Itta/320/2006 Of Andhra Bank Financial Services Limited v. The Commissioner Of Income Tax-I

/ IN THE HIGH COURT FOR THE STATE OF TELANGANAAT HYDERABAD FRIDAY ,THE NINTH DAY OF JUNETWO THOUSAND AND TWENTY THREE PRESENT THE HONOURABLE THE CHIEF JUSTICE UJJAL BHUYANANDTHE HONOURABLE SRI JUSTICE C.V. BHASKAR REDDYITTA. NO: 424 425 AND 445 0F 2005 320 0F 2006 AND 114 0F 2012 ITTA. NO: 424 ot 2005 (lncome Tax Tribunal Appeal Under Sectlon 260-4 of the lncome Tax Act 1961,against the order of the lncome Tax Appellate Tribunal, Hyderabad Bench ['B',]Hyderabad in ITA No 12614yd12000, for assessment Year ['1996-97 ]dated08-06-2005, preferred against the Order of the Commissioner of lncome Tax(Appeals)-V, Central Hyderabad, l.T.A No.B16/CC-3/CIT(A)V dated 29-11-1999,preferred against the Order of the Deputy Commissioner of lncome tax CentralCircle-lll, Hyderabad, PAN/GlR No A-2lCC-lll/Hyd, dated 12-03-1 999. Between: Andhra Bank Financial Services Ltd, Hyderabad I Floor, 4-5-1 to 23, [Andhra]Bank Buildings, Sultan Bazar, Koti, Hyderabad - 195. ...APPELLANT AND The Commissioner of lncome Tax-|, Aayakar Bhavan, Basheerbagh, Hyderabad-5OOOO1 ...RESPONDENT INCOME TAX TRIBUNAL APPEAL NO: 425 OF 2005 (lncome Tax Tribunal Appeal Under Section 260-4 of the lncome Tax Act, againstthe order of the lncome Tax Appellate Tribunal, Hyderabad Bench ['A', Hyderabad ][in]llA No.115/Hyd/1999. for Assessment Year 1994-95 dated 06-06-2005, [preferred]against the Order of the Commissioner of lncome Tax Appeals, Hyderabad, [Appeal]No.SO/CC.3/C|T(A) (Cent)/98-99 dated 30-11-1998, [preferred ][against ][the ][Order ][of]the order of the lncome Tax Appellate Tribunal, Hyderabad Bench ['A', Hyderabad ][in]llA No.115/Hyd/1999. for Assessment Year 1994-95 dated 06-06-2005, [preferred]against the Order of the Commissioner of lncome Tax Appeals, Hyderabad, [Appeal]No.SO/CC.3/C|T(A) (Cent)/98-99 dated 30-11-1998, [preferred ][against ][the ][Order ][of] the Assistant Commissioner of Inccrne Tax, Central Circle lll. [PAN/GlR ]No.A-2/CC.lll dated 31 -03-1997) Between: Andhra Bank Financial Services L-td. Hyderabad I Floor, 4-5-1 to 23, AndhraBank Buildings, Sultan Bazar, Kotr Hyderabad - 195 ...APPELLANT AND The Commissioner :f lncome Tax [I]Aayakar Bhavan. Basheerbagh, Hyderabad-500001RESPONDENT INCOME TAX TRIBUNAL APPEAL NO: 445 OF 2005 (lncome Tax Tnbunal Appeal Under Section 260-4 of the lncome Tax Act, againstthe order of the lncome Tax Appellate Tribunal, Hyderabad [Bench 'A', Hyderabad ][in]ITA No.116/Hyd/1999, for Assessment Year 1995-96, dated 06-06-2005, [preferred]against the Order of the Commissioner of lncome Tax Appeals-Central, [Hyderabad,]in Appeal No.119/C C3/ClT(A) (Central)/98-99 dated 30-11-1998, [preferred against]the Order of the Assistant Commissioner of lncome [Tax ]Central [Circle-lll, ][PAN/GlR]No.-A-2lCC-lll, Hyderabad, dated 3'1-03-1998)the order of the lncome Tax Appellate Tribunal, Hyderabad [Bench 'A', Hyderabad ][in]ITA No.116/Hyd/1999, for Assessment Year 1995-96, dated 06-06-2005, [preferred]against the Order of the Commissioner of lncome Tax Appeals-Central, [Hyderabad,]in Appeal No.119/C C3/ClT(A) (Central)/98-99 dated 30-11-1998, [preferred against]the Order of the Assistant Commissioner of lncome [Tax ]Central [Circle-lll, ][PAN/GlR]No.-A-2lCC-lll, Hyderabad, dated 3'1-03-1998) Between: Andhra Bank Financial Services Ltd. Hyderabad I Floor, 4-5-1 to 23, AndhraBank Buildings, Sultan Bazar, Koti. Hyderabad - [195.] ...APPELLANT AND Aayakar Bhavan, tr.n*'lfflSEJ,iitftl- The Commissioner o{ lncome Tax-l500001 INCOME TAX TRIBUNAL APPEAL NO: 320 OF 2006 (lncome Tax Tribunal Appeal Under Section 260-4 of the lncome Tax Act, againstthe order of the lncome ['fax ]Appellate Tr bunal, Hyderabad Bench 'A', Hyderabad inthe order of the lncome ['fax ]Appellate Tr bunal, Hyderabad Bench 'A', Hyderabad inITA No.562/Hyd12001 for Assessment Year 1993-94, dated 14-03-2006, preferredagainst the Order of the Commissioner of lncome Tax (Appeals) V (Central) Between: Andhra Bank Financial Services Ltd. Hyderabad I Floor, 4-5-1 to 23, AndhraBank Buildings, Sultan Bazar, Koti. Hyderabad - [195.] ...APPELLANT AND Aayakar Bhavan, tr.n*'lfflSEJ,iitftl- The Commissioner o{ lncome Tax-l500001 INCOME TAX TRIBUNAL APPEAL NO: 320 OF 2006 (lncome Tax Tribunal Appeal Under Section 260-4 of the lncome Tax Act, againstthe order of the lncome ['fax ]Appellate Tr bunal, Hyderabad Bench 'A', Hyderabad inthe order of the lncome ['fax ]Appellate Tr bunal, Hyderabad Bench 'A', Hyderabad inITA No.562/Hyd12001 for Assessment Year 1993-94, dated 14-03-2006, preferredagainst the Order of the Commissioner of lncome Tax (Appeals) V (Central) Hyderabad, Appeal No 809/CC-3/C|T(A)V, [(Cent ])/1999-2000, [dated ][29'05'2001']preferred agarnst the order of the Deputy [Commissioner ][(Appeals) ][of ][lncome-Tax]and commissioner of [lncome-Tax (Appeals) PAN/GIR ][No.A-2lCC-lll/Hyderabad,]dated 12-03-1999.) Between: Andhra Bank Financial [Services ][Ltd, ][Hyderabad ] [Floor, ][4-5-1 to 23, ][Andhra]Bank Buildings, Sultan Bazar, [Koti, Hyderabad ][- ][195] ..,APPELLANT AND The