Harshad Shantilal Mehta v. Custodian (1998)

In interpretation of statutes this case is used for one clear idea: a tax passes through three distinct stages — the charge (declaration of liability), the assessment (which fixes the exact sum), and recovery. The Court adopted Lord Dunedin's statement of these stages in Whitney v. Commissioners of Inland Revenue, via the Federal Court in Chatturam v. CIT, Bihar. Keeping the stages apart tells you which provision is the charging provision (construed strictly) and which are machinery provisions.

It is also a clean example of a word — "due" — whose meaning the Court said depends on its context. The same word can mean "owing" or "presently payable"; here, because the section dealt with actually paying money out, it meant a finally assessed, quantified liability.

After the 1992 securities scam, the Special Court Act set up a Special Court and a Custodian. Under s. 3(2)–(3), once the Custodian notified a person involved in securities offences between 1 April 1991 and 6 June 1992 (the "statutory period"), all that person's property stood attached. Section 11(2) laid down the order in which liabilities were to be paid out of the attached property: first, under clause (a), "all revenues, taxes, cesses and rates due" to the Central Government, a State Government or a local authority; then amounts due to banks, financial institutions and mutual funds; then other liabilities specified by the Special Court.

With distribution approaching for the Harshad Mehta Group and Fairgrowth Financial Services Ltd., the Special Court framed questions on the meaning of s. 11 and answered them. The Custodian and several notified persons appealed; a writ petition challenging the constitutional validity of s. 11 was transferred to the Supreme Court from the Delhi High Court and heard with them.

1. What does "taxes … due" in s. 11(2)(a) mean — a bare liability under the charging section, or a liability crystallised into an ascertained sum?
2. Do the taxes in clause (a) cover all taxes of the notified person, or only those for a specific period?
3. At what point of time must the taxes have been assessed?
4. Must the Special Court pay assessed taxes in full, or has it some discretion?
5. Do "taxes" include penalty and interest?
6. Does the attached property include the interests of third parties, such as a mortgagee or pledgee?

The appeals were disposed of on the interpretation below, and the transferred writ petition was dismissed: in view of the Court's reading of ss. 11 and 3(3), the constitutional challenge did not survive.

The three stages of a tax

Following State of Rajasthan v. Ghasilal, the Court said the charging section creates the liability, but "till the tax payable is ascertained by the Assessing Authority under Section 10 or by the assessee under Section 7(2), no tax can be said to be due." It then quoted Lord Dunedin in Whitney: "Now, there are three stages in the imposition of a tax." First comes the declaration of liability; next, the assessment — "Liability does not depend on assessment, that ex hypothesi has already been fixed. But assessment particularizes that exact sum which a person liable has to pay." Last, "come the methods of recovery if the person taxed does not voluntarily pay."

"Taxes due" in s. 11(2)(a)

The Court said: "\"Tax due\" usually refers to an ascertained liability. However, the meaning of the words 'taxes due' will ultimately depend upon the context in which these words are used." Because s. 11 deals with distributing property, "the phrase 'taxes due' cannot refer merely to a liability created by the charging section to pay the tax under the relevant law. It must refer to an ascertained liability for payment of taxes quantified in accordance with law." Its conclusion: "In the context of Section 11(2), therefore, \"the taxes due\" refer to \"taxes as finally assessed\"."

Which period, and at what time

The priority in clause (a) covers only tax liability arising out of transactions in securities during the statutory period, 1 April 1991 to 6 June 1992. Tax for other periods remains the notified person's liability but has no priority; it may be paid under clause (c) or recovered in some other lawful manner. The assessment must be final and binding by the date of distribution, which arrives when the Special Court completes its examination of claims under s. 9A.

Discretion to scale down

The Special Court cannot sit in appeal over tax assessments or reopen them. But it can decide how much of the liability is paid out of the attached funds. Where an assessment is a "best judgment" assessment, it may check whether the tax is grossly out of proportion to the attached property, applying the Wednesbury principle, and scale it down. That should be done only in serious cases of miscarriage of justice, fraud or collusion, or gross disproportion, and "The Special Court must have strong reasons for doing so." The balance remains recoverable, but without priority.

Penalty and interest

Tax, penalty and interest are different concepts under the Income Tax Act, and "tax" as defined in s. 2(43) does not include penalty or interest. The Court agreed with the Special Court that neither is "taxes" under s. 11(2)(a). It added that a taxing statute is "a code in itself for imposition of tax, penalty or interest" (the judgment's text reads "a taking statute", plainly a scanning error for taxing).

Third-party interests

The words "belonging to" in s. 3(3) reach only the notified person's right, title and interest. A third party's share, including a mortgage or pledge made before attachment, is not extinguished unless the Custodian sets the transaction aside under s. 4. The attached property does not vest in the Custodian.

A charging provision creates the liability to tax; assessment only quantifies it; recovery is a separate stage. What "taxes due" means depends on its context. In a provision that directs actual payment out of attached property — s. 11(2)(a) of the Special Court Act — it means taxes finally assessed and presently payable, for the statutory period, not a bare liability under the charging section. Penalty and interest are not "taxes".

• Direct question: Explain the distinction between charging provisions and machinery provisions in a taxing statute. Set out the three stages from Whitney, as adopted here, and explain that strict construction is aimed at the charge.
• Context question: The meaning of a word depends on its context. Illustrate. Use "due" here: dictionaries give it two meanings, and the Court chose between them by looking at the job s. 11 does.
• Related point: the Court noted that "taxes, cesses and rates due" in s. 11(2) — unlike s. 530(1)(a) of the Companies Act ("due and payable") — did not spell the meaning out, which is why context decided it.
• Cross-reference: read with The Empress Mills, Nagpur v. Municipal Committee, Wardha on the strict construction of the charging provision.