Full Judgment Text
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CASE NO.:
Appeal (civil) 6316-23 of 2005
PETITIONER:
Tax Recovery Officer,Central Range-1
RESPONDENT:
Custodian the Special Court( T.O.R.T.S) Act, 1992 & ors.
DATE OF JUDGMENT: 17/08/2007
BENCH:
G.P. Mathur & P.K. Balasubramanyan
JUDGMENT:
J U D G M E N T
G.P. Mathur, J.
These appeals have been filed by Tax Recovery Officer,
Central Range-1, under Section 10 of the Special Courts (Trial Of
Offences Relating To Transactions In Securities) Act, 1992
(hereinafter referred to as the \021Special Courts Act\022) against the
order dated 24.2.2005 of the Special Court passed on Intervention
Application Nos. 458 to 465 of 2004 in Execution Application
Nos. 98 to 105 of 2001 in Miscellaneous Petition Nos. 189/95,
92/96, 102/95, 188/95, 103/95, 251/95 and 252/95.
2. The custodian exercising powers under Section 3(2) of the
Special Courts Act published the name of M/s. Dhanraj Mills Pvt.
Ltd. in gazette as a notified person. In view of Section 3(3) of the
Special Courts Act all the assets belonging to the notified party
stands attached to the Special Court. Thus, the assets of M/s.
Dhanraj Mills Pvt. Ltd. stood attached to the Special Court. It was
found that M/s. Killick Nixon Pvt. Ltd. and its 13 group companies
owed substantial amount of money to M/s. Dhanraj Mills Pvt. Ltd.
and M/s. Killick Nixon Pvt. Ltd. also stood as guarantor for the
repayment of the money. The custodian on behalf of M/s. Dhanraj
Mills Pvt. Ltd. filed suits for recovery of its dues against M/s.
Killick Nixon Pvt. Ltd. and its 13 group companies. The Special
Court passed decrees against M/s. Killick Nixon Pvt. Ltd. and its
group companies on 18.9.1997. The custodian then filed Executing
Applications bearing Nos. 98 to 105 of 2001 before the Special
Court for recovery of the decretal amount on behalf of M/s.
Dhanraj Mills Pvt. Ltd. The Special Court on 14.2.2003 appointed
a receiver for taking charge of certain assets and properties of M/s.
Killick Nixon Pvt. Ltd. and the other group companies which were
sufficient to satisfy the entire decretal amount. Subsequently
thereto the properties of M/s. Killick Nixon Pvt. Ltd. were put to
auction and money was realized. It appears that a certified
demand of Rs.25.88 crores against M/s. Killick Nixon Pvt. Ltd.
was pending for recovery by the Tax Recovery Officer, Central
Range-1, Mumbai. On 25/30.8.2004 the Tax Recovery Officer
filed Intervention Application Nos. 450 to 465 of 2004 before the
Special Court with a prayer that the custodian be directed to
consider the claim of recovery of arrears of income tax from M/s.
Killick Nixon Pvt. Ltd. on a priority basis before distribution of
sale proceeds to any other creditor. A further prayer was made that
the custodian be restrained from distributing the sale proceeds
without first satisfying the claim of the income tax department. On
1.9.2004 the Special Court passed an order directing the custodian
to submit a report which was complied with by the custodian on
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19.6.2004. On 24.11.2004 the Special Court passed an order
confirming the sale of the property of M/s. Killick Nixon Pvt. Ltd.
to the highest bidder M/s. Gama Constructions for Rs.30 crores.
The Intervention Applications filed by the Tax Recovery Officer
were, however, rejected by the Special Court on 24.2.2005 by the
following order: -
\023By these applications, recovery orders against a third
party which is not a notified party, are sought. These
applications are not maintainable before this court.
Applications disposed of.\024
It is this order which is subject matter of challenge in the present
appeal.
3. Before adverting to the submissions made by the learned
counsel for the parties it will be convenient to set out the relevant
provisions of the Special Courts (Trial Of Offences Relating To
Transactions In Securities) Act, 1992 which have a bearing on the
controversy in hand. Section 3, sub-sections (1), (2) and (3) of
Section 9A, Sections 11 and 13 of the Special Courts Act read as
under: -
\0233. 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 sub-section (2),
any property, movable or immovable, or both,
belonging to any person notified under that sub-
section shall stand attached simultaneously with the
issue of the notification.
(4) The property attached under sub-section (3) shall
be dealt with by the Custodian in such manner as the
Special Court may direct.
(5) The Custodian may take assistance of any person
while exercising his powers or for discharging his
duties under this section and section 4.\024
\0239A. Jurisdiction, powers, authority and procedure
of Special Court in civil matters. (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
sub-section (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 sub-section (2) of section
3 is involved as a party, broker, intermediary or
in any other manner.
