Tax Recovery Officer's Intervention Applications Rejected by Special Court under Special Courts Act".

These appeals have been filed by the Tax Recovery Officer, Central Range-1, under Section 10 of the Special Courts (Trial Of Offences Relating To Transactions In Securities) Act, 1992 against the order dated 24.2.2005 of the Special Court. The order pertains to 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.

The case involves M/s. Dhanraj Mills Pvt. Ltd., which was notified as a person under the Special Courts Act. According to Section 3(3) of the Special Courts Act, all assets belonging to the notified party stand attached to the Special Court. M/s. Killick Nixon Pvt. Ltd. and its 13 group companies owed a substantial amount of money to M/s. Dhanraj Mills Pvt. Ltd. and M/s. Killick Nixon Pvt. Ltd. also acted as a guarantor for the repayment of the money. Decrees were passed against M/s. Killick Nixon Pvt. Ltd. and its group companies, and execution applications were filed for the recovery of the decretal amount. The Special Court appointed a receiver and subsequently auctioned the properties of M/s. Killick Nixon Pvt. Ltd., resulting in the realization of money.

The Tax Recovery Officer filed Intervention Applications before the Special Court, seeking priority in the recovery of arrears of income tax from M/s. Killick Nixon Pvt. Ltd. and restraining the distribution of sale proceeds. The Special Court rejected the Intervention Applications, stating that recovery orders against a third party that is not a notified party are not maintainable before the court.

The appellants argued that until the money from the auction of M/s. Killick Nixon Pvt. Ltd.'s properties is distributed, it remains the property of M/s. Killick Nixon Pvt. Ltd., and thus the Income Tax Department should have priority in recovering its dues. They relied on legal precedents supporting this argument. On the other hand, the custodian contended that the attached property belonged to the notified party, M/s. Dhanraj Mills Pvt. Ltd., and the Income Tax Department had no claim to the money realized from the auction.

The court examined the relevant provisions of the Special Courts Act and concluded that the jurisdiction of the Special Court is limited to the property of the notified party. Since M/s. Killick Nixon Pvt. Ltd. was not notified, the Special Court rightly rejected the Intervention Applications. The court also emphasized that the Special Courts Act prevails over other laws, including the Income Tax Act.

The court found no merit in the appeals and dismissed them. The Special Court's order was deemed valid, and no costs were awarded.

1. These appeals have been filed by Tax Recovery Officer,

Central Range-1, under Section 10 (of Income Tax Act, 1961) of the Special Courts (Trial Of

Offences Relating To Transactions In Securities) Act, 1992

(hereinafter referred to as the Special Courts Act) 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 Income Tax Act, 1961) 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 Income Tax Act, 1961) 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

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.

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 (of Income Tax Act, 1961), sub-sections (1), (2) and (3) of

Section 9A (of Income Tax Act, 1961), Sections 11 and 13 of the Special Courts Act read as

under: -

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 (of Income Tax Act, 1961).

A. 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 (of Income Tax Act, 1961);

(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

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 denovo 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).

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 (of Income Tax Act, 1961) 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.

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.

Sub-section (2) of Section 3 (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961)

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 (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961) deals with the jurisdiction,

powers, authority and procedure of Special Court in civil matters.

Clause (a) of sub-section (1) of Section 9A (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961). The words in relation to any matter or claim

occurring at the end of sub-section (1) of Section 9A (of Income Tax Act, 1961) 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 (of Income Tax Act, 1961).

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 (of Income Tax Act, 1961) 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 Income Tax Act, 1961) 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: -

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, 1961. 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 (of Income Tax Act, 1961). The other modes of recovery are specified in section 226 (of Income Tax Act, 1961). Sub-section (4) of section 226 (of Income Tax Act, 1961) 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) (of Income Tax Act, 1961) 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

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) (of Income Tax Act, 1961) 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.

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, 1961 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: -

It 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 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..

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

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, 1961 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 Income Tax Act, 1961) 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 (of Income Tax Act, 1961), 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. Fair growth Financial

Services Ltd. (2001) 3 SCC 71, wherein it was observed as under

at page 74 of the reports: -

Under 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) (of Income Tax Act, 1961), the

Special Court can give directions regarding property

of a notified party. Under Section 11(2) (of Income Tax Act, 1961), 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) (of Income Tax Act, 1961).

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..

7. The language employed in Section 13 (of Income Tax Act, 1961) 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 Income Tax Act, 1961)

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 Income Tax Act, 1961) of the Sick

Industrial Companies (Special Provisions) Act, 1985 were

examined and it was held that both these Acts are special Acts and

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 Income Tax Act, 1961) 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 Income Tax Act, 1961) 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.