Case: Tax Recovery Officer, Central Range-1 Vs. Custodian the Special Court (T.O.R.T.S) Act, 1992 &amp; Others

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 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 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, 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. Fairgrowth 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), the Special Court can give directions regarding property of a notified party. Under Section 11(2), 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). 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 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 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 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 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 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.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.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]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. 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) 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 taxt 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 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 :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 aproperty 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 theLearned counsel hasi 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 to recover its income tax dues from M/s. Killick Nixon Pvt. Ltd. out of the money so realized.Learned counsel hasfurther submitted that Section 11 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 hasalso submitted that in view of Section 13, the Special Courts Act shall have an overriding effect over the provisions of the Income-tax Act.Learned counsel hasreferred to the decision of this Court in Solidaire India Ltd. vs. Fairgrowth Financial Services Ltd. (2001) 3 SCC 71 , wherein it was observed as under at page 74 of the reports: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. 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. 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 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 inrelation to any matter orclaim 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 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 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.9. Learnedcounsel 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.