TaxTMI 
TaxTMI 
2006 (1) TMI 257
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....lats in a building called Madhuli Apartments in Worli area of Mumbai. The family of the Appellants consists of four brothers, their wives, children and their widowed mother. The eldest among them, Harshad S. Mehta, has since expired. The said nine flats, it is said, were merged and redesigned for joint living of the entire family. The Appellants herein and the said late Harshad Mehta were persons notified in terms of the Act which was enacted to provide for the establishment of a Special Court for the trial of offences relating to transactions in securities and for matters connected therewith. In terms of the provisions of the Act along with late Harshad Mehta, the Custodian had notified 29 entities in terms of section 3 of the Act, comprising three of his younger brothers, wife of late Harshad Mehta, wives of two of his younger brothers and other corproate entities, a partnership firm and three HUFs. However, out of the said 29 entities, only Late Harshad Mehta and two of his younger brothers were cited as accused in various criminal cases filed against them. The properties of Late Harshad Mehta and the Appellants, herein being notified persons stood attached in terms of the....
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....sion thereof to the custodian within a period of four weeks from the date on which the custodian sends them communication asking them to vacate the flats, on sale of the flats being sanctioned by the Court. The custodian shall permit the members of family of late Shri Harshad Mehta to occupy the flats during the time that the process of the sale of the flats goes on. In case on such undertakings are filed by the adult members as directed above, within the aforesaid period, the custodian shall stand appointed as receiver of the flats which are described in Exh. 8 and Exh. 8-1 to Mics. petition No. 41 of 1999." Contentions of the parties Appellants 6. Mr. Mahesh Jethmalani, learned senior counsel appearing on behalf of the Appellants in assailing the said judgment of the learned Special Court inter alia raised the following contentions: (i)Some of the entities having their asset base much more than actual liability, the impugned judgments are unsustainable. There was no occasion for the Custodian to club all the notified entities in one block so as to be termed as Harshad Mehta Group and/or to club their assets and liabilities jointly. Although in relation to a body co....
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.... (ii)The applications for de-notification filed by the Appellants herein having been withdrawn, the contention raised by the Appellants that they are not liable in terms of the provisions of the Act are not open to question, particularly, in view of the fact that no application for de- notification could be filed subsequently as they had become barred by limitation. (iii)The order of assessment under the Income-tax Act having become final and binding as on the date when the orders of assessment were passed and, thus, mere filing of appeals, were not sufficient for raising a contention that the taxes did not become due. Reliance in this behalf has been placed on B.C. Dalal v. Custodian [Civil Appeal No. 2795 of 2004] and Kedarnath Jute Mfg. Co. Ltd. v. CIT [1972] 3 SCC 252. (iv)The Appellants herein, apart from the corporate entity which is a front company of late Harshad Mehta, have received large loans, advances and credits from the Harshad Mehta Group and there had been intermingling of the assets to the tune of crores of rupees, they cannot escape their liabilities under the Act. The affidavit filed by the Appellant hereinbefore the Special Court clearly shows that the lia....
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....ularities 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 the 6-6-1992. 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." 9. Section 3 of the Act provides for appointment and functions of the Custodian. Sub-section (2) of section 3 postulates that 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, 1....
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....therein. Section 11 of the Act reads as under: "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 be, in the order as under: (a )all revenues, taxes, cesses and rates due from the persons notified by the Custodian under sub-section (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." Analysis of the statutory provisions 11. The Act provides for stringent measures. It was enacted for dealing with an extraordinary situation in the sense that any person who was involved in any offence relating to transaction of any security may be notified whereupon, all his properties stand attached. The provision contained in the Act being stringent in n....
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.... It must refer to an ascertained liability for payment of taxes quantified in accordance with law. In other words, taxes as assessed which are presently payable by the notified person are taxes which have to be taken into account under section 11(2)(a) while distributing the property of the notified person. Taxes which are not legally assessed or assessments which have not become final and binding on the assessee, are not covered under section 11(2)(a) because unless it is an ascertained and quantified liability, disbursement cannot be made. In the context of section 11(2), therefore, "the taxes due" refer to "taxes as finally assessed'. In regard to Question No. 2, it was opined: "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. Such tax liability may be discharged either under the directions of the Special Court under section 11(2)( c), or the taxing authority may recover the same from any subsequently acquired property of a notified person (vide Tejkumar Balakrishna Ruia v. A.K. Menon) or in any other manner from the notified person in ....
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.... 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 out of the funds in the hands of the Custodian." 15. In regard to Question No. 5, this Court agreed with the finding of the Special Court that neither penalty nor interest can be considered as tax under section 11(2)(a) of the Act. 16. So far as Question No. 6 is concerned, it was held that the remedy of a notified person who is assessed to penalty or interest, after the notified period, would be entitled to move the appropriate authority under the taxing statute stating: "If it is open to him under the relevant taxing statute to contend that he was unable to pay his taxes on 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 ....
