TaxTMI 
TaxTMI 
1995 (2) TMI 301
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....partment has filed before this Court a large number of applications, for payment in priority, of tax, interest and penalty. There are approximately 24 such applications. Out of these approximately 17 applications are against the Harshad Mehta Group. By these 17 applications, a sum of approximately Rs. 1,380 crores has been claimed. I am also informed that the Income-tax Department is also in the process of reopening assessment of various notified parties. Undoubtedly this will take some time. Further by reason of the fact that many notified parties have not paid advance tax or filed income-tax returns, penalties and interest are also sought to be levied by the Income- tax Department under the various provisions of the Income-tax Act. 3. As is well known large amounts are due to Banks and Financial Institutions. Many-of these Banks and Financial Institutions are making claims under various documents in their favour. Some of these claims are by way of mortgages, hypothecations, pledges, assignments of debts and even by way of bankers lien, set off and/or right to adjust accounts. Many of the Banks and Financial Institutions are claiming interest including in some cases penal interes....
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....r. Balasubramanian should not be taken to be on behalf of the Income-tax Department. Dr. Balasubramanian then claimed that he was merely assisting the Court on a question of law. Similarly on behalf of the various members of the Harshad Mehta Group various counsels appear in various Applications. They also desired to be heard. The Court has heard them all. Thus Mr. S.B. Jaisinghani made submissions on behalf of Mr. Harshad Mehta and M/s. Harshad Mehta. Mr. M.R. Jethmalani made submissions on behalf of Mr. Ashwin Mehta and M/s. Ashwin Mehta, Mr. J. Mistry made submissions on behalf of Mrs. Jyoti Mehta and M/s. Jyoti Mehta. 8. At this stage itself it must be mentioned that in 1992-93 a number of Banks and Financial Institutions had claimed rights in properties stand- ing attached. At that stage, the custodian had contended that notwith-standing the special rights claimed by Banks and Financial Institutions, distribution could only take place under section 11 of the Special Court Act. The Custodian had submitted that even secured creditors have now to stand in line and be paid only at the time of distribution under section 11 of the Special Court Act. On 22nd July, 1993, this Court h....
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....es taken out of one Bank or Financial Institution would have been placed first into an account of the notified party with another Bank or utilised to pay off debts of other Banks or financial institutions. Also properties and assets purchased out of monies taken out of one Bank/ Financial Institution may have been pledged or hypothecated with another. The Financial Institutions or Banks were most likely to have documents in their favour or make claims on the basis of Bankers' Rights of Lien, set off or adjustment. In my view, by this Act, the Legislature therefore sought to provide : (1) for a speedy trial of offences; (2) immediate attachment and thus freezing of all assets of parties suspected to be involved and thus preventing any further transfers or alienations; (3) a reasonable, rational and equitable distribution of the property by this Court as it would have the total picture. This last would ensure a much speedier return of monies than under the present legal system. That these were the objectives is clear from the provisions of the said Act. The first object is clear on a plain reading of the Act. The second object is achieved by the provisions regarding a person being "....
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....e effect notwithstanding anything inconsistent therewith in any other law or in any instrument having effect by virtue of any law or in any Decree or Order of any Court, Tribunal or Authority. The provision regarding distribution would be the only provision against the absolute claims and rights under prior contracts. This only if the interpretation of the Custodian is accepted. If Mr. Mehta's, Mr. Kapadia's, Mr. Doctor's and Mr. Tulzapurkar's interpretations are to be accepted, then there is no provision in this Act which would be inconsistent with any contract. This interpretation would render ineffective and virtually nugatory the words "inconsistent therewith contained. . . . or in any instrument having effect by virtue of any law". Further secured creditors and persons having special interests may get Decrees or Orders of Courts in their favour. Section 13 provides that provisions of this Act prevail even over any Decree and Order of any Court, Tribunal or Authority. This would include even Decrees and Orders obtained by secured creditors or persons having a special interest in property. If secured creditors and persons having special interests were meant to stand outside, the....