Commissioner of lncome Tax-1, [Aayakar ][Bhavan, ][Basheerbagh, ][Hyderabad-]5OOOO1 ...RESPONDENT INCOME TAX TRIBUNAL APPEAL [NO: ][114 ] [211?] (lncome Tax Tribunal Appeal Under Section [260-A of ][the ][lncome ][Tax ][Act, ][against]ihe order of the lncome [Tax ][Appellate Tribunal, Hyderabad ][Bench ]['A', ][Hyderabad ][in]ITA No.318/Hyd/2003, for Assessment [Year'1995-96' ][dated ][14-03-2006, ][preferred]against the Order of the Commissioner [of ][lncome Tax ][Appeals-ll, ][Hyderabad, ] No.51O CIT [(A)-ll ]02-03 dated [06-11-2002, preferred ][against ][the ][Order ][of ][the]Assistant Commissioner of [lncome Tax, ][PAN/GIR No.A-1 ][dated ][15-02-2002)] Between: Andhra Bank Financial Services [Ltd, ][Hyderabad ] [Floor, ][4-5-1 ][to 23' ][Andhra]Bank Buildings, Sultan Bazar, [Koti, Hyderabad ][- ][195] ...APPELLANT AND The Commissioner of lncome [Tax-|, ][Aayakar ][Bhavan, ][Basheerbagh, ][Hyderabad-]5OOOO1 ...RESPONDENT Counsel for the Appellant: [SRl. ][C. P. ] Counsel ior the Respondent: SRI [B.NARASIMHA SARMA, SENIOR ] COUNSEL FOR INCOME TAX The Court delivered the following [Common Judgment:] r. THE HON'BLE THE CHIEF JUSTICE UJJAI BHUYANAND THE HON'BLE SRI JUSTICE C.V.BHASKAR REDDY I.T.T.A. Nos.424 425 and 445 of 2OO5and 114 of 2012 32O of 2006 COMMON JUDGMENT: ltr. tt , [tlar)'t)te ]the CheJ.Justic( [IUat ][tttulltatl)] This common order t,ill dispose of I.T.T.A. Nos.424,425 and 445 ::f 2OO5, 32O of 2006 and 114 of 2012. 2. We havr: heard Mr. C.P.Ramaswami, learned counselfor the appellarrt (also referred to as 'the assessee') arrdMr. B.Narasimha Sarmar. learned Standing Counsel,Income Tax Department representing the respondents [(also]referred to as 'the Revenue') 3. Issue raised in all thc appeals is one and the sameand therefore, all the appeals were heard together and arebeing disposed of by this common [judgment ]ald orderHou,ever, Mr. C.P.Ramaswami had argued I.T.T.A.No.425 of2O05 as the lead appeal. T}-rerefore, reference to facts andorders would be in relation to LT.T.A.No.425 of 2OO5 32O of 2006 COMMON JUDGMENT: ltr. tt , [tlar)'t)te ]the CheJ.Justic( [IUat ][tttulltatl)] This common order t,ill dispose of I.T.T.A. Nos.424,425 and 445 ::f 2OO5, 32O of 2006 and 114 of 2012. 2. We havr: heard Mr. C.P.Ramaswami, learned counselfor the appellarrt (also referred to as 'the assessee') arrdMr. B.Narasimha Sarmar. learned Standing Counsel,Income Tax Department representing the respondents [(also]referred to as 'the Revenue') 3. Issue raised in all thc appeals is one and the sameand therefore, all the appeals were heard together and arebeing disposed of by this common [judgment ]ald orderHou,ever, Mr. C.P.Ramaswami had argued I.T.T.A.No.425 of2O05 as the lead appeal. T}-rerefore, reference to facts andorders would be in relation to LT.T.A.No.425 of 2OO5 4. Before we deal with the said appeal, we may mentionthat LT.T.A.No.424 of 2005 arises out of the order dated06.06.2OOS passed by the Income Tax Appellate Tribunal,Hyderabad Bench-A, Hyderabad (briefly, the Tribuna-l'hereinafter) in I.T.A.No.126 lHydl2OO0 for the assessmentyear 1996-97. Likewise, I.T.T.A.No.425 of 2005 arises outof order dated 06.06.2005 passed by the Tribunal inI.T.A.No.lL5/Hyd/1999 for the assessment year 1994-95;I.T.T.A. No.445 of 2O05 arise s out of the order of theTribunal dated 06.06.2005 in I.T.A.No.116/Hyd/1999 forthe assessment year 1995-96; I.T.T.A.No.320 of 2OO6arises out of the order dated 14.03.2006 passed by theTribunal in I.T.A.No.562/Hydl2OOl for the assessmentyear 1993-94; and hnally I.T.T.A.No.ll4 of 2Ol2 arises outof the order of the Tribunal dated 14.03.2006 passed bythe Tribunal in I.T.A.No.318 /Hyd l2OO3 for the assessmentyear 1995-96. 5. These appeals have been filed by the assesseeASappellant under Section 260A of the Income Tax Act, 1961(briefly, 'the Act' hereinafter) against the aforesaid orders of ilI / I the Tribur-ral and I'ravt' bcen admitted on the [follou'ing]substantial qr-re stions ol ia\\ ( l ) Whcthcr orl the facts and in t]rccircunrsrances of tltc' [c ]rrsc, Tribunal [was ][jusrified ][in]holdrng that thc appcll:Lrrt [rvas ]the [ou'ner of the l;onrls]in qrrestion despite thc notification [dated ][02.O7 1992]issued by the Custodiarr in terms of Section [3 of ][thc]Special Courl (Trial of Offences [Relating ][to]Transaciions in Securitics) Act, [1992? ][And] \2) Whcther on the facts and iI.t [the]circumst ances of thc case, Tribuna.l [was ][justified ][in]holding that the assessing officer as [well ][as ][the]Comrnissioner of Incomc Tar (Appeals) [was competent]to decide the ownership of the [bonds ][in ][assessment]proceedings in spite of tl-re provisions of sub [section](4) of Se,rtion 3 of the Spccral Court (Trial of OffenccsRelating to Transactions in Securities) [Lct, ][1992?] 