Case Note & Summary
The Supreme Court considered an appeal by special leave against an order of the Special Court constituted under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992. The appellant, an Assistant Commissioner of Income Tax, had applied to the Special Court seeking release of Rs.80,80,198.34 from the funds available with the Custodian appointed under the Act, representing the tax liabilities of the respondents who were notified persons under the Act. The Special Court, while acknowledging that it could not sit in appeal over orders of tax authorities, took the view that it was entrusted with distributing funds in the manner laid down under Section 11 of the Act and that the priorities and objects of the Act could be defeated if the court could not go into the bona fides of a claim. It observed that a party like the Income Tax Department might make a claim in an absurdly large amount and that whether a claim was justified or enforceable could only be decided by looking into that claim. Accordingly, the Special Court permitted counsel for the notified parties to try to show that the tax claim was unreasonable and unjustified, and adjourned the application. The appellant challenged this order. The Supreme Court analyzed the statutory scheme. It noted that the Act was enacted to establish a Special Court for trial of offences relating to transactions in securities and for matters connected therewith. The Special Court had exclusive jurisdiction under Section 7 to hear and decide prosecutions in respect of offences under the Act. By reason of the amendment and inclusion of Sections 9A and 9B, the Special Court was invested with civil jurisdiction in regard to such transactions. Section 11 was relevant: sub-section (1) empowered the Special Court to direct the Custodian for disposal of property under attachment, and sub-section (2) required that certain liabilities be paid or discharged in full, as far as may be, in the order specified, with all revenues, taxes, cesses and rates due from notified persons to the Central or State Government or any local authority ranking first. The Court held that the Special Court had no power to sit in appeal over or overrule orders of tax authorities, the Income Tax Appellate Tribunal, or courts in regard to tax liabilities of notified persons. Its only power was to determine the priorities in which claims upon the attached property should be paid. Tax liabilities, along with revenues, cesses and rates, were entitled to be paid first in the order of priority and in full, as far as may be. The Special Court had only the limited power to determine what, having regard to the funds available, could be paid—whether the claim could be satisfied in full or only in part. If a particular tax claim could not at any time be paid in full, provision would have to be made for the balance so far as possible so that it was not jeopardized. The Court distinguished the decision in S.V. Kondaskar v. V.M. Deshpande, AIR 1972 SC 878, on which counsel for the Custodian relied. It explained that the observation in that case about a liquidation court scrutinising a revenue claim referred only to the obligation of the liquidation court to decide, having regard to the fact that income-tax payable by a company in liquidation had to rank pari passu with other debts, how far the amount determined could be paid while safeguarding the interests of other creditors. That judgment did not support the Special Court's assumption of appellate power over tax assessments. Accordingly, the Supreme Court allowed the appeal and set aside the order under appeal insofar as it required the appellant to produce records and permitted notified persons to satisfy the Special Court that the tax claims were not bona fide, unreasonable, unjustified, or unenforceable. No order as to costs was made.
Headnote
A) Special Courts - Jurisdiction and Powers - Special Court cannot sit in appeal over tax assessments and cannot examine bona fides, reasonableness, or enforceability of tax claims against notified persons; its jurisdiction under Section 11 is limited to determining priorities and amounts payable from attached funds - Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, Sections 3(2), 7, 9A, 9B, 11 - The Special Court had adjourned an application for release of tax liabilities to allow notified persons to challenge the bona fides of the Income Tax Department's claim. The Supreme Court held that the Special Court has no power to sit in appeal over assessments made by tax authorities and is only empowered to determine priorities under Section 11, ensuring tax liabilities are paid first as far as possible. Held that the Special Court cannot examine whether a tax claim is bona fide, reasonable, justified, or enforceable. (Paras Not mentioned)
Issue of Consideration
Whether the Special Court under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 can examine the bona fides, reasonableness, justifiability, or enforceability of income tax claims made against notified persons, beyond determining priority and amount payable under Section 11.
Final Decision
The Supreme Court allowed the appeal and set aside the Special Court's order insofar as it required the appellant to produce records and permitted the notified persons to satisfy the Special Court that the tax claims were not bona fide, unreasonable, unjustified, or unenforceable. No order as to costs.
Law Points
- Special Court cannot sit in appeal over tax assessments
- Only power under Section 11 is to determine priorities
- Tax liabilities rank first priority
- Special Court can decide amount payable from available funds
- Cannot examine bona fides or reasonableness of tax claims
