Tax can be recovered only when it becomes debt due from assessee and it becomes a debt due when notice of demand is served – tax recovery officer cannot file claim against property attached by court : SC

NEW DELHI, AUG 23, 2007 : 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 before the Special Court for recovery of the decretal amount on behalf of M/s. Dhanraj Mills Pvt. Ltd. The Special Court 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, the properties of M/s. Killick Nixon Pvt. Ltd. were put to auction and money was realized.

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. 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 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: –

By 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.

This order is under challenge before the Supreme Court.

The Supreme Court first had a cursory glance at the provisions of the Special Courts (Trial Of Offences Relating To Transactions In Securities) Act, 1992.

1. 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.

2. 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.

3. 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.

4. Section 9A deals with the jurisdiction, powers, authority and procedure of Special Court in civil matters.

5. 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.

6. The words in relation to any matter or claim 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.

7. 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.

8. 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.

9. 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.

Based on this, the Supreme Court observed,

1. 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.

2. 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.

3. It is only after the court is satisfied of this that the court can proceed to pay over the amount demanded to the Income-tax Officer.

4. 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.

5. 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.

6. The distribution can only take place provided the assets are first collected.

7. 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.

8. 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.

9. 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.

10. 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.

11. 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.

12. What is attached under sub-section (3) of Section 3 of the Special Courts Act is the property, movable or immovable, or both belonging to any person notified under sub-section (2) of Section 3 of the Special Courts Act.

13. 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.

The counsel for the appellant had submitted that having regard to Section 10 of the Special Courts Act which provides appeal against the order of the Special Court to the Supreme 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.

But the Supreme Court was not impressed and held that, “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.”

The Supreme Court found no merit in these appeals and dismissed the same.

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