Holding

The Special Court's scaling‑down of the tax priority claim is invalid without a finding on the nexus and duplication, and the matter must be remitted to the Special Court for determination of those issues.

Summary

The Supreme Court examined an appeal by the Deputy Commissioner of Income Tax challenging a Special Court order that scaled down the tax priority claim against the assets of Harshad S. Mehta, a notified person under the Special Court Act, 1992. The Income Tax Department argued that the Special Court lacked jurisdiction to reassess tax liability and that the banks must demonstrate a nexus between the decreed amounts and the income included for the statutory period. The Court held that priority under Section 11(2)(a) applies only to taxes finally assessed for the statutory period (1‑Apr‑1991 to 6‑Jun‑1992) and that the Special Court could not reduce the tax claim without a finding on the nexus and any duplication of amounts. It noted that the Special Court may examine fraud or miscarriage of justice in "best‑judgment" assessments but cannot sit in appeal over tax assessments. Consequently, the Court set aside the Special Court’s scaling‑down order except for amounts already accepted (Rs 253 cr and Rs 101 cr), ordered that the deposited amount not be refunded, and remitted the matter to the Special Court to determine the nexus and duplication issues. The appeals were dismissed and the case was remitted for further proceedings.

Issues considered

Whether the Special Court can scale down the tax liability by examining the merits of income‑tax assessments.
Whether the banks must establish a nexus between the decreed amounts and the income included for the statutory period.
Whether there is duplication of amounts in the Special Court's scaling‑down order.
Scope of priority under Section 11(2)(a) of the Special Court Act – limited to the statutory period.
Whether the Special Court's order scaling down the tax claim is valid.

Legislation cited

Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992s. 11(1), s. 11(2)(a), s. 11(2)(b), s. 11(2)(c), s. 3, s. 7, s. 9-A

Subjects

tax prioritySpecial Court jurisdictionHarshad Mehta securities scamnexus of decreed amountsduplication of amountsscaling down tax liabilitystatutory periodincome tax assessment

Judgment

[2008) 16 S.C.R. 1146

·A DY. COMMISSIONER OF INCOME TAX
\I.
STATE BANK OF INDIA AND ORS:
(Civil Appeal No. 32945 of 2007 etc.)

DECEMBER 03, 2008
B
[TARUN CHATiERJEE AND DR. MUKUNDAKAM
SHARMA, JJ.]

Special Court (Trial of Offences relating to transactions
c in Securities) Act, 1992 - s.11(2)(a) and (b) - Discharge of
tax liabilities under - Of notified person - Priority claim of
Revenue .-- Creditor Banks seeking scaling down the claim
of Revenue - ·Allowed by Special Court - On appeal, plea of
Banks that the amount for which decree was passed in their
p favour against the notified person prior to issuance of
Notification uls.3 could not have been assessed as the
income of the notified person without showing nexus between _.,
the decreed amount and the amount included in income for
statutory period - Duplication of amount in the order of scaling
E down also disputed - Held: Priority in payment of tax liability
is only for statutory period and not beyond that - Question of
nexus required to be decided - Issue of nexus and issue of
duplication, since not decided by Special Court, the matter
is remitted to Special Court for finding on these issues - If
F nexus is found, the amount shall be disbursed to the Banks.
Income Tax Officer passed assessment order in
,,.
respect of the assessment years 1992-93 and 1993-94 at
Rs.2014 crores and Rs.1396 crores respectively in
respect of person notified u/s. 3 of Special Court (Trial of
G Offences Relating to Transactions in Securities) Act, 1992.
CIT (Appeals) confirmed the assessment order. The
appeals against the order are pending with Income Tax
Appellate Tribunal. In terms of s.11 (2) (a) of the Act,
•
Income Tax Department was having first right on
H 1146
• DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1147
OF INDIA AND ORS.

appropriation of assets of the notified persons. The A
1
custodian released a sum of Rs.686.22 crores to the
Department,· pursuant to various orders-passed by
Special Court confirmed by Supreme Court.

In Harshad S. Mehta vs Custodian & Ors. (1998) 5 SCC B
1, this Court held that priority could be restricted to the
tax component of the demand for priority period relevant
1
to Assessment Years 1992-1993 and 1993-1994; tnat
Special Court could not sit in appeal over the order of tax
assessment, but 1n case of any fraud, collusion or
miscarriage of justice in assessment proceedings where C
tax assessed is disproportionately high in relation to
funds available, Special Court could scale down the tax
liability to be paid in priority.

Respondent-Banks filed applications before Special D
Court seeking direction to scale down the priority
demand of the appellate-Department on the ground that
there was gross miscarriage of justice in making an order
of assessment in the case of the notified person. They
contended that decree passed in their· favour against the E
notified person, proved that the money in question which
was assessed as income of the notified person was, in
fact, money of the Banks and hence could not have been
assessed as income of the notified person; that
miscarriage of justice also crept iri, in r~spect of, F
additions on account of oversold securities, unexplained
stock and unexplained deposits in Banks etc. Special
Court accepting the plea of the Banl<s, scaled down the
priority demand. It directed the appellant-Department to
refund Rs.546.22 crores out of the already received G
amount of Rs.686.22 crores to the custodian, because in
view of the plea of the Banks, the tax liability of ttle
)
notified person was only Rs.140 crores. It further oirected
the custodian to disburse the available amount to tfle
Banks in respect of the principal amount against their H
SUPREME
. \
'COURT REPORTS (2008] 16 S.C.R.

A decrees. Hence, the present appeals. . -. · \

The question for CQO$ideration J;>efore this Court was
whether the Special Court w~~ ri~~t in scaling down the
priority tax demand by delving intg th~ merits of the
assessment orders and by deciding th~ m~tter ~s an
8
appellate authority which directions according tg the
appellant were in violation of the decision of the CQurt in
Harshad Mehta's case. Revenue contended inter alia that '
there was duplication of two amounts which were scaled
C down, as both the amounts were with rn~pe~t ~<? the
oversold securities and were one and the same~ .