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....umbered property in the first instance. So far as private persons are concerned, there appears to be rational as to why they are put last. As is known, almost all the monies were siphoned off into private pockets from Financial Institutions and/or Banks. It has then been diverted into shares and stocks, various private companies, partnerships and their businesses, or given as loans, etc. Thus, the notified party has in most cases purchased the property or asset out of public money. The money was not his property. It belonged to the Financial Institution/Bank from whose pocket it came. The object is to collect public money and return it to the Financial Institutions and/or Banks from where it came in the first instance. This is clear because what is to be distributed is "property belonging to a Notified Party". This Court has under section 4(2) the power to see whether a person is correctly notified. It is only after the Court is so satisfied that the distribution would arise. Thus even when private rights/special interests are created, it is out of public monies or assets acquired out of public monies. As stated above in most cases, the notified party would have had no right to the....
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....his Court for distribution. The distribution can only be as laid down in section 11. In my view, the classification is a reasonable, rational, equitable and logical. They have been incorporated to meet the objective and have a clear nexus with the objective. In my view the section provides for the distribution of the property in an orderly fashion. In my view, such an interpretation is not subject to any attack either under article 14 or article 19. In my view, therefore, it will have to be held that even though the contractual and special rights in property have not been abrogated or done away with, they can only be enforced subject to the order of payments laid down under section 11 of the said Act. All such parties, whether decree holders or otherwise, must come before this Court and put their case before this Court. They may make their claim directly before this Court or enforce their claim in normal Civil Courts and then approach this Court on the basis of Decrees or Orders obtained from any Court or Tribunal. Even when parties elect to make their claim in the normal Civil Court, in my view, it would be preferable and advisable that the parties intimate this Court. This so th....
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....hat there is significance in use of the word "due" in section 11(2)(a) and (b). He submitted that the word "due" must have reference to a point of time. He fairly pointed out that in the Act, words to the effect "presently due" or "due in future" or "contingent liability" have not been used. He points out that similarly words to the effect "due from time to time" or "periodically due" have not been used. He submits that the Legislature was well aware that the liabilities under section 11(2)(a) would arise periodically and from time to time. He submitted that the intention of the Legislature must, therefore, be ascertained from the objects/scheme of the Special Courts Act. 11. The Learned Advocate General referred to Black's Legal Dictionary wherein it is stated as follows : "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. It may mean that the debt or claim in question is now (presently or immediately) matured and enforceable, or that it matured at some time in the past and yet r....
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....tion to pay a sum of money at a future date, it is a debt owing but when the obligation is to pay a sum of money in praesentiit is a debt due. A sum due would, therefore, mean a sum for which there is an existing obligation to pay in praesenti or in other words, which is presently payable...." Thus, in this case, the Supreme Court is laying down that the sum would be due when there is an existing obligation to pay the same now or in future. 12. The Learned Advocate General also referred to section 530 of the Companies Act, 1956. He pointed out that even under the Companies Act, all revenues, taxes, cesses and rates due at the relevant date and having become due and payable within 12 months next before the relevant date get a priority. He submitted that even under the Companies Act, priority is given to revenues, taxes, cesses and rates only up to the relevant date and for a period of 12 months prior thereto. 13. The Learned Advocate General submitted that even though under section 11 does not specify the period of time when the liabilities are deemed to be due, some period must be imported into the section. He submitted that the period must be ascertained keeping in mind the sch....
