orders, making a huge addition of Rs.2014 crores to the total income of Harshad Mehta and family. Almost every receipt from banks towards purchase of securities, where Harshad Mehta was a mere broker, was taxed in his hands as his undisclosed and unexplained income, which it was not.

Huge additions were made on account of sources like money market oversold position, money market unexplained stock, profit on sale of shares in shortage, money market difference received, share market trading profit, interest on securities in money market etc. These very heads under which such huge undisclosed income was taxed in the hands of Harshad Mehta, meant and indicated not just the ignorance and prejudice of the tax department, but also the hyper technical approach to tax incomes, where there were none. Such additions to total income are wholly contrary to the underlying facts and are not tenable.

Brief Facts
The Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 ('the Act') is a Special Act. 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 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 Special Court has observed that it has been functioning since June 1992. In respect of two notified parties, namely, the Harshad Mehta Group & Fairgrowth Financial Services Ltd., the time is approaching for distribution of their assets under section 11. 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.

Issues against the Court
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 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 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:
The Special Court has raised five 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 crystalised 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 or 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?
    

View
Tax, penalty and interest are different concepts under the 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, 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 as tax under section 11(2)(a).

Held
The Special Court with regarding to the questions raised, held that:
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). Block's Law Dictionary at page 499 defines the word `due', inter alia, as, "owing; payable; justly 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 context." (underlining ours) Jowitt's Dictionary of English Law Vol. I, 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".

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 proceeding relating to transactions in securities of a notified person between 1st of April, 1991 and 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 1.4.1991 to 6.61992, as also all claims relating to the property attached, the Special Court will also have 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 6.61992.

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 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 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 the banks and financial institution.

Questions No. 3: At what point of time should this tax liability have become quantified by a large 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 Act coming into force should be paid under Section 11(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 12(2)(a) refers only to such liability for the period 1.4.1991 to 6.6.1992, it would not be correct t hold that the liabilities arising during this period should also be finally assessed before 6.6.1992 (the date of the Act) or the date of the 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 9A. It 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 11(2)(a), subject to what follows.

Question No. 4: The next question is, whether the assessed tax liability for the statutory period requires to be discharged in full under Section 11(2)(a) or whether the Special Court has any discretion in relation to the extent of payment to be made under Section 11(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 11(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 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 relevant period, substantial funds would be left over for being paid to the banks and financial institutions concerned.

Question No. 5: One other connected question remains: whether "taxes" under Section 11(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, 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 61 to 70 of his judgment, has come to the conclusion that neither penalty nor interest can be considered as tax under Section 11(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 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 the date of the notification, are not covered by the Act. However, we must reiterate that a taking statute is a code in itself for imposition of tax, penalty or interest.

Conclusion
Tax, penalty and interest are different concepts under the Income-tax Act. The definition of tax under section 2(43) of the Income-tax Act, 1961, does not include penalty or interest. Neither penalty nor interest can be considered as tax under section 11(2)(a) of the Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992. (CA No. 5326 of 1995 dt. 13-05-1998).

As per section 249(4)(a) of the Income-tax Act, 1961 the shall not be admitted unless the assessee has paid the tax due on the income returned by him. Accordingly if interests have not been paid the appeal cannot be dismissed.

All the appeals are disposed of as above with no order as to costs.