1998 (5) TMI 25 - SUPREME COURT

What is meant by revenues, taxes, cesses and rates due ? Does the word "due" refer merely to the liability to pay such taxes, etc., or does it refer to a liability which has crystallised into a legally ascertained sum immediately payable ?

Do the taxes (in clause (a) of s. 11(2)) refer only to taxes relating to a specific period or to all taxes due from the notified person ?

At what point of time should the taxes have become due ?

Does the Special Court have any discretion relating to the extent of payments to be made under s. 11(2)(a) from out of the attached funds/property?

Whether taxes include penalty or interest ?

Whether the Special Court has the power to absolve a notified person from payment of penalty or interest for a period subsequent to the date of his notification under s. 3. In the alternative, is a notified person liable to payment of penalty or interest arising from his inability to pay taxes after his notification?

Held that:- In the present case, the words "taxes due" occur in a section dealing with distribution of property. Taxes which are not legally assessed or assessments which have not become final and binding on the assessee, are not covered under s. 11(2)(a) because unless it is an ascertained and quantified liability, disbursement cannot be made. In the context of s. 11(2), therefore, "the taxes due" refer to "taxes as finally assessed".

Every kind of tax liability of the notified person for any other period is not covered by s. 11(2)(a), although the liability may continue to be the liability of the notified person. Such tax liability may be discharged either under the directions of the Special Court, under s. 11(2)(c) or the taxing authority may recover the same from any subsequently acquired property of a notified person or in any other manner from the notified person in accordance with law. The priority, however, which is given under s. 11 (2)(a) to such tax liability only covers such liability for the period 1st April, 1991 to 6th June, 1992.

Since we have held that tax liability under s. 11(2)(a) refers only to such liability for the period 1st April, 1991 to 6th June, 1992, it would not be correct to hold that the liabilities arising during this period should also be finally assessed before 6th June, 1992 (the date of the Act), or the date of the notification. It must refer to the date of distribution. The date of distribution arrives when the Special Court completes the examination of claims under s. 9A. If on that date, any tax liability for the statutory period is legally assessed, and the assessment is final and binding on the notified person, that liability will considered for payment under s. 11(2)(a), subject to what follows.

Although the liability of the assessee for the balance tax would subsist, and the taxing authorities would be entitled to realise the remaining liability from the assessee, the same will not be paid in priority over the claims of everybody else under s. 11(2)(a). If the Special Court so decides, it may direct payment of the balance liability under s. 11(2)(c). Otherwise the taxing authorities may recover the same from any other subsequently acquired property of the assessee or in any other manner in accordance with law. The Special Court must have strong reasons for doing so. In fact, the IT authorities have also accepted that exorbitant tax demands can be ignored, applying the Wednesbury principle.

Similarly, under s. 156, it is provided that when any tax, interest, penalty, fine or any of other sum is payable in consequence of any order passed under this Act, the AO shall serve upon the assessee a notice of demand as prescribed. The provisions for imposition of penalty and interest are distinct from the provisions for imposition of tax. The learned Special Court judge, after examining various authorities in paras 51 to 70 of his judgment, has come to the conclusion that neither penalty nor interest can be considered as tax under s. 11(2)(a). We agree with the reasoning and conclusion drawn by the Special Court in this connection.

The Special Court is required to consider this question only from the point of view of distributing any part of the surplus assets in the hands of the Custodian after the discharge of liabilities under ss. 11(2)(a) and 11(2) (b). The Special Court has full discretion under s. 11(2)(c) to decide whether such claim for penalty or interest should be paid out of any surplus funds in the hands of the Custodian.