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....t satisfied. He submitted that this could never be the intention of the Legislature. 16. The Learned Advocate General fairly submitted that the point of time could also be the date of distribution. He however submitted that this would create a number of difficulties. He submitted that that would not be reasonable and harmonious construction. He pointed out by way of an example that the Income-tax Department could now re-assess, make larger demands and levy penalties and interest. He submitted that this Court would not be sitting in Appeal over the assessment orders by the Income-tax Department. He submitted that that could only be done by the Tribunal or the Tax or Writ Bench of the High Court or the Supreme Court. He submitted that thus by reason of re-assessment, levy of penalty/interest the Income-tax Department may have very large claims. He submitted that notified parties may be challenging those claims. Yet this Court could not distribute the assets until the disputed claims are finally settled at the stage of the Supreme Court. He submitted that it is well known that all this would take a number of years. He submitted that the very object of speedy distribution would be def....
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....ue in the case of representative institutions, like banks and banking companies. They are governed by their rules and regulations which do not change from debtor to debtor and which, if anything, are intended to benefit the weaker sections of society. It is for this reason that debts owing to such creditors are excepted from the operation of the Act. 18. A necessary implication and an inevitable consequence of the Attorney- General's argument is that in order to attract the application of clause (1) of section 2(4), it is enough to show that the debt was, at some time before the commencement of the Act, owed to banking company; it does not matter whether it was in its inception owed to private money-lender and, equally so, whether it was owed to such money-lender on the date of the commencement of the Act. This argument, if accepted, will defeat the very object of the Act. The sole test which assumes relevance according to that argument is whether the debt was owed, at any time before the commencement of the Act, to a banking company. It means that it is enough for the purpose of attracting clause (1) that, at some time in the past, may be in a chain of transfers, the right to rec....
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....e before the commencement of the Act, what it truly means to convey is not that the debt should have been due to a banking company at some point of time before the commencement of the Act, but that it must be a debt which was incurred from a banking company before the commencement of the Act. 21. Thus, the application of clause (1) is subject to these conditions: (i) the debt must have been incurred from a banking company; (ii) the debt must have been so incurred before the commencement of the Act; and (iii) the debt must be due to a banking company on the date of the commencement of the Act. There are cumulative conditions and unless each one of them is satisfied, clause (1) will not be attracted and the exclusion provided for therein will not be attracted and the exclusion provided for therein will not be available as an answer to the relief sought by the debtor in terms of the Act." Thus, the Supreme Court read the words into the statute. In its own words, the Supreme Court restructured the clause in order to further the object of the Act. 18. The Learned Advocate General also relied upon the case of Siraj-ul- Haq Khan v. Sunni Central Board of Waqf MR 1959 SC 198. In this ca....
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....e the total problem exposure figures at Rs. 3,729.48 crores on account of amounts outstanding against Harshad Mehta Group - Rs. 1,559.74 crores, the Dalai Group - Rs. 1,886.68 crores and Fairgrowth Financial Services Ltd. - Rs. 283.06 crores. 29. The Custodian has Notified 41 persons and has attached assets worth around Rs. 2910 crores based on November 1994 valuation. Out of the assets attached by the Custodian, the value of attached assets of HSM group is about Rs. 2034 crores as against problem exposure of Rs. 1559.74 crores and in case of FFSL it is Rs. 456 crores as against problem exposure of Rs. 283.06 crores. Only in case of Dalai Group there is a shortfall of Rs. 1466.77 crores against problem exposure of Rs. 1886.68 crores." 20. Mr. Setalvad also relied on the case of Government of India v. Taylor [1955] AC 491. In this case, the question was whether in a winding-up of an English Company trading in India, the liabilities payable by the Official Liquidator included claims for Indian tax. The House of Lords held as follows (pp. 508/509): "... But it is said that under section 302 of the Companies Act, 1948, the 'liabilities' which the liquidator in a voluntary winding-up....