6. Appellart before us is an assessee under [the ][Act]having the status of a company. [Assessment ][year ][under]consideration is 1994'95. Assessee is [engaged ][in ][the]business of providing financial services 7. For the trforesaid assessment [year, ]the [assessee ][filed] return of incorne on 29.11 .1994 declaring Ni1 income aftersetting-off the losses of earller years. This was foiioued by ( t 6. Appellart before us is an assessee under [the ][Act]having the status of a company. [Assessment ][year ][under]consideration is 1994'95. Assessee is [engaged ][in ][the]business of providing financial services 7. For the trforesaid assessment [year, ]the [assessee ][filed] return of incorne on 29.11 .1994 declaring Ni1 income aftersetting-off the losses of earller years. This was foiioued by ( t filing of a revised return b1,' the asscssee on 22.08.1995again declaring Nil incomc after setting-off the lossesThereafter revised return \/as processed under Section 143of the Act. Assessing officer noted that one entity called'Fair Growth Financial Services Limited' [(referred ]tohereina-fter as 'Fair Growth') had delivered five bonds to theassessee in discharge of twelve contracts much before thenotifled date. However, assessee had not accounted for theaccrued interest on the said bonds on the ground that tillsuch time the petitions hled by the assessee before theSpecial Court constituted under the Special Court (Trial ofOffences Relating to Transactions in Securities) Act, 1992(briefly, the Special Court Act' hereinafter) were decideddeclaring the ownership of the bonds, assessee could notdeal witl- the bonds including getting its name registeredas the owner. According to the assessing ofhcer, assesseehad purchased these bonds before the notified date thoughthose were under the custody of the Special Court alongwith various other bonds. Therefore, assessing officer tookthe view that the interest accrued on those bonds had to beaccounted for by the assessee. By the assessment order )) t#lffi*r' [,']/ dated 31.O3.1997 passcrl Lrnder Section 143(3) of the Acr,thc assessinli officer treatecl the interest amount u,hicl'r r.l.asu,orked out b1, the asscssce itself at Rs.47.03 crores asincome beinrl intercst due lrom Fair Grou,th and on thatbasis, proceerled to completc the assessment. B. Aggrievcd thereb1,, assessee preferred appeal beforethe Commissioner of Income Tax (Appeals) (Central),Hyderabad (briefly referred to hereinaJter as 'CIT-A'). By theappellate orcler dated 30.11.1998, CIT-A upheld theaddition holdir-rg that the bonds had been purchased by theassessee prior to the notification date. It was held to be avalid purchase and thus the assessee was treated as theabsolute owner of those ltonds as delivery of the bonds tothe assessee was not hit by the Special Court ActTherefore, the addition of the interest accrued on the bondsby the assessing officer as income of the assessee wasupheid by thi: CIT-A 9. Assessee filed further appeal before the Tribuna_lu,hich w-as rcgisteredAS I'l'.A.No.115lHyd/ 1999 for the ( r assessment year 1994-95. The said appeal [r.r'as ][heard ]bvthe Tribunal along with I.T.A.No.116 lllydl1999 [for ][the]assessment year 1995-96 filed by the assessee [itself]Tribunal vide the order dated 06.06.2005 hoq'ever [upheld]the decision of the assessing ofhcer as aJfirmed by theCIT-A on this point. 1O. Mr. C.P.Ramaswami, learned counsel for theappellant, argued that the question for consideration inthis batch of appeals is whether interest income accrued tothe appellant on the bonds held by it without transfer oftitle and more particularly when such bonds were attachedby operation of law and the title of the bonds was indispute before the Special Court under the Special CourtAct? Corollary to the above question would be the [question]as to whether Income Tax authorities have power todetermine ownership of the bonds between the period fromJuly, 1992 to May, 1997 when the title to the bonds wassub [judice ]before the Special Court? 1O. Mr. C.P.Ramaswami, learned counsel for theappellant, argued that the question for consideration inthis batch of appeals is whether interest income accrued tothe appellant on the bonds held by it without transfer oftitle and more particularly when such bonds were attachedby operation of law and the title of the bonds was indispute before the Special Court under the Special CourtAct? Corollary to the above question would be the [question]as to whether Income Tax authorities have power todetermine ownership of the bonds between the period fromJuly, 1992 to May, 1997 when the title to the bonds wassub [judice ]before the Special Court? 10. I . Mr. Rilmasri'ami [poilrtcd ][out that ][appellant ][lt'as]incorporated in Februarr'. [1 ][()q ] [as ][a ][lOOoh ][subsidiary of]Andhra Bar-rk, a [pr-rbli<: ][scctor ][undertaking, ][presently]s'ith Lrnion [Bank. ][rts ][a ][Non-Banking ][Financial]merged Corporation [(NBFC) ][u'ith ][strare ][capital ][of ][Rs ][5 ][crores']Betlr,een April, [199 ][1 ][ald ][Jurre, ][1992, ][appellant ][had ][all ][its]hnancial transactions [onl5- r'u'ith ][Fair ][Growth for value ][of]more than Rs.2OO [crores ][m ][alinly ][out ][of ][borrowed ][funds']Most of these [transactions ][u'ere ][in ][securities ][through ][ready]ancl forward tr:rnsactions [Adverting ][to the ][Special Court]Act, he submits [that ][Fair ][Growth ][was ][a ][notilied ][person ][in]terms of Section [3 ][thereof ][bv virtue ][of notification ][dated]O2.O7.1992 isstted [by the ][Custodian' ][In ][terms ][of ][Section]3(3) of the [Spe<:ial ][Court ][Act, ][all properties of ][the ][notified]person stood atlached simultaleously [with the ][issue ][of ][the]notif-rcation. [According ][to ][hrm, ][appellant ][was ][required ][to]all the [income ][arising ][from ][the ][bonds ][to ][the]deposit Custodian in [t ][erms ][of the ][Special ][Court ][Act ][pending]decision of the [Special ][Court. ][All ][the ][concerned ][public]sector underta-l:ings [u'hich ][h ][ad issued ][the ][securities ][had]directed the appellant to [prorluce ]['No ][Objection Certificate'] (NOC) irom the Custodian for [interest ][and ]ou'nership [ovcr]such bonds. [Consequentiy, ][in ][the ][audited ][final ][accounts]for the financial year [1993-94, relevant ][to ][the ][assessment]year L994-95, appellant had [disclosed ][in ][the ]['Notes ][on]Account' that no income [had ][accrued ][to the ][appellant ][on]bonds valued at Rs.40.83 [crores since ][the title ][to ][the]bonds/ securities was in [dispute ][before ][the ][Special Court]by virtue of the petitions [filed by the ][appellalt ][before the]Special Court. Mr. [Ramaswami ][submits ][that ][in ][all ][such]cases, the Special Court [had ][held ][that all ][the ][ready ][and]forward transactions [entered ][into ][during ][the ][period ][from]O 1.04. 1991 to 06.06. 1992 [were ][illegal. ][However, ][this]decision of the [Special ][Court was ][partly ][reversed ][by ][the]Supreme Court in the [case ][of ][Bauk ][of.India ][v. ][The ][Custodian]on 19.O3.1997 by [holding ][that the ][ready ][and ][forward]contracts were severable [into ][two ][parts ]- [i.e., ][the ][ready ][leg]and the forward leg. [While ][the ][ready leg ][was ][legal, ][the]forward leg was illegal. 10.2. In the case of the [appellant, ][Special ][Court ][by ][its]order passed in 1997 declared it [to ][be ][the ][owner ][of ][the] n. bonds valued at Rs.4O.83 crores. Consequentlr,, theappellant rlr'clared rr it s return of income for theassessment vear 1997-98 all the accrued interest as itsincome- Thus, the arppelJ:rnt substantiated its stand thatno income haLd accrtred to it on those bonds till the title tothe bonds u,as clealed trv the Special Court in the year1997. 10.3. Learned counsel submits that the Revenueauthorities including th c' appellate authorities did notappreciate the abovc fer<:ts: rather they proceeded todetermine the ou,nership of the bonds which is notpermissible. 10.2. In the case of the [appellant, ][Special ][Court ][by ][its]order passed in 1997 declared it [to ][be ][the ][owner ][of ][the] n. bonds valued at Rs.4O.83 crores. Consequentlr,, theappellant rlr'clared rr it s return of income for theassessment vear 1997-98 all the accrued interest as itsincome- Thus, the arppelJ:rnt substantiated its stand thatno income haLd accrtred to it on those bonds till the title tothe bonds u,as clealed trv the Special Court in the year1997. 10.3. Learned counsel submits that the Revenueauthorities including th c' appellate authorities did notappreciate the abovc fer<:ts: rather they proceeded todetermine the ou,nership of the bonds which is notpermissible. 10.4. Learned counscl submits that Tribunal erred inre\ring upon 1wo decisions of the Calcutta High Court inre\ring upon 1wo decisions of the Calcutta High Court inMahamaya Dassi v. Commissioner of Income Taxt and in thecase of Champa Properties (Privatel Limited v. Commissioner ofIncome Taxz in as much as facts were completelycase of Champa Properties (Privatel Limited v. Commissioner ofIncome Taxz in as much as facts were completelydistinguish:rblt: in the tu,o referred cases. In the twoll9801 [126 ] [7,18 ][(t ][al)]ll987l [166 ][II'R ][167 ][(('al)]ll9801 [126 ] [7,18 ][(t ][al)]ll987l [166 ][II'R ][167 ][(('al)] decisions of the Calcutta High Court, title to the concernedproperties was not in dispute, whereas by operation of lawunder the Special Court Act appellant was divested of itstitle to the bonds held by it till 1997 when it was declaredto be the owner by the Special Court. He, therefore,submits that decision of the Supreme Court in CIT v.Hindustan Housiag and Laad Development Trust Limited3followed by the Ca,lcutta High Court in cIT v. EasternInvestments Linited4 is squarely applicable to the facts ofthis case. He submits that Tribunal had completelymisconstrued the provisions of the Special Court Act andthus arrived at an erroneous conclusion. Thus, he submitsthat the two questions may be answered in favour of theappellant and against the Revenue. 11. On the other hand, Mr. B.Narasimha Sarma, learnedStanding Counsel, Income Tax Department appearing forthe respondents has supported the orders passed by therevenue authorities including the Tribunal. He submitsthat the Tribunal has correctly appreciated the provisions 'Irq86l t6t ITR 524 (sc)n 1rso51 [213 ][rrR ]i34 [(cat1] --t ffitr1: ,r! '! 