.Disposing of the appeals, and remitting the matter to
the Special Court, the Court

.0 f:IELO: 1.1. There could be no dispute with r~gFtrcl to
.the priority clai.m of the Income Tax Department in
releasing the tax due. At the same time ther~ coMld ~l~o
be no di,spute with regard to the fact that if any party
other than .the l'.IQtified person has any right, title or
E interest. in the attached property on the date of the.
notification u/s. 3 of.Special Court (Trial of Offences
relating to Transactions in Securities) Act; 1992, the said
right of the third party did not and could not have been
held to be extinguished. [Para 22] [1170-D·E]

F 1.2. There could be no <;lisagreenient with regard to
the fact that if any amount is found due and payable by
the Sanks towards_, amount advanced by it as loan to the
notified person in that event the right of the Ba.nk to the
extent of the said amount,_ must be held to be the existing
· G right of the bank on the property which is attached. It also
carll'.lof be ignored that the said amount could not have
been asses$ed in the hands of the notified person as his
Income, for the Banks continued to have an existing right
on the aforesaid amount which is required to be released
H .
r
~ DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1149
OF INDIA AND ORS.

t • in terms of the decrees which are obtained by the Banks A
and the non-relee\~e of the said amount would amount to
miscarriag@ of h4stice. [Para 24) (1170-H; 1171-A-B]

( .
1.3. As the priority in payment of tax liability u/s.
11 (2)(a) 1$ only for the statutory period and not for any
8
-{ ather period, the appellant is justified while contending
' that if _the banks have a right, title or interest in the
attached property on the. date of the notification u/s. 3 of
. the Act, for which decrees have been obtained and if the ·.
Banks are claiming that the said amount has wrongly C
been included in the income of the notified party for the
statutory period, then the banks are required to show the
nexus between the said decreed amount and the amount
wflich is Included in the income of the notified party for
the statutory period. [Para 24] ~1171-E-G]
D
1.4 . .The issue with respect to duplictation is
correlated to the first is~ue and a finding on the said issue
.can be given, only once· the finding with respect to the
first issue is arrived at. There is no finding either on the
issue of nexus or on the issue of duplication by the E
Special Court in the impugned judgment. All the disputed
questions are required to be decided by the Special Court
after giving an opportunity to the parties to place all the
relevant documents so as to enable it to come to a proper
and considered finding. If the nexus is shown by the F
( ...
banks between the amounts for which decrees have been
obtained, which have become final and binding and the
amount which is included in the income in the hands of
the notified person by the Department, the same will have
to be disbursed to the banks by the Special Court. On
account of oversold securities if the delivery has been G ·
given by the notified person and the transaction is
complete, only the difference between the payable and
receivable will be taken and not the gross amount.
However the issue as to whether the decrees are on
H
1150 $UPREME COURT REPORTS [2008] 16 S.C.R.

A account of oversold securities and, if so, is there any
duplication or whether the decrees ar~ on ~ccount of
siphoning of the funds, is required to be adjudicated by
the special Court on appreciation of the releyan!
documents. [Paras 26 and 29) [1173-D-G]
B
. 2. So far as the amounts of Rs. 253 crores and Rs;
101 crores are concerned, the appellants have not staied
th~t the said amount were not included in the in.come of
the notified party for the statutory period. The. consent
decrees obtained. in respect of Rs. 253 crores were not
C challenged by the appellant which led the Special Court
to believe that the·.appellant has accepted the settlement
and accordingly scaled down the said amount from the
income of the notified person. Similar is the cas.e with the
.amount of Rs. 101 crores. Thus the scaling down of the
D said amount is upheld and will not be disturbed. [Para 31)
[1174-C:_!:]
Harshad S. Mehta vs. Custodian and Ors. ·19~8 (5) SCC
1, relied on.
E
Case· Law Reference:
1998· (5) ·sec 1 Relied on, Para 20

CIVIL APPELLATE JURISDICTION : Civil Appeal D.No.
F 32945 of 2007.

From the Judgment and Order dated 29.9.2007 of the
Special Court (Trial of Offences Relating To Transactions In
Securities) at Bombay in Report of the C.ustodian No.· 15 of
2006 with Misc. Application Nos. 210, 51 and 365 of 2003.
G
WITH

Ci.vii Appeal Nos. 326-329 of 2008 ~nd Civil Appeal No. 0:-
1537 of 2008.

H G.E. Vahanwati, S.G. Mohan Parasaran, A.S.G., K.K.
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1151
OF INDIA AND ORS.

Venugopal, Janak Dwarka Das, Jaideep Gupta, Daryus A
Khambatta, C.A. Sundaram, Beni Chatterjee, Raghavendra
Rao, Benu Chatterjee, Arijit Prasad, D.D. Karnath, Rahul
Kaushik, T.A. Khan, D.L. Chidanand, B.V. Balaram Das, Vijaya
Lakshmi Menon, Shashi Kapila, Priya Bansal, Gopal
Sankaranarayanan, Tushad Cooper, Rohini Musa, Rohma s
Hameed, Mahesh Agarwal, E.C. Agrawala, Rishi Agrawala,
Abhishek Gupta, Zafar lnayat, Kamini Jaiswal, Shomila Bakshi
Abhimanue Shreshta, Subramonium Prasad, Ranjeeta Rohtagi,
Sumit Goel and Nitin Thukral (for M/s. Parekh & Co.) for the
appearing parties. . c
The Judgment of the Court was delivered by

DR. MUKUNDAKAM SHARMA, J. 1. The present
appeals were filed against the judgment and order of the
Special Court constituted under the Special Court (Trial of D
Offences Relating to Transactions in Securities) Act, 1992
(hereinafter referred to as 'Act') for conducting trial of offences
related to transactions in securities. By the impugned judgment
and order the Special Court allowed the application filed by the
respondent No. 1, the State Bank of India and dfrected the E
appellant to deposit an amount of Rs. 546.22 crores with the
Cl_Jstodian alongwith interest at 9% per annum. The Special
Court while issuing the said direction held that the income tax
liaqility for the statutory period of the notified party, namely, Mr.
Harshad S. Mehta under Section 11 (2)(a) did not at that stage F
appear to be in excess of Rs. 140 crores approximately,
subject to further orders that the Court might pass at a later
stage. In the impugned judgment and order a further direction
was issued that no useful purpose would be served by keeping
the amount lying deposited with the Custodian and, therefore, G
a direction was also issued to the Custodian to pay to the
banks, namely, the State Bank of 1lndia and the Standard
Chartered Bank against their decrees the principal amount,
from the amounts in deposit with the Custodian as also from
the amount that was likely to be coming back from the Income
H
I
~'

1152 SUPREME COURT REPORTS :[2008] 16 S.C.R.

A Tax Department. As the said amount was in~dequate to fully
satisfy the claims of the Banks wit~ respect to the principal
amount it was further held that the same wquld be disbursed
by the Custodian on pro.,rata basis and after receiving an
undertaking from the banks to the Court that they would bring
8 back the amount; if so required, on such terms and conditions
as may be directed. by the Court.