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....sidering this question, the Court held as follows (p. 247): "No doubt the words 'liability' and 'contingent liability' are more often used in connection with obligations arising from contract than with statutory obligations. But I cannot doubt that if a statute says that a person who has done something must pay tax, that tax is a 'liability' of that person. If the amount of tax has been ascertained and it is immediately payable it is clearly a liability; if it is only payable on a certain future date 'it must be a liability which has' not matured at the date of 'death' within the meaning of section 50(1). If it is not yet certain whether or when tax will be payable, or how much will be payable, why should it not be a contingent liability under the same section ?" 22. Mr. Setalvad also relied upon Black's Law Dictionary, 6th Edition, p. 499 wherein the word "due" has been defined as meaning "presently payable". 23. Mr. Setalvad also relied upon the case of Stockton Malleable Iron Co., In re [1875] LR 11 Ch. D. 101. In this case, the Company had a first and paramount lien upon all shares of any member for any money due to the Company from him alone or jointly with any other person....
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....-tax Act. Before me nobody has disputed this proposition. However, as Mr. Setalvad has cited authorities, it may only be mentioned that in support of this contention, he relied upon the case of Union of India v. India Fisheries (P.) Ltd AIR 1966 SC 35. In this case, the Supreme Court was considering the provisions of the Income- tax Act and the Companies Act. The Supreme Court held that section 49E of the Income-tax Act which entitled the Tax Authorities to adjust the refund amount due against any other tax due did not apply when the provisions of the Companies Act were attracted. Mr. Setalvad also relied upon the authority in the case of S. V. Kondaskar, Official Liquidator v. V.M. Deshpande, ITO AIR 1972 SC 878. In this case also, the Supreme Court held that while the Company Court could not determine what tax was due once the Tax Authorities determined the tax due, it was for the Company Court to decide whether the claim was a lawful liability and also to decide to what extent the Income-tax Depart-ment would get priority. 27. Mr. E.P. Bharucha Fully Supported Mr. Setalvad. He Further Submitted that it was not as if the demands for revenues, taxes, cesses and rates were existi....
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....he date of Notification in assessment year 1993-94. He submitted that that would create the problem of ascertaining how tax for that period was to be computed. 30. Mr. Parekh also submitted that normally owners are free to deal with their assets, even if they are debtors for large amounts to several Banks and Financial Institutions. He submitted that as a normal rule, Banks and Financial Institutions have security on the assets of debtors which over- ride tax claims of the State. He submitted that under normal circum- stances, any normal Civil Court would have taken a long time before all claims were settled and all disputes adjudicated upon. He submitted that the Parliament was aware that the Scam took place because of collusion of public servants, bank officials and brokers who diverted the funds into the hands of private parties. He submitted that the Parliament intended to provide a quick remedy for recovery by the Banks and Financial Institutions. He submitted that the interpretation must be one which would further this object and not render it nugatory. He submitted that unless the Court accepts the interpretation given by Mr. Setalvad, the liabilities under section 11(2)(a)....
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....in those twelve months next before the relevant date, ascertainable if necessary later, if not already ascertained. The Supreme Court has thus interpreted the word "due" as meaning "due and payable but hot necessarily ascertained". 34. Mr. Jaisinghani further submitted that if the interpretation of Mr. Setalvad is accepted, then it would mean that most notified parties would in effect have no tax liabilities which are to be paid in priority. This submission has been dealt with in greater detail by Mr. Mistry and is set out hereafter. 35. Mr. Mistry supported Mr. Jaisinghani. He submitted that interpreta- tion of Mr. Setalvad cannot be accepted. He submitted that if it is held that only those tax liabilities which were assessed and in respect of which demands were made fall under section 11(2)(a), then in effect and in practical terms only tax liabilities for the year ending 31st March, 1990 would be payable under section 11(2)(a). Mr. Mistry submitted that the liability for tax arises on the last date of an assessment year. In support of this, he relied upon the authority in the case of CWT v. K.S.N. Bhatt [1984] 145 ITR 1. In this case, the Supreme Court has held that the income....