1: ,r! '! \ )) of the Specia: Court Acl :rnrl has in fact parth. allor.r,ed thcappeal of thr. appcllanr lrr any view, of the matter, hesubmits that findin{r ol the assessing officer has beenaliirmed b-y thr: CIT A as u'c,11 as by thc Tribunal albeit w,ithsubmits that findin{r ol the assessing officer has beenaliirmed b-y thr: CIT A as u'c,11 as by thc Tribunal albeit w,ithsome modific:rtion, ancl t ltercfore, in an appeal underSection 260,4 of the Act, lurther interference by the HighSection 260,4 of the Act, lurther interference by the HighCourt is not n(tcessary. IIc ftnally submits that no questionof law arises in this batch of appeals muchless anysubstantial qui:stion of lau .of law arises in this batch of appeals muchless anysubstantial qui:stion of lau . 12. Submissions made bl learned counsel for the partieshave received the due consideration of the Court. 13. Before ad verting to th e findings of the Tribunal, itwould be apposite to first deal with the provisions of theSpecial Court Act. The Spet:ia1 Court Act was enacted inthe year 1992 ind camc into force on 06.06.1992. It wasenacted to provide for the establishment of a Special Courtfor the trial of olTences relating to transactions in securitiesand for matters connectecl ttrerervith or incidental thereto.'Custodian' has been definerl under Section 2(b) to mean the Custodial appointed under sub-section (1) of Section3. 'Special Court' has been defined in Section 2(d) to meanthe Special Court established under sub-section (1) ofSection 5. 14. Section 3 of the Special Court Act is the essence ofthe Act and reads as follows: 13. Before ad verting to th e findings of the Tribunal, itwould be apposite to first deal with the provisions of theSpecial Court Act. The Spet:ia1 Court Act was enacted inthe year 1992 ind camc into force on 06.06.1992. It wasenacted to provide for the establishment of a Special Courtfor the trial of olTences relating to transactions in securitiesand for matters connectecl ttrerervith or incidental thereto.'Custodian' has been definerl under Section 2(b) to mean the Custodial appointed under sub-section (1) of Section3. 'Special Court' has been defined in Section 2(d) to meanthe Special Court established under sub-section (1) ofSection 5. 14. Section 3 of the Special Court Act is the essence ofthe Act and reads as follows: 3. Appointment and functions of Custodian:- (1) The Central Governmcnt may appoint one or more Custodiansas it may deem fit for the purposes of this Act. (21 The Custodian may, on being satisfred oninformation received that any person has been involved inaly offence relating to transactions in securities after the1"! day of April, 1991 and on and before the 6fr June,1992, nottfy the name of such person in the Oflicia-lGa"rtLe. (3) Notwithsta-nding anything contained in theCode and aly other law for the time beingin force, on andfrom the date of notil-rcaLion under sub-section [(2), ]anyproperty, movable or immovable, or both, belonging to anyperson notified under that sub-section shall standattached simultaneously with the issue of the notifrcation. 14) [The ][property ][attached ][under ][sub-]section (3) shall be dealt with by the Custodian in suchmanner as the Special Court may direct. (5) The Custodian may take assistance of any personwhile exercising his powers or for dischargrng his duties underttris section ald section 4. \t\t.'i{ .r.-l 14.1. As per sub scction (1), Centrat Govemment mayappoint one c,r morc Cuslodians as it may deem fit for thepurposes of r,he Speci:rl Court Act. Sub-section (2) saysthat the Custodian ma\., ()n being satisfied on informationreceived that any person has been involved in any offencerelating to transactions in securities after O1.04.1991 andon or before 0(;.06.1992, notifv the narne of such person inthe Officia1 Gazette. Srrb-section (3) provides thatnotwithstanding anything contained in the Code ofCriminal Procedure, 1973 and any other law for the timebeing in force, on and from the date of notification undersub-section (2l,, any property, movable or immovable, orboth, beionging to aly person notified under that sub_section shall stand attacherl simultaneously with the issueof the notification. Thus, lr.hat sub-section (3) says is thaton and from the date of notification notifying the name ofsuch person in the Official Gazette involved in any offencerelating to tralsactions in securjties after 01.O4.1991 andon or before 06.06.1992, zrrrr. property, be it movable or immovable, belonging to such person shall stand attachedsimultaneously u'ith the issue of the notification. 