2. As this Court in an order i!l an interim application
recorded the directions of the committee of the..Union· of India
regarding the State Bank of India not requesting for any interim ·
C payment, the aforesaid orders and directions were made
subject to the condition of the Custodian seeking clarification
from this Court and releasing such payment in favour 9f the
concerned parties, only if, permitted by this Court.

o 3. The issue which is particularly sought to be raised by
the appellant, Income Tax Department by filing the prese!lt
appeal is whether the Special Court constituted under the
aforesaid Act was right in scaling down thepriority.·tax d~mand
by delving into the merits of the asses§ment orders and by
E deciding the matter as an aP,pellate authority which directions
according to the appellant are in violation of the decision of this
Court in the case of Harshad S. M~hta v. Custodian & Ors .
s
. [(1998) sec 11.

4. The subject matter of the present appeal relates to the
F security scam of Harshad S. Mehta and the perioq relevant to
.;
the said scam relates to assessment yea.rs 1992-1993 and
1993-19~4. The Assessing Officer completed thE! assessment
proceedings for both the aforesaid years in respect of Harshad
s, Mehta after gathering information from many sources and
G after giving an opportunity to the assessee to furnish details/
explanations on the same. The Income Tax Officer pass~d an
assessment order assessing the income for the assessment
year 1992.-1993 at Rs. 2014 crores and for the assessment
year 1993.-1994 at Rs. 1396 crores. The assessment orders
H

...
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1153
OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]

were challenged before CIT (Appeals) by the assessee and A
were largely confirmed. Cross appeals have been filed by the
Revenue as also by the assessee for the assessment year
1992-1'993, which are pending with the lncom·e\Tax Appellate
Tribunal, whereas for assessment year 1993-1994 appeal file~
by the a,ssessee is pending for admission. The orders of B
assess~ent. largely confirmed by CIT (Appeals) resulted in
raising ~ax demand of Rs. 1743 crores by the Income Tax
Departm~t.
5. In terms of the provisions of Section 11 (2) (a) of th~
Act the Income Tax Department has first right on appropriation C
of the assets of Harshad S. Mehta lying in the custody of the
Custodian against his tax demand for the assessment year
1992-1993 and assessment year 1993-1994 as tax
component. Therefore the Income Tax Department is required
to be paid in priority over the liabilities payable to the banks,, D
financial institutions and other creditors particularly for the
aforesaid relevant_ two years which were considered as
statutory period.

6. In terms of the aforesaid provisions and at the request, E
of the Income Tax Department, the Custodian had earlier
released a sum of Rs. 686.22 crores to the Departmenf
pursuant to various 'orders passed by the Special Court which,
were confirmed by this Court. The said interim release of funds
of Rs. 686.22 crores to the Department was subject to filing of F
an affidavit/undertaking by Secretary (Revenue), Government,
of India that the amount would be brought back to the Court/
Cu~todian alongwith interest within a period of four weeks, if
so directed by the Special Court.

7. In Harshad S. Mehta v. Custodian & Ors. (Supra) it was G
held by the Supreme Court that such priority would be restricted .
to the tax component of the demand for priority period relevant
to assessment year 1992-1993 and assessment year 1993-
1994. This Court also held that Special Court cannot sit in
H
·'

1154 SUPREME COURT REPORTS [2008] 16 S.C.R.

A appeal over the order of tax assessment but in case of any
fraud, collusion or miscarriage of justice in the assessment
proceedings where tax assessed is disproportionately high in
relation to funds available, the Special Court could scale down
the tax liability to be paid in priority.
B
8. Applications were filed by the State Bank of India
(hereinafter referred to as 'SBI') and also by other banks
including Standard Chartered Bank (hereinafter referred to as
'SCB.') before the Special Court seeking for direction tc;> scale
down the priority demand on the ground that there was gross
C miscarriage of.justice in making an order of assessment in the
case of the notified party, namely, Harshad Mehta. In the said
applications reference was also made to the decrees on
admission passed in favour of the banks against Harshad S.
Mehta which according to the banks have become final and
D binding. Relying on the said decrees it was contended on behalf
of the banks that passing of decrees prove that the concerned
money which are assessed as income in the hands of Harshad
S. Mehta as his income was, in fact, money belonging to the
banks and therefore there is a miscarriage of justice as the
E Income Tax Department has considered the said amount/sum
to be the income of Harshad Mehta. It was also submitted that
miscarriage of justice also crept in, in respect of, additions on
account of oversold securities, unexplained stock and
unexplained deposits in banks etc. The aforesaid applications
F were heard by the Special Court wherein the Income Tax
Department refuted the aforesaid submissions that there has
been any miscarriage of justice in making the order of
assessment in the case of Harshad Mehta. However, the
Special Court under the impugned order dated 29.09.2007
G accepted the pleas raised by the SBI and other ban.ks in part
with a direction to scale down the priority demand in the case
of Harshad ·s. Mehta in the following terms and on following
grounds:

H
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1155
OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]

Amount Added in Income Ground on which deducted by A
in Crores under the Head the Special Court
1688 Decreed Amount in favour of banks.
1080 Over-sold As the assessing .officer stated that
Securities the securities have been delivered
by the notified party, therefore, only B
the difference in purchase and SC!lle
price can be taken and not the
entire amount.
253 Unexplained Consent decrees passed by the ,
Stocks Supreme Court were not challenged c
by the appellant.
101 Unexplained For an amount of Rs. 18. 75 crores
money/Deposits decree of Special Court in favour of
in Banks SBI, w.r.t 64.94 and 17.77 crores,
Bank filing affidavit stating that the
amount never transferred into the,
D
account of Harshad S. Mehta.
, 9. Consequently, it was held that if the above amounts a~e
! excluded from total assessed income of the statutory perio~,
the total income would be reduced to approximately Rs. 277 E
crores, arid therefore, it was held by the Special Court that th,e
tax liability of Harshad S. ·Mehta for the aforesaid twp
assessment years payable under Section 11 (2) (a) of the A<;:t
in no case would exceed Rs. 140 crores. In terms of the
aforesaid findings and conclusions arrived at by the Special F
Court directions were issued directing the Income Tax
Department to deposit with the Custodian an amount of Rs,.
546.22 cror~s with interest at 9% per annum from the date of
receipt of the amounts amounting Rs. 686.22 crores, with a
further direction that the said amount which is to be deposited G
by the Income Tax Department alongwith other amount lying
deposited with the Custodian would be released in favour of
the banks in terms of observations made in the impugned order.