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....se may be carried in second appeal to the Appellate Tribunal, in reference to the High Court and ultimately in appeal before this Court. At every stage, the endeavour of the authority. Tribunal or court is to adjudicate on questions which will lead in the final result to a true determination of the tax liability. There may be cases where the assessment finally made may be re-opened in accordance with the procedure and subject to the conditions stated in the relevant statute. There may also be cases where a rectification of apparent errors is effected pursuant to jurisdiction granted by the relevant statute. Both these proceedings are similarly intended for the true quantification of the tax liability...." 38. Mr. Jethmalani supported Mr. Jaisinghani and Mr. Mistry, in support of his submissions, he relied upon the authority in the case of Chatturam v. CIT [1947] 15 ITR 302 (FC), wherein it is held as follows (pp. 307-8): "It was next contended that in the present case notices under section 22(1) and (2) of the Income-tax Act were already issued before the Notification of 26th May, 1940. The notices were the foundation of the jurisdiction of the Income-tax Officer. At that time th....
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....the duty of the subject to whom a notice is given to render a return in order to enable the Crown to make an assessment upon him; but the charge is made in consequence of the Act, upon the subject; an assessment is only for the purpose of quantifying it'. He quoted with approval the following passage from the judgment of Sargant, L.J., in the case of Williams (not reported): 'I cannot see that non-assessment prevents the incidence of the liability, though the amount of the deduction is not ascertained until assessment. The liability is imposed by the charging section, namely, section 38 (of the English Act) the words of which are clear. The subsequent provisions as to assessment and so on are machinery only. They enable the liability to be quantified, and then quantified to be enforced against the subject, but the liability is definitely and finally created by the charging section and all the materials for ascertaining it are available immediately'." 39. Mr. Jethmalani also relied upon the authority in the case of Kesoram Industries & Cotton Mills Ltd v. CWT [1966] 59 ITR 767. In this case, the Supreme Court has again reiterated that the liability for tax arises on the last day o....
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....e Legislature gave a first priority to revenues, taxes, cesses and rates, it did so anticipating that there would be enough left over to pay the Banks and Financial Institutions. The Legislature was aware that liabilities like revenues, taxes, would have priority over unsecured creditors. The Legislature was aware that most of the money which has been siphoned out was in transactions in securities. Banks and Financial Institutions who had lost monies under securities transactions would, in most cases be unsecured creditors. The fact that a priority is given to revenue, taxes, cesses and rates clearly indicates that, even though the object was to return monies lost by the Banks and/or Financial Institutions, it was not to be at the cost of revenue, taxes, cesses and rates. The priority normally available to these claims over unsecured creditors is maintained. Under the Special Courts Act, the relevant period is between 1st April, 1991 to 6th June, 1992. This for purposes of the Special Courts Act is (for want of a better term) the 'year of the Scam'. In my view, it is clear that the intention of the Legislature was to pay off, in priority, 'liabilities due' during the year of the. s....
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....er the Special Courts Act, is the date of Notification. 46. However, the question still arises whether the taxes, which are to be paid in priority, are only those where an assessment has taken place and demand made prior to date of Notification. The Legislature was well aware that it normally takes 2 to 3 years before final assessment is completed and demands made. Thus in practical terms only assessments and demands for the years 1989-90 or at the most 1990-91 would have been made. In practical terms assessments for the year of the scam would not have been made. To accept the arguments of Mr. Setalvad, Mr. Parikh and Mr. Bharucha would mean that under section 11(2)(b) amounts due up to date of Notification are to be paid, but under section 11(2)(a) taxes due up to assessment year 1989-90 and/or at the most 1990-91 would be paid in priority. This would necessitate giving a different meaning to the word 'due' under section 11(2)(a) and under section 11(2)(b) . In my view, the Legislature clearly intended a same point of time when it used the word 'due' in both sub-sections of section 11. An interpretation which arbitrarily gives different meanings should not be and is not accepted.....