(2) Every suit, claim or other legal proceeding
(other than an appeal) pending before any court
immediately before the commencement of the Special
Court (Trial of Offences Relating to Transactions in
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Securities) Amendment Act, 1994, being a suit, claim
or proceeding, the cause of action whereon it is based
is such that it would have been, if it had arisen after
such commencement, within the jurisdiction of the
Special Court under sub-section (1), shall stand
transferred on such commencement to the Special
Court and the Special Court may, on receipt of the
records of such suit, claim or other legal proceeding
proceed to deal with it, so far as may be, in the same
manner as a suit, claim or legal proceeding from the
stage which was reached before such transfer or from
any earlier stage or de novo as the Special Court may
deem fit.
(3) On and from the commencement of the Special
Court (Trial of Offences Relating to Transactions in
Securities) Amendment Act, 1994, no court other than
the Special Court shall have, or be entitled to exercise,
any jurisdiction, power or authority in relation to any
matter or claim referred to in sub-section (1).\024
\02311. 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.\024
\02313. Act to have overriding effect - The provisions
of this Act shall have effect notwithstanding anything
inconsistent therewith contained in any other law for
the time being in force or in any instrument having
effect by virtue of any law, other than this Act, or in
any decree or order of any court, tribunal or other
authority.\024
Sub-section (2) of Section 3 empowers the custodian, on being
satisfied on information received that any person has been involved
in any offence relating to transaction in securities after the first day
of April, 1991 and on or before 6th June, 1992 to notify the name of
such person in the official Gazette. Sub-section (3) of Section 3
provides that on and from the date of notification under sub-section
(2), any property, moveable or immovable, or both belonging to
any person notified under sub-section (2) shall stand attached
simultaneously with the issue of the notification. Sub-section (4)
of Section 3 provides that the property attached under sub-section
(3) shall be dealt with by the custodian in such manner as the
Special Court may direct. Section 9A deals with the jurisdiction,
powers, authority and procedure of Special Court in civil matters.
Clause (a) of sub-section (1) of Section 9A provides that on and
from the commencement of the Special Courts (Trial Of Offences
Relating To Transactions In Securities) Amendment Act, 1994, the
Special Court shall exercise all such jurisdiction, power and
authority as were exercisable immediately before such
commencement by any civil court in relation to any matter or claim
relating to any property standing attached under sub-section (3) of
Section 3. The words \023in relation to any matter or claim\024
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occurring at the end of sub-section (1) of Section 9A are important
and they clearly indicate that the Special Court shall have power
and authority in relation to any matter or claim relating to any
property standing attached under sub-section (3) of Section 3.
Therefore, the jurisdiction of the Special Court is confined to the
property of the notified person which stands attached under sub-
section (3) of Section 3 of the Special Courts Act. Sub-section (1)
of Section 11 of the Special Courts Act empowers the Special
Court to pass such orders as it may deem fit directing the custodian
for the disposal of the property under attachment. Sub-section (2)
of Section 11 enumerates the liabilities which have to be paid or
discharged and also the priority which has to be followed in
discharging the liability. Section 13 of the Special Courts Act
gives an overriding effect to the Special Courts (Trial Of Offences
Relating To Transactions In Securities) Act, 1992.
4. Dr. R.G. Padia, learned senior counsel for the appellant, has
submitted that there were dues of the Income Tax Department as
against M/s. Killick Nixon Pvt. Ltd. and it was only after issuance
of the public notice for auction of the properties that the Income
Tax Department came to know of the impending auction of the
assets of the assessee company. At the time of the auction notice a
certified demand of Rs.25.88 crores was pending for collection by
the Tax Recovery Officer. It was under these circumstances that
the Tax Recovery Officer filed Intervention Applications before the
Special Court praying that the custodian may be restrained from
distributing the sale proceeds without first satisfying the claim of
the Income Tax Department and that the said claim should be
considered on a priority basis. Learned counsel has submitted that
even after the sale of the property of M/s. Killick Nixon Pvt. Ltd.,
until the money had been distributed to the creditors it was the
money of M/s. Killick Nixon Pvt. Ltd. and, therefore, under
Section 226(4) of the Income Tax Act the Tax Recovery Officer
could apply to the Special Court for payment of the money to
discharge the income tax liability of M/s. Killick Nixon Pvt. Ltd.
In support of this submission Dr. Padia has placed reliance upon
several decisions of this Court and notably on Manmohan Lal and
others vs. Income-Tax Officer 168 ITR 616, wherein it was held as
under: -
\023..............................When an assessee is in default,
there are two modes of recovery open to an Income-
tax Officer. The first mode is provided under section
222 of the Income-tax Act. Under that section when
an assessee is in default in making a payment of tax,
the Income-tax Officer may forward to the Tax
Recovery Officer a certificate specifying the amount
of arrears due from the assessee, and on such
certificate, the Tax Recovery Officer shall proceed to
recover from the assessee the said amount by one or
more of the modes set out in section 222. The other
modes of recovery are specified in section 226. Sub-
section (4) of section 226 provides that the Income-tax
Officer may apply to the court in whose custody there
is money belonging to the assessee for payment to him
of the entire amount of such money, or, if it is more
than the tax due an amount sufficient to discharge the
tax.