10. In the light of the aforesaid facts and issues we now H
1156 SUPREME COURT REPORTS (2008] 16 s.C.R.

A proceed to deal with the various contentions raised on behalf ~
of the parties who in support of theit contention have referred
to various documents on record.

11 ·. DL!ring the course of hearing our attention was drawn
to tWo pending applications which were for the deletion of the
B
name of respondent No. 11 namely, State Bank of Saurashtra
from array of parti:es 8$ .the said bank was liioC1uired by 1
respondent No. 1, State Barik of India undet Notification No.
G.S. R. 589 (E) d~ted 13.08.2008. In view of the aforesaid
position, both the applications which were filed for deletion of
c the name of respondent No. 7 in the aJ)peals are allowed.
· Ordered accordingly.

12. Mr. G.E. Vahanvati; the Solicitor General of India
appearing for the Income Tax Department submitted that the
D - order of the Special Court is perverse as the Special Court
while scaling down the figures of Rs. 1688 ~rores, with respect
to the decreed amount in favour .of the banks\h~s failed .to even ... )-"

_consider the_ fact that whether or not the said ameunts which >
have been decreed in favour of the batik were ~c~ually included )

L
E in the income of the assessee/notified person for the Statutory .•
period. It was further submitted that unless it was demonstrated -~
tf~

and established by the banks that there is a nexus between the
amounts vyhich have been decreed in their favour and the
amount which has been included in the income of the
assessee/notified person for the statutory period, the said
F
amount cannot be scale down. Elaborating the. argument it was ~

submitted that as the banks have failed to prove an~ establish
that the amounts have been wrongly assumed to be the income
of the assessee as per the decrees, the Special Courts was )-
r
neither justified nor legal in assuming that the said am?unts
-G
were part _and parcel of the assessment for the statutory period
and thereby directing for the scaling down of the said amounts.. +-

The learned Solicitor General further submitted that the
impugned judgment is erroneous not only. to the_ aforesaid
H extent but also on account of the fact that there has been
-OY. COMMISSIONER OF INCOME iAX v. STATE BANK 1157
- OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]

'> _duplication of amount while scaling down the figures of R$. A
1688 and Rs. 1080 crores. The amount of Rs. 1080 crores was
scaled down by the Special court on account of oversold
securities and the said amount'is arrived at after deducting a11
amount of Rs: 601.22 crores credited to SBI from an amount
of Rs. 1681.79 crores. With regard to the said amount it was B
submitted that the said amount is arrived at by the assessing
• officer after taking note of various suits flied by the banks with
respect to oversold securities, but he agreed that as at that
point of time the suits were pending and there was no decree
the claims of the banks were declined by the assessing officer, c
except the amount of Rs. 601.22 crores for which the credit was
given to the SBI. Thus, acc~rding the learned _Solicitor General -
the figure of Rs; 1080 crores is an integral part of Rs. 16_88
crores which is the alleged suit amount claimed by the banks.

On the question of refund and disbursement it was D
submitted that the application of Section 11 (2)(a) can arise only
.. at the stage of final distribution. of assets and ari order under,
the said section can be passed orjty after examining the claims:
by the S~cial Court under Section 9(a) ofthe Act. It.was further
1

submitted th-at even otherwise as per Section 11 (2)(a) of the. E
Act the claim of the Income Tax Department on account of taxes
due will have priority over ihe claims of the bank. In order to'
support the said contention the learned Solicitor General has,
referred to paragraph 15 of the above mentioned decision of
this Court in Harshad S. Mehta v. Custodian & Ors. (Supra)' F
wherein it was held by this Court that before the amounts can
" be paid to the banks or financial institutions under Section
11 (2)(b), the liabilities under Section 11 (2)(a) are r~quired to
be discharged.
G
13. On the other hand, Mr. K.K. Venugopal, the learned
senior counsel appearing for. the respondent No. 9, SCB
-<
supported the judgment and order of the Special Court.
Negating the abovesaid claims of the appellant, it was
submitted by the learned senior counsel that the· decrees in the
H
1158 SUPREME COURT REPORTS [2008] 16 S.C.R.

A favour of the banks were with respect to siphoning of funds from --1
the bank and not on account of the oversold securities. As per
the learn.ad ·senior counsel the assessing officer has placed
reliance on Annexi.Jre - M2 as comprising a list containing such
oversold seci.Jritie·s and accordingly added the amount into the
B income of Harshad Mehta. It was further submitted that the
· department, merely on the fact that the assessing officer has
credited an amouht of Rs. 601.22 crores in favour of SBI while t
arri'.ting at the· figure of 1080 crores, has come to the conclusion
that the decrees for the entire amount of Rs. 1688 crores are
c on account of over sold securities, which is ex-faci~ wrong and
misconceived and thus the entire contention that there is an
duplication is fanciful. In support to the said submission it was
·submitted that a bare perusal of the said Annexure M-2, which
is· neither a trading account nor an account which show the
0 purchases and sales effected by the assessee, would make it
~bundantly clear that the entries reflected therein have nothing
·to· do with any of the claims made by the banks in any of the
sui.t filed by the b_anks. ·

· In response to the contention of the appellant department
E that there is no nexus between the am·ounts which have been
decreed in.favour of the banks and the amount which has been
included in the inconie of the assessee/notified person, it was
·submitted that it is not the case of the bank that there is a direct
nexus between the amount of the decrees and the individual
F items· added to the income of the notified party but what is
submitted is that.the·decretal amount represents the liability
which ought to have been deducted whilst arriving at a
conclusion of the tax liability of the notified party.