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....ting: ". . . It is enough for the purpose of this appeal to hold that section 29(2) of the Limitation Act, 1963 does not apply to proceedings under section 4(2) of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992. Since the appellant's petition of objection had been filed much beyond the period prescribed under that section, the Special Court was right in rejecting the petition in limine. The appeal is accordingly dismissed but without any order as to costs." (p. 519) Attachment of properties 20. The Appellants herein are notified persons in terms of the provisions of the Act. Therefore, all the properties belonging to them stand attached. Such attachment being automatic, no finding was required to be arrived at that the same had been acquired either during the notified period or the Appellants were involved in offences in transactions in securities. 21. In Tejkumar Balakrishna Ruia v. A.K. Menon [1997] 9 SCC 123, this Court held: "In our view, the terms of sub-section (3) of section 3 are clear. By reason thereof, the property that belongs to a notified person stands attached simultaneously with the issue of the notification tha....
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....nvolved in offences in transactions in securities could have been proceeded against in terms of the provisions of the Act. (ii)Whether individual liabilities of the Appellants ought to have been separately considered by the Special Court as not a part of Harshad Mehta Group. (iii)Whether the tax liabilities could not have been held to be due as the order of assessments did not become final and binding. (iv)Whether the commercial properties could have been sold in auction. (v)Whether the residential properties should have been released from attachment. 23. Before adverting to the questions raised herein, we may notice that both the parties have raised several contentions before us which have not precisely been raised before the learned Special Judge. Several subsequent events have also been brought to our notice. The parties have also filed several charts before us showing individual assets and liabilities. It has, as noticed hereinbefore, further been contended that various best judgment assessments passed by the Assessing Authority against some of the Appellants have been set aside in appeal and the matters are pending reassessment before the Assessing Authority. ....
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...., are concerned." (p. 675) 28. Although, we do not intend to enter into the correctness or otherwise of the said contention of the Appellants at this stage, however, there cannot be any doubt whatsoever that they being notified persons, all their properties would be deemed to be automatically attached as a consequent thereto. For the said purpose, it is not necessary that they should be accused of commission of an offence as such. 29. The contention of the Appellants to the effect that their properties should have been attached only towards the liabilities incurred by the parties in respect of the transactions made during the Statutory Period, cannot be accepted as all the appellants being notified, the attachment of the assets would be automatic - L.S. Synthetics Ltd.'s case (supra). 30. However, the contention of the Appellants that the properties held by them otherwise are sufficient to meet their liabilities was required to be gone into, as, in our considered opinion, there cannot be any dispute that the Appellants have such a right. A corporate veil indisputally can be lifted on several grounds. Lifting the corporate veil 31. The principal of lifting the corp....
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....venue on interest are given by the Custodian. (ii)Liabilities have been shown in relation to unperformed contracts. (iii)Credits not given for relief obtained from Income-tax. Subsequent to the filing of the present appeal in a large number of cases the revenue demands have been set aside. 33. It is open to the Appellants, herein to show that even if they continued to be notified, the Custodian was not right in clubbing all the individual members of the family as a single entity styled as Harshad Mehta Group. It is interesting to note that the properties belonging to the mother of Harshad Mehta has since been released from attachment. 34. The learned Special Court, despite, such a contention having been raised by the Appellants in their affidavit in reply did not advert thereto. It is furthermore not in dispute that pursuant to or in furtherance of the directions issued by the learned Special Court, the accounts of all entities, be it corporate or individual, were drawn up separately which approach had not been disapproved by the Auditor appointed by the Special Court. Even in the rejoinder filed by the Custodian, e.g., paragraphs 14, 20, 21 and 22, before the Special C....
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....dual basis and the effect thereof, in our opinion, should have received serious consideration at the hands of the learned Special Court. 40. The Custodian in terms of the directions issued by the learned Special Court had affirmed an affidavit putting on record the assets and liabilities of each of the members of the so-called Harshad Mehta Group on an individual basis. Allegedly, therein it was shown that the individuals had received large loans, advances, credits from the Harshad Mehta Group and there had been intermingling of the assets to the tune of crores of rupees. Before us, Mr. Desai had filed a chart for showing the same. The said chart, however, shows that at least Mrs. Deepika Mehta held assets more than her liabilities. Mr. Desai contended that if interest is calculated, liabilities would be more than assets. But, the said chart has been drawn up on the basis of the audited accounts, the correctness whereof is itself in dispute. Before us a chart has been produced by the Appellants herein as regards Mrs. Deepika Mehta to show her liabilities payable as on 8th June, 1992 which are as under : "Chart showing comparison of payables as on 8th June, 1992 : ....
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....only taken huge loans or advances from Harshad Mehta in one capacity or the other but also even transactions and shares were made by Harshad Mehta on their behalf. Further contention of the Custodian is that even Dr. Hitesh Mehta and Dr. Pratima Mehta have admitted that they had no knowledge about the transactions. This may be so, but then the effect of the rival contentions was required to be gone into by the learned Special Court. A finding of fact arrived at upon discussing and analyzing the respective contentions could have gone a long way in assisting this Court in arriving at a correct conclusion. The learned Judge proceeded on the basis that the assets and liabilities, joint and collective, of all those who are related with Harshad Mehta as also the corporate entities in which he was a Director or had some other interest must be considered as a group. Even in this behalf, it was necessary for the Special Judge to assign sufficient and cogent reasons. 43. A question may further arise as to whether the learned Judge was correct in considering the individual liabilities of the notified parties as the liabilities of the group. If those individuals, who had no connection with ....