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....ied and crystallised. Thus if assessments are not completed Court will not have before it any ascertained and/or quantified amount. The priority would then be lost. Similarly if assessment for any year has been reopened and the reassessment proceedings are in progress the Court whilst distributing will only take into account figures as per the earlier assessments. This will be so unless and until the re-assessment proceed- ings are completed and an order passed. This, in my view, will also have the effect of encouraging the Income-tax Department to proceed expedi-tiously and not in its usual slow manner. 49. This, so far as question No. 1 is concerned. 50. As set out above, the second question is : "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." 51. The Learned Advocate General has drawn the attention of this Court to a para in Law of Income-tax by Kanga & Palkhivala. On page 1630, it has been mentioned as follows : "Power to levy penalty. - Penalty is not additional tax. -....
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....f penalty imposed. The Supreme Court held that imposition of penalty is a necessary concomitant or incident of the process of assessment, levy and collection of tax. 54. The Learned Advocate General also relied upon the authority in the case of CIT v. Express Newspapers (P.) Ltd. [1978] 111 ITR 347. In this case, after considering various authorities, the Madras High Court has held that penalty is not an additional tax. 55. Mr. Andhyarujina also referred to Law of Income-tax by Sampat and Iyer, 8th Edition, wherein on pages 4524-5 and 5919-20 it is observed as follows : "6. Tax, penalty, interest, fine or any other sum. - These different expressions denote different things. The expression 'tax' has been defined in section 2(43) to mean income-tax and super tax (so long it was leviable). It is different from penalties, fines and interest levied under the Act (116 ITR 620), but it includes the surcharge and additional surcharge, if any, levied under the relevant Finance Act (83 ITR 346; 101 ITR 24). Tax and penalty are different (149 ITR 233) though penalty has sometimes been described as additional tax (41 ITR 425; 42 ITR 123). So also tax and interest are distinct and different ....
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....ed upon the authority in the case of Bhor Industries Ltd. v. CIT AIR 1961 SC 1100 wherein the Supreme Court held that interest is not to be treated as tax even though it is recoverable along with tax. 58. Mr. Andhyarujina also relied upon the authority in the case of P.S. Subramanyan, ITO v. Simplex Mills Ltd. [1963] 48 ITR 182 wherein the Supreme Court rejected the contention that interest was part of tax. The Supreme Court held that it cannot obviously be suggested that interest is tax paid by the assessee. 59. The Learned Advocate General also relied on the authority in the case of CIT v. Nonshi Devshi Kattawala (P.) Ltd. [1962] 45 ITR 47 (Ker.). In this case, the Kerala High Court has held that tax, interest and penalty are three distinct and different items dealt with under the Income-tax Act. 60. The Learned Advocate General also relied upon the authority in the case of CIT v. T. Raja & Satyanarayana Murthy [1974] 96 ITR 175. In this case, the Andhra Pradesh High Court has held that proceedings for levy of penalty are independent proceedings and the appropriate stage for levy of penalty is after the completion of the assessment proceedings. 61. Mr. Setalvad supported the ....
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....y pointed out that under section 229 of the Income-tax Act, interest, fine and penalty are to be recovered as tax. They pointed out that if interest, penalty and fine were tax, then there would be no need for a section like section 229. They pointed out that section 229 had to be incorporated because interest, penalty and fine are not tax. They also relied upon the authority of the Supreme Court in the case of Associated Cement Co. Ltd v. CTO AIR 1981 SC 1887. In this case, the Supreme Court has held that tax, interest and penalty are three different concepts. 66. They also relied upon the authority in the case of Bhor Industries Ltd (supra) . Here again it has been held that interest is different from tax. 67. On the other hand, Mr. Bobde, Dr. Balasubramanian, Mr. Chatterjee and Mr. Vyas have submitted that penalty is an additional tax. They relied upon the judgment of the Supreme Court in the abovementioned two cases, viz., C.A. Abraham's case (supra) and Bhikaji Dadabhai & Co.'s case (supra). They submitted that these authorities of the Supreme Court are very clear and that they would be binding on this Court. 68. Mr. Vyas also submitted that the Income-tax Act is enacted by ....