14.2. Post such attachment, sub-section (4) empowers the Custodian to deal with such attached property in suchmanner as the Special Court may direct 15. As per Section 4(11, if the Custodian is satished afteran inquiry that any contract or agreement entered into atany time after O1.04.1991 and on or before 06.06.7992 inrelation to arry property of the person notihed under sub-section (2) of Section 3 has been entered into fraudulentlyor to defeat the provisions of the Special Court Act, he maycancel such contract or agreement ald on suchcancellation, such property would sta-nd attached.However, as per the proviso no contract or agreement shallbe cancelled except after giving to the parties to thecontract or agreement a reasonable opportunity of beingheard. Sub-section (2) provides that any person aggrievedby the notification issued under sub-section (2) of Section3 or any cancellation made under sub-section (1) of Section 15. As per Section 4(11, if the Custodian is satished afteran inquiry that any contract or agreement entered into atany time after O1.04.1991 and on or before 06.06.7992 inrelation to arry property of the person notihed under sub-section (2) of Section 3 has been entered into fraudulentlyor to defeat the provisions of the Special Court Act, he maycancel such contract or agreement ald on suchcancellation, such property would sta-nd attached.However, as per the proviso no contract or agreement shallbe cancelled except after giving to the parties to thecontract or agreement a reasonable opportunity of beingheard. Sub-section (2) provides that any person aggrievedby the notification issued under sub-section (2) of Section3 or any cancellation made under sub-section (1) of Section ,1 or al_v- othur orcler m:rrle' bv the Custodian in exercise ofthe pori,ers cr )nferrecl on hirn under Sections 3 or 4 mav filethe pori,ers cr )nferrecl on hirn under Sections 3 or 4 mav filea petition objecting to tl-re same u/ithin such period as maybe specificd ',r'hereafter t1'rr, Spe cial Court mav make suchorder as it mzry deem fit :rftcr hearing the partiesbe specificd ',r'hereafter t1'rr, Spe cial Court mav make suchorder as it mzry deem fit :rftcr hearing the parties 16. Section 5 provides lbr establishment of Special Court.Section 94 of the Specral Clourt Act deals with jurisdiction,powers, authority ald pror:edure of Special Court in civilmatters. Whal is relevant for our present discourse is sub-section (1) of Section 9A. It says that on and from thecommencement of the Special Court (Trial of OffencesRelating to Tralsaction s ir-r Securities) Amendment Act,1994, the Sper:ial Court shal1 exercise all such jurisdiction,powers and eLuthority as were exercisable, immediatelybefore such commencement by any civil court in relation toany matter or claim relating to any property standingattached under sub-section (3) of Section 3 and/or arisingout of transactions in securities entered into after01.04.199 1 ard on or be:forc 06.06.1992 for which aperson notifiecl under sub section (2) of Section 3 is i I lii involved as a party, broker, ir-rtermediar5z or in any othermanner. 77. Section 13 confers overriding effect on the SpecialCourt Act. It says that provisions of the Special Court Actshall have effect notwithstanding anything inconsistenttherewith contained in any other law for the time being inforce or in any instrument having effect by virtue of anylaw other than this Act or in any decree or order of anycourt, tribunal or other authority. 18. We may now advert to the order of Tribunal. Tribunalsummed up the facts in the following manner: 4. The facts of the case are that the appellantcompany is incorporated in 1991 as 100% subsidiary ofAndhra Bank Lirnited, a Nationalized Bank. It is engagedin the business of linancial services, leasing, hire purchaseactivities etc. As regards the addition of interest onSecurities of Rs.41.83 crores the facts are that thefollowing Bonds had been delivered by M/s Fair GrowthFinancial Services Ltd. [M/s FGFSL in short] to theassessee company in discharge of 12 contracts muchbefore the notifred date: 18. We may now advert to the order of Tribunal. Tribunalsummed up the facts in the following manner: 4. The facts of the case are that the appellantcompany is incorporated in 1991 as 100% subsidiary ofAndhra Bank Lirnited, a Nationalized Bank. It is engagedin the business of linancial services, leasing, hire purchaseactivities etc. As regards the addition of interest onSecurities of Rs.41.83 crores the facts are that thefollowing Bonds had been delivered by M/s Fair GrowthFinancial Services Ltd. [M/s FGFSL in short] to theassessee company in discharge of 12 contracts muchbefore the notifred date: 5. 'lhc assessee h:rcl mentioncd in thc notes onaccounts that the interest irccrued on the aforesaid bondshas not ber:n accountcd for since the matter was pendingbefore the Special Court and until the Special Courtdeclared the assessec as owner of those bonds, theassesseo could not get lho bonds registered in its name.The AO, horvever, formed an opinion that the assessce hadpurchased those bonds and those have been delivered tothe assessee before the noLified date mentioned in theSpecial Court Act. The asscssee contended before the AOthat the ser:urities were in the name of M/s FGFSL aldthere was no endorsement on those bonds transferring thesarne to the assessee and that the CAs appointed by theSpecial Court was to verify ald certify the claim of theassessee has reported that m the books of M/s FGFSLonly Rs.21.58 crores has been treated as sale on ready-forward basis and the ["ready ]forward transactions"balance was treated as closil-rg stock of securiLies in theirbooks ald bcing illegal, thr: Securities of Rs.41.83 croresdid not belong to the assessee. The AO opined that thisobservation of thc CA hit<l no