Case background and facts
In June 1992, the income tax department conducted a massive raid at multiple properties belonging to Harshad Mehta and his family. They seized a large amount of shares, securities, account books, and documents without any specific selection. This raid was part of the investigations carried out by the JPC, CBI, and other agencies looking into the Harshad Mehta scam. Harshad Mehta was primarily found guilty of breaking capital markets and securities laws, with the help of senior bankers. The banks provided him with thousands of crores, which he used to become a major player in the Indian stock market, as shown by several investigations. Therefore, there was no unaccounted or black money involved in his share market transactions; it was bank money that he misused. The huge amount of documents seized showed that his transactions were well-documented and that the sources of funds for his share purchases were legitimate. The Income Tax Department then issued high assessment orders, adding Rs. Two thousand fourteen crores to the total income of Harshad Mehta and his family. Almost every receipt from banks for purchasing securities, where Harshad Mehta acted only as a broker, was taxed as his undisclosed and unexplained income, which was not accurate. Huge additions were made under categories like money market oversold position, unexplained stock in the money market, profit on the sale of shares in shortage, money market differences received, share market trading profit, and interest on securities in the money market. These categories, under which large undisclosed incomes were taxed, indicated the tax department’s ignorance and prejudice, as well as their overly technical approach to taxing incomes where there were none. Such additions to the total income are completely contrary to the actual facts and are not justified.
The Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 (‘the Act’) is a specific law designed to handle large-scale financial offences committed by brokers who obtained significant amounts from banks and financial institutions. However, the proceedings before the Special Court, which was established to quickly prosecute or settle claims, have encountered complex legal and interpretative challenges due to the poorly drafted Act, relying heavily on the courts’ interpretation and judgment.
The Special Court noted that it has been in operation since June 1992. Regarding two notified parties, the Harshad Mehta Group and Fair growth Financial Services Ltd., the time is nearing for the distribution of their assets under section 11. Due to the various potential interpretations of section 11, the Special Court raised some legal questions. After listening to all involved parties, the Special Court provided answers to these questions in its judgment, similar to an Originating Summons. Additionally, the custodian raised further questions about interpreting and implementing section 11.
Issues Involved
The Special Court has noted that it has been operating since June 1992. For two notified parties, the Harshad Mehta Group and Fair growth Financial Services Ltd., it is almost time to distribute their assets under Section 11 of the Special Court Act, 1992. Due to various potential interpretations of Section 11, the Special Court has posed several legal questions. After hearing from all involved parties, the Special Court provided answers in its judgment, similar to an Originating Summons. Additionally, the Custodian has brought up further questions about how to interpret and apply Section 11 of the Special Court Act.
The Special Court has posed six questions about distribution under Section 11(2). However, we want to expand on three of these questions to clarify the issues that have been debated. The reframed questions are:
- What does “revenues, taxes, cesses, and rates due” mean? Does “due” refer simply to the obligation to pay these taxes, or does it mean a liability that has been legally determined and is immediately payable?
- Do the taxes mentioned in clause (a) of Section 11(2) relate only to a specific period or to all taxes owed by the notified person?
- At what time should these taxes have become due?
- Does the Special Court have any discretion over how much should be paid under Section 11(2)(a) from the attached funds or property?
- Do taxes include penalties or interest?
- Can the Special Court relieve a notified person from paying penalties or interest after their notification under Section 3, or is the person still liable for penalties or interest due to their inability to pay taxes post-notification?
Tax, penalty, and interest are treated as separate concepts under the Act. According to Section 2(43), the term ‘tax’ does not include penalty or interest. Similarly, Section 157 states that when any tax, interest, penalty, fine, or other amount is owed due to an order under this Act, the Assessing Officer must issue a demand notice to the assessee. The rules for imposing penalties and interest are different from those for taxes. After reviewing various cases in paragraphs 51 to 70 of his judgment, the Special Court Judge concluded that penalty and interest cannot be regarded as tax under Section 11(2)(a).
Decision of the court
Regarding the questions raised, the Special Court decided as follows:
The first question discussed was the meaning of the phrase “tax due” used in Section 11(2)(a). According to Black’s Law Dictionary, the term ‘due’ means “owing; payable; justly owed or owing as distinguished from payable.” This implies that a debt is considered due from someone if they are responsible for paying it, whether the payment time has come or not. The word ‘due’ signifies a fixed and settled obligation, but there is ambiguity regarding when it is payable, which must be determined from the context in each case. Jowitt’s Dictionary of English Law also defines ‘due’ as anything owing or that one is obligated to pay or perform for another. For a sum of money, ‘due’ can mean that it is either owing or payable immediately or at a future date. The exact meaning of ‘due’ in a specific situation depends on its context.
Do these taxes relate to a specific period or do they include all assessed taxes for the notified person?