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....of process of assessment must be deemed to be tax. 70. I have considered the rival submissions. In my view, the question of interpretation of statute only comes in if there is any ambiguity in the statute. In my view, so far as this question is concerned, the provisions of the Special Courts Act are very clear. Under the Special Courts Act, what is given priority to is only 'revenue, tax, cess and rates'. The term "tax" has been defined under the Income-tax Act itself. Under section 2(43) , "tax" only means in relation to an assessment year the income-tax chargeable under the provisions of this Act. There cannot be the slightest doubt that neither penalty nor interest is income-tax. The authorities of the Supreme Court which are relied upon and referred to by Mr. Bobde do not lay down that for all purposes penalty must be construed to be an additional tax. As is seen in the Provincial Insolvency Act, 1920 and the Presidency-Towns Insolvency Act, 1909, priority is given to all debts of the Government. If the intention was to give priority to all debts, then the Legislature would have used the same term under the Special Courts Act also. Under the Special Courts Act, the Legislature....
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....sing penalty under the Income-tax Act. Also Banks and Financial Institutions continue to charge interest and in some cases even penal interest on unpaid amounts. A notified party may have enough assets to pay advance tax and/or the amount of the demand notice, yet the notified party is unable to do so as all his assets are attached and the time for distribution has not yet arisen. Similarly a notified party having sufficient assets may have opted to pay off some Bank or Financial Institution. This so that interest would stop running. Yet now the provisions of the Special Courts Act prevent the notified party from making any payments. It is in this context that the Court raised the question whether penalty and/or interest can be levied or charged on notified parties after the date of Notification. 73. The Learned Advocate General relied upon the case on Rajratna Naranbhai Co. Ltd. (supra) . He submitted that a Notification under the Special Courts Act has the same effects as a winding-up and/or bank ruptcy. He submitted that this being the case, the Court must apply the same principles as apply in cases of bankruptcy. 74. Mr. Setalvad supported the Learned Advocate General. He rel....
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....nterpretation which would lead to an unreasonable result must be disregarded. He submitted that the Court must adopt an interpretation which must be reasonable and practical. He submitted that, after the legal disabilities in which the notified party is placed, if the Court were to still hold that the notified parties continue to remain liable to pay interest and/or penalty, then it would lead to very unfair results. He submitted that in most cases it would make the notified party bankrupt or insolvent. He submitted that for this reason, the Court must hold that the notified party is not liable to pay any penalty or interest. Mr. Jaisinghani, Mr. Mistry and Mr. Jethmalani supported these arguments. 79. Mr. Bharucha on the contrary submitted that there is no abrogation of any rights of any parties. He submitted that in the absence of any express provision abrogating any right, the right to claim interest would continue to run. He fairly admitted that the notified parties were under a disadvantage. He submitted that however that would not mean that Banks and Financial Institutions could not charge interest. He submitted that it would be for the Court, to keep in mind the fact of the....
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.... granted to the notified party. He submitted that a notified party continued to remain bound by the provisions of the Income-tax Act. He submitted that if a contrary view was taken, then there would be exercise of discretion in favour of notified/guilty parties which discretion would not exist in favour of an ordinary/good citizen of the country. 82. Dr. Balasubramanian also submitted that by virtue of sections 2 and 11 of the Special Courts Act, in effect a notified party was put into a civil death. He submitted that the notified party had an absolute disability. He submitted that the Custodian became a Representative Assessee on behalf of the notified parties. He submitted that now it was the duty and the obligation of the Custodian to file returns and pay taxes. 83. At this stage Mr. Bobde interrupted and informed Court that these must not be deemed to be arguments on behalf of the Income-tax Department. One Mr. K.V.M. Pai, Commissioner of Income-tax, II Circle also asked Mr. Bobde to inform Court that Dr. Balasubramanian was not instructed by the Tax Department to make any such submissions on their behalf. Dr. Balasubramanian then stated that he was merely assisting the Court....