G 14. Mr. C. A. Sundaram, learned senior counsel appearing
for the·respondent No. 1, SBI while concurring.with the above
said submissions of the learned senior counsel for respondent
No. 1 submitted that the amount of Rs. 1681.78 crores, i.e. 1080
crores plus 601.22 crores credited to SBI, was against the
oversold securities delivery of which was made by Harshad
H
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1159
OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]

Mehta, the fact which has been accepted by the assessing A
officer in the Assessment order. It was submitted that as the
assessing officer has included the gross amount ·with6.ut
deducting the payable from the receivable, thus, the entire
addition per se is wrong and invalid and therefore the same is
liable to be. deducted from the assessment. On the question of . B
duplication he submitted that the entire contention is frivolous
and misconceived as the decrees for an amount of Rs. 1688
crores were in regard to the transactions which were not
complete or concluded whereas the amount of Rs. 1080 crores
was in respect of the transactions which were satisfied, c
concluded and complete and in which case the deliveries were
made. It was also submitted that the issue of duplication is an
after thought as the Income Tax Department never raised the
same before the Special Court and it is raised for the first time
before this Court.
D
15. On the issue of jurisdiction of the Special Court with
" regard to scaling down both the learned senior counsel
submitted that though the Special Court cannot sit in appeal
over the assessment of tax authorities and that there can be
no question of reopening of any tax assessment before the E
Special Court as the same has to be determined under the
mechanism provided under the relevant tax law, but that it is
within the authority and jurisdiction of the Special Court to
decide as to how much of the liability would and could be
discharged out of the funds in the hands of the Custodian and F
th~t in coming to the said decision it will also be within the
authority and jurisdiction of the Special Court to direct. for
making payment either in full or in part. It was further submitted
that for this purpose the Special Court can examine whether
there is any fraud, collusion or miscarriage of justice in G
assessment proceedings and that since in the present case
the revenue has raised a fanciful claim of an alleged income
of the assessee, to the tune of Rs. 3400 crores, on the basis
of "Best Judgment" assessment without disclosing material
thereof there has been miscarriage of justice. The learned H
,...,
~
~

1160 SUPREME COURT REPORTS [2008] 16 S.C.R.

A counsel in support of their contention placed reliance on the
~
observations made by this Court in paragraph 35 of the
abovementioned decision of this Court in Harshad S. Mehta
v. Custodian & Ors. (Supra) wherein it was held that where the
. assessment 'is based on proper material and pertains to .the
B "statutory period", the Special Court may not reduce the tax
claimed and pay it out in full. _It was also held that if the
assessment is a "best judgment" assessment, the Special
t
Court may examine whether, for example, the income which is
so assessed to tax bears comparison to the amounts.attached
c by the Custodian, or whether the taxes so assessed are grossly
· disproportionate to the properties of the assessee in the hands
. of the Custodian, applying the Wednesbury Principle of ,)
~-
Proportionality. hi such cases it was held that, the Special Court
may, scale down the tax liability to be paid out of the funds in
D the hands of the Custodian. Reference was also made to
paragraph 36 wherein it is held that although the liability of the
assessee for the balance tax would subsist, .and the taxing
autho,rities would be entitled_to real.ise the remaining liability 'f

fr()m the assessee, the same will not be paid in priority· over
th~ claims of everybody else under Section 11 (2)(a).
E
16. ·111 ·order to arrive at a finding it would be essential for
us to extract the relevant provisions of the Act and the judicial
interpretation of the said provisions.

F 17. The Special Court (TORTS) Act, 1992 was enacted : .,
to provide for the establishment of a Special Court for the trial
of offences relating to transactions in securities and for matters
connected therewith or: incidental thereto. Section 3 of the Act
requires the appointment of a Custodian thereunder who is,
G inter. alia, required to deal with the properties of the persons
notified in such manner as .the Special Court may direct. The
said section reads as under: "
~

"3. Appointment and functions of Custodian - ( 1) lhe

H
··Central Government may appoint one or more Custodian
as it may deem fit for the purposes of this Act.
r
1·
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1161
OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]

(2) The Custodian may, on being satisfied on information A
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 6th June, 1992, notify the
name of such person in the Official Gazette.
B
(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. C

(4) The property attached under sub-section (3) shall be
dealt with by the Custodian in such manner as the Special
Court may direct.
D
(5) The Custodian may take assistance of any person
while exercising his powers or for disGharging his duties
under this section and Sec. 4."

The Special Court has jurisdiction, under Section 7 of the
Act, exclusively to hear and decide prosecutions in respect of E
offences under the said Act, that is to say, offences relating to
transactions in securities after 1-4-1991 and on or before 6-6-
1992. By reason of the amendment of the said Act and the
inclusion of Sections 9-A and 9-B, the Special Court is invested
with civil jurisdiction in regard to such transactions. Section 11 F
of the Act provides the manner in which the liabilities are
1
. required to be discharged. The said section reads as under:

"Section 11. Discharge of liabilities. - (1) Notwithstanding
anything contained in the Code and any other law for the G
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 attachm~nt.

(2) The following liabilities shall be paid or
H
1162 · SUPREME COURT REPORTS [2008] 16 S.C.R

A . · discharged ih full, as far as may be, in the order as under:
~-

, .· (a).~11,revenues, taxe~. cesses_ and rates due from
: the persons· notified by the Custodian· under sub.,section
· (2) of Section· 3 to the Central .(3overnment or any State
· ·Government or any local authority;
B
(b) all amounts due from the person so notified by
the Custodian.to any bank or financial institution or mutual )'
fund; and

c (c) any. other liability as may be speci~ed by the
Special Gourt from time to time."··

18. In the case of CIT v. A.K. Menon, L\ 1995) 5 sec 200)
this Court discussed the jurisdiction of the Special Court with
respect to tax liability of the notified persons. In paragraph 4 of
D the judgment it was held as under:
'.
"It 'is cle.ar that the Special Court has no power to sit in
' ' -r
appeal over or overrule the orden~ of the tax authorities,
the Income Tax Appellate Tribunal or the courts in regard
E to the tax liabilities of notified persons. The only power of
·the. Special Cqurt is to- determine the priorities in which
claims upon the property under attachment shall be paid.
The .claims relating-to the tax liabilities of a notified person
· are.1 along with revenues, cesses and rates entitled to be
F · paid first in the order_ of priority and in full, as far as may
be: In relation to: a claim for payment of the tax liability of
, a notifi~d person, the Special Court has, therefore, only the.
limited power to determine what; having regard to the funds
availaole, 'can be pa.id; that is to say, whether the claim can
G · be satisfied in full or ·only in part. If a particular tax claim
cannot at any time· be paid in full, provision would have to
be made for the balance, so far as may be, so that it is
+-
not jeopardized."
~~
·19. Subsequently, the aforesaid section of the Act was
H
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1163
· OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]

• discussed in detail by this Court in the case of Harshad S; A
Mehta v. Custodian & Ors. (supra). In paragraph 11 of the said
judgment it was held as follows:

"11. This section obviously deals with disbursement of
properties attached under Section 3(3). Since the property
8
(moveable or immovable or both) which is attached is of
the person notified, the liabilities which are to be paid or
· discharged under Section 11 (2) are also liabilities of the
person notified - whether these liabilities be in respect of
payment of revenues, taxes, cesses or rates, or whether
they be the liabilities to any bank, financial institution or C
mutual fund."