The Special Court Act is clear in its purpose. It covers all criminal and civil proceedings related to securities transactions by a notified person between April 1, 1991, and June 6, 1992. The Special Court has the authority to examine all civil claims and try all offences related to such transactions during this period. Under Section 3(2), the property of such offenders is attached by the Custodian and disbursed under the directions of the Special Court as per Section 11(2). Therefore, since the Special Court is empowered to examine all securities transactions from April 1, 1991, to June 6, 1992, as well as all claims related to the attached property, it must also examine the tax liability of the notified person for this period. The aim of the Special Court Act includes safeguarding the funds to which banks and financial institutions are entitled and ensuring these funds are not misused. This is why there are provisions for attaching property, ascertaining claims, and distributing funds. However, before the liabilities of a notified person to banks and financial institutions can be settled, Section 11(2)(a) requires the tax liability of the notified person to be paid. In this context, the tax liability refers to the tax owed by the notified person due to securities transactions during the period from April 1, 1991, to June 6, 1992. For example, if any income tax needs to be paid on income earned by a notified person from securities transactions during this period, that liability must be settled before distributing funds to banks and financial institutions.
When should the tax liability be considered final and binding for payment under Section 11(2)(a)?
Some parties argue that only the tax liability that was finally assessed and determined by the time the Act came into effect should be paid under Section 11(2)(a). Others believe that the tax liability should have been finalized by the date of the notification. Another view is that the tax liability should be assessed by the date of distribution. Since we have established that Section 11(2)(a) pertains only to tax liabilities arising from the period between April 1, 1991, and June 6, 1992, it is not necessary for these liabilities to be finally assessed by June 6, 1992, or by the notification date. The appropriate point of reference is the date of distribution. The date of distribution is when the Special Court finishes reviewing claims under Section 9A. On this date, any tax liability for the statutory period that has been legally assessed and finalized will be considered for payment under Section 11(2)(a), subject to any further stipulations.
The next question is whether the full assessed tax liability for the statutory period must be paid under Section 11(2)(a), or if the Special Court has any discretion regarding the amount to be paid under this section.
Banks with large claims against the notified persons argue that the Special Court is not required to pay the entire tax liability in full but has some discretion about how much should be paid. They highlight the phrase “shall be paid or discharged in full as far as may be” in Section 11(2) as suggesting that the Special Court has some leeway in determining the payment of liabilities under Section 11(2)(a). They point out that when the Act was enacted or when the Ordinance it replaced was introduced, the full extent of the funds misappropriated from banks and financial institutions was not fully known. After the Janakiraman Committee’s report, a special inter-disciplinary group was formed to track how the funds were used. Auditors were appointed to address discrepancies where attached assets fell short. It was anticipated that the funds from attached assets would be quickly returned to banks and financial institutions. Even after settling the tax liabilities for the relevant period, it was expected that there would be significant funds remaining to be distributed to the banks and financial institutions involved.
Another related question is whether “taxes” under Section 11(2)(a) also includes interest or penalties.
In this case, we are dealing with penalties and interest under the Income Tax Act. Under this Act, tax, penalty, and interest are treated as separate concepts. Section 2(43) defines tax and does not include penalties or interest. Similarly, Section 157 states that if any tax, interest, penalty, fine, or other amount is due to an order under this Act, the Assessing Officer must issue a demand notice to the taxpayer. The rules for imposing penalties and interest are different from those for imposing taxes. The Special Court judge, after reviewing various sources in paragraphs 61 to 70 of his judgment, concluded that penalties and interest are not considered as taxes under Section 11(2)(a). We agree with the Special Court’s reasoning and conclusion on this matter.
The Special Court also discussed whether it can relieve a notified person from penalties or interest imposed after the notification date.
Since Section 11(2)(a) only covers liabilities arising between April 1, 1991, and June 6, 1992, and does not include penalties or interest, this issue doesn’t really apply. In any case, penalties or interest for actions or defaults occurring after the notification date are not covered by the Act. However, it is important to note that the Act itself serves as a complete guide for handling taxes, penalties, or interest.
Conclusion
In the Harshad Mehta case, the Special Court Act, 1992, has posed complex questions about the scope and application of tax liabilities. Key issues include the interpretation of “tax due,” which should be assessed at the time of asset distribution rather than at earlier fixed dates. The Act’s provisions cover all taxes arising from securities transactions between April 1, 1991, and June 6, 1992, but exclude penalties and interest, which are treated separately under tax law. The Court has discretion regarding the extent of tax payments but must adhere to the Act’s stipulations, ensuring tax liabilities from the specified period are settled first. The Act does not cover penalties or interest imposed after the notification date. Ultimately, the Special Court’s conclusions emphasize the need for precise adherence to the Act’s provisions and offer a balanced approach to resolving financial claims while excluding post-notification penalties and interest.
AUTHOR Vridhi Saini, a student at University Institute of Legal Studies, Panjab University, Chandigarh