bearing on income taxproceedings. He was of thc opinion that since the assesseewas maintaining the books of accounts on mercantilesystem and ;Ls per the books. the assessee claimed to havepurchascd thcse bonds, tltc interest due on those bonds / J should have becn accounted for as income during the [year.]Rclyrng on the principle lard down b1,the Supreme Courtin thc case of State Bank of Travancore v CIT 158-lTR-lO2, the AO held that merely because the assessee couldnot dea.l with the bonds as those were in the custody of theCustodian appointed under the Special Court Act, theassessee cannot disown the liability to tax on the accruedinterest. He has pointed out that the Supremc Court inthat case held that even the interest due on strcky loansshould be treated as income of the assessee. Hc held thatthe realisability or the ability of thc assessee to deal withtfre bonds or otherwise cannot bar the assessce fromadmitting the accrued interest as income- Finding thatt-here were some tax free bonds, he added thc interest onthe following balance bonds to the total income of the ASSCSSCE: I 17% NTPC Bonds of face Rs.2,53,93,75Ovalue of Rs. ['l4,93,75,000]value of Rs. ['l4,93,75,000]2 13y. NPC Bonds of face of face face Rs. 1,i5,70,000value of Rs.8,9O,00,0O0Rs.8,9O,00,0O0Rs.3,69,63,750value of Rs.8,9O,00,0O0Rs.8,9O,00,0O0Rs.3,69,63,750 2 13y. NPC Bonds of face of face face value of Rs.8,9O,00,0O0Rs.8,9O,00,0O0value of Rs.8,9O,00,0O0Rs.8,9O,00,0O0 5A. The CIT(A) upheld the addition after discussing indetail the development in this case before and after theSpecial Court Act was constituted. He held that the bondsworth Rs.4O.83 crores which had been purchased by theassessee prior to the notification date and which had beentaken into consideration while ca-lculating the arnountoutstanding against M/s FGFSL for the purpose of balalcesheet dated 3l-3-1993 was a valid purchase and in view ofthe Supreme Court decision, the purchase was completeby way of first leg of the ready forward transaction andtherefore, the assessee was the absolute owner of those P,. 2 13y. NPC Bonds of face of face face value of Rs.8,9O,00,0O0Rs.8,9O,00,0O0value of Rs.8,9O,00,0O0Rs.8,9O,00,0O0 5A. The CIT(A) upheld the addition after discussing indetail the development in this case before and after theSpecial Court Act was constituted. He held that the bondsworth Rs.4O.83 crores which had been purchased by theassessee prior to the notification date and which had beentaken into consideration while ca-lculating the arnountoutstanding against M/s FGFSL for the purpose of balalcesheet dated 3l-3-1993 was a valid purchase and in view ofthe Supreme Court decision, the purchase was completeby way of first leg of the ready forward transaction andtherefore, the assessee was the absolute owner of those P,. bor<ls. I'lr,th in rlrc I\1rsr. Irerition No.6/1992 ancl j\,lisc.Pel ition i\o.2 1O lt)'i , tlrc ;rsscssee has also corrtc.trdedPel ition i\o.2 1O lt)'i , tlrc ;rsscssee has also corrtc.trdedItefor-c lhc Spccral Cortr.t Iirirl it \r,as the absolutc ou.ncr ofthosc bonrls. Hc lirrttrer olrsen,ed pcrtinently thal in theMis<:. Pctirion No 6/ l9!t-2. nowhere the assesscc hadpraled tlrc Spccial Courr 1.ll declare it absolute orvncr ofthose bor-rtls, sinr:e it hari all aiong claimcd that thosebonds [,,r.,<:r: ]not hit by rl.:r. Special Court Act sir.rce thelrarlsacrlolt had bcen coml;leted long back. Although thethose bor-rtls, sinr:e it hari all aiong claimcd that thosebonds [,,r.,<:r: ]not hit by rl.:r. Special Court Act sir.rce thelrarlsacrlolt had bcen coml;leted long back. Although theCustodian had disputcd Lhc ownership and to be on theseLfc side. the assessce l.rad allowed the Custodian tocollcct thc intcrest accrLrccl on such bonds, those bondscould not be part of th(] attached property of the notificdpersons. since thc notrficd persons had delivered thosebonds to the assessee anrl as per the Supreme Courtdccision. those wcre no longcr the property of the notificdIrersons. [It ][is ]only in the l\4rsc. Petition No.2lO/97 whilepointing our- that the assessee was in possession of thebonds to the assessee anrl as per the Supreme Courtdccision. those wcre no longcr the property of the notificdIrersons. [It ][is ]only in the l\4rsc. Petition No.2lO/97 whilepointing our- that the assessee was in possession of theexcess v:rlue of thc bonds. the assessee has requested theSpeci:r1 Court to allow it to purchase such excess bondszrnd dcclare it as the absolutc owner. Even in that petition,the assessee has never cxprcssed its doubt about its titlcthe assessee has never cxprcssed its doubt about its titlcover ttre bonds worth Rs.4O.83 crores and there is nopraycr for declaring the assessee as absolute owner oflhose bonds. Thesc facts clcarly indicate that the deliveryof the bonds to the assessce was not hit by the Specialpraycr for declaring the assessee as absolute owner oflhose bonds. Thesc facts clcarly indicate that the deliveryof the bonds to the assessce was not hit by the SpecialCourt Act as thosc bonds had been purchased by theassessee and the assessee was the absolute owner