A perusal of these provisions clearly shows that
the Tax Recovery Officer has nothing to do with an
application under section 226(4) made by the Income-
tax Officer to a court in which there is money lying to
the credit of the assessee in default. If such an
application is made, it is certainly open to the court to
determine as to whether there has been a proper notice
of demand served on the decree-holder (assessee in
default) according to law. It is only after the court is
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satisfied of this that the court can proceed to pay over
the amount demanded to the Income-tax Officer.
It is settled by authority long accepted that tax
can be recovered from an assessee only when it
becomes a debt due from him and that it becomes a
debt due when a notice of demand calling for payment
of the tax has been served on the assessee. If an
assessee objects to the recovery proceedings taken
under section 226(4) on the ground that there has been
no valid service of a notice of demand and that,
therefore, no debt is due, the court must decide the
objection, and if it upholds the objection, it cannot
permit recovery of the tax claimed.\024
The next decision relied upon by Dr. Padia is Lakshman Swarup
Om Prakash vs. Union of India 229 ITR 662, wherein it was held
that under Section 226(4) of the Income-tax Act the Assessing
Officer or the Tax Recovery Officer can move the court having
custody of money belonging to the assessee for payment to him of
such money for discharging the tax liability of the assessee. What
is necessary is that on the date when the application is made the
court should have custody of money belonging to the assessee. In
that case reference was made to the following observations made in
Union of India vs. Somasundaram Mills (P) Ltd. 152 ITR 420: -
\023It is a general principle of law that debts due to
the State are entitled to priority over all other debts. If
a decree-holder brings a judgment-debtor\022s property to
sale and the sale proceeds are lying in deposit in court,
the State may, even without prior attachment, exercise
its right to priority by making an application to the
executing court for payment of its dues. If, however,
the State does not choose to apply to the court for
payment of its dues from the amount lying in deposit
in the court but allows the amount to be taken away by
some other attaching decree-holder, the State cannot
thereafter make an application for payment of its dues
from the sale proceeds, since there is no amount left
with the court to be paid to the State............\024
Learned senior counsel has also referred to decision of this Court in
Dena Bank vs. Bhikhabhai Prabhudas Parekh and Co. 247 ITR
165, wherein it was held that the State of Karnataka had a
preferential claim to recover arrears of sales tax including penalty
from a firm over that of the appellant bank in relation to debts due
to the bank from the firm for the payment of which the partners of
the firm had mortgaged properties belonging to them, and the High
Court was right in directing that, even though the bank had
obtained a decree (in 1992) and was authorized to bring the
mortgaged property to sale, the arrears due to the State had to be
paid to the State first and only thereafter the bank could adjust the
remaining amount towards the amount due to it under the decree.
5. Learned counsel has thus submitted that it is a settled
proposition of law that if money is realized by sale of the properties
of the judgment-debtor in execution of the decrees obtained by the
decree-holders, until the money is actually paid over to the decree-
holders it is the property of the judgment-debtor and the Income
Tax Department will have a priority to recover its dues from the
judgment-debtor out of the money so realized. According to
learned senior counsel the Intervention Applications moved by the
Tax Recovery Officer should, therefore, have been entertained by
the Special Court as the Income Tax Department had a certified
demand against M/s. Killick Nixon Pvt. Ltd. and the money
realized by auction of its property was still lying with the Special
Court and had not been distributed to the custodian or anybody
else. The summary rejection of the Intervention Applications by
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the Special Court, it is urged, is wholly illegal.
6. Shri Subramonium Prasad, learned counsel for the custodian,
has, on the other hand, submitted that it was M/s. Dhanraj Mills
Pvt. Ltd. which had been notified as a party under sub-section (2)
of Section 3 of the Special Courts Act and the property, both
moveable and immoveable, or both of the notified party stood
attached simultaneously with the issue of the notification under
sub-section (2) of Section 3 of the Special Courts Act. Thus the
attached property also became property of the notified party. M/s.