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....contract as a whole or to perform his obligation as regarding payment of interest. Mr. Tulzapurkar submitted that the only disability contemplated by law is under section 56 of the Contract Act. He submitted that the Special Courts Act does not frustrate any contracts. Mr. Tulzapurkar submitted that the effect of frustration under section 56 would be that the other party would also stand discharged of the contract. He submitted that almost all the notified parties have in fact approached this Court for fulfilment of contracts by way of Applications for rights shares, by way of payment of instalments for purchase of properties, for permission to complete agreements to sell, etc. He submitted that this Court has in fact granted those Applications and permitted performance of those contracts. He submitted that so long as the contract subsists, the obligation to pay interest and/or penalty does not stand frustrated. 87. Mr. Tulzapurkar submitted that merely because performance be- comes more onerous, it does not lead to a discharge of the contract on the ground of impossibility. He pointed out that under section 537 of the Companies Act, the Official Liquidator could disclaim onerous ....
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....aju v. Pulavarthi Lakshmanaswami AIR 1931 Mad. 729. 92. Mr. Tulzapurkar also referred to the provisions of the Insolvency Act and the Companies Act. He pointed out that under section 49 of the Presidency-Towns Insolvency Act, 1909 as well as under section 61(6) of the Provincial Insolvency Act, 1920, even in cases of insolvency, interest is payable. He submitted that a notified party should not be put on a higher footing. 93. Mr. Tulzapurkar relied upon the authority in the case of Dehra Dun Mussoorie Electric Tramway Co. Ltd., In re AIR 1934 All. 189 wherein it was held that on a winding-up of a company, a creditor should be given interest before paying preferential shareholders. The Court also held that interest need not be granted at the contractual rate. 94. Mr. Tulzapurkar also relied upon the case of Sabapathi Rao v. Sabapathi Press Co. Ltd.[1931] Comp.Cas. 102 (Mad.) wherein it has been held that if there is a surplus, then the appropriation should be first towards interest and then towards principal. 95. Mr. Tulzapurkar submitted that there was no disability. He submitted that in many cases, the notified parties have no monies to repay the amounts due to Banks and Finan....
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....ication, the Court can at that stage absolve him from the liability to pay interest or reduce the interest. In such cases Court would not permit penalty to be levied. However if the notified party did not have assets enough to meet his liability, then merely because he is notified will not absolve him from liability to pay interest and/or penalty. This because even if he had not been notified he would still have been at default and been liable to pay interest and/or penalty. In this case the Notification has made no difference. Another type of case would be where a notified party is prevented, by reason of Notification, from doing things which are required to be done by him under other Acts or contracts. In such cases, if the provisions of the Special Courts Act prevents a Notified Party from doing that thing, then by reason of this legal disability, no penalty or interest can be levied on that party. Thus no penalty or interest can be imposed for non-fulfilment of an act which a Notified Party is prevented from doing by reason of the Special Courts Act. In such cases even though the provisions of some other Act or contract lay down consequences for non-performance, the provisions ....
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....o pay interest at 1.5% per month. Here again by reason of the legal disability, imposed by the Special Courts Act, the notified party is not in a position to pay the amounts demanded by that demand notice. If that is so, then the notified party cannot be said to be in default. Then there is no question of the notified party becoming liable to pay interest under section 220(2). The same would apply in respect of penalty under the Income-tax Act. Thus, in cases where, by reason of the legal disability, a notified party is prevented from doing something there can be no levy of interest or penalty on the notified party for not doing that thing. However where the Special Courts Act does not prevent a party from doing something required to be done under some other Act/contract and the notified party does not perform his obligation he will be liable to pay interest and/ or penalty. Just by way of example under the Income-tax Act, penalty can be levied for not filing a return; penalty can be levied for failure to produce evidence to support the return of income. These are not matters where any disability is imposed on a notified party by the Special Courts Act. There is nothing in the Spec....