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....tax dues should have been considered at the point of time when they become recoverable cannot be accepted having regard to the 3-Judge Bench decision of this Court in B.C. Dalal's case (supra) wherein this Court categorically held that in absence of any order of stay granted by the higher court, the liabilities would remain. 47. We may further notice that the learned Special Court relied upon a decision in Custodian v. Union of India [Misc. Petition No. 64 of 1998, dated 17-8-2000 wherein allegedly a dichotomy between sale and distribution was sought to be resolved in terms of the decision of this Court in Harshad Shantilal Mehta's case (supra), the appeal whereagainst being Civil Appeal No. 5812 of 2000 was dismissed by this Court by an order dated 4-12-2000 stating that it was in agreement with the decision of the Special Court which called for no interference. 48. This Court, therefore, has laid down a law that mere filing of an appeal is not sufficient, particularly, when there is no order of stay on recovery has been granted and the demand is outstanding. 49. In Kedarnath Jute Mfg. Co. Ltd.'s case (supra), this Court has held : ". . . Although that liability cannot....
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....e diverted from banks and financial institutions by Late Harshad Mehta which were in turn diverted to his family concerns and family members. These moneys were used for speculative transactions and securities and the profits generated was used for acquiring assets. 53. The learned Special Court, having not arrived at such a finding, this Court is not in a position to go into the correctness or otherwise thereabout. 54. In any view of the matter, the learned Judge, Special Court having not dealt with the question as regard the mode and manner of disbursements of the amount so far as the tax liabilities of the Appellants are concerned elaborately, the same requires fresh determination in the light of the decision of this Court in Harshad Shantilal Mehta's case (supra). 55. In fact, the Appellants have brought on records various orders passed by Income-tax Appellate Authorities to show that the demands of the revenue have been set aside. 56. Furthermore, the orders of the appellate authority have been passed during pendency of this appeal. This Court, it is trite, can take into consideration the subsequent events. Such subsequent events could also be taken into considerati....
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....id not dispute the commercial properties being put to sale by the Custodian. 61. In that view of the matter, evidently, creation of any third party interest is no longer in dispute nor the same is subject to any order of this Court. In any event, ordinarily, a bona fide purchaser for value in an action sale is treated differently than a decree holder purchasing such properties. In the former event, even if such a decree is set aside, the interest of the bona fide purchaser in an auction sale is saved. See Zain-ul-Abdin Khan v. Muhammad Asghar Ali Khan 15 IA 12. The said decision has been affirmed by this Court in Gurjoginder Singh v. (Smt.) Jaswant Kaur [1994] 2 SCC 368. 62. In Janak Raj v. Gurdial Singh [1967] 2 SCR 77, this Court confirmed a sale in favour of the Appellant therein who was a stranger to the suit being the auction purchaser of the judgment-debtor's immovable property in execution of an ex parte money decree in terms of Order XXXI Rule 92, Civil Procedure Code. Despite the fact that ordinarily a sale can be set aside only under rules 89, 90 and 91 of Order XXXI, it was opined that the court is bound to confirm the sale and direct the grant of a certificate ves....
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....h by the learned Judge, Special Court. The purchasers have also filed applications for their impleadment in these appeals. We, however, have not heard the purchasers as the question as to whether the auction sale of the said flats will be confirmed or not will depend upon the ultimate finding of the learned Judge, Special Court upon consideration of the matter afresh in the light of the observations made hereinbefore. 67. We, therefore, would direct that the confirmation of sale of those flats be considered and appropriate order thereupon may be passed by the learned Special Court while considering the matter afresh. In the light of the directions issued herein, it would be for the purchasers of the said flats to wait till a final decision is made or take back the amount deposited by them, subject to any other or further order(s) that may be passed by the learned Special Judge. Conclusion 68. In view of our foregoing discussions, we are of the opinion that : (i)The contention of the Appellants that they being not involved in offences in transactions in securities could not have been proceeded in terms of the provisions of the Act cannot be accepted in view of the fact t....
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.... thereafter. The Custodian may also take assistance and/or further assistance from a Chartered Accountant of his choice. A reply and/or rejoinder thereto shall be filed within one week from the date of the receipt of the copy of the objection. The parties shall file their respective documents within one week thereafter. Such documents should be supported by affidavits. Both the parties shall be entitled to inspect such documents and filed their responses thereto within one week thereafter. The parties shall file the written submissions filed before this Court together with all charts before the learned Special Judge, Special Court within eight weeks from the date. (viii)The learned Judge, Special Court shall allow the parties to make brief oral submissions with pointed reference to their written submis- sions. Such hearing in the peculiar facts and circumstances of this case should continue from day to day. (ix)The learned Judge, Special Court while hearing the matter in terms of this order shall also consider as to whether the auction sale should be confirmed or not. It will also be open to the learned Judge, Special Court to pass an interim order or orders, as it may think ....