In paragraph 12, however, this Court held that before the
Special Court proceeds to make an order under Section 11 (1),
the said court must be fully satisfied that the property which is D
attached and is being disposed of is the, property belonging to
" the notified person. If any person other than the notified person
has any share, or any right, title or interest in the attached
property on the date of notification under Section·3 of the Act
that right of a third party cannot be extinguished. After having E
held thus this Court proceeds to observe as follows in
paragraph 13:

"13. The directions, therefore, for disposal under Section
11 ( 1) can be. given only after the Special Court has
satisfied itself that. the property under attachment is the F
property which belongs to the notified person. The
directions for disposal can only be in respect of the right,
title and interest of the notified person in the attached
property. If, therefore, any application is filed before the
Special Court by a .third party claiming the property so G
attached and/or for releasing the right, title and interest of
a third party in the property from attachment, the Special
Court wit! have to decide the application before proceeding
under Section 11." •
H
1164 SUPREME COURT REPORTS [2008] 16 S.C.R.

A This Court thereafter proceeded to interpret the phrase
"taxes due" as used in Section 11 (2) (a) and after analyzing
the same held as follows in paragraph 23 and 24 :-

"23. "Tax due" usually refers to an ascertained liability.
However, the meaning of the words "taxes due" will
B ultimately depend upon the context in which these words
are used.

24. In the present case, the words "taxes due" occur in a
section dealing with distribution of property. At this sta·ge
c the taxes "due" have to be actually paid out. Therefore, 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. In other words,
D taxes as assessed which are presently payable by the
notified person are taxes which have to be taken into
account under Section 11 (2)(a) while distributing the
. property of the notified person. Taxes which are not legally
assessed or assessments which have not become final
E and binding on the assessee, are not covered under
Section 11 (2)(a) because unless it is an ascertained and
quantified liability, disbursement cannot be made, In the
context of Section 11 (2), therefore, "the taxes due" refer
to "taxes as finally assessed"."
F In paragraphs 25 the Court dealt with the question that
whether the taxes relate to a specific period or to all the taxes
due from the notified party. The said question was answered
in the following manner:

G "25 .......... The Special Court Act is q·uite clear in its intent.
It seeks to cover all criminal and civil proceedings rela~ing
to transactions in securities of a notified person between
1-4-1991 and 6-6-1992. The Special Court is empowered
to examine all civil claims and to try all offences pertaining
H to such transactions during the said period. Under Section
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1165
OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]

3(2), it is the property of such offenders which is attached A
by the Custodian and which is disbursed under the
directions of the Special Court under Section 11 (2).
Clearly, therefore, as the Special Court is empowered to
examine all transactions in securities during the period 1-
4-1991 to 6-6-1992, as also all claims relating ~o the B '.
property attached, the Special Court will also have to
examine the tax liability of the notified person arising during
the period 1-4-1991 to 6-6-1992. As the purpose of the
Special Court Act, inter alia, ·is as far as practicable, to
safeguard the funds to which the banks and financial c
institutions may be entitled, and to ensure that these funds
are not done away with, there are provisions for
attachment, ascertainment of claims and distribution of
funds. However, before the liabilities of a notified person
to banks and financial institutions can be discharged,
0
Section 11 (2)(a) requires the tax liability of the notified
person to be paid. In this context the tax liability can
properly be construed as tax liability of the notified person
arising out of transactions in securities during the "statutory
period" of 1-4-1991 to 6-6-1992. If, for example, any
income tax is required to be paid in connection with the E
income accruing to a notified person in respect of
transactions in security during the "statutory period", that
liability will have to be paid before the funds are made
available to the banks and financial institutions. Similarly,
in respect of any property which is attached, if any rates F
or taxes are payable for the "statutory period" those rates
and· taxes will have to be paid before the proceeds of the
property are distributed to banks and financial institutions.
In the same manner, the liabilities to banks and financial
institutions in Section 11 (2)(b) are also liabilities pertaining G
to the statutory period ........... "

What will be the fate of the tax liability of the notified person
for any other period was mentioned in para 26, which is as
under:
H
1166 SUPREME COURT REPORTS [2008] 16 S.C.R.

A "26. Every kind of tax liability of the notified person for any
.other period is not covered by Section 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 Section 11 (2)(c),
B or the taxing authority may recover the same from any
subsequently acquired property of a notified person (vide
. Tejkumar Balakrishna Ruia v. A.K. Menon [(1997) 9 SCC
'1'23]} "or in any other manner from the notified person in
accordance with law. The priority, however, which is given
c $ under Section 11 (2)(a) to such tax liability only covers such
liability for the period 1-4-1991 to 6-6-1992."

After having held thus, this Court proceeded to determine
the· jurisdiction of the Special Court with respect to discharge
df tax liability out of the funds in the hands of the Custodian. In
D para 34 and 35 the Court qualified the observation of this Court
in the case of CIT v. A.K. Menon (Supra) and held that the
y
Special Court can, for the purpose of discharging tax liability,
examine whether there is any fraud, collusion or miscarriage
of justice· in assessment proceedings. The said aspect was
E furth'er elaborated in para 36. The said paras are as under:

"34. While we respectfully agree with the finding that the
Special Court cannot sit in appeal over the assessment
.of taxes by ~h.e tax authorities, we would like to qualify the
Court's subsequent observations relating to payment in full
F
of ~II· assessed taxes under Section 11 (2)(a). There is
undqubtedly no question of any reopening of tax
.assessments before the Special Court. There is also no
provision under the Special Court Act for proof of debts
as in insolvency. The provisions in the Special Court Act
G
for examination of claims are under Section 9-A. A claim
in respect of tax assessed, therefore, cannot be reopened
by the Special Court. The liability of the notified person to
pay the tax will have to be determined under the machinery
provided by the relevant tax law. The extent of liability,
H
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1167
OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]

therefore, cannot be examined by the Special Court. A

35. But the Special Court can decide how much of that
liability will be discharged out of the funds in the hands of
the Custodian. This is because the tax liability of a notified
person having priority under Section 11 (2)(a) is only tax 8
liability pertaining to the "statutory period". Secondly
payment in full may or may not be made by the Special
Court depending upon various circumstances. The Special
Court can; for this purpose, examine whether there is any
fraud, cdllusion or miscarriage of justice in assessment
proceedings. The assessee who is before the Special C
Court, is a person liable to be charged with an offence
relating to transactions in securities. He may not, in these
circumstances, explain transactions before the Income Tax
authorities, in case his position is prejudicially affected in
defending criminal charges. Then, on account of his D
property. being attached, he may not be in a position to
deposit the tax assessed or file appeals or further
proceedings under the relevant tax law which he could have
otherwise done. Where the assessment is based on
proper material and pertains to the "statutory period", the E
Special Court may not reduce the tax claimed and pay it
out in full. But if the assessment is a "best judgment"
assessment, the Special Court may examine whether, for

- example, the income which is so assessed to tax bears
comparison to the amounts attached by the Custodian, or
whether the taxes so assessed are grossly
F

disproportionate to the properties of the assessee in the
·hands of the Custodian, applying the Wednesbury
Principle of Proportionality. The Special Court may in these
cases, scale down the tax liability to be paid out of the G
funds in the hands ofthe Custodian.

36. 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,
H
1168 SUPREME COURT REPORTS [2008] 16 S.C.R.

A the same will not be paid in priority over the claims of \

everybody else under Section 11 (2)(a)~ If the Special Court
so decides, it may direct payment of the balance liability
under Section 11 (2)( c). Otherwise the taxing authorities
may recover the same from any other subsequently
B acquired property of the assessee or in any other manner
in accordance with law. Such scaling down, however,
should be done only in serious cases of miscarriage of
justice, fraud or collusion, or where tax assessed is so
disproportionately high in relation to the funds in the hands
c of the Custodian as to require scaling down in the interest
of the claims of the banks and financial institutions and to
further the purpose of the Act. The Special Court must have
strong reasons for doing so. In fact, the Income Tax
authorities have also accepted that exorbitant tax demands
D can be ignored, applying the Wednesbury Principles."

20. From the above mentioned legislat.ive provisions and
judicial interpretation in the decision of Harshad S. Mehta v.
Custodian & Ors. (supra), in our considered opinion, the
following general principles regarding the powers ~f the Special
E Court while discharging the tax liability emerge:

(i) Special Court has no jurisdiction to sit in appeal
over the assessment of the tax liability of a notified
person by the authority or tribunal or c6urt authorised
F to perform that function by the statute under which
the tax is levied. A claim in respect of tax assessed-
cannot be reopened by the Special Court and the -
extent of liability, therefore, cannot be examined by
the Special Court.
G (ii) The claims relating to the tax liabilities of a notified
person are, along with revenues, cesses and rates
entitled, for the statutory period, to be paid first in
the order of priority and in full, as far as may be,
depending upon various circumstances.
H
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1169
OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]

(iii) The 'taxes due' refer to 'taxes as finally assessed'. A
The tax liability can properly be construed as tax
liability of the notified person arising out of
transactions in securities during the "statutory
period" of 1-4-1991 to 6-6-1992.
B
(iv) The priority, however, which is given under Section
11 (2)(a) to such tax liability only covers such liability
for the period 1-4-1991 to 6-6-1992. Every kind of
tax liability of the notified person for any other period
is not covered by Section 11 (2)(a), although the
liability may continue to be the liability of the notifiedc
person. Such tax liability may be discharged either
under the directions of the Special Court under
Section 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 D
notified person in accordance with law.

(v) The Special Court can decide how much of the tax
liability will be discharged out of the funds in the
hands of the Custodian and the Special Court can, E
for the purpose of disbursing the tax liability,
examine whether there is any fraud, collusion or
miscarriage of justice in assessment proceedings.

(vi) Where the assessment is based on proper material
" and pertains to the "statutory period", the Special
p
Court may not reduce the tax claimed and pay it out
in full, but if the assessment is a "best judgment"
assessment, the Special Court may examine
whether the taxes so assessed are grossly
disproportionate to the properties of the assessee G
-1
in the hands of the Custodian, applying the
Wednesbury Principle of Proportionality and other
issues of the said nature. The Special Court may
in these cases, scale down the tax liability to be
H
1170 SUPREME COURT REPORTS [2008] 16 S.C.R.

A paid out of the funds in the hands ofthe Custodian.
Such scaling down, however, should be done only
in s&rious cases of miscarriage of justice, fraud or
collusion, or where tax assessed is so
disproportionately high in relation to the funds in the
B hands of the Custodian as to require scaling down
in the interest of the claims of the banks and
financial i.nstitutions and to fµrther the purpose of
the Act. The Special Court must have strong
reasons for doing so. ·
c 21. In the light of the abovementioned general principles
which are culled out from the legislative provision and the
decisions referred to above regarding the powers of the
Special Court while discharging the tax liability we proceed to
analyse the merit of the contentions.
D
22. So far.as the claims are concerned, there could be no
dispute with regard to the priority claim of the Income Tax
Department in' releasing the tax due. At the same time there
could also·be no dispute with regard to the fact that if any party
E other than the notified person has any right, title or interest in
the attached property on the date of the notification under
Section 3 of the Act the said right of the third party did not and
could not have been held to be extinguished.

23. The banks on the basis of the decrees in their favour
F have contented that there right, title and interest respectively in
the attached property on the date of the notification has been
extinguished,· as the said amount has been included in the
income of the notified party for the statutory period and the
payment of the same is claimed in priority over the claims of
G the banks. ·

24. There could be no disagreement with regard to the fact
that if any amount is· found due and payable by the banks
towards amount advanced by it as loan to Mr. Harshad Mehta,·
H
DY. COMMISSIONER OF INCOME TAX v. STATf: BANK 1171
OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]

in that event tne right of the bank to the extent of the said A
amount, must be held to be the existing right of the bank on
the property which is attached. It also cannot be ignored that
the. said amount could not have been assessed in the hands
· of Harshad S. Mehta as his income, for the banks continued
to have an existing right on the aforesaid amount which is B
required to be released in terms of the decrees which are
obtained by the banks and the non-release of the said amount
would amount to miscarriage of justice.

However, the fact that decrees have been obtained by the
banks in respect of the certain dues of Harshad S. Mehta could·. C
not be disputed by the Income Tax Department. It also could
not be disputed by the Income Tax Department that the amounts.
for which decrees have been obtained by the banks have
become final and binding. But then, it was submitted that the .
taxes due have been ascertained and arrived at in terms of the D
provisions of the Act and that the banks have failed to establish
by producing the relevant documents on record that the said
· amount, which is decreed in favour of the bank, has been
wrongly included in the income of the notified party for the
statutory period. As the priority in payment of tax liability under E
Section 11 (2)( a) is only for the statutory period and not for any
other period, we find that the appellant is justified while
contending that if the banks have a right, title or interest in the
attached property on the date of the notification under Section
3 of the Act for which decrees have been obtained and if the F
banks are claiming that the said amount has wrongly been
included in the income of the notified party for the statutory
period, then the banks are required to show the nexus between
the said decreed amount and the amount which is included in
the income of the notified party for the statutory period. G

25. The second disputed question of fact which is also
sought to be raised by the Income Tax Department is with
regard to the duplication of amount while order for scaling down
the amount of Rs. 1688 crores and Rs. 1080 crores. It was
H
1172 SUPREME COURT REPORTS [2008] 16 S.C.R.

A contended by the Department that both the aforesaid amounts
are with respect to the oversold securities and are one and the
same. As mentioned earlier the amount of Rs. 1080 crores was
arrived at after taking out the amount of,Rs. 601.22 crores from
the amount of Rs. 1681. 79 crores. The said amount of Rs.
B 601.22 crores appears to have been recognised as a claim
under a pending suitfiled by SBI. Consequently, the said
amount was credited in favour of the SBI by the Assessing
Officer while making the order of assessment.

On the other hand it was submitted by the learned counsel
C .for the respondents that the said contention is untenable in law
as the reliance on Annexure M-2 is itself erroneous.

· 26. The said second issue with respect to duplication is
correlated to the first issue and a finding on the said issue can
D be given, only once the finding with respect to the first issue is
arrived at. There is no finding either on the issue of nexus or
on the issue of duplication by the Special Court in the
impugned judgment. Probably the reason for the same as also
mentioned by Mr. Sundaram is that the said issues were not
E raised before the Special Court and even if they were raised
before the Sp'ecial Court the same were not addressed or
considered in the manner in which they should have been so
done.

27. For the adjudication of the disputes which are raised
F in the present appeal a finding on the said issues and questions
would be mandatory and the same cannot be dispensed with
under any circumstances. It was submitted by the learned senior
counsel appearing for the respondents that at this point the
matter should not be· remanded back to the Special Court for
G a finding on the said issues and questions and the said finding
should also be given by this Court. We considered the said
submission. But we find that it would not be possible for us to
give any finding on such disputed questions of fact without the
same having been looked into by the Special Court after giving
H
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1173
OFINDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J]

opportunity to the parties to file all relevant documents and A
papers in support of their contention relating to the aforesaid
two issues. Even otherwise, neither the decrees in favour of the
banks nor the documents with respect to the suits filed by the
banks which indicate the claims of the banks in the suits have
been placed before us. Therefore we are not in a position to B
give any conclusive finding at this stage.

,,- 28. In the absence of the relevant documents neither would
it be possible nor would it be appropriate for us to give a
finding on the said issues and questions. Therefore as a
Hobson's choice we are of the opinion that all such disputed
c
questions are required to be decided by the Special Court after
giving an opportunity to the parties to place all the relevant
documents so as to enable it to come to a proper and
considered finding.
D
29. However, while remanding the matter for a finding on
the said issues and questions we decide the issue that if the
nexus is .shown by the banks between the amounts for which
decrees have been obtained, which have become final and
binding and the amount which is included in the income in the E
·.._
hands of Harshad S. Mehta by the Department, the same will
have to be disbursed· to the banks by the Special Court. We
also hold that on account of oversold securities if the delivery
has been given by Harshad S. Mehta and the transaction is
complete, only the difference between the payable and F
receivable will be taken and not the gross amount. However the
~
issue as to whether the decrees are on account of oversold
securities and, if so, is there any duplication or whether the
decrees are on account of siphoning of the funds, is requii'ed
to be adjudicated by the special Court on appreciation of the G,
relevant documents.
' 30. To be specific, the Special Court will give its finding
on the two below mentioned issues in addition to the other
issues, if any :
H
1174 SUPREME COURT REPORTS [2-008] 16 S.C.R.

A 1. Whether-there is any nexus between the decretal
~
amount and the income included in the assessment
of the notified person for the statutory period.

2. Whether the decrees are with. re.gard to the
B . Oversold_Securities, and if so, whether there is any
duplication of amount while scaling down the tax
liability.
1"
31. After giving its finding on the said issues, the Special
Court will dispose of the matter in the light of the observations
G made herein above. We may however clarify that so far as the
amounts of Rs. 253 crores and Rs. 101 crores are concerned, ·
./...
the. appellants have not stated that the said amount were not
included in the income of the notified party for the statutory
period. The consent decrees obtained in respect qf Rs. 253
D crores were .not challenged by the appellant which ler:t the
~ Special Court.to believe that the appellant. hasaccepted the
settlement and accordingly scaled 'down .the said amount from
the income of Harshad Mehta. Similar is the case with the
amount of Rs. 101 crores. Thus the scaling down of the said
E amount is upheld and will not be disturbed. ,..,.
32. It is needless to say that the orders of disbursement
made during the pendency of the disputes tetween the parties
cannot be said to be final and the same will have to be interim
in nature and would finally get settled and take shape on the
F
determination of the final liabi'lity· after final adjudication of the
disputes by the appropriate forums. ;..

33. In the light of the aforesaid observations and directions
and till ~ decision is taken with regard to the aforesaid issues
G which are remanded back to the Special Court we direct that
!
the said amount which was directed to be deposited by the
Income Tax Department with the Custodian may not be
refunded. We therefore set aside the directions of the Special
Court, except to the extent mentioned in para 31 and remit the
"H entire matter and claims of the parties to be decided afresh in
DY. COMMISSIONER OF INCOME TAX v. STATE BANK 1175
OF INDIA AND ORS. [DR. MUKUNDAKAM SHARMA, J.]

terms of the observations made in this order. We also make it A
clear that none of the observations made in this order would
be construed as any observations made by this Court on the
merit of the claims. We request the Special Court to decide
the aforesaid issues as expeditiously as possible preferably
within a period of three months from today and while doing so B
give an opportunity to the parties to file such documents which
are required or desired to be filed in support of the appeals.

34. Accordingly, all the appeals stand disposed in terms
of the aforesaid observations and directions.
c
K.K.T. Appeals disposed of.

..
1