as pcrlaw. At no point of trme, the assessee had raised any doubt,zrbout [its ][owrrcrship. Like ][otI.rers, ][it ][has ][also contested the]law. At no point of trme, the assessee had raised any doubt,zrbout [its ][owrrcrship. Like ][otI.rers, ][it ][has ][also contested the]claim o[ the Custodian that all the shares and secuntieshalded or..er by thc notilleci I)ersons were to be att:rche<i.halded or..er by thc notilleci I)ersons were to be att:rche<i.Taking inlo constdcration tt)(, legal position, he held that I t \ the asscssee was the owner o[ thcse bonds ciuring tlrcrelevant accounting yeer and therefore intcrcst on thosebonds accrued to the asscssee. Mcrely because theCustodian had raised somc doubt about the title of theappellart over those bonds, would not postpone theaccnral of the income to the fulure period. With regards tothe submission of the assessee that the intcrest accruedon those bonds has been accounted for in the Asst. year1998-99 he observed that I t \ the asscssee was the owner o[ thcse bonds ciuring tlrcrelevant accounting yeer and therefore intcrcst on thosebonds accrued to the asscssee. Mcrely because theCustodian had raised somc doubt about the title of theappellart over those bonds, would not postpone theaccnral of the income to the fulure period. With regards tothe submission of the assessee that the intcrest accruedon those bonds has been accounted for in the Asst. year1998-99 he observed that "6.2. [^fhe ]time of accrual or arisal of income is ofsignificance in taxation. [n order that income maybe said to have accrued at a particular point of law,it must have ripened into a debt at that moment,that is to say, the assessee should have acquired aright to receive payment at that moment, thoughthe receipt itself may take place later. The date ofaccrual will depend upon the nature and terms ofthe statute or agreement which gives rise to theright. In this case, the interest on the PSU Bondsaccrued in the relevant year. The PSU have notpostponed the payment of interest. Only receipt ofthe interest by the appellant has been postponedsince in view of the Special Court Act, clear decisionhas to be taken by recording legal ownership overthe bonds, but such decision regarding legalownership cannot postpone accrual of the intereston those bonds. The expression "accrual"represents a stage anterior to the point of timewhen the income becomes receivable ald connote acharacter of the income, which is more or lessinchoate and which is something less than a receiptas held by the Supreme Court in the case of AngloFrench Textile Co. Ltd. v CIT 25 ITR 27 (SC). Theappetlant maintained accounts on mercantile \ s\'slcrn, it lrrd shorlrr tllose bonds as its assets intlrc l,iililno(,sltcet (i,awn on 31,3-93 an(l also on3 i .] ) I an(l [jrr ]vicq ol rlrt' Supreme Court decision,it ltas lltle o\1 r sLtclL l,rrnds at thc rcle\.ant pcriodtlrc l,iililno(,sltcet (i,awn on 31,3-93 an(l also on3 i .] ) I an(l [jrr ]vicq ol rlrt' Supreme Court decision,it ltas lltle o\1 r sLtclL l,rrnds at thc rcle\.ant pcriodhrrs lrcen corrllrmcrl IIcnce, the appcllant ufasleqallr cntrtlcd to lhc interest on those bondsdr,.!)ll thc rcl(:van1 asscssment year. Only tht:re.crpr o[ tlr(] irrtercsl had been postponed. Sincerhc ai)l)ellanL \,as ntairrtaining the accounts onleqallr cntrtlcd to lhc interest on those bondsdr,.!)ll thc rcl(:van1 asscssment year. Only tht:re.crpr o[ tlr(] irrtercsl had been postponed. Sincerhc ai)l)ellanL \,as ntairrtaining the accounts onmt rca ttile svstem, lt [.,', ]a s assessable to the accruedlnlcre:.t no( llt lhe -\1';,11 it was received, but in theve:rr ir rvhrch, .rs per th(. terms of the agreement bythc PSI[J, rlre intercsL u,ould be payable to thelnlcre:.t no( llt lhe -\1';,11 it was received, but in theve:rr ir rvhrch, .rs per th(. terms of the agreement bythc PSI[J, rlre intercsL u,ould be payable to theholrler of thc 1)orrds. 'lircrcfore, I confirm the actionoI the AO rn arlding th.r interest on those bondsam.)unting to Rs 3,69.63.750/ -."oI the AO rn arlding th.r interest on those bondsam.)unting to Rs 3,69.63.750/ -." 18.1. Tribunal. thereafter, analysed the provisions of the Special Court r\ct and recorded the following findings: 9. A nrrtification u,as issued on 2-7-Igg2 by theCustodian trnder sectior.r 3(2) of the Special Act, 1992declaring M Is FGFSL zrs one of the notified persons. Apublic notic(.was zrlso issued by the Custodian informinglhat all thc propcrties of the notifred person have beenzlttached art<l asking all thosc including Banks, Financiallnstitutions, Mutu:rl Fund. \vho had dealings with thenotifiL-d pcrs, )ns to intimatc thc Custodian the details ofsuch propert es hcld by thenr ir the name of the notifiedpersons .rs on the dilte of n()tification, jointly or on bchalfof tl-lc noLifi( d l)ers()r1s as rrlso the detatls of value o[slrarcs / 1;r>nd s. held as coilalt'ral security furnished by thcnotificd so ls.l)cr )) ) \ Special Court r\ct and recorded the following findings: 9. A nrrtification u,as issued on 2-7-Igg2 by theCustodian trnder sectior.r 3(2) of the Special Act, 1992declaring M