Rakshak Chemicals (P) Ltd., Vapi Vs. Ito, Tds, Valsad - Court Judgment

Excerpt:
these 30 appeals are by six assessees arising out of the orders of the commissioner (appeals) for assessment years 1995-96 to 1999-2000 confirming the levy of penalty under section 201 read with section 221 of the income tax act for the failure of the assessees in not deducting tax at source as required under section 194a of the act from the interest provided and claimed deduction in its profit and loss account.the facts giving rise to these appeals are that all these assessees negotiated with and took short term loan of rs. 44,98,25,000 from fairgrowth financial services ltd. (hereinafter referred to as ffsl) somewhere in march/april, 1992. all these loans were secured and pledged of 3,50,000 shares of united phosphorous ltd. as per the terms of the loan, 20 per cent of the amount was to be repaid within 60 days and the balance within a period of 180 days. the security by way of pledging of these shares were not to be redeemed in the market and, the shares were not to be transferred unless there was a default in repayment. the assessee repaid loan of a sum of rs. 6,32,00,000 within 60 days and this amount was more than the said 20 per cent. the balance was to be paid in september/october, 1992. it transpired that on 10-8-1992 out of the said 3.5 lakh shares. syndicate bank acquired 2.5 lakh shares from fairgrowth investments ltd. with whom ffsl has made a forward transaction and national housing bank came in possession of the balance 1 lakh shares as sub-pledgee against advancing loan to ffsl.somewhere at that time a special (trial of offences relating to prosecutions in securities) ordinance, 1992 came into force in june, 1992 with the object to deal with large scale irregularities and mal-practices came to the notices in the course of investigation by reserve bank of india in respect of transaction in both the government and the other securities indulged in by some brokers in collusion with the employees of various banks and financial institutions, which led to the diversion of funds from banks and financial institutions to the individual accounts of certain brokers. to deal with the situation and in particular to ensure speedy recovery of the huge amount involved, to punish the guilty and restore confidence in and maintain the basic integrity and credibility of the banks and financial institutions the special court, ordinance is provided for establishment of special court with a sitting judge of a high court for speedy trial of offence relating to transactions in securities and disposal of properties attached. it also provided for appointment of one or more custodians for attaching the property of the offenders with a view to prevent diversion of such properties by the offenders. a custodian under the ordinance was appointed on 2-7-1992. ffsl was declared to be a notified party and the amount advances by it to these assessees became an "attached asset" under section 3(3) of the ordinance. the said ordinance was replaced by an act on 18-8-1992 (hereinafter referred to as the special act). all the transactions during 1-4-1991 to 6-6-1992 were covered by this act. the attached property of the notified persons were to be disposed of and distributed by the custodian as per the direction of the special court in accordance with the provisions of section 11 of the special act.the assessees therefore, had to approach the special court against the alleged transfer and sub-pleading of these shares. on 15/20-4-1994, by an interim order the special court accepted the assessees ownership of the shares and directed that by repaying the loan with interest the assessees could get back the shares and until then, the assessees were restrained to transfer these shares in any manner. on 4-9-1994 this interim order dated 15/20-4-1994 was made a final order. the special court held that the assessees were entitled to redeem these shares on repayment of balance loan along with interest till the date of redemption. the said amount is worked out to be rs. 31,63,70,843 (principal amount of rs.20,28,12,500 plus rs. 11,35,58,343 as interest). this was to be bifurcated between the two, i.e., (i) rs. 22,59,79,174 payable to syndicate bank and (ii) rs. 9,03,91,669 payable to national housing bank. the amount was to be deposited with the special court on or before 31-7-1994 with an interest of 24 per cent for delay thereafter. both the syndicate bank and the assessees went to supreme court against the special court order-syndicate bank for accepting the assessees ownership and assessees for not granting unconditional and immediate return of 23.76 per-cent on the security and against payment of interest at the rate of 24 per cent per annum from due date upto the date of payment. on 12-9-1994 on appeal by syndicate bank and on 7-10-1994 on appeal by the assessees the supreme court directed the parties by two different orders to maintain status quo. syndicate bank again filed a suit no. 5/1994 claiming ownership of the said 2,50,000 shares of united phosphorous ltd. or recovery of amount paid to fair growth investments ltd. for transfer of these shares but the suit was adjourned by order dated 29-3-1995 till the appeal by the supreme court is finally disposed of. in this decision it was also observed that if the assessees were concerned about their liability for payment of interest on the loan amount, they could reply the loan and get back the shares redeemed or take the permission of the supreme court to deposit the money with the custodian. the assessees did neither.the assessees made provision for interest payable to ffsl of rs. 2,63,58,000 and also claimed the same as allowable expenses in their respective assessments. by a letter dated 4-2-2000, the income tax officer (tds) drew the attention of the assessees to the provisions of the explanation to section 194a of the said act and stated that the assessees had defaulted in not deducting tax at source from the said interest amounting to rs. 2,63,58,000 provided for in the books of account and accordingly the assessees would be liable to pay penalty under section 271c as well as interest under section 201 (1a) of the act. subsequently, a show cause notice dated 10-3-2000 was issued. in the said letter the assessing officer required the assessees to submit an explanation in respect of the following observation so as not to treat the assessees as defaulters and thereby initiate proceeding for action under section 271c. section 201(1) read with sections 221 and 201(1a), viz., (a) provision for interest amounting to rs. 2,66,79,580 owing to ffsl had been made during the relevant accounting year, (b) no tax has been deducted at source thereon as per the provisions of explanation to section 194a and (c). the decision of the honble supreme court to maintain status quo was not a bar to the liability to deduct tax at source even on a provision made for interest payable.dissatisfied with the explanation of the assessees the assessing officer by an order dated 19-4-2000 under section 201 (1) read with section 221 (1) of the act, the assessing officer treated the assessees to be in default by holding that they had duly provided the interest of rs. 2,63,58,000 and had claimed the same as a deduction in the profit and loss account for the year under reference; that in view of the explanation to section 194a, interest credited to any account whether called interest payable account or suspense account or by any other name, in books of account, liable to pay such income, such credit shall be deemed to be credit of such income to the account of the payee and provision of section 194a shall apply accordingly; that the special court (incorrectly mentioned as the supreme court) had specifically ordered that the deductor is entitled to redeem the shares on repayment of entire loan amount along with entire interest thereon; that the special court had nowhere in the order mentioned not to deduct tax at source or not to pay interest on loan amount; that the matter was not sub-judice with the supreme court at all for consideration of payment of interest or for not deducting tax at source under section 194a; that the special court had held that the transactions relate to pledge transaction only, wherein element of interest payment are always involved; that the assessees had not submitted notification, if any, which may suggest that the payee was a notified institution for the purpose of section 194a(iii)(1); that had also been verified from the list of notified institutions and bodies for the purpose of section 194a(3)(iii) that the name of the ffsl was not covered in the said list and that from the attitude of the assessees for non-submission of the explanation of their explanation, if any for non deduction of tax at source under section 194a, as above, it was very much clear that they had made tacit admission of default and they had nothing to offer as their explanation for non-deduction of tax under section 194a.similar orders were made against the assessees under section 201 (1a) levying interest on the amount of tax allegedly not deducted at source.the assessees preferred appeals against the aforesaid orders to the commissioner (appeals) challenging the validity of the aforesaid orders holding the assessees to be assessees in default. at the time of hearing before the commissioner (appeals), the assessee inter alia submitted that as provided under section 13 of the special act, the provision of the said act overrides the provisions of any other law for the time being in force including the provisions of the income tax act, 1961 and accordingly the provisions relating to deduction of tax at source were not applicable. the commissioner (appeals) set aside the order for considering the above submission of the assessees, though holding the liability of the assessees to deduct taxes at source. the assessees preferred appeals to the tribunal against the aforesaid order but the tribunal declined to interfere in the matter as the orders have been set aside by the commissioner (appeals) and the issue would have to be settled in the course of the fresh proceedings.the assessing officer made the impugned orders dated 7-11-2000 afresh holding that the assessees were required to deduct tax at source and upheld the original orders by stating that the decision of the special courts in the case of sam lease co. ltd. relied upon by the assessees was not a direct decision in the cases of the assessees; that the assessees could not submit any evidence to suggest that the facts in the said case were identical; that the order passed by the special court dated 9-9-1996 required persons making payment to the custodian to deposit amount of tds in a separate account; that though the special act overrides other laws, the legislation had no intention to defeat revenues of other departments; that the supreme court has merely passed an order to maintain status quo and no direction had been passed for non-deduction of tax at source; and that the decision of the special court dated 3-5-1999 does not have retrospective effect.on going through the provisions of section 11(2) of the special courts act, the commissioner (appeals) observed that there cannot be any dispute about the priority fixed by the special court. he, however, observed that the question in these cases was not of the priority and the income tax department has not claimed any recovery of the demand on priority basis. the question, according to him, was whether at the relevant time, i.e., during the assessment years 1995-96 to 1999-2000 when the assessees made the provision for payment of interest to ffsl it was liable to deduct tax at source or not. according to him, the provisions of section 194a were clear and the assessees were required to deduct the tax and as the assessees credited to the account of ffsl interest in different year and have debited the same to the profit and loss account claiming deduction for the same, the assessees were in default as per explanation to section 194a of the act. according to him, the supreme court in the case of t.b ruto v. a.k. menon (1977) 84 air 442 (sic) had recognised that income tax act is a code in itself and the income tax department is free to determine the liability of the notified person under the provisions of the income tax act and in these cases to pay the tax on the interest income is the liability of the notified person. as per the provisions of section 194a, the assessees were under an obligation to make deduction of tax at source so that the tax liability of the notified party could be idealised. according to him, there is no provision under the special act nor there was any order of the special court or supreme court which prohibited the assessees from deducting tax at source for these years and it was only the decision of the special court dated 3-5-1999 which said that the interest should be deposited with the custodian without deducting the tax at source. this decision according to him, would be applicable for assessment year 2000-01 and not for the years under appeal. referring to the decision of sam lease co. ltd. he observed that in that case the company was making payment under the direction of special court and in these circumstances, it was held that in respect of payments made pursuant to the order and direction of the court, no tds was to be made. here, in the present case, no payment has been made to the custodian pursuant to the order of the court and the provision for payment of interest to the notified party has been made by the assessees on their own volition and not under the orders of the court.referring to the special court order dated 5-4-1994 wherein the assessees were directed to deposit the amount payable to ffsl with the officer on special duty on or before 31-7-1994 he observed that the assessees did not make any payment to the officer on special duty which simply means the assessees did not honour the orders of the special court and no payment or provision can be said to have been made in pursuance of the order of the special court.with regard to the decision of the special court dated 21-3-1995 the commissioner (appeals) held that there is no mention in this order that no deduction of tax has to be made or that the income tax department will have no claim as regards taxes due to it. the decision according to him, only says that the income tax department will have priority only for the scam period and other dues will fall under-section 11(2)(c) of the special court act. this decision according to him, does not empower the assessees not to deduct the tax at source while making provision of interest to the notified party. he referred to the decision of the special court in the case of a.k. menon v. chairman, cbdt (misc. petition no. 282 of 1995, dated 9-9-1996) wherein it was held that its earlier order dated 20-2-1995 fully applies to even tax deducted at source and by use of the word now the court had made clear that after the date of order no bank company, financial institution or person can pay over the income-tax authorities the tax deducted at source in respect of any payment being made to or on behalf of the notified party. he further observed that there is nothing in this order which said that no tds was to be made at the time of making payment of interest. on the contrary, the decision says that tds has to be deposited in separate account and the intimation has to be given to the custodian and the income-tax authorities for having deposited the same.according to him, the assessees were thus under an obligation not only to make tds but also pay the same to the government in assessment years 1995-96 and 1996-97. for other years namely, assessment years 1997-98 and 1999-2000, the assessees should have deposited the amount of tds in a separate account under intimation to the custodian and the income tax department. the decision of the special court in the case of custodian v. chief cit dated 3-5-1999 was after march, 1999 and, therefore, had no application to assessment years 1995-96 to 1999-2000. the observation of the supreme court to maintain status quo, according to him, did not mean non-deduction of tax at source or non-payment of tds amount to the income tax department after making the provision for interest payment in their books of account as irrespective of the order of the supreme court in september, 1994 the assessees kept on making provision for payment of interest and kept on debiting such interest to the profit and loss account which was allowed as a deduction to the assessees. if status quo means no payment of the assessees liability, the assessees should not have debited the interest to profit and loss account and once they have decided to make the provision and debited the same to the profit and loss account they were under obligation to deduct tax at source and pay the same to the income tax department upto assessment year 1996-97 and thereafter deposit the same with custodian.the commissioner (appeals) also referred to the decision of the special court dated 29-3-1995 observing that if the assessees are concerned about the interest they can always deposit the amount in the court and shares can be released after disposal of appeals by the supreme court or they can apply to the supreme court for permission to deposit the amount with the special court for which the parties have agreed that they will oppose no such application. he, therefore, held that the assessees cannot take shelter under the orders of the supreme court for maintaining status quo. referring to the possibility of the outcome of the supreme court decision in three situations, the commissioner (appeals) observed that the assessees rely on future decisions but keep on committing default in present every year by making provision of interest payment and debiting the same to profit and loss account. the default committed in the present, according to him, cannot be absolved by subsequent courts order.referring to all the above, the appeals of the assessees were dismissed by the commissioner (appeals) by observing in paragraph 9. 10 as under : "9.10 from the facts on record. it can be seen that it is only the income tax department which is the sufferer. the syndicate bank and the national housing bank are secured because they have the custody of the shares. as regards the appellant, it has the money borrowed by it at its command and disposal. the ffsl has also got its money back on the sale/pledge of the shares of the appellant to the syndicate bank and the national housing bank. the only party at loss is the income tax department, which has allowed the interest claim of the appellant allegedly payable to the notified party without realising the tax either from the notified party or from the appellant. it will be grave injustice to the department if the appellant does not pay the tds due to the government as per the provisions of section 194a of the income tax act by misinterpreting the provisions of the special court and the various decisions of the courts. thus, in view of the above discussion it is held that the appellant has violated the provisions of law contained in section 194a of the act and is accordingly liable to make the payment as per the order of the income tax officer (tds), valsad passed under section 201(1) read with section 221(1) of the income tax act." the learned counsel of the assessee submitted that as provided by section 13, the special act has the overriding effect over any other law, that the said act provides for the appointment of a custodian who is to deal with attached assets in accordance with the provisions of the said act; that section 11 of the said act provides for the manner in which the liabilities of a notified party have to be discharged in the following order-(a) all revenues, taxes, cesses and rates due to the central or state government for the notified period, (b) all amounts due to any bank, financial institution or mutual fund, (c) any other liability; that the purpose of the said act, therefore, is to ensure that banks and financial institutions are given priority in the amount recovered from notified parties and their dues were to be discharged before any other liability, except government dues in respect of the notified period, that in view of the aforesaid provisions, the special court in its order dated 14-9-1993 in the case of sam lease co. ltd. held that the company was not entitled to deduct tax at source before paying amounts to the custodian and directed it to pay to the custodian all amounts deducted by way of tax at source and not to deduct any such amount in future, that the special court went to the extent of stating that it was for the company to recover the amount of tds from the income tax department if they were already paid; that in this connection, the observation made by the income tax officer (tds) that as the decision of the special court in the case of sam lease co. ltd. is not a direct decision in the case of the assessees, or that the ratio of this judgment is not applicable to the case of rakshak chemicals ltd. is unwarranted and baseless; that the ratio of the decision of the special court is applicable to their case in view of the fact that in both the cases the amounts due were in respect of attached assets of notified parties and that the facts were identical; that it was not possible for the assessees to submit the required appeal memo and such other details in respect of the said case since they had no access to the same.the learned counsel drew our attention to the observations in the order of the special court wherein it stated that there is no provision for deducting tax at source in respect of payments made pursuant to the orders and direction of the court and had accordingly, held that the company was not entitled to deduct tax at source before sending the amount to the custodian; that the court had further directed the respondent not to deduct any such tax in future, that the said findings would be clearly applicable to the assessees case since. ffsl was a notified party as confirmed by the custodian and accepted by the assessing officer, and the amount of loan advanced was an attached asset and any payment due to ffsl has to be paid only to the custodian.the learned counsel referred to paragraphs 45 and 98 of the order of the special court, dated 21-3-1995 and also referred to the decision of the special court, dated 9-9-1996 where under the special court has directed all the banks companies, etc. who have to make payments of interest or dividends in respect of the notified parties to the custodian to deduct tax at source and then deposited the amount which they would have otherwise paid to the income-tax authorities in a separate account. it was submitted that such deposit in a separate account was to be made only at the time of payment of interest or dividend. in the case of the assessees, no payment has been made by them to the custodian, which fact has also been confirmed by the custodian and accepted by the income tax officer (tds) and accordingly the question of depositing the amount in a separate account did not arise.referring to the decision of the supreme court in an appeal against the order of the special court, dated 20-2-1995 and the later and consequent decision of the special court, dated 3-5-1999, the learned counsel reiterated that the banks, companies, financial institutions, etc. have been directed by the special court to pay the custodian, interest and dividend on attached amounts without deduction of any tax at source and therefore there was no liability on the part of the assessees to deduct tax at source in respect of the provision made in its books of account for interest payable to ffsl who was a notified party.the learned counsel further invited our attention to the decision of the culcutta high court in the case of apeejay industries ltd. v. cit (2002) 120 taxman 440 in a petition against the order rejecting application for waiver of interest. the high court had issued a rule and passed an order of injunction against the demand on 31-1-1978 and the demand imposed was stayed till the writ petition was dismissed on 8-1-1986 with the following observations : "there was nothing in the impugned order to show the commissioner had considered the implication and impact of the order of injunction granted by the court that continued from 1978 till 1986, rationally as a reasonable prudent man could do while examining the condition that default was due to circumstances beyond the control of the assessee. he had not considered that during this long period, the department did not take any step for getting the interim order vacated. no one could have two opinions about the impact and implication of the restraint order of the court that parties thereto could not be held responsible for any lapses during the period as per the well-known maxim actus curiae neminem gravabit, i.e., an act of court shall prejudice no one." the learned counsel further submitted that the loan has to be repaid by the assessees and they would be getting back the shares given by them by way of pledge or whether the said shares would belong to syndicate bank was itself in dispute and would have been known once the supreme court gave its decision in the aforesaid matter. hence, as per the direction of the supreme court since the assessees have been asked to maintain status quo in the matter, no payment of the amounts due to ffsl had been made to the custodian by the assessees in respect of the amounts being principal as well as the interest due thereon. in these circumstances, the provision for interest made in the account was not of such a nature as would require a deduction of tax at source. he further submitted that the credit referred to in section 194a must mean a credit which would entitle a person whose account was credited to claim payment. at this stage, neither ffsl nor syndicate bank would be entitled to the interest in view of the order of the special court and the supreme court and hence for this reason also there would have been no requirement to deduct the tax at source. it was submitted that the supreme court order requiring the assessees to maintain status quo has been passed much prior to the order dated 9-9-1996. in view of the above, the learned counsel of the assessees submitted that they cannot be held to be assessees in default in respect of non-deduction of tax at source.without prejudice to the above submission, the learned counsel of the assessees stated that the supreme court may decide the appeals filed by syndicate bank and the assessees in any one of the following manner : (i) in favour of the assessees, i.e., the title of the shares remains with the assessees and the loan is to be repaid to : (a) the custodian; if the supreme court decides that the loan along with interest is to be repaid to the custodian then as per the order of the special court no tax is to be deducted since the special court act overrides the income tax act; or else the loan is to be paid to; (b) syndicate bank; as they have made an alternative claim to step into the shoes of ffsl in its appeal before the special court/supreme court. if the said claim is accepted then the loan along with interest would be repayable to syndicate bank and as per the provisions of section 194a(3)(iii)(a) no tax is required to be deducted from interest payable to a bank.