Killick Nixon Pvt. Ltd. had not been notified as a party under sub-
section (2) of Section 3 of the Special Courts Act. The money
realized by the auction sale of the property of M/s. Killick Nixon
Pvt. Ltd. in the execution proceedings initiated after decrees had
been passed in favour of M/s. Dhanraj Mills Pvt. Ltd. was the
property of the notified party, viz., M/s. Dhanraj Mills Pvt. Ltd.
and as such the Income Tax Department could not claim any right
under Section 226(4) of the Income-tax Act to recover its income
tax dues from M/s. Killick Nixon Pvt. Ltd. out of the money so
realized. Learned counsel has further submitted that Section 11 of
the Special Courts Act lays down the manner in which the
liabilities of the notified party has to be discharged and under
clause (a) of sub-section (2) thereof all taxes due from the notified
party to the Government have to be discharged first. Learned
counsel has also submitted that in view of Section 13, the Special
Courts Act shall have an overriding effect over the provisions of
the Income-tax Act. Learned counsel has referred to the decision
of this Court in Solidaire India Ltd. vs. Fairgrowth Financial
Services Ltd. (2001) 3 SCC 71, wherein it was observed as under
at page 74 of the reports: -
\023Under Section 3 of the 1992 Act, all property
of notified persons is to stand attached. Under Section
3(4), it is only the Special Court which can give
directions to the Custodian in respect of property of
the notified party. Similarly, under Section 11(1), the
Special Court can give directions regarding property
of a notified party. Under Section 11(2), the Special
Court is to distribute the assets of the notified party in
the manner set out thereunder. Monies payable to the
notified parties are assets of the notified party and are,
therefore, assets which stand attached. These are
assets which have to be collected by the Special Court
for the purposes of distribution under Section 11(2).
The distribution can only take place provided the
assets are first collected. The whole aim of these
provisions is to ensure that monies which are siphoned
off from banks and financial institutions into private
pockets are returned to the banks and financial
institutions. The time and manner of distribution is to
be decided by the Special Court only..........\024
7. The language employed in Section 13 of the Special Courts
Act is clear and explicit when it says that the provisions of the Act
shall have effect notwithstanding anything inconsistent therewith
contained in any other law for the time being in force. Section 32
of the Sick Industrial Companies (Special Provisions) Act, 1985
also contains a similar clause that the provisions of the said Act
and of any rules or schemes made thereunder shall have effect
notwithstanding anything inconsistent therewith contained in any
other law except the provisions of the Foreign Exchange
Regulation Act, 1973 and the Urban Land (Ceiling and Regulation)
Act, 1976. In Solidair India Ltd. (supra) the provisions of Section
13 of the Special Courts (Trial Of Offences Relating To
Transactions In Securities) Act, 1992 and Section 32 of the Sick
Industrial Companies (Special Provisions) Act, 1985 were
examined and it was held that both these Acts are special Acts and
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in such an event it is the later Act, namely, the Special Courts
(Trial Of Offences Relating To Transactions In Securities) Act,
1992 which must prevail. Thus there can be no manner of doubt
that the provisions of the Special Courts Act, wherever they are
applicable, shall prevail over the provisions of the Income-tax Act.
8. In view of Section 9A of the Special Courts Act the
jurisdiction of the Special Court is in relation to any matter or
claim relating to any property standing attached under sub-section
(3) of Section 3 of the Special Courts Act. What is attached under
sub-section (3) of Section 3 of the Special Courts Act is the
property, moveable or immoveable, or both belonging to any
person notified under sub-section (2) of Section 3 of the Special
Courts Act. As already mentioned it was M/s. Dhanraj Mills Pvt.
Ltd. which had been notified as a party under sub-section (2) of
Section 3 of the Special Courts Act and not M/s. Killick Nixon Pvt.
Ltd. M/s. Killick Nixon Pvt. Ltd. had not been notified as a party.
M/s. Dhanraj Mills Pvt. Ltd. owed money from M/s Killick Nixon
Pvt. Ltd. and its 9 subsidiary companies of which the former stood
as guarantor and it was in execution of the decrees passed in favour
of M/s. Dhanraj Mills Pvt. Ltd. that the property of M/s. Killick
Nixon Pvt. Ltd. was put to auction. Thus the Special Court could
not have entertained the application moved by the Income Tax
Department under Section 226(4) of the Income Tax Act for
realization of its income tax dues from M/s. Killick Nixon Pvt. Ltd.
The application moved by the Income Tax Department was,
therefore, rightly rejected by the Special Court.
9. Learned counsel for the appellant has also submitted that
having regard to Section 10 of the Special Courts Act which
provides appeal against the order of the Special Court to this Court
both on facts and law, the Special Courts ought to have examined
the matter in detail and has erred in rejecting the Intervention
Applications by passing a short and cryptic order of 4 or 5 lines. In
our opinion, the Special Court having noted the relevant legal
provision for rejecting the applications, no exception can be taken
to the order passed by it. At any rate we have examined the matter
on merits and have arrived at a conclusion that the Intervention
Applications were not maintainable before the Special Court.
10. For the reasons discussed above there is no merit in these
appeals, which are hereby dismissed.
11. No costs.