(ii) against the assessee, i.e., the title of the shares is transferred to syndicate bank : in that case no amount would be payable by the assessees to the custodian on behalf of ffsl, and the question of deducting tax at source would not arise, as the payment to a bank is exempt from tds.the learned counsel also referred to the decision of the supreme court in an appeal by syndicate bank and the consequential order of the special court dated 13-2-2003 along with the minutes of the order whereby the parties have settled their disputes and the matter was closed. this is the development which has taken place after the filing of the appeals and assessees prayed for the admission thereof by way of an additional evidence.lastly, he submitted that what we are dealing with today is the scope of levying the penalty and in a case where there is doubtful proposition or position of law prevailing at the impugned time when the assessees were required to deduct the tax whether to deduct and/or pay the tax, they should not have been saddled with the penalty under section 201 read with section 221 of the act and prays that the assessees be exonerated from such penalty on the ground of reasonable and bona fide belief for its inaction.mr. r.c. gupta, the learned cit-dr supported the orders of the departmental authorities and submitted that the assessees have provided interest in their books of account and claimed deduction and therefore the provision of section 194a read with explanation thereunder clearly apply which cast liability upon the assessees to deduct and pay tax to the credit of the central government. having failed to do so, the assessees committed default and were therefore, assessee in default.consequently the assessing officer rightly levied the penalty under section 221 read with section 201 of the act. he further submitted that the special act only provided for distribution of attached assets as per order of the special court and did not in any way deal with the liability of the assessees to deduct tax as required under the income tax act or prohibited otherwise to deduct and pay tax at source.according to him there is no conflict between special act and income tax act for this obligation and therefore the income-tax dues do not stand abrogated by the special act and in this connection he relied upon the decision of the special court in the case of t.b. ruta (supra) referred to by the commissioner (appeals) in his order. the decision in the case of a.k. menon v. sam lease co. ltd. (m.a. no. 89 of 1993, dated, 14-9-1993) he submitted is of no help to the assessees because (1) firstly it was not an order in assessees case, and (ii) secondly, the payment in that case was as per direction of the special court made to the custodian; whereas in the present case the question of payment to anybody was not there as the assessees have made provision of interest payment and therefore by virtue of explanation to section 194a, the assessees were liable to deduct tax at source and pay the same to the credit of central government. according to him, the use of the word "now" denotes that the decision of the special court was to apply only hence forward and not prior to the date of the order. he therefore submitted that for assessment year 1995-96 the assessees were clearly in default; for assessment years 1996-97 to 1999-2000 the assessees were obliged to deduct tax but instead of paying it to the central government, the tax was to be deposited with the custodian in a separate account and the assessees having failed to deduct and to deposit that tax with the custodian, committed default for all the years under consideration. as regards the status quo direction, he submitted that these observations do not mean the assessees liability to pay interest ceased as is evident from the assessees own conduct when they made the provisions for the liability of interest and claimed deduction thereof, as allowable expenditure. as regards the later settlement of the dispute by consent terms, he submitted that it is a new evidence which should not be admitted at this stage and in any case it does not absolve the assessees from their liabilities which had already been incurred by them prior to such decision. as regards the doubtful proposition of law submitted that there was no such doubt and the doubt was being created by the assessees by making submissions contrary of law.(1) any person, not being an individual or a hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force : that an individual or a hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44ab during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income tax under this section.for the purpose of this section, where any income by way of interest as aforesaid is credited to any account, whether called "interest payable account" or "suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.(i) where the amount of such income or, as the case may be, the aggregate of the amount of such income credited or paid or likely to be credited or paid during the financial year by the person referred to in sub-section (1) to the account of, or to, the payee, does not exceed five thousand rupees : (a) time deposits with a banking company to which the banking regulation act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that act); or (b) time deposits with a co-operative society engaged in carrying on the business of banking; (c) deposits with a public company which is formed and registered in india with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in india for residential purposes and which is eligible for deduction under clause (viii) of sub-section (1) of section 36, the aforesaid amount shall be computed with reference to the income credited or paid by a branch of the banking company or the co-operative society or the public company, as the case may be; (a) any banking company to which the banking regulation act, 1949 (10 of 1949), applies or any co-operative society engaged in carrying on the business of banking (including a cooperative land mortgage bank), or (b) any financial corporation established by or under a central, state or provincial act, or (c) the life insurance corporation of india established under the life insurance corporation act, 1956 (31 of 1956), or (d) the unit trust of india established under the unit trust of india act, 1963 (52 of 1963), or (e) any company or co-operative society carrying on the business of insurance,or such other institution, association or body or class of institutions, associations or bodies which the central government may, for reasons to be recorded in writing, notify in his behalf in the official gazette; (iv) to such income credited or paid by a firm to a partner of the firm; (v) to such income credited or paid by a co-operative society to a member thereof or any other co-operative society; (vi) to such income credited or paid in respect of deposits under any scheme framed by the central government and notified by it in this behalf in the official gazette; (vii) to such income credited or paid in respect of deposits (other than time deposits made on or after the 1-7-1995) with a banking company to which the banking regulation act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that act); (a) deposits with a primary agricultural credit society or a cooperative land mortgage bank or a co-operative land development bank; (b) deposits (other than time deposits made on or after the 1-7-1995) with a co-operative society, other than a co-operative society or bank referred to in sub-clause (a); (viii) to such income credited or paid by the central government under any provision of this act or the indian income tax act, 1922 (11 of 1922), or the estate duty act, 1953 (34 of 1953), or the wealth tax act, 1957 (27 of 1957), or the gift tax act 1958 (18 of 1958), or the super profits tax act, 1963 (14 of 1963, or the companies (profits) surtax act, 1964 (7 of 1964), or the interest tax act, 1974 (45 of 1974).(ix) to such income credited or paid by way of interest on the compensation amount awarded by the motor accidents claims tribunal where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid during the financial year does not exceed fifty thousand rupees.for the purposes of clauses (i), (vii) and (viia), "time deposit" means deposits (excluding recurring deposits) repayable on the expiry of fixed periods.(4) the person responsible foi-making the payment referred to in sub-section (1) may, at the time of making any deduction, increase or reduce the amount to be deducted under this section for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year." on a close reading of this section it is evident that this section cast a liability upon a person responsible for paying any income by way of interest other than interest on securities to deduct tax at source thereon. this liability is fastened at the time of crediting to the account of the payee or at the time of making payment whichever is earlier and by virtue of the provisions of the explanation thereto the credit of income to the account of the payee is expanded to mean credit to any account whether called interest payable account or suspense account or any other name. the assessees in these cases made provision of interest payable to the payees and claimed deduction as expenditure and therefore by virtue of explanation to section 194a it amounted to credit of income by way of interest to the payees account. the assessees thus incurred liability to deduct the tax and pay the same to the credit of central government as per the provisions of section 194a by not deducting tax at source they became assessees in default.the assessees however seek protection under the special act which was introduced in the year 1992. under this act, section 3(3) provides for an attachment of property, whether movable or immovable, or both, belonging to the notified person to be effective simultaneously with the issue of notification under section 3(2) of the act. it is with respect to this attached property that powers under section 11 of the act could be exercised. the supreme court, in the case of kudremukh iron ore co. ltd. v. fairgrowth financial services ltd. (1994) (4) scc 246 held that the special court under section 11 of the act had jurisdiction to direct repayment of its liability provided there was a privity of contract between the notified person and the person claiming the money.under section 3(4) of the special act, the special court can give directions to the custodian in respect of attached property of a notified person. the loan repayable by the assessees to ffsl thus became an attached property. the interest payable by the assessee being usufruct also became the attached property in view of the decision of the supreme court dated 9-9-1996 in the case of t.b. ruia (supra) wherein it is held that any usufruct of the attached property also becomes the "attached property" in the following : "it is perhaps necessary to make clear that the income or usufruct of attached property is also attached property. thus if the property be shares, dividend and bonus and rights shares thereon would also be attached property. it is only income generated by a notified person by dint of his own labour which falls outside the net of section 3(3). in respect of such income the attachment under section 3(3) does not operate." similarly section 11(1) of the act provides for the distribution of attached assets of the notified person. ffsl to whom the interest was to be paid was a notified person under the special act. section 11(2) of this act provides for distribution of the property of a notified person and for the purpose of which the court has to collect money for distribution. it provides for payment of tax due in full by virtue of clause (a) payments due to banks, financial institutions, etc. as per clause (b) and any other liability by virtue of clause (c). whereas under clause (a) no order of special court is required and it is the liability of the notified period, the liability other than this clause and clause (b) can be covered by only clause (c) which requires a specific order of the special court.solidaire india ltd. v.fairgrowth financial services ltd. (2001) 104 comp. cas. 569 (sc).their lordships of the supreme court held as under : "under section 3 of the 1922 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 the 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." by section 13 of the special act the provision of the special act are to prevail and shall have to an overriding effect over the provisions of the other acts to the extent of conflict. it reads as under : .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." there was a conflict between the provisions of sick industrial companies (special provisions) act, 1985 and this special act. under section 22 of the former act, recovery proceedings can only be with the consent of the board for industrial and financial reconstruction or the appellate authority. the supreme court held that the legislature being aware of the provisions of section 22 under the 1985 act still empowered only the special court under the 1922 act to give directions to recover and to distribute the assets of the notified persons in the manner set down under section 11(2) of the 1922 act. this can only mean that the legislature wanted the provisions of section 11(2) of the 1992 act to prevail over the provisions of any other law including those of the sick industrial companies (special provisions) act, 1985.the special court in its order dated 22-7-1993 in ma no. 96 held that undoubtedly there is great force in the submission that private rights cannot be abrogated or curtailed without compensation; that all private rights are preserved and that the said act provides for distribution in a particular manner only; that the legislature has sought to provide (i) for a speedy trial of offences; (ii) immediate attachment and thus freezing of all assets of the parties suspected to be involved and thus preventing any further transfer or alienation; and (iii) a reasonable, rational and equitable distribution of property by this court as it would have the total picture; that whilst these were the objects, the legislature has also kept in mind the fact that there may be contractual rights in favour of third parties. financial institutions and/or banks. undoubtedly, these rights were not to be affected. this is clear from section 4 which gives the custodian the power to set aside contracts under certain conditions; that by section 11(2) of the said act the legislature has provided for payment of liabilities towards tax and government dues and of financial institutions and banks and that the provision regarding distribution would be the only provision against the absolute claims and rights under prior contracts; that none of the rights under contracts or under law are abrogated or done away with. all that section 11(2) provides for is equitable and rational distribution of, what was public money in the first instance; that whilst paying this dues the court could and would keep in mind the claims of the parties over specific properties or assets, so that the statutory dues would, as far as possible be paid out of unencumbered property in the first instance"; that thus private parties entering into contracts with a notified party would get only such rights as the notified party had. they cannot get a better title, except may be in cases of negotiable instruments and/or shares; that even though contractual and special rights in property have not been abrogated or done away with, they can only be enforced subject to the order of payments laid down under section 11 of the said act.on the special court in the case of sam lease co. ltd. in (ma no. 89 of 1993, dated 14-9-1993) also held that : "p.c. the respondent no. 1 is paying to the custodian pursuant to order of this court. in my view there is no provision for deducting tax at source, in respect of payments made pursuant to orders and directors of court. accordingly, respondent no. 1 was not entitled to deduct tax at source before sending amounts to the custodian. accordingly, respondent no. 1 is directed to pay to the custodian all amounts deducted by way of tax deducted at source. as respondent no. 1 chose to act on its own, without seeking clarification from court, it will be for respondent no.1 to recover these monies from income tax authority if already paid to them. respondent no. 1 is directed not to deduct any such amount in future." (emphasis supplied).by order in misc. petition no. 282 of 1995 in a.k. menon v. chaiman, cbdt and others including ffsl, dated 9-9-1996, the court held in paras 5 and 6 as under: "5. it will therefore have to be held that the order dated 20-2-1995 fully applies even to tax deductions at source. in my view no banks, company, industries or person can now pay over to the income tax authorities the tax deducted at source in respect of any payment being made to or on behalf of a notified party. this because to make such payment would amount to giving to the income tax department a priority not contemplated by section 11 of the said act. any provisions of the income tax act which are contrary to the provisions of the said act must give way to the provisions of the said act. this is because the said act is a special act and a later act.6. i, therefore, direct all banks, companies, institutions and persons who have to make payments of interest or dividends to deduct tax at source and then deposit the amount which they would have otherwise paid to the income tax authorities in a separate account to be maintained by them under intimation to the custodian and income tax authorities.every time such deduction is made and amount deposited in the separate account, intimation to be given to the .custodian and income tax authorities. such intimation to contain all relevant particulars. the amounts to be thereafter invested in fixed deposits in nationalized banks. this is to be done within two weeks of deposit in separate account. the fixed deposits and interest earned thereon must be kept renewed until further orders of this court. these amounts or interest thereof must not be used in any manner whatsoever by the bank, company, institution or person. it is clarified that any bank, company, institution or person acting under this order would not be considered to be an assessee in default." as the time for distribution of assets of the notified parties was approaching, the custodian issued a public notice calling upon the parties for lodging their claims, if any. the income tax department also filed petitions for priority payment for about rs. 1380 crores being tax, interest and penalty. noticing the fact that income tax department was taking action for levying penalty and interest as the notified parties have not paid advance tax nor filed their income-tax returns, the special court by an order dated 20-2-1995 framed the following three questions to be answered : "1. whether the priority created by section 11 of the special court (trial of offences relating to transactions in securities) act, 1992 is only in respect of amounts due prior to the date of notification and/or whether the priority would also apply to amounts due after the date of notification.2. whether the phrase taxes as used in section 11 of the special, court (trial of offences relating to transactions in securities) act, 1992 can only mean amounts due as and by way of taxes or whether it would also include penalties and interests, if any.3. whether penalty and/or interest can be levied on or charged to notified parties after the date of notification." while answering these three questions and quoting its earlier judgment dated 22-7-1993 in ma no. 96 the special court observed that "thus earlier, this court has already taken a view that the liabilities for taxes, rates, cess, etc. are given a priority because they are recurring liabilities, which if not paid, would incur penalties. whilst expressing that view, the questions now under consideration were not before the court. on a proper consideration, for reasons set out hereafter, that view does not appear to be correct." the special court in paragraph 44 answered the 1st question by stating that the priorities which were laid down were in respect of what was due on the date of notification and that whilst distributing the court will only take into consideration such liabilities as have been ascertained, quantified and crystallized. thus, if the assessments are not completed court will not have before it any ascertained or any quantified amount, the priority would then be low. as regards the second question the special court held that the term "tax, penalty and interest" are conceptually different and priority has been given only to tax and nothing else. as regards the third question, the special court held that a notified party may have enough assets to pay advance tax and/or the amount of the demand notice, yet the notified party is unable to do so as all his assets are attached and the time of distribution has not arisen."98. i have considered the rival submissions. there is no doubt that a notification places a notified party at a disadvantage. he is no longer able to deal with his property, all profit making activities have come to an end. however, the law is clear. no rights can be abrogated unless the statute does so expressly or by necessary implication. at the same time law cant be such that it prevents a party or puts restraint on him but does not absolve him from adverse consequences of such restraint.in my view, the court will have to make a distinction between different types of cases. the following are just by way of example. they are not exclusive. each case would have to be decided on its own merit. just by reason of notifjcation intere.,;t and/or penalty would not automatically stop running under contracts. however, if the court finds that a notified party would have been able to pay off his debt, but could not do so only because of the notification, the court can at that stage absolve him from the liability to pay interest or reduce the interest. in such cases, court would not permit penalty to be levied.however, if the notified party, did not have assets enough to meet his liability, then merely because he is notified will not absolve him from liability to pay interest and/ot-penalty. this because even if he had not been notified he would still have been default and been liable to pay interest and/or penalty. in this case the notification has made no difference. another type of case would be where a notified party is prevented by reason of notification, from doing things which are required to be done by him under other acts or contracts. in such cases, if the provisions of the special courts act prevents a notified party from doing that thing, then by reason of this legal disability, no penalty or interest can be levied on that party. thus no penalty or interest can be imposed for non-fullilment of an act which a notified party is prevented from doing by reason of the special court act. in such cases even though the provisions of some other act or contract lay down consequences for non-performance the provisions of the special court act will prevail this is because in such cases there would be a conflict between the provisions of the special courts act and that other law and/or contract. in cases of such conflict, the provisions of the special court act must prevail. to take an example, under section 234b of the income tax act, every assessee is liable to pay advance tax. all parties are notified between june 1992 to august, 1992. all of them would be liable to advance taxes for the financial year ending march, 1993 and for subsequent years. however, as seen earlier, taxes only upto assessment yeat-1992-93 can be paid in priority. these would have to rank as ordinary debts under section 1)(2)(c). this therefore can only be released after the entire distribution has taken place.even if the notified party were to make an application to this court to pay advance tax, the court would refuse it. thus monies for payment of advance tax have not been released thus a notified party has been prevented from paying advance tax. thus, under the special courts act, there is a legal disability to pay advance tax. yet under the income tax act there is a compulsion to pay advance tax. there is a conflict between the provisions of the special courts act and the income tax act. the provisions of the special courts act must prevail. under the income tax act if advance tax is not paid, for such non-payment interest can be levied. this obviously on the footing that the assessee is in default. however, a notified party, has been prevented by law from paying advance tax. he is not a defaulting party. he has not paid advance tax because of legal restraint. on him the law has prevented him from paying advance tax. in my view, in such cases, i.e., where there is a conflict between the provisions of the special courts act and some other act/contract, the contrary provision must necessarily give way. if there is this legal disability then there is no question of the notified party being foisted with the liability to pay interest and/or penalty. similarly under section 220(2) of the income tax act, a demand notice may have been served on a party. that demand notice may be for tax, interest and/or penalty. under the income tax law, the sum specified in the notification must be paid within 30 days. under the income tax act, if the same is not paid within 30 days, the assessee is liable to pay interest at 1.5 per cent per month. here again by reason of the legal disability, imposed by the special courts act, the notified party is not in a position to pay the amounts demand by that demand notice. if that is so, then the notified party cannot be said to be in default, then there is no question of the notified party becoming liable to pay interest under section 220(2). the same would apply in respect of penalty under the income tax act. thus in cases where, by reason of the legal disability, a notified party is prevented from doing something there can be no levy of interest or penalty on the notified party for not doing that thing. however, where the special courts act does not prevent a party from doing something required to done under some other act/contract and the notified party does not perform his obligation he will be liable to pay interest and/or penalty. just by way of example under the income tax act penalty can be levied for not filing a return; penalty can be levied for failure to produce evidence to support the return of income. these are not matters where any disability is imposed on a notified party by the special courts act. there is nothing in the special courts act which prevents a notified party from filing his return within time. there is nothing in the special courts act which prevents a party from producing evidence in support of his return. if a notified party has failed to file his return in time and/or failed to produce evidence in support of his return, he does so at his own peril. in this case, there is no conflict between the special courts act and the income tax act. if there is no conflict, the provisions of the income tax act will continue to apply.of course in such cases, the court may not release amounts for payment of interestlpenalty or only release it after discharge of other liabilities. but merely because this court may not release amounts does not mean that interest/penalty cannot be imposed. as stated above, these are mere examples. in each case, the court would have to examine whether there is a legal disability by reason of the special courts act. if the special courts act prevents a notified party from doing a certain thing, then there can be no interest/penalty. if on the other hand, the special courts act has not prevented or disabled a person nor abrogated any right, then the provisions of other laws/contracts will continue to apply." (emphasis supplied) supreme court by its order dated 13-5-1998, in an appeal against this order of the special court dated 20-2-1995, enlarged the three questions to the following six questions : "(i) 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 crystallized into a legally ascertained sum immediately payable? (2) do the taxes (in clause (a) of section 11(2)) refer only to taxes relating to a specific period or to all taxes due from the notified person? (4) does the special court have any discretion relating to the extent of payments to be made under section 11(2)(a) from out of the attached funds/property? (6) 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 urider section 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?" the supreme court also considered the question raised by the custodian that the term any properties movable or immovable or both belonging to any person notified would refer only to the right, title or interest of the notified person in the mortgaged/pledged property and not the entire property itself and the supreme court answered the last question as unless the custodian exercised the power under section 4 the right of attachment does not get extinguished nor it is the property whether free from encumbrance or otherwise and the ownership of the property remains as it was.as regards question no. 1 the supreme court held that in the context of section 11(2) the taxes due refer to taxes as finally assessed and it must refer to an ascertained liability for payment of taxes quantified in accordance with law. as regards question no. 2 it was held that priority given under section 11(2)(a) is to such tax liability only as was for the period 1-4-1991 to 6-6-1992. as regards question no. 3 the court held that the liability arising during the notified period must refer to the liability on the date of distribution which arise when the special court contemplates the examination of claim under section 9a and 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 be considered for payment under section 11(2)(a). as regards question no. 4 it was held that both the liability of the assessee for the balance tax should subsist and the taxing authorities would be entitled to realise the remaining liability from the assessee and the same will not be paid in priority over the claims of everybody else under section 11(2)(a)of the act and 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 acquired property of the assessee or any 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 the tax is so disproportionately high in relation to the funds in the hands of the custodian as to require scaling down in the interest of and to further the purpose of the act. the special court must have strong reason for doing so. in fact, the income-tax authorities have also accepted that exorbitant tax demand can be ignored applying the wednesbury principle. as regards question no. 5 their lordship upheld the decision of the special court that tax does not include penalty nor interest under section 11(2)(a).as regards question no. 6 their lordships held in paragraph 38 of their order as under : "38. the special court has, in the impugned judgment, also dwelt at some length on the question whether it can absolve a notified person from imposition of penalty or interest after the date of the notification. since the liabilities covered under section 11(2)(a) are only liabilities arising during the period 1-4-1991 to 6-6-1992, and do not cover penalty and interest, this question does not reallv arise. in any case, interest or penalty for any action or default after the date of the notification, are not covered by the act. however, we must reiterate that a taxing statute is a code in itself for imposition of tax, penalty or interest. the remedy of a notified person who is assessed to penalty or interest, after the notified period would be to move the appropriate authority under the taxing statute in that connection. if it is open to him under the relevant taxing statute to contend that he was unable to pay his taxes on account of the attachment of all his properties under the special court act, and that there is a valid reason why penalty or interest should not be imposed upon him the date of notification, the authorities concerned under the taxing statute can take notice of these circumstances in accordance with law for the purpose of deciding whether penalty or interest can be imposed on the notified person. 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 section 11(2)(a) and 11(2)(b). the special court has full discretion under section 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." consequent upon modification of its order by the supreme court the special court, thereafter, in its order dated 3-5-1999 after referring to the aforesaid supreme court decision, held that : "4 the supreme court by an order dated 13-5-1998 in civil appeal no.5326 of 1995 has now held that every kind of tax liability, for any period apart from the statutory period, i.e., 1-4-1991 to 6-6-1992, is not covered under section 11(2)(a). the supreme court has held that although the liability continues to be liability of the notified party, such liability may be discharged, under directions ofthe special court under section 11(2)(c) of the said act or in any other mariner in accordance with law. the supreme court has held that the priority under section 11(2)(a) only covers tax liability for the period 1-4-1991, to 6-6-1992 or the taxing authority may recover from any subsequently acquired of notified party.5. the supreme court has in a judgment dated 9-9-1996, in the case of tejkumar b. ruia v. custodian reported in air (1997) sc page 443 held that all notified parties are free to earn future incomt, the supreme court has held that such future income would not stand attached. the supreme court has however clarified that interest and dividend on attached assets also remain attached as they are mere usufruct of attached assets.6. this court has already held by the order that any claim of the tax department which falls under section 11(2)(c) could not be paid in priority for the reasons set out in detail in the order dated 20-2-1995. this court held that any payment of advance tax deduction at source in respect of attached assets would amount to making payment to income tax department not contemplated by section 1 of the said act.this court has held that the provisions of the said act. this court has held that this must be so as the said act was a special act and also a later act.7. the law is now well settled by the supreme court judgment dated 13-5-1998 in civil appeal no. 5326 of 1995. the income tax department can get no priority in respect of tax which is not for the statutory period, i.e., 1-4-1991 to 6-6-1992, as has been held by the supreme court tax for any subsequent or any other period can only be recovered by the income tax authorities under section 11(2)(c) or from subsequently acquired property or income of the notified party which do not stand attached .....there is now no purpose in letting bank, companies, financial institutions and persons hold on to such amounts in separate accounts.now, that law is well settled these amounts must come to the custodian.also there can be no tax deduction at source. all banks, companies, financial institutions and persons who have to pay interest and dividends on attached accounts must make those payments without any deduction of tax at source." based on the decision dated 15/20-4-1994, of the special court the assessees made provision of interest on the sum of rs. 10,98,25,000, i.e., rs. 2,63,58,000 from year to year but no tax was deducted at source thereon. the said provision had not been credited to the partys account but had been reflected under schedule k to the balance sheet under liabilities as interest accrued but not due. it was further submitted that in the return of income filed for the assessment year 1999-2000 no deduction had been claimed in respect of the said interest amounting to rs. 2,63,58,000. the assessees had filed an annual return in form no. 26a in respect of tax deducted at source from interest on securities for the assessment year 1995-96 on 29-6-1995.section 194a as stated above provides for tax deduction at source at the rates in force on the income which a person is responsible for paying to a resident either at the time of credit (which term includes credit to any account-whether called "interest payable account" or "suspense account" or any other name) or at the time of payment thereof whichever is earlier. the liability is to deduct tax "thereon" and not "therefrom" as otherwise also the tax cannot be deducted from a mere provision made or interest payable account because the payment is no made. the term "thereon" therefore forms the amount of interest as a base and not a source. in case it is a provision only, as in these cases the assessee has to deduct tax hereon and pay the same from any of his sources and not out of amount deducted therefrom. this shows, it is a individual liability of a person responsible for paying the income, independent of his prior deduction from the interest paid/payable. this is also evident by reading sub-section (2) of section 4 which makes it a charge on the person paying independent of the recipient who is liable only when the person responsible for payment does not deduct and pay the tax."4(1) where any central act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of this act in respect of the total income of the previous year of every person : where by virtue of any provision of this act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.(2) in respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provisions of this act." failure to deduct and pay entails liability for interest under section 201(1a) and penalty under section 201 read with section 221. section 201(2) and also creates a charge on all assets of such person responsible for deduction and payment of tax, if after deduction, person does not pay the same. section 205 then puts a bar for collection of the tax from the person from whose income tax is to be deducted to the extent the tax has been deducted from that income.on a combined reading of the provisions of sections 4, 194a and 201, what in our opinion accrue to the payee is only the net of tax amount and not the whole amount of interest. the tax to be deducted is diverted at source by virtue of these provisions of sections 4, 194a and 201 of the act. in many cases the entire amount of interest may not be the taxable income because of certain deductions or the other income including this income may not cross taxable limits or may be that the tax payable is less than what has been deducted, the tax so deducted is deemed as income of the interest recipient by virtue of section 198, which reads as under : "section 198. all sums deducted in accordance with the provisions of sections 192 to 194, section 194a, section 194b, section 194bb, section 194c, section 194d, section 194e, section 194ee, section 194f, section 194g, section 194h, section 194-i, section 194j, section 194k, section 194l, section 195, section 196a, section 196b section 196c and section 196d shall, for the purpose of computing the income of an assessee, be deemed to be income received : that the sum being the tax paid, under sub-section (1a) of section 192 for the purpose of computing the income of an assessee, shall not be deemed to be income received." the scope of net accrual came up before the calcutta high court in the case of cit v. shaw wallace & co. ltd. (1981) 132 itr 466 wherein after considering the supreme court decision in the case of cit v. clive insurance co. ltd. (1978) 113 itr 636. the question in this case was whether gross amount of dividend from u.k. company accrued to the assessee or the net of tds only. it may be stated here that under section 5(1)(c) of the income tax act, the income of an assessee is taxable in india only if the same is accrued or arisen to him outside india. the court noted the kerala high court decision in the case of cit v. y.n.s. hobbs (1979) 116 itr 20 wherein reading section 5(1)(c) and section 198 together it was held that in absence of provision like section 198, deeming the tds as deemed receipt of income, it is only net amount of income that has been received or accrued to the assessee and tax deducted at source was only a deeming income which is for tax deducted at source in india.in a later decision, the calcutta high court in the case of cit v.oriental co. ltd. (1982) 137 itr 777 also examined the nature of tds vis-a-vis debt accrued to the assessee. the contention of the revenue was that the declaration of dividend brings into existence the debt owed by the company to the shareholder and therefore the entire amount of dividend accrued to the assessee. the court did not accept this contention of the assessee and observed at page 783 of the report as under : "in this connection, it would be instructive, in our opinion, to refer to section 8 of the income tax act, 1961, which deals with dividend income, and which provides that for the purpose of inclusion in the total income of an assessee any dividend declared by a company or distributed or paid by it within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (a) or sub-clause (e) of clause (22) of section 2 shall be "deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be. in this connection, reference may be made to section 194 of the act which obliges the principal officer of an indian company or a company which has made the prescribed ari-arrangements for the declaration and payment of dividends within india, before, making any payment in cash or before issuing any cheques or warrant in respect of a dividend or payment to a shareholder of any dividend within the meaning of the different clauses we have mentioned, to deduct from the amount of such dividend, income-tax at the rates in force. it is provided that, where in the case of a shareholder, not being a company, the income tax officer gives a certificate in writing in the prescribed manner that to the best of his belief the total income of the shareholder would be less than the minimum liable to income-tax, such a deduction might not be necessary. the net effect of this section appears to be that the statute enjoined, leaving aside the case where there is a declaration given that the person to whom the dividend is paid is not taxable, that the company is not free but statutorily obliged to deduct the tax at source this is important because the main question, in this case, is whether the whole amount becomes the income of the assessee the moment it is declared or in other words it can be said that the entirety of the amount declared, with the gross dividend declared, accrues or a right arises in favour of the assessee, on the declaration. as we have noticed, that the right, except in cases of certain special classes of assessees, with which we are not concerned, viz., the assessees whose total income do not exceed the minimum limit, the assessee is not entitled to receive the entirety of the amount nor is the company obliged to pay the entirety of the amount without deduction. there is no right accrued in favour of these kinds of assessees to receive the gross amount and no obligation consequently upon the company to pay the gross amount. if this is the position then read with section 8 along with sections 198 and 199 makes the suns deducted, in accordance with the provisions of section 194, deemed "income received" if that is the position, then, under the indian law, contrary to what was urged by the learned advocate for the revenue, it cannot be said, leaving aside those kinds of assessee who are not assessable to tax, that such amount of in come which is liable to be deducted at source arises or accrues to the assessee in india the moment it is declare. therefore, it cannot be said that the right to receive the same, or the right to treat the same as income, arises on the declaration of dividends. so it is not possible to accept, on principle, the first argument urged on behalf of the revenue that declaration of dividend creates a right so far as gross dividend is concerned in favour of the shareholder and as such a declaration would be taken to have caused accrual of income to a shareholder." (emphasis supplied) "we come, therefore, to the basic question whether on a declaration of dividend as such the amount which is liable to be deducted under the relevant finance act accrues or arises to an assessee in india." this question was answered by the high court at page 791 of the report as under : "in our opinion, in view of the scheme of section 194 read with section 198, in the case of the assessee who are liable to pay income-tax, the company is obliged by the statute to deduct that tax. in such cases, the assessee has no right to claim the deduction from the company even if the assessee is not liable to pay the taxes. the only right that the assessee gets is against the revenue to claim refund if he is liable to pay a part or none at all of the tax deducted the statute creates on the declaration of the dividend an obligation to deduct that tax.therefore, in this scheme of the indian income tax act, so far as the dividend income is concerned, in our opinion, section 8 read with section 194 and section 198 of the income tax act, 1961, make!i it clear that so far as the tax portion is concerned, there is diversion of that portion by statute at the declaration stage. therefore, this was not a case of application of income after accrual that income in the eye of law never accrues in the sense of a debt owing by the company to the assessee, that is a debt undoubtedly by the company to the revenue but no debt on that amount accrues in favour of the assessee. in that view of the matter we are unable to accept these contention urged on behalf of the revenue. this has to be borne in mind that under section 194 of the income-tax act, 1961 the principal officer of an indian company before making payment in cash or before issuing any cheque or warrant in respect of any dividend or making any distribution or payment to a shareholder of a dividend within the meaning of section 2(22) sub-clause (a), (b), (c) or (a) is enjoined to deduct, from the amount of such dividend of the indian company, income-tax at the rates which are in force." "section 198 of the income tax act, 1961 specifically provides that all sums deducted in accordance with the provisions of section 194 and the other sections shall, "for the purpose of computing the income of an assessee, be deemed to be income received." "section 199 of the income tax act, 1961 further provides that any deduction made in accordance with the provisions of section 194 and paid to the central government should be treated as a payment of tax on behalf of the person from whose income the deduction was made and credit should be given to him for the amount so deducted on production of the certificate furnished under section 203 in the immediately following assessment year under the income tax act, 1961." "it is apparent, therefore, that under the income tax act, 1961, and under the indian law it is only in respect of the dividend of an indian company that the indian company was obliged to deduct tax which should be on the payment of the dividend and the amount deducted at the time of the payment of the dividend, vide the statutory fiction, was deemed to be the income of the agsessee, for computing the income of the shareholders." (emphasis supplied) the madhya pradesh high court in the case of cit v. yawar rashid (1996) 218 itr 699 also considered the provisions of section 5(1)(c) with regard to income from dividend and interest and it held as under : "according to section 5 of the income tax act, 1961, the total income of the previous year of the assessee who is a resident in india includes all income from whatever source, i.e., which is received or deemed to be received in india in such year by or on behalf of such person, or accrues or arises or is deemed to accrue or arise to him in india during such year or accrues or arises to him outside india during such year. a distinction has to be made among the three clauses of section 5 of the act. clause (c) of section 5 is different from both clauses (a) and (b) of section 5. in clauses (a) and (b), the words used are "is received or is deemed to be received or accrues or arises or is deemed to accrue or arise india". clause (c) is in the present tense and makes it clear that the actual income which accrues or arise to him from outside india shall be counted, i.e., the gross income in clause (c) is not to be counted, but actual income which is received at the hands of the assessee, is to be counted. section 198 states how tax deducted should be included in the gross income under the various provisions of the income tax act. there is no inclusion under section 198 of the act of the sums deducted at source abroad. there is no provision which mandates that if any tax has been deducted at source abroad then that amount should also be computed for the purpose of arriving at the gross income of the assessee for tax liability. a harmonious reading of sections 5 and 91 shows that if any income accrues or arises to any indian resident from abroad and it does not fall clause (c) under section 5(1) which talks about the total income, then there is no question of claiming the benefit of section 91 of the income tax act of double taxation of that income. hence, tax deducted at source outside india from foreign dividend and interest income is not part of total income." the tax is deductible at source on interest. therefore what accrues to an assessee is only the net amount of interest after the tax is deducted at source under section 194a. it is only in order to enable to give tax deducted at source as a benefit or a credit to the assessee, the tax deducted at source is deemed as income received under section 198 and therefore assessable as income deemed to have been received and not on the principle/ground that it had accrued to him. consequent to the deemed receipt of credit is allowed to the assessee as if it was tax paid by him. if that be the position, the tax which is deducted at source is diverted at source and did not accrue to ffsl, and consequently no debt accrued to it which could be said to be subject-matter of distribution by the special court under section 11 of the act. a deemed receipt of tds cannot be subject to an order of special court.as stated by the supreme court in the case of solidaire industrial co.v. the assessees (supra) the special court for the purposes of distribution of assets of notified party, the money payable to them was to be collected first. if the money is not payable or accrues to the assessee it cannot be collected nor distributed. the portion of the interest payable to ffsl by the assessees was diverted by virtue of statutory provision of section 194a at source and did not accrue to them and it was a liability of the assessees under section 194a and a charge on the assessees themselves under section 4(2) of the act. see also the answer given by the supreme court order dated 13-5-1998 to the question posed by the custodian regarding mortgaged property. the court stated that the property belonging to the notified person is the interest of the notified person in that mortgaged/pledged property and not the entire property. similarly, when the interest payable to the notified person is subject to tds under section 194a of the act, the property in that interest recoverable is only for net of tds and not the whole amount of interest.further, the tax priority within the jurisdiction of the special court was of the tax for the period 1-6-1991 to 6-6-1992 and the tds liability is for the period much after that namely for the impugned assessment year 1995-96 onwards. therefore, it was not automatic and required a specific order of the special court under section 11(2)(c) of the act for the percentage of distribution and not otherwise.with regard to penalty and interest the supreme court observed that the interest or penalty for any action or default after the date of notification are not covered by the act; that the income tax act is a code in itself for imposition of penalty and interest; that the remedy of a notified person who is levied penalty after notified period would be to move the appropriate authority under the taxing statute in that connection and that it would be upon him to point out his inability on account of attachment and plead for valid reason who will take note of that reason in deciding the matter.it is not that the special court in its order dated 3-5-1999 alone stated that "now" the tax is not to be deducted at source and paid to the credit of the central government but it was in its order dated 9-9-1996 itself when the special court directed in paragraph 5 of its order that "now" no bank, etc. can pay to the income tax department the tax deducted at source and directed vide paragraph 6 thereof to deposit the tax deducted in a separate account under intimation to the custodian and the income tax department. the commissioner (appeals), in our opinion, therefore, was not right in stating by virtue of the word "now" that the assessees were exempted from liability to tds only from assessment year 2000-01 and not earlier. in fact, it applied for assessment year 1997-98 onwards itself when the special court on 9-9-1996 prohibited all persons to pay the tds to the income tax department.as regards the settlement of dispute by mutual agreement in 2003, we may state that the dispute was settled for an amount over and above the principal amount by a sum of rs. 44,24,700 (rs. 21,93, 10,000 recovered by ffsl min us the amount payable of rs. 21,48,85,300 including interest due 30-6-1992) which was not taken back. the transfer of 3.5 lakhs original shares of united phosphorus were considered to be invalid, meaning thereby that loan stood as payable by the assessees which was settled by the consent terms by giving 15 lakhs shares of united phosphorus as against the original 3.5 lakhs shares. it had thus an element of interest of some amount and the settlement was not absolutely without payment of interest at all. at this juncture, we may refer to the decision of godhra electricity co. ltd. v. cit (1997) 225 itr 746 wherein the enhanced rate of electricity was credited in the books of account but on account of litigation about the rate and pendency of the suits followed by the letter of the under secretary to the government of gujarat and the taking over of the company by the government the enhanced amount of charge but not recovered at all and in that context it was held by the supreme court that no income resulted at all and the receipt was only a hypothetical income which really never accrued to the assessee. similarly, in the case of cit v.bokaro steel ltd. (1999) 236 itr 315 (sc) the original agreement ceased to be operative ab initio and the entries regarding income of interest shown by the assessee were reversed in the next year since the supplier had replace 8 locomotives lent by the assessee company to it by new ones. the entire nature of transaction was changed between the parties.there was resolution of the assessee company in this regard and the income from interest did not result at all as the original agreement ceased to be operative ab initio. the entry in the books which was made was about a hypothetical income which did not materalise and the entry was reversed in the next year. on the parity of reasoning, when income is not taxable because ultimately it did not result at all, the interest would also not be accrue or arise, consequently not allowable deduction, as ultimately it did not remain to be payable at all.however, as stated above, these are not the cases where there is no liability to pay interest at all and in view of the settlement of the higher amount of repayment there was a liability of the resulting amount which was settled over and above the principal amount of loan.as regards the assessees plea for doubtful proposition of law, we may state that it was not so. the 1993-decision of the special court in the case of sam lease co. ltd. (supra) was first of all not in the case of the assessees and it was the case of payment to the custodian whereas in the present cases we have held that it was the liability of the assessees payable to the credit of the government of india under the income tax act and even the special court held in 1995 that the tax was to be deducted but instead of paying it to the income tax department it was to be deposited in a separate account. therefore, there was no doubt that upto 1995 order, it was the assessees liability to deduct and also pay the tax to the credit of the government of india. it was also not a liability for the notified period and the assessees were prohibited to pay only in 1995 and to deduct and pay in 1999.vide paragraph 98 of the order-dated 20-2-1995 the special court observed that if the notified party is disabled party is disabled by virtue of the notification to perform its obligations, it shall be absolved of its consequences for the liabilities to pay interest and penalty. these were the observations for the notified persons on disability and not for other persons and that too for their own application independent of the obligations of the notified persons. .in view of the aforesaid discussion up till 9-9-1996 order of the special court in a.k menons case (supra) including ffsl, the assessee were not justified not to deduct and pav the tax deducted at source under section 194a of, the act. they have to be treated as assessee-in-default and penalties for the years 1995-96 and 1996-97 cannot be said to be unjustified. as the assessees, in our opinion were under an obligation to deduct the tax the pay the same to the credit of the central government; that being the independent liability of the assessee under section 4(2) of the act read with section 194a. however looking to the facts and circumstances of the case the levy of penalties as equivalent to amount of arrears of tax is excessive and we are of the opinion that it would meet the ends of justice if a token penalty of rs. 1 lakh in each for the assessment years 1995-96 and 1996-97 in cases of each of the assessees is levied. we direct accordingly.for assessment years 1997-98 to 1999-2000, however, in view of the special courts specific direction to deduct the tax and pay the same in a separate account under intimation to the income tax department as well as to the custodian, the assessees, of course, committed a default in not deducting and consequently not paying even to the special court, they were also not exonerated from default in absence of compliance thereof. the assessees in our opinion, though guilty of non-deduction, cannot be held to be guilty for non-payment of the tax as the liability was only to deduct the tax and the payment could not be made to the credit of the central government as was required to be deposited in a separate account in view of the specific order of the special court.section 201 deals with an assessee to be in default for both the defaults, i.e., for non-deduction of tax at source as well as failure to pay the tax deducted at source. both these defaults are independently covered under section 201 but for the purpose of levy of penalty under section 221, proviso to section 201 provides that no penalty shall be charged unless the assessing officer is satisfied that such person has without good and sufficient reason failed to deduct and pay the tax. this proviso gives an impression that for the purpose of levying the penalty there must be a combined default of non-deduction of tax as well as non-payment of tax. in any case, in view of the specific order of the special court not to deposit the tax to the credit of central government but to deposit the same with the special court would not be a default within the meaning of section 201 read with proviso thereto.in the result, the appeals of the assessees for assessment years 1995-96 and 1996-97 are partly allowed and for other years are allowed.

Judgment:
These 30 appeals are by six assessees arising out of the orders of the Commissioner (Appeals) for assessment years 1995-96 to 1999-2000 confirming the levy of penalty under section 201 read with section 221 of the Income Tax Act for the failure of the assessees in not deducting tax at source as required under section 194A of the Act from the interest provided and claimed deduction in its profit and loss account.

The facts giving rise to these appeals are that all these assessees negotiated with and took short term loan of Rs. 44,98,25,000 from Fairgrowth Financial Services Ltd. (hereinafter referred to as FFSL) somewhere in March/April, 1992. All these loans were secured and pledged of 3,50,000 shares of United Phosphorous Ltd. As per the terms of the loan, 20 per cent of the amount was to be repaid within 60 days and the balance within a period of 180 days. The security by way of pledging of these shares were not to be redeemed in the market and, the shares were not to be transferred unless there was a default in repayment. The assessee repaid loan of a sum of Rs. 6,32,00,000 within 60 days and this amount was more than the said 20 per cent. The balance was to be paid in September/October, 1992. It transpired that on 10-8-1992 out of the said 3.5 lakh shares. Syndicate Bank acquired 2.5 lakh shares from Fairgrowth Investments Ltd. with whom FFSL has made a forward transaction and National Housing Bank came in possession of the balance 1 lakh shares as sub-pledgee against advancing loan to FFSL.

Somewhere at that time a Special (Trial of Offences Relating to Prosecutions in Securities) Ordinance, 1992 came into force in June, 1992 with the object to deal with large scale irregularities and mal-practices came to the notices in the course of investigation by Reserve Bank of India in respect of transaction in both the Government and the other securities indulged in by some brokers in collusion with the employees of various banks and financial institutions, which led to the diversion of funds from banks and financial institutions to the individual accounts of certain brokers. To deal with the situation and in particular to ensure speedy recovery of the huge amount involved, to punish the guilty and restore confidence in and maintain the basic integrity and credibility of the banks and financial institutions the Special Court, ordinance is provided for establishment of Special Court with a sitting judge of a High Court for speedy trial of offence relating to transactions in securities and disposal of properties attached. It also provided for appointment of one or more custodians for attaching the property of the offenders with a view to prevent diversion of such properties by the offenders. A custodian under the ordinance was appointed on 2-7-1992. FFSL was declared to be a notified party and the amount advances by it to these assessees became an "attached asset" under section 3(3) of the Ordinance. The said Ordinance was replaced by an Act on 18-8-1992 (hereinafter referred to as the Special Act). All the transactions during 1-4-1991 to 6-6-1992 were covered by this Act. The attached property of the notified persons were to be disposed of and distributed by the custodian as per the direction of the Special Court in accordance with the provisions of section 11 of the Special Act.

The assessees therefore, had to approach the Special Court against the alleged transfer and sub-pleading of these shares. On 15/20-4-1994, by an interim order the Special Court accepted the assessees ownership of the shares and directed that by repaying the loan with interest the assessees could get back the shares and until then, the assessees were restrained to transfer these shares in any manner. On 4-9-1994 this interim order dated 15/20-4-1994 was made a final order. The Special Court held that the assessees were entitled to redeem these shares on repayment of balance loan along with interest till the date of redemption. The said amount is worked out to be Rs. 31,63,70,843 (principal amount of Rs.20,28,12,500 plus Rs. 11,35,58,343 as interest). This was to be bifurcated between the two, i.e., (i) Rs. 22,59,79,174 payable to Syndicate Bank and (ii) Rs. 9,03,91,669 payable to National Housing Bank. The amount was to be deposited with the Special Court on or before 31-7-1994 with an interest of 24 per cent for delay thereafter. Both the Syndicate Bank and the assessees went to Supreme Court against the Special Court order-Syndicate Bank for accepting the assessees ownership and assessees for not granting unconditional and immediate return of 23.76 per-cent on the security and against payment of interest at the rate of 24 per cent per annum from due date upto the date of payment. On 12-9-1994 on appeal by Syndicate Bank and on 7-10-1994 on appeal by the assessees the Supreme Court directed the parties by two different orders to maintain status quo. Syndicate Bank again filed a suit No. 5/1994 claiming ownership of the said 2,50,000 shares of United Phosphorous Ltd. or recovery of amount paid to Fair growth Investments Ltd. for transfer of these shares but the suit was adjourned by order dated 29-3-1995 till the appeal by the Supreme Court is finally disposed of. In this decision it was also observed that if the assessees were concerned about their liability for payment of interest on the loan amount, they could reply the loan and get back the shares redeemed or take the permission of the Supreme Court to deposit the money with the custodian. The assessees did neither.

The assessees made provision for interest payable to FFSL of Rs. 2,63,58,000 and also claimed the same as allowable expenses in their respective assessments. By a letter dated 4-2-2000, the Income Tax Officer (TDS) drew the attention of the assessees to the provisions of the Explanation to section 194A of the said Act and stated that the assessees had defaulted in not deducting tax at source from the said interest amounting to Rs. 2,63,58,000 provided for in the books of account and accordingly the assessees would be liable to pay penalty under section 271C as well as interest under section 201 (1A) of the Act. Subsequently, a show cause notice dated 10-3-2000 was issued. In the said letter the assessing officer required the assessees to submit an explanation in respect of the following observation so as not to treat the assessees as defaulters and thereby initiate proceeding for action under section 271C. Section 201(1) read with sections 221 and 201(1A), viz., (a) Provision for interest amounting to Rs. 2,66,79,580 owing to FFSL had been made during the relevant accounting year, (b) No tax has been deducted at source thereon as per the provisions of Explanation to section 194A and (c). The decision of the Honble Supreme Court to maintain status quo was not a bar to the liability to deduct tax at source even on a provision made for interest payable.

Dissatisfied with the explanation of the assessees the assessing officer by an order dated 19-4-2000 under section 201 (1) read with section 221 (1) of the Act, the assessing officer treated the assessees to be in default by holding that they had duly provided the interest of Rs. 2,63,58,000 and had claimed the same as a deduction in the profit and loss account for the year under reference; that in view of the Explanation to section 194A, interest credited to any account whether called interest payable account or Suspense Account or by any other name, in books of account, liable to pay such income, such credit shall be deemed to be credit of such income to the account of the payee and provision of section 194A shall apply accordingly; that the Special Court (incorrectly mentioned as the Supreme Court) had specifically ordered that the deductor is entitled to redeem the shares on repayment of entire loan amount along with entire interest thereon; that the Special Court had nowhere in the order mentioned not to deduct tax at source or not to pay interest on loan amount; that the matter was not sub-judice with the Supreme Court at all for consideration of payment of interest or for not deducting tax at source under section 194A; that the Special Court had held that the transactions relate to pledge transaction only, wherein element of interest payment are always involved; that the assessees had not submitted notification, if any, which may suggest that the payee was a notified institution for the purpose of section 194A(iii)(1); that had also been verified from the list of notified institutions and bodies for the purpose of section 194A(3)(iii) that the name of the FFSL was not covered in the said list and that from the attitude of the assessees for non-submission of the explanation of their explanation, if any for non deduction of tax at source under section 194A, as above, it was very much clear that they had made tacit admission of default and they had nothing to offer as their explanation for non-deduction of tax under section 194A.Similar orders were made against the assessees under section 201 (1A) levying interest on the amount of tax allegedly not deducted at source.

The assessees preferred appeals against the aforesaid orders to the Commissioner (Appeals) challenging the validity of the aforesaid orders holding the assessees to be assessees in default. At the time of hearing before the Commissioner (Appeals), the assessee inter alia submitted that as provided under section 13 of the Special Act, the provision of the said Act overrides the provisions of any other law for the time being in force including the provisions of the Income Tax Act, 1961 and accordingly the provisions relating to deduction of tax at source were not applicable. The Commissioner (Appeals) set aside the order for considering the above submission of the assessees, though holding the liability of the assessees to deduct taxes at source. The assessees preferred appeals to the Tribunal against the aforesaid order but the Tribunal declined to interfere in the matter as the orders have been set aside by the Commissioner (Appeals) and the issue would have to be settled in the course of the fresh proceedings.

The assessing officer made the impugned orders dated 7-11-2000 afresh holding that the assessees were required to deduct tax at source and upheld the original orders by stating that the decision of the Special Courts in the case of Sam Lease Co. Ltd. Relied upon by the assessees was not a direct decision in the cases of the assessees; that the assessees could not submit any evidence to suggest that the facts in the said case were identical; that the order passed by the Special Court dated 9-9-1996 required persons making payment to the Custodian to deposit amount of TDS in a separate account; that though the Special Act overrides other laws, the legislation had no intention to defeat revenues of other departments; that the Supreme Court has merely passed an order to maintain status quo and no direction had been passed for non-deduction of tax at source; and that the decision of the Special Court dated 3-5-1999 does not have retrospective effect.

On going through the provisions of section 11(2) of the Special Courts Act, the Commissioner (Appeals) observed that there cannot be any dispute about the priority fixed by the Special Court. He, however, observed that the question in these cases was not of the priority and the Income Tax Department has not claimed any recovery of the demand on priority basis. The question, according to him, was whether at the relevant time, i.e., during the assessment years 1995-96 to 1999-2000 when the assessees made the provision for payment of interest to FFSL it was liable to deduct tax at source or not. According to him, the provisions of section 194A were clear and the assessees were required to deduct the tax and as the assessees credited to the account of FFSL interest in different year and have debited the same to the profit and loss account claiming deduction for the same, the assessees were in default as per explanation to section 194A of the Act. According to him, the Supreme Court in the case of T.B Ruto v. A.K. Menon (1977) 84 AIR 442 (sic) had recognised that Income Tax Act is a code in itself and the Income Tax Department is free to determine the liability of the notified person under the provisions of the Income Tax Act and in these cases to pay the tax on the interest income is the liability of the notified person. As per the provisions of section 194A, the assessees were under an obligation to make deduction of tax at source so that the tax liability of the notified party could be idealised. According to him, there is no provision under the Special Act nor there was any order of the Special Court or Supreme Court which prohibited the assessees from deducting tax at source for these years and it was only the decision of the Special Court dated 3-5-1999 which said that the interest should be deposited with the Custodian without deducting the tax at source. This decision according to him, would be applicable for assessment year 2000-01 and not for the years under appeal. Referring to the decision of Sam Lease Co. Ltd. he observed that in that case the company was making payment under the direction of Special Court and in these circumstances, it was held that in respect of payments made pursuant to the order and direction of the court, no TDS was to be made. Here, in the present case, no payment has been made to the Custodian pursuant to the order of the court and the provision for payment of interest to the notified party has been made by the assessees on their own volition and not under the orders of the court.

Referring to the Special Court order dated 5-4-1994 wherein the assessees were directed to deposit the amount payable to FFSL with the Officer on Special Duty on or before 31-7-1994 he observed that the assessees did not make any payment to the Officer on Special Duty which simply means the assessees did not honour the orders of the Special Court and no payment or provision can be said to have been made in pursuance of the order of the Special Court.

With regard to the decision of the Special Court dated 21-3-1995 the Commissioner (Appeals) held that there is no mention in this order that no deduction of tax has to be made or that the Income Tax Department will have no claim as regards taxes due to it. The decision according to him, only says that the Income Tax Department will have priority only for the scam period and other dues will fall under-section 11(2)(c) of the Special Court Act. This decision according to him, does not empower the assessees not to deduct the tax at source while making provision of interest to the notified party. He referred to the decision of the Special Court in the case of A.K. Menon v. Chairman, CBDT (Misc. Petition No. 282 of 1995, dated 9-9-1996) wherein it was held that its earlier order dated 20-2-1995 fully applies to even tax deducted at source and by use of the word now the court had made clear that after the date of order no bank company, financial institution or person can pay over the income-tax authorities the tax deducted at source in respect of any payment being made to or on behalf of the notified party. He further observed that there is nothing in this order which said that no TDS was to be made at the time of making payment of interest. On the contrary, the decision says that TDS has to be deposited in separate account and the intimation has to be given to the Custodian and the Income-tax authorities for having deposited the same.

According to him, the assessees were thus under an obligation not only to make TDS but also pay the same to the government in assessment years 1995-96 and 1996-97. For other years namely, assessment years 1997-98 and 1999-2000, the assessees should have deposited the amount of TDS in a separate account under intimation to the Custodian and the Income Tax Department. The decision of the Special Court in the case of Custodian v. Chief CIT dated 3-5-1999 was after March, 1999 and, therefore, had no application to assessment years 1995-96 to 1999-2000. The observation of the Supreme Court to maintain status quo, according to him, did not mean non-deduction of tax at source or non-payment of TDS amount to the Income Tax Department after making the provision for interest payment in their books of account as irrespective of the order of the Supreme Court in September, 1994 the assessees kept on making provision for payment of interest and kept on debiting such interest to the profit and loss account which was allowed as a deduction to the assessees. If status quo means no payment of the assessees liability, the assessees should not have debited the interest to profit and loss account and once they have decided to make the provision and debited the same to the profit and loss account they were under obligation to deduct tax at source and pay the same to the Income Tax Department upto assessment year 1996-97 and thereafter deposit the same with Custodian.

The Commissioner (Appeals) also referred to the decision of the Special Court dated 29-3-1995 observing that if the assessees are concerned about the interest they can always deposit the amount in the court and shares can be released after disposal of appeals by the Supreme Court or they can apply to the Supreme Court for permission to deposit the amount with the Special Court for which the parties have agreed that they will oppose no such application. He, therefore, held that the assessees cannot take shelter under the orders of the Supreme Court for maintaining status quo. Referring to the possibility of the outcome of the Supreme Court decision in three situations, the Commissioner (Appeals) observed that the assessees rely on future decisions but keep on committing default in present every year by making provision of interest payment and debiting the same to profit and loss account. The default committed in the present, according to him, cannot be absolved by subsequent courts order.

Referring to all the above, the appeals of the assessees were dismissed by the Commissioner (Appeals) by observing in paragraph 9. 10 as under : "9.10 From the facts on record. It can be seen that it is only the Income Tax Department which is the sufferer. The Syndicate Bank and the National Housing bank are secured because they have the custody of the shares. As regards the appellant, it has the money borrowed by it at its command and disposal. The FFSL has also got its money back on the sale/pledge of the shares of the appellant to the Syndicate Bank and the National Housing Bank. The only party at loss is the Income Tax Department, which has allowed the interest claim of the appellant allegedly payable to the notified party without realising the tax either from the notified party or from the appellant. It will be grave injustice to the department if the appellant does not pay the TDS due to the government as per the provisions of section 194A of the Income Tax Act by misinterpreting the provisions of the Special Court and the various decisions of the courts. Thus, in view of the above discussion it is held that the appellant has violated the provisions of law contained in section 194A of the Act and is accordingly liable to make the payment as per the order of the Income Tax Officer (TDS), Valsad passed under section 201(1) read with section 221(1) of the Income Tax Act." The learned counsel of the assessee submitted that as provided by section 13, the Special Act has the overriding effect over any other law, that the said Act provides for the appointment of a Custodian who is to deal with attached assets in accordance with the provisions of the said Act; that section 11 of the said Act provides for the manner in which the liabilities of a notified party have to be discharged in the following order-(a) All revenues, taxes, cesses and rates due to the Central or State Government for the notified period, (b) All amounts due to any bank, financial institution or mutual fund, (c) Any other liability; that the purpose of the said Act, therefore, is to ensure that banks and financial institutions are given priority in the amount recovered from notified parties and their dues were to be discharged before any other liability, except Government dues in respect of the notified period, that in view of the aforesaid provisions, the Special Court in its order dated 14-9-1993 in the case of Sam Lease Co. Ltd. held that the company was not entitled to deduct tax at source before paying amounts to the Custodian and directed it to pay to the Custodian all amounts deducted by way of tax at source and not to deduct any such amount in future, that the Special Court went to the extent of stating that it was for the company to recover the amount of TDS from the Income Tax Department if they were already paid; that in this connection, the observation made by the Income Tax Officer (TDS) that as the decision of the Special Court in the case of Sam Lease Co. Ltd. is not a direct decision in the case of the assessees, or that the ratio of this judgment is not applicable to the case of Rakshak Chemicals Ltd. is unwarranted and baseless; that the ratio of the decision of the Special Court is applicable to their case in view of the fact that in both the cases the amounts due were in respect of attached assets of notified parties and that the facts were identical; that it was not possible for the assessees to submit the required appeal memo and such other details in respect of the said case since they had no access to the same.

The learned counsel drew our attention to the observations in the order of the Special Court wherein it stated that there is no provision for deducting tax at source in respect of payments made pursuant to the orders and direction of the court and had accordingly, held that the company was not entitled to deduct tax at source before sending the amount to the Custodian; that the court had further directed the respondent not to deduct any such tax in future, that the said findings would be clearly applicable to the assessees case since. FFSL was a notified party as confirmed by the Custodian and accepted by the assessing officer, and the amount of loan advanced was an attached asset and any payment due to FFSL has to be paid only to the Custodian.

The learned counsel referred to paragraphs 45 and 98 of the order of the Special Court, dated 21-3-1995 and also referred to the decision of the Special Court, dated 9-9-1996 where under the Special Court has directed all the banks companies, etc. who have to make payments of interest or dividends in respect of the notified parties to the Custodian to deduct tax at source and then deposited the amount which they would have otherwise paid to the income-tax authorities in a separate account. It was submitted that such deposit in a separate account was to be made only at the time of payment of interest or dividend. In the case of the assessees, no payment has been made by them to the Custodian, which fact has also been confirmed by the Custodian and accepted by the Income Tax Officer (TDS) and accordingly the question of depositing the amount in a separate account did not arise.

Referring to the decision of the Supreme Court in an appeal against the order of the Special Court, dated 20-2-1995 and the later and consequent decision of the Special Court, dated 3-5-1999, the learned counsel reiterated that the banks, companies, financial institutions, etc. have been directed by the Special Court to pay the Custodian, interest and dividend on attached amounts without deduction of any tax at source and therefore there was no liability on the part of the assessees to deduct tax at source in respect of the provision made in its books of account for interest payable to FFSL who was a notified party.

The learned Counsel further invited our attention to the decision of the Culcutta High Court in the case of Apeejay Industries Ltd. v. CIT (2002) 120 Taxman 440 in a petition against the order rejecting application for waiver of interest. The High Court had issued a rule and passed an order of injunction against the demand on 31-1-1978 and the demand imposed was stayed till the writ petition was dismissed on 8-1-1986 with the following observations : "There was nothing in the impugned order to show the Commissioner had considered the implication and impact of the order of injunction granted by the court that continued from 1978 till 1986, rationally as a reasonable prudent man could do while examining the condition that default was due to circumstances beyond the control of the assessee. He had not considered that during this long period, the department did not take any step for getting the interim order vacated. No one could have two opinions about the impact and implication of the restraint order of the court that parties thereto could not be held responsible for any lapses during the period as per the well-known maxim actus curiae neminem gravabit, i.e., an act of court shall prejudice no one." The learned counsel further submitted that the loan has to be repaid by the assessees and they would be getting back the shares given by them by way of pledge or whether the said shares would belong to Syndicate Bank was itself in dispute and would have been known once the Supreme Court gave its decision in the aforesaid matter. Hence, as per the direction of the Supreme Court since the assessees have been asked to maintain status quo in the matter, no payment of the amounts due to FFSL had been made to the Custodian by the assessees in respect of the amounts being principal as well as the interest due thereon. In these circumstances, the provision for interest made in the account was not of such a nature as would require a deduction of tax at source. He further submitted that the credit referred to in section 194A must mean a credit which would entitle a person whose account was credited to claim payment. At this stage, neither FFSL nor Syndicate Bank would be entitled to the interest in view of the order of the Special Court and the Supreme Court and hence for this reason also there would have been no requirement to deduct the tax at source. It was submitted that the Supreme Court order requiring the assessees to maintain status quo has been passed much prior to the order dated 9-9-1996. In view of the above, the learned counsel of the assessees submitted that they cannot be held to be assessees in default in respect of non-deduction of tax at source.

Without prejudice to the above submission, the learned counsel of the assessees stated that the Supreme Court may decide the appeals filed by Syndicate Bank and the assessees in any one of the following manner : (i) In favour of the assessees, i.e., the title of the shares remains with the assessees and the loan is to be repaid to : (a) The Custodian; if the Supreme Court decides that the loan along with interest is to be repaid to the Custodian then as per the order of the Special Court no tax is to be deducted since the Special Court Act overrides the Income Tax Act; or else the loan is to be paid to; (b) Syndicate Bank; as they have made an alternative claim to step into the shoes of FFSL in its appeal before the Special Court/Supreme Court. If the said claim is accepted then the loan along with interest would be repayable to Syndicate Bank and as per the provisions of section 194A(3)(iii)(a) no tax is required to be deducted from interest payable to a bank.

(ii) Against the assessee, i.e., the title of the shares is transferred to Syndicate Bank : In that case no amount would be payable by the assessees to the Custodian on behalf of FFSL, and the question of deducting tax at source would not arise, as the payment to a bank is exempt from TDS.The learned counsel also referred to the decision of the Supreme Court in an appeal by Syndicate Bank and the consequential order of the Special Court dated 13-2-2003 along with the minutes of the order whereby the parties have settled their disputes and the matter was closed. This is the development which has taken place after the filing of the appeals and assessees prayed for the admission thereof by way of an additional evidence.

Lastly, he submitted that what we are dealing with today is the scope of levying the penalty and in a case where there is doubtful proposition or position of law prevailing at the impugned time when the assessees were required to deduct the tax whether to deduct and/or pay the tax, they should not have been saddled with the penalty under section 201 read with section 221 of the Act and prays that the assessees be exonerated from such penalty on the ground of reasonable and bona fide belief for its inaction.

Mr. R.C. Gupta, the learned CIT-DR supported the orders of the departmental Authorities and submitted that the assessees have provided interest in their books of account and claimed deduction and therefore the provision of section 194A read with Explanation thereunder clearly apply which cast liability upon the assessees to deduct and pay tax to the credit of the Central Government. Having failed to do so, the assessees committed default and were therefore, assessee in default.

Consequently the assessing officer rightly levied the penalty under section 221 read with section 201 of the Act. He further submitted that the Special Act only provided for distribution of attached assets as per order of the Special Court and did not in any way deal with the liability of the assessees to deduct tax as required under the Income Tax Act or prohibited otherwise to deduct and pay tax at source.

According to him there is no conflict between Special Act and Income Tax Act for this obligation and therefore the income-tax dues do not stand abrogated by the Special Act and in this connection he relied upon the decision of the Special Court in the case of T.B. Ruta (supra) referred to by the Commissioner (Appeals) in his order. The decision in the case of A.K. Menon v. Sam Lease Co. Ltd. (M.A. No. 89 of 1993, dated, 14-9-1993) he submitted is of no help to the assessees because (1) firstly it was not an order in assessees case, and (ii) secondly, the payment in that case was as per direction of the Special Court made to the Custodian; whereas in the present case the question of payment to anybody was not there as the assessees have made provision of interest payment and therefore by virtue of Explanation to section 194A, the assessees were liable to deduct tax at source and pay the same to the credit of Central Government. According to him, the use of the word "now" denotes that the decision of the Special Court was to apply only hence forward and not prior to the date of the order. He therefore submitted that for assessment year 1995-96 the assessees were clearly in default; for assessment years 1996-97 to 1999-2000 the assessees were obliged to deduct tax but instead of paying it to the Central Government, the tax was to be deposited with the Custodian in a separate account and the assessees having failed to deduct and to deposit that tax with the Custodian, committed default for all the years under consideration. As regards the status quo direction, he submitted that these observations do not mean the assessees liability to pay interest ceased as is evident from the assessees own conduct when they made the provisions for the liability of interest and claimed deduction thereof, as allowable expenditure. As regards the later settlement of the dispute by consent terms, he submitted that it is a new evidence which should not be admitted at this stage and in any case it does not absolve the assessees from their liabilities which had already been incurred by them prior to such decision. As regards the doubtful proposition of law submitted that there was no such doubt and the doubt was being created by the assessees by making submissions contrary of law.

(1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any income by way of interest other than income by way of interest on securities, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct income tax thereon at the rates in force : that an individual or a Hindu undivided family, whose total sales, gross receipts or turnover from the business or profession carried on by him exceed the monetary limits specified under clause (a) or clause (b) of section 44AB during the financial year immediately preceding the financial year in which such interest is credited or paid, shall be liable to deduct income tax under this section.

For the purpose of this section, where any income by way of interest as aforesaid is credited to any account, whether called "Interest payable account" or "Suspense account" or by any other name, in the books of account of the person liable to pay such income, such crediting shall be deemed to be credit of such income to the account of the payee and the provisions of this section shall apply accordingly.

(i) Where the amount of such income or, as the case may be, the aggregate of the amount of such income credited or paid or likely to be credited or paid during the financial year by the person referred to in sub-section (1) to the account of, or to, the payee, does not exceed five thousand rupees : (a) time deposits with a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); or (b) time deposits with a co-operative society engaged in carrying on the business of banking; (c) deposits with a public company which is formed and registered in India with the main object of carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes and which is eligible for deduction under clause (viii) of sub-section (1) of section 36, the aforesaid amount shall be computed with reference to the income credited or paid by a branch of the banking company or the co-operative society or the public company, as the case may be; (a) any banking company to which the Banking Regulation Act, 1949 (10 of 1949), applies or any co-operative society engaged in carrying on the business of banking (including a cooperative land mortgage bank), or (b) any financial corporation established by or under a Central, State or Provincial Act, or (c) the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956 (31 of 1956), or (d) the Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of 1963), or (e) any company or co-operative society carrying on the business of insurance,or such other institution, association or body or class of institutions, associations or bodies which the Central Government may, for reasons to be recorded in writing, notify in his behalf in the Official Gazette; (iv) to such income credited or paid by a firm to a partner of the firm; (v) to such income credited or paid by a co-operative society to a member thereof or any other co-operative society; (vi) to such income credited or paid in respect of deposits under any scheme framed by the Central Government and notified by it in this behalf in the Official Gazette; (vii) to such income credited or paid in respect of deposits (other than time deposits made on or after the 1-7-1995) with a banking company to which the Banking Regulation Act, 1949 (10 of 1949) applies (including any bank or banking institution referred to in section 51 of that Act); (a) deposits with a primary agricultural credit society or a cooperative land mortgage bank or a co-operative land development bank; (b) deposits (other than time deposits made on or after the 1-7-1995) with a co-operative society, other than a co-operative society or bank referred to in sub-clause (a); (viii) to such income credited or paid by the Central Government under any provision of this Act or the Indian Income Tax Act, 1922 (11 of 1922), or the Estate Duty Act, 1953 (34 of 1953), or the Wealth Tax Act, 1957 (27 of 1957), or the Gift Tax Act 1958 (18 of 1958), or the Super Profits Tax Act, 1963 (14 of 1963, or the Companies (Profits) Surtax Act, 1964 (7 of 1964), or the Interest Tax Act, 1974 (45 of 1974).

(ix) To such income credited or paid by way of interest on the compensation amount awarded by the Motor Accidents Claims Tribunal where the amount of such income or, as the case may be, the aggregate of the amounts of such income credited or paid during the financial year does not exceed fifty thousand rupees.

For the purposes of clauses (i), (vii) and (viia), "time deposit" means deposits (excluding recurring deposits) repayable on the expiry of fixed periods.

(4) The person responsible foi-making the payment referred to in sub-section (1) may, at the time of making any deduction, increase or reduce the amount to be deducted under this section for the purpose of adjusting any excess or deficiency arising out of any previous deduction or failure to deduct during the financial year." On a close reading of this section it is evident that this section cast a liability upon a person responsible for paying any income by way of interest other than interest on securities to deduct tax at source thereon. This liability is fastened at the time of crediting to the account of the payee or at the time of making payment whichever is earlier and by virtue of the provisions of the Explanation thereto the credit of income to the account of the payee is expanded to mean credit to any account whether called interest payable account or suspense account or any other name. The assessees in these cases made provision of interest payable to the payees and claimed deduction as expenditure and therefore by virtue of Explanation to section 194A it amounted to credit of income by way of interest to the payees account. The assessees thus incurred liability to deduct the tax and pay the same to the credit of Central Government as per the provisions of section 194A by not deducting tax at source they became assessees in default.

The assessees however seek protection under the Special Act which was introduced in the year 1992. Under this Act, section 3(3) provides for an attachment of property, whether movable or immovable, or both, belonging to the notified person to be effective simultaneously with the issue of notification under section 3(2) of the Act. It is with respect to this attached property that powers under section 11 of the Act could be exercised. The Supreme Court, in the case of Kudremukh Iron Ore Co. Ltd. v. Fairgrowth Financial Services Ltd. (1994) (4) SCC 246 held that the Special Court under section 11 of the Act had jurisdiction to direct repayment of its liability provided there was a privity of contract between the notified person and the person claiming the money.

Under section 3(4) of the Special Act, the Special Court can give directions to the Custodian in respect of attached property of a notified person. The loan repayable by the assessees to FFSL thus became an attached property. The interest payable by the assessee being usufruct also became the attached property in view of the decision of the Supreme Court dated 9-9-1996 in the case of T.B. Ruia (supra) wherein it is held that any usufruct of the attached property also becomes the "attached property" in the following : "It is perhaps necessary to make clear that the income or usufruct of attached property is also attached property. Thus if the property be shares, dividend and bonus and rights shares thereon would also be attached property. It is only income generated by a notified person by dint of his own labour which falls outside the net of section 3(3). In respect of such income the attachment under section 3(3) does not operate." Similarly section 11(1) of the Act provides for the distribution of attached assets of the notified person. FFSL to whom the interest was to be paid was a notified person under the Special Act. Section 11(2) of this Act provides for distribution of the property of a notified person and for the purpose of which the court has to collect money for distribution. It provides for payment of tax due in full by virtue of clause (a) payments due to banks, financial institutions, etc. as per clause (b) and any other liability by virtue of clause (c). Whereas under clause (a) no order of Special Court is required and it is the liability of the notified period, the liability other than this clause and clause (b) can be covered by only clause (c) which requires a specific order of the Special Court.Solidaire India Ltd. v.Fairgrowth Financial Services Ltd. (2001) 104 Comp. Cas. 569 (SC).

Their Lordships of the Supreme Court held as under : "Under section 3 of the 1922 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 the 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." By section 13 of the Special Act the provision of the Special Act are to prevail and shall have to an overriding effect over the provisions of the other Acts to the extent of conflict. It reads as under : .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." There was a conflict between the provisions of Sick Industrial Companies (Special Provisions) Act, 1985 and this Special Act. Under section 22 of the former Act, recovery proceedings can only be with the consent of the Board for Industrial and Financial Reconstruction or the Appellate Authority. The Supreme Court held that the Legislature being aware of the provisions of section 22 under the 1985 Act still empowered only the Special Court under the 1922 Act to give directions to recover and to distribute the assets of the notified persons in the manner set down under section 11(2) of the 1922 Act. This can only mean that the Legislature wanted the provisions of section 11(2) of the 1992 Act to prevail over the provisions of any other law including those of the Sick Industrial Companies (Special Provisions) Act, 1985.

The Special Court in its order dated 22-7-1993 in MA No. 96 held that undoubtedly there is great force in the submission that private rights cannot be abrogated or curtailed without compensation; that all private rights are preserved and that the said Act provides for distribution in a particular manner only; that the Legislature has sought to provide (i) for a speedy trial of offences; (ii) immediate attachment and thus freezing of all assets of the parties suspected to be involved and thus preventing any further transfer or alienation; and (iii) a reasonable, rational and equitable distribution of property by this court as it would have the total picture; that whilst these were the objects, the Legislature has also kept in mind the fact that there may be contractual rights in favour of third parties. Financial Institutions and/or Banks. Undoubtedly, these rights were not to be affected. This is clear from section 4 which gives the custodian the power to set aside contracts under certain conditions; that by section 11(2) of the said Act the legislature has provided for payment of liabilities towards tax and Government dues and of Financial Institutions and Banks and that the provision regarding distribution would be the only provision against the absolute claims and rights under prior contracts; that none of the rights under contracts or under law are abrogated or done away with. All that section 11(2) provides for is equitable and rational distribution of, what was public money in the first instance; that whilst paying this dues the court could and would keep in mind the claims of the parties over specific properties or assets, so that the statutory dues would, as far as possible be paid out of unencumbered property in the first instance"; that thus private parties entering into contracts with a Notified Party would get only such rights as the Notified Party had. They cannot get a better title, except may be in cases of Negotiable Instruments and/or Shares; that even though contractual and special rights in property have not been abrogated or done away with, they can only be enforced subject to the order of payments laid down under section 11 of the said Act.

On the Special Court in the case of Sam Lease Co. Ltd. in (MA No. 89 of 1993, dated 14-9-1993) also held that : "P.C. The Respondent No. 1 is paying to the Custodian pursuant to order of this Court. in my view there is no provision for deducting tax at source, in respect of payments made pursuant to Orders and Directors of Court. Accordingly, Respondent No. 1 was not entitled to deduct tax at source before sending amounts to the Custodian. Accordingly, Respondent No. 1 is directed to pay to the custodian all amounts deducted by way of tax deducted at source. As Respondent No. 1 chose to act on its own, without seeking clarification from Court, it will be for Respondent No.1 to recover these monies from Income Tax Authority if already paid to them. Respondent No. 1 is directed not to deduct any such amount in future." (Emphasis supplied).

By order in Misc. Petition No. 282 of 1995 in A.K. Menon v. Chaiman, CBDT and others including FFSL, dated 9-9-1996, the court held in paras 5 and 6 as under: "5. It will therefore have to be held that the order dated 20-2-1995 fully applies even to tax deductions at source. In my view no banks, company, industries or person can now pay over to the Income Tax Authorities the tax deducted at source in respect of any payment being made to or on behalf of a Notified Party. This because to make such payment would amount to giving to the Income Tax department a priority not contemplated by section 11 of the said Act. Any provisions of the Income Tax Act which are contrary to the provisions of the said Act must give way to the provisions of the said Act. This is because the said Act is a Special Act and a later Act.

6. I, therefore, direct all Banks, Companies, Institutions and persons who have to make payments of interest or dividends to deduct tax at source and then deposit the amount which they would have otherwise paid to the Income Tax Authorities in a separate account to be maintained by them under intimation to the Custodian and Income Tax Authorities.

Every time such deduction is made and amount deposited in the separate account, intimation to be given to the .Custodian and Income Tax Authorities. Such intimation to contain all relevant particulars. The amounts to be thereafter invested in Fixed Deposits in Nationalized Banks. This is to be done within two weeks of deposit in separate account. The Fixed Deposits and interest earned thereon must be kept renewed until further Orders of this Court. These amounts or interest thereof must not be used in any manner whatsoever by the bank, company, institution or person. It is clarified that any Bank, Company, Institution or person acting under this order would not be considered to be an assessee in default." As the time for distribution of assets of the notified parties was approaching, the Custodian issued a public notice calling upon the parties for lodging their claims, if any. The Income Tax department also filed petitions for priority payment for about Rs. 1380 crores being tax, interest and penalty. Noticing the fact that Income Tax department was taking action for levying penalty and interest as the notified parties have not paid advance tax nor filed their income-tax returns, the Special Court by an order dated 20-2-1995 framed the following three questions to be answered : "1. Whether the priority created by section 11 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 is only in respect of amounts due prior to the date of Notification and/or whether the priority would also apply to amounts due after the date of notification.

2. Whether the phrase taxes as used in section 11 of the Special, court (Trial of Offences Relating to Transactions in Securities) Act, 1992 can only mean amounts due as and by way of taxes or whether it would also include penalties and interests, if any.

3. Whether penalty and/or interest can be levied on or charged to Notified Parties after the date of Notification." While answering these three questions and quoting its earlier judgment dated 22-7-1993 in MA No. 96 the Special Court observed that "Thus earlier, this court has already taken a view that the liabilities for taxes, rates, cess, etc. are given a priority because they are recurring liabilities, which if not paid, would incur penalties. Whilst expressing that view, the questions now under consideration were not before the Court. On a proper consideration, for reasons set out hereafter, that view does not appear to be correct." The Special Court in paragraph 44 answered the 1st question by stating that the priorities which were laid down were in respect of what was due on the date of Notification and that whilst distributing the court will only take into consideration such liabilities as have been ascertained, quantified and crystallized. Thus, if the assessments are not completed court will not have before it any ascertained or any quantified amount, the priority would then be low. As regards the second question the Special Court held that the term "tax, penalty and interest" are conceptually different and priority has been given only to tax and nothing else. As regards the third question, the Special Court held that a notified party may have enough assets to pay advance tax and/or the amount of the demand notice, yet the notified party is unable to do so as all his assets are attached and the time of distribution has not arisen.

"98. I have considered the rival submissions. There is no doubt that a Notification places a notified party at a disadvantage. He is no longer able to deal with his property, all profit making activities have come to an end. However, the law is clear. No rights can be abrogated unless the statute does so expressly or by necessary implication. At the same time law cant be such that it prevents a party or puts restraint on him but does not absolve him from adverse consequences of such restraint.

In my view, the court will have to make a distinction between different types of cases. The following are just by way of example. They are not exclusive. Each case would have to be decided on its own merit. Just by reason of Notifjcation intere.,;t and/or penalty would not automatically stop running under contracts. However, if the court finds that a Notified party would have been able to pay off his debt, but could not do so only because of the Notification, the court can at that stage absolve him from the liability to pay interest or reduce the interest. In such cases, Court would not permit penalty to be levied.

However, if the Notified party, did not have assets enough to meet his liability, then merely because he is Notified will not absolve him from liability to pay interest and/ot-penalty. This because even if he had not been Notified he would still have been default and been liable to pay interest and/or penalty. In this case the Notification has made no difference. Another type of case would be where a Notified Party is prevented by reason of Notification, from doing things which are required to be done by him under other Acts or contracts. In such cases, if the provisions of the Special Courts Act prevents a Notified Party from doing that thing, then by reason of this legal disability, no penalty or interest can be levied on that party. Thus no penalty or interest can be imposed for non-fullilment of an act which a Notified Party is prevented from doing by reason of the Special Court Act. In such cases even though the provisions of some other Act or contract lay down consequences for non-performance the provisions of the Special Court Act will prevail This is because in such cases there would be a conflict between the provisions of the Special Courts Act and that other law and/or contract. In cases of such conflict, the provisions of the Special Court Act must prevail. To take an example, under section 234B of the Income Tax Act, every assessee is liable to pay Advance Tax. All parties are Notified between June 1992 to August, 1992. All of them would be liable to Advance Taxes for the Financial Year ending March, 1993 and for subsequent years. However, as seen earlier, taxes only upto assessment yeat-1992-93 can be paid in priority. These would have to rank as ordinary debts under section 1)(2)(c). This therefore can only be released after the entire distribution has taken place.

Even if the Notified Party were to make an Application to this court to pay Advance Tax, the court would refuse it. Thus monies for payment of Advance Tax have not been released Thus a Notified Party has been prevented from paying Advance Tax. Thus, under the Special Courts Act, there is a legal disability to pay Advance Tax. Yet under the Income Tax Act there is a compulsion to pay Advance tax. There is a conflict between the provisions of the Special Courts Act and the Income Tax Act. The provisions of the Special Courts Act must prevail. Under the Income Tax Act if Advance tax is not paid, for such non-payment interest can be levied. This obviously on the footing that the assessee is in default. However, a Notified Party, has been prevented by law from paying Advance Tax. He is not a defaulting party. He has not paid Advance Tax because of legal restraint. on him The law has prevented him from paying Advance Tax. In my view, in such cases, i.e., where there is a conflict between the provisions of the Special Courts Act and some other Act/contract, the contrary provision must necessarily give way. If there is this legal disability then there is no question of the notified party being foisted with the liability to pay interest and/or penalty. Similarly under section 220(2) of the Income Tax Act, a Demand Notice may have been served on a party. That Demand Notice may be for tax, interest and/or penalty. Under the Income Tax Law, the sum specified in the notification must be paid within 30 days. Under the Income Tax Act, if the same is not paid within 30 days, the assessee is liable to pay interest at 1.5 per cent per month. Here again by reason of the legal disability, imposed by the Special Courts Act, the Notified Party is not in a position to pay the amounts demand by that Demand Notice. If that is so, then the Notified Party cannot be said to be in default, then there is no question of the Notified Party becoming liable to pay interest under section 220(2). The same would apply in respect of penalty under the Income Tax Act. Thus in cases where, by reason of the legal disability, a Notified Party is prevented from doing something there can be no levy of interest or penalty on the Notified Party for not doing that thing. However, where the Special Courts Act does not prevent a party from doing something required to done under some other Act/contract and the Notified party does not perform his obligation he will be liable to pay interest and/or penalty. Just by way of example under the Income Tax Act penalty can be levied for not filing a return; penalty can be levied for failure to produce evidence to support the return of income. These are not matters where any disability is imposed on a Notified Party by the Special Courts Act. There is nothing in the Special Courts Act which prevents a Notified party from filing his return within time. There is nothing in the Special Courts Act which prevents a party from producing evidence in support of his return. If a Notified party has failed to file his return in time and/or failed to produce evidence in support of his return, he does so at his own peril. In this case, there is no conflict between the Special Courts Act and the Income Tax Act. if there is no conflict, the provisions of the Income Tax Act will continue to apply.

Of course in such cases, the court may not release amounts for payment of interestlpenalty or only release it after discharge of other liabilities. But merely because this court may not release amounts does not mean that interest/penalty cannot be imposed. As stated above, these are mere examples. In each case, the court would have to examine whether there is a legal disability by reason of the Special Courts Act. If the Special Courts Act prevents a Notified Party from doing a certain thing, then there can be no interest/penalty. If on the other hand, the Special Courts Act has not prevented or disabled a person nor abrogated any right, then the provisions of other Laws/contracts will continue to apply." (Emphasis supplied) Supreme Court by its order dated 13-5-1998, in an appeal against this order of the Special Court dated 20-2-1995, enlarged the three questions to the following six questions : "(I) 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 crystallized into a legally ascertained sum immediately payable? (2) Do the taxes (in clause (a) of section 11(2)) refer only to taxes relating to a specific period or to all taxes due from the notified person? (4) Does the Special Court have any discretion relating to the extent of payments to be made under section 11(2)(a) from out of the attached funds/property? (6) 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 urider section 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?" The Supreme Court also considered the question raised by the Custodian that the term any properties movable or immovable or both belonging to any person notified would refer only to the right, title or interest of the notified person in the mortgaged/pledged property and not the entire property itself and the Supreme Court answered the last question as unless the Custodian exercised the power under section 4 the right of attachment does not get extinguished nor it is the property whether free from encumbrance or otherwise and the ownership of the property remains as it was.

As regards question No. 1 the Supreme Court held that in the context of section 11(2) the taxes due refer to taxes as finally assessed and it must refer to an ascertained liability for payment of taxes quantified in accordance with law. As regards question No. 2 it was held that priority given under section 11(2)(a) is to such tax liability only as was for the period 1-4-1991 to 6-6-1992. As regards question No. 3 the court held that the liability arising during the notified period must refer to the liability on the date of distribution which arise when the Special Court contemplates the examination of claim under section 9A and 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 be considered for payment under section 11(2)(a). As regards question No. 4 it was held that both the liability of the assessee for the balance tax should subsist and the taxing authorities would be entitled to realise the remaining liability from the assessee and the same will not be paid in priority over the claims of everybody else under section 11(2)(a)of the Act and 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 acquired property of the assessee or any 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 the tax is so disproportionately high in relation to the funds in the hands of the Custodian as to require scaling down in the interest of and to further the purpose of the Act. The Special Court must have strong reason for doing so. In fact, the income-tax authorities have also accepted that exorbitant tax demand can be ignored applying the Wednesbury Principle. As regards question No. 5 Their Lordship upheld the decision of the Special Court that tax does not include penalty nor interest under section 11(2)(a).

As regards question No. 6 Their Lordships held in paragraph 38 of their order as under : "38. The Special Court has, in the impugned judgment, also dwelt at some length on the question whether it can absolve a notified person from imposition of penalty or interest after the date of the notification. Since the liabilities covered under section 11(2)(a) are only liabilities arising during the period 1-4-1991 to 6-6-1992, and do not cover penalty and interest, this question does not reallv arise. In any case, interest or penalty for any action or default after the date of the notification, are not covered by the Act. However, we must reiterate that a taxing statute is a code in itself for imposition of tax, penalty or interest. The remedy of a notified person who is assessed to penalty or interest, after the notified period would be to move the appropriate authority under the taxing statute in that connection. If it is open to him under the relevant taxing statute to contend that he was unable to pay his taxes on account of the attachment of all his properties under the Special Court Act, and that there is a valid reason why penalty or interest should not be imposed upon him the date of notification, the authorities concerned under the taxing statute can take notice of these circumstances in accordance with law for the purpose of deciding whether penalty or interest can be imposed on the notified person. 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 section 11(2)(a) and 11(2)(b). The Special Court has full discretion under section 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." Consequent upon modification of its order by the Supreme Court the Special Court, thereafter, in its order dated 3-5-1999 after referring to the aforesaid Supreme court decision, held that : "4 The Supreme Court by an order dated 13-5-1998 in Civil Appeal No.5326 of 1995 has now held that every kind of tax liability, for any period apart from the statutory period, i.e., 1-4-1991 to 6-6-1992, is not covered under section 11(2)(a). The Supreme Court has held that although the liability continues to be liability of the Notified Party, such liability may be discharged, under directions ofthe Special Court under section 11(2)(c) of the said Act or in any other mariner in accordance with law. The Supreme Court has held that the priority under section 11(2)(a) only covers tax liability for the period 1-4-1991, to 6-6-1992 or the taxing authority may recover from any subsequently acquired of Notified Party.

5. The Supreme Court has in a judgment dated 9-9-1996, in the case of Tejkumar B. Ruia v. Custodian reported in AIR (1997) SC page 443 held that all Notified Parties are free to earn future incomt, The Supreme Court has held that such future income would not stand attached. The Supreme Court has however clarified that interest and dividend on attached assets also remain attached as they are mere usufruct of attached assets.

6. This court has already held by the order that any claim of the Tax department which falls under section 11(2)(c) could not be paid in priority for the reasons set out in detail in the order dated 20-2-1995. This court held that any payment of Advance Tax Deduction at Source in respect of attached assets would amount to making payment to Income Tax department not contemplated by section 1 of the said Act.

This court has held that the provisions of the said Act. This court has held that this must be so as the said Act was a Special Act and also a later Act.

7. The law is now well settled by the Supreme Court judgment dated 13-5-1998 in Civil Appeal No. 5326 of 1995. The Income Tax Department can get no priority in respect of tax which is not for the statutory period, i.e., 1-4-1991 to 6-6-1992, As has been held by the Supreme Court tax for any subsequent or any other period can only be recovered by the Income Tax Authorities under section 11(2)(c) or from subsequently acquired property or income of the Notified Party which do not stand attached .....

There is now no purpose in letting bank, companies, financial institutions and persons hold on to such amounts in separate accounts.

Now, that law is well settled these amounts must come to the Custodian.

Also there can be no tax deduction at source. All banks, companies, financial institutions and persons who have to pay interest and dividends on attached accounts must make those payments without any Deduction of Tax at Source." Based on the decision dated 15/20-4-1994, of the Special Court the assessees made provision of interest on the sum of Rs. 10,98,25,000, i.e., Rs. 2,63,58,000 from year to year but no tax was deducted at source thereon. The said provision had not been credited to the partys account but had been reflected under Schedule K to the Balance Sheet under liabilities as interest accrued but not due. It was further submitted that in the return of income filed for the assessment year 1999-2000 no deduction had been claimed in respect of the said interest amounting to Rs. 2,63,58,000. The assessees had filed an Annual Return in Form No. 26A in respect of tax deducted at source from interest on securities for the assessment year 1995-96 on 29-6-1995.

Section 194A as stated above provides for tax deduction at source at the rates in force on the income which a person is responsible for paying to a resident either at the time of credit (which term includes credit to any account-whether called "Interest Payable Account" or "Suspense Account" or any other name) or at the time of payment thereof whichever is earlier. The liability is to deduct tax "thereon" and not "therefrom" as otherwise also the tax cannot be deducted from a mere provision made or interest payable account because the payment is no made. The term "thereon" therefore forms the amount of interest as a base and not a source. In case it is a provision only, as in these cases the assessee has to deduct tax hereon and pay the same from any of his sources and not out of amount deducted therefrom. This shows, it is a individual liability of a person responsible for paying the income, independent of his prior deduction from the interest paid/payable. This is also evident by reading sub-section (2) of section 4 which makes it a charge on the person paying independent of the recipient who is liable only when the person responsible for payment does not deduct and pay the tax.

"4(1) Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of this Act in respect of the total income of the previous year of every person : where by virtue of any provision of this Act income-tax is to be charged in respect of the income of a period other than the previous year, income-tax shall be charged accordingly.

(2) In respect of income chargeable under sub-section (1), income-tax shall be deducted at the source or paid in advance, where it is so deductible or payable under any provisions of this Act." Failure to deduct and pay entails liability for interest under section 201(1A) and penalty under section 201 read with section 221. Section 201(2) and also creates a charge on all assets of such person responsible for deduction and payment of tax, if after deduction, person does not pay the same. Section 205 then puts a bar for collection of the tax from the person from whose income tax is to be deducted to the extent the tax has been deducted from that Income.

On a combined reading of the provisions of sections 4, 194A and 201, what in our opinion accrue to the payee is only the net of tax amount and not the whole amount of interest. The tax to be deducted is diverted at source by virtue of these provisions of sections 4, 194A and 201 of the Act. In many cases the entire amount of interest may not be the taxable income because of certain deductions or the other income including this income may not cross taxable limits or may be that the tax payable is less than what has been deducted, the tax so deducted is deemed as income of the interest recipient by virtue of section 198, which reads as under : "Section 198. All sums deducted in accordance with the provisions of sections 192 to 194, section 194A, section 194B, section 194BB, section 194C, section 194D, section 194E, section 194EE, section 194F, section 194G, section 194H, section 194-I, section 194J, section 194K, section 194L, section 195, section 196A, section 196B section 196C and section 196D shall, for the purpose of computing the income of an assessee, be deemed to be income received : that the sum being the tax paid, under sub-section (1A) of section 192 for the purpose of computing the income of an assessee, shall not be deemed to be income received." The scope of net accrual came up before the Calcutta High Court in the case of CIT v. Shaw Wallace & Co. Ltd. (1981) 132 ITR 466 wherein after considering the Supreme Court decision in the case of CIT v. Clive Insurance Co. Ltd. (1978) 113 ITR 636. The question in this case was whether gross amount of dividend from U.K. Company accrued to the assessee or the net of TDS only. It may be stated here that under section 5(1)(c) of the Income Tax Act, the income of an assessee is taxable in India only if the same is accrued or arisen to him outside India. The court noted the Kerala High Court decision in the case of CIT v. Y.N.S. Hobbs (1979) 116 ITR 20 wherein reading section 5(1)(c) and section 198 together it was held that in absence of provision like section 198, deeming the TDS as deemed receipt of income, it is only net amount of income that has been received or accrued to the assessee and tax deducted at source was only a deeming income which is for tax deducted at source in India.

In a later decision, the Calcutta High Court in the case of CIT v.Oriental Co. Ltd. (1982) 137 ITR 777 also examined the nature of TDS vis-a-vis debt accrued to the assessee. The contention of the revenue was that the declaration of dividend brings into existence the debt owed by the company to the shareholder and therefore the entire amount of dividend accrued to the assessee. The court did not accept this contention of the assessee and observed at page 783 of the Report as under : "In this connection, it would be instructive, in our opinion, to refer to section 8 of the Income Tax Act, 1961, which deals with dividend income, and which provides that for the purpose of inclusion in the total income of an assessee any dividend declared by a company or distributed or paid by it within the meaning of sub-clause (a) or sub-clause (b) or sub-clause (c) or sub-clause (a) or sub-clause (e) of clause (22) of section 2 shall be "deemed to be the income of the previous year in which it is so declared, distributed or paid, as the case may be. In this connection, reference may be made to section 194 of the Act which obliges the principal officer of an Indian company or a company which has made the prescribed ari-arrangements for the declaration and payment of dividends within India, before, making any payment in cash or before issuing any cheques or warrant in respect of a dividend or payment to a shareholder of any dividend within the meaning of the different clauses we have mentioned, to deduct from the amount of such dividend, income-tax at the rates in force. It is provided that, where in the case of a shareholder, not being a company, the Income Tax Officer gives a certificate in writing in the prescribed manner that to the best of his belief the total income of the shareholder would be less than the minimum liable to income-tax, such a deduction might not be necessary. The net effect of this section appears to be that the statute enjoined, leaving aside the case where there is a declaration given that the person to whom the dividend is paid is not taxable, that the company is not free but statutorily obliged to deduct the tax at source This is important because the main question, in this case, is whether the whole amount becomes the income of the assessee the moment it is declared or in other words it can be said that the entirety of the amount declared, with the gross dividend declared, accrues or a right arises in favour of the assessee, on the declaration. As we have noticed, that the right, except in cases of certain special classes of assessees, with which we are not concerned, viz., the assessees whose total income do not exceed the minimum limit, the assessee is not entitled to receive the entirety of the amount nor is the company obliged to pay the entirety of the amount without deduction. There is no right accrued in favour of these kinds of assessees to receive the gross amount and no obligation consequently upon the company to pay the gross amount. If this is the position then read with section 8 along with sections 198 and 199 makes the suns deducted, in accordance with the provisions of section 194, deemed "income received" If that is the position, then, under the Indian law, contrary to what was urged by the learned advocate for the revenue, it cannot be said, leaving aside those kinds of assessee who are not assessable to tax, that such amount of in come which is liable to be deducted at source arises or accrues to the assessee in India the moment it is declare. Therefore, it cannot be said that the right to receive the same, or the right to treat the same as income, arises on the declaration of dividends. So it is not possible to accept, on principle, the first argument urged on behalf of the revenue that declaration of dividend creates a right so far as gross dividend is concerned in favour of the shareholder and as such a declaration would be taken to have caused accrual of income to a shareholder." (Emphasis supplied) "We come, therefore, to the basic question whether on a declaration of dividend as such the amount which is liable to be deducted under the relevant Finance Act accrues or arises to an assessee in India." This question was answered by the High Court at page 791 of the Report as under : "In our opinion, in view of the scheme of section 194 read with section 198, in the case of the assessee who are liable to pay income-tax, the company is obliged by the statute to deduct that tax. In such cases, the assessee has no right to claim the deduction from the company even if the assessee is not liable to pay the taxes. The only right that the assessee gets is against the revenue to claim refund if he is liable to pay a part or none at all of the tax deducted The statute creates on the declaration of the dividend an obligation to deduct that tax.

Therefore, in this scheme of the Indian Income Tax Act, so far as the dividend income is concerned, in our opinion, section 8 read with section 194 and section 198 of the Income Tax Act, 1961, make!i it clear that so far as the tax portion is concerned, there is diversion of that portion by statute at the declaration stage. Therefore, this was not a case of application of income after accrual That income in the eye of law never accrues in the sense of a debt owing by the company to the assessee, that is a debt undoubtedly by the company to the revenue but no debt on that amount accrues in favour of the assessee. In that view of the matter we are unable to accept these contention urged on behalf of the revenue. This has to be borne in mind that under section 194 of the Income-tax Act, 1961 the principal officer of an Indian company before making payment in cash or before issuing any cheque or warrant in respect of any dividend or making any distribution or payment to a shareholder of a dividend within the meaning of section 2(22) sub-clause (a), (b), (c) or (a) is enjoined to deduct, from the amount of such dividend of the Indian company, income-tax at the rates which are in force." "Section 198 of the Income Tax Act, 1961 specifically provides that all sums deducted in accordance with the provisions of section 194 and the other sections shall, "for the purpose of computing the income of an assessee, be deemed to be income received." "Section 199 of the Income Tax Act, 1961 further provides that any deduction made in accordance with the provisions of section 194 and paid to the Central Government should be treated as a payment of tax on behalf of the person from whose income the deduction was made and credit should be given to him for the amount so deducted on production of the certificate furnished under section 203 in the immediately following assessment year under the Income Tax Act, 1961." "It is apparent, therefore, that under the Income Tax Act, 1961, and under the Indian law it is only in respect of the dividend of an Indian company that the Indian company was obliged to deduct tax which should be on the payment of the dividend and the amount deducted at the time of the payment of the dividend, vide the statutory fiction, was deemed to be the income of the agsessee, for computing the income of the shareholders." (Emphasis supplied) The Madhya Pradesh High Court in the case of CIT v. Yawar Rashid (1996) 218 ITR 699 also considered the provisions of section 5(1)(c) with regard to income from dividend and interest and it held as under : "According to section 5 of the Income Tax Act, 1961, the total income of the previous year of the assessee who is a resident in India includes all income from whatever source, i.e., which is received or deemed to be received in India in such year by or on behalf of such person, or accrues or arises or is deemed to accrue or arise to him in India during such year or accrues or arises to him outside India during such year. A distinction has to be made among the three clauses of section 5 of the Act. Clause (c) of section 5 is different from both clauses (a) and (b) of section 5. In clauses (a) and (b), the words used are "is received or is deemed to be received or accrues or arises or is deemed to accrue or arise India". Clause (c) is in the present tense and makes it clear that the actual income which accrues or arise to him from outside India shall be counted, i.e., the gross income in clause (c) is not to be counted, but actual income which is received at the hands of the assessee, is to be counted. Section 198 states how tax deducted should be included in the gross income under the various provisions of the Income Tax Act. There is no inclusion under section 198 of the Act of the sums deducted at source abroad. There is no provision which mandates that if any tax has been deducted at source abroad then that amount should also be computed for the purpose of arriving at the gross income of the assessee for tax liability. A harmonious reading of sections 5 and 91 shows that if any income accrues or arises to any Indian resident from abroad and it does not fall clause (c) under section 5(1) which talks about the total income, then there is no question of claiming the benefit of section 91 of the Income Tax Act of double taxation of that income. Hence, tax deducted at source outside India from foreign dividend and interest income is not part of total income." The tax is deductible at source on interest. Therefore what accrues to an assessee is only the net amount of interest after the tax is deducted at source under section 194A. It is only in order to enable to give tax deducted at source as a benefit or a credit to the assessee, the tax deducted at source is deemed as income received under section 198 and therefore assessable as income deemed to have been received and not on the principle/ground that it had accrued to him. Consequent to the deemed receipt of credit is allowed to the assessee as if it was tax paid by him. If that be the position, the tax which is deducted at source is diverted at source and did not accrue to FFSL, and consequently no debt accrued to it which could be said to be subject-matter of distribution by the Special Court under section 11 of the Act. A deemed receipt of TDS cannot be subject to an order of Special Court.

As stated by the Supreme Court in the case of Solidaire Industrial Co.

v. the Assessees (supra) the Special Court for the purposes of distribution of assets of notified party, the money payable to them was to be collected first. If the money is not payable or accrues to the assessee it cannot be collected nor distributed. The portion of the interest payable to FFSL by the assessees was diverted by virtue of statutory provision of section 194A at source and did not accrue to them and it was a liability of the assessees under section 194A and a charge on the assessees themselves under section 4(2) of the Act. See also the answer given by the Supreme Court order dated 13-5-1998 to the question posed by the custodian regarding mortgaged property. The court stated that the property belonging to the notified person is the interest of the notified person in that mortgaged/pledged property and not the entire property. Similarly, when the interest payable to the notified person is subject to TDS under section 194A of the Act, the property in that interest recoverable is only for net of TDS and not the whole amount of interest.

Further, the tax priority within the jurisdiction of the Special Court was of the tax for the period 1-6-1991 to 6-6-1992 and the TDS liability is for the period much after that namely for the impugned assessment year 1995-96 onwards. Therefore, it was not automatic and required a specific order of the Special Court under section 11(2)(c) of the Act for the percentage of distribution and not otherwise.

With regard to penalty and interest the Supreme Court observed that the interest or penalty for any action or default after the date of notification are not covered by the Act; that the Income Tax Act is a code in itself for imposition of penalty and interest; that the remedy of a notified person who is levied penalty after notified period would be to move the appropriate authority under the taxing statute in that connection and that it would be upon him to point out his inability on account of attachment and plead for valid reason who will take note of that reason in deciding the matter.

It is not that the Special Court in its order dated 3-5-1999 alone stated that "now" the tax is not to be deducted at source and paid to the credit of the Central Government but it was in its order dated 9-9-1996 itself when the Special Court directed in paragraph 5 of its order that "now" no bank, etc. can pay to the Income Tax Department the tax deducted at source and directed vide paragraph 6 thereof to deposit the tax deducted in a separate account under intimation to the custodian and the Income Tax Department. The Commissioner (Appeals), in our opinion, therefore, was not right in stating by virtue of the word "now" that the assessees were exempted from liability to TDS only from assessment year 2000-01 and not earlier. In fact, it applied for assessment year 1997-98 onwards itself when the Special Court on 9-9-1996 prohibited all persons to pay the TDS to the Income Tax Department.

As regards the settlement of dispute by mutual agreement in 2003, we may state that the dispute was settled for an amount over and above the principal amount by a sum of Rs. 44,24,700 (Rs. 21,93, 10,000 recovered by FFSL min us the amount payable of Rs. 21,48,85,300 including interest due 30-6-1992) which was not taken back. The transfer of 3.5 lakhs original shares of United Phosphorus were considered to be invalid, meaning thereby that loan stood as payable by the assessees which was settled by the consent terms by giving 15 lakhs shares of United Phosphorus as against the original 3.5 lakhs shares. It had thus an element of interest of some amount and the settlement was not absolutely without payment of interest at all. At this juncture, we may refer to the decision of Godhra Electricity Co. Ltd. v. CIT (1997) 225 ITR 746 wherein the enhanced rate of electricity was credited in the books of account but on account of litigation about the rate and pendency of the suits followed by the letter of the Under Secretary to the Government of Gujarat and the taking over of the company by the Government the enhanced amount of charge but not recovered at all and in that context it was held by the Supreme Court that no income resulted at all and the receipt was only a hypothetical income which really never accrued to the assessee. Similarly, in the case of CIT v.Bokaro Steel Ltd. (1999) 236 ITR 315 (SC) the original agreement ceased to be operative ab initio and the entries regarding income of interest shown by the assessee were reversed in the next year since the supplier had replace 8 locomotives lent by the assessee company to it by new ones. The entire nature of transaction was changed between the parties.

There was resolution of the assessee company in this regard and the income from interest did not result at all as the original agreement ceased to be operative ab initio. The entry in the books which was made was about a hypothetical income which did not materalise and the entry was reversed in the next year. On the parity of reasoning, when income is not taxable because ultimately it did not result at all, the interest would also not be accrue or arise, consequently not allowable deduction, as ultimately it did not remain to be payable at all.

However, as stated above, these are not the cases where there is no liability to pay interest at all and in view of the settlement of the higher amount of repayment there was a liability of the resulting amount which was settled over and above the principal amount of loan.

As regards the assessees plea for doubtful proposition of law, we may state that it was not so. The 1993-decision of the Special Court in the case of Sam Lease Co. Ltd. (supra) was first of all not in the case of the assessees and it was the case of payment to the custodian whereas in the present cases we have held that it was the liability of the assessees payable to the credit of the Government of India under the Income Tax Act and even the Special Court held in 1995 that the tax was to be deducted but instead of paying it to the Income Tax Department it was to be deposited in a separate account. Therefore, there was no doubt that upto 1995 order, it was the assessees liability to deduct and also pay the tax to the credit of the Government of India. It was also not a liability for the notified period and the assessees were prohibited to pay only in 1995 and to deduct and pay in 1999.

Vide paragraph 98 of the order-dated 20-2-1995 the Special Court observed that if the notified party is disabled party is disabled by virtue of the notification to perform its obligations, it shall be absolved of its consequences for the liabilities to pay interest and penalty. These were the observations for the notified persons on disability and not for other persons and that too for their own application independent of the obligations of the notified persons. .

In view of the aforesaid discussion up till 9-9-1996 order of the Special Court in A.K Menons case (supra) including FFSL, the assessee were not justified not to deduct and pav the tax deducted at source under section 194A of, the Act. They have to be treated as assessee-in-default and penalties for the years 1995-96 and 1996-97 cannot be said to be unjustified. As the assessees, in our opinion were under an obligation to deduct the tax the pay the same to the credit of the Central Government; that being the independent liability of the assessee under section 4(2) of the Act read with section 194A. However looking to the facts and circumstances of the case the levy of penalties as equivalent to amount of arrears of tax is excessive and we are of the opinion that it would meet the ends of justice if a token penalty of Rs. 1 lakh in each for the assessment years 1995-96 and 1996-97 in cases of each of the assessees is levied. We direct accordingly.

For assessment years 1997-98 to 1999-2000, however, in view of the Special Courts specific direction to deduct the tax and pay the same in a separate account under intimation to the Income Tax Department as well as to the Custodian, the assessees, of course, committed a default in not deducting and consequently not paying even to the Special Court, they were also not exonerated from default in absence of compliance thereof. The assessees in our opinion, though guilty of non-deduction, cannot be held to be guilty for non-payment of the tax as the liability was only to deduct the tax and the payment could not be made to the credit of the Central Government as was required to be deposited in a separate account in view of the specific order of the Special Court.

Section 201 deals with an assessee to be in default for both the defaults, i.e., for non-deduction of tax at source as well as failure to pay the tax deducted at source. Both these defaults are independently covered under section 201 but for the purpose of levy of penalty under section 221, proviso to section 201 provides that no penalty shall be charged unless the assessing officer is satisfied that such person has without good and sufficient reason failed to deduct and pay the tax. This proviso gives an impression that for the purpose of levying the penalty there must be a combined default of non-deduction of tax as well as non-payment of tax. In any case, in view of the specific order of the Special Court not to deposit the tax to the credit of Central Government but to deposit the same with the Special Court would not be a default within the meaning of section 201 read with proviso thereto.

In the result, the appeals of the assessees for assessment years 1995-96 and 1996-97 are partly allowed and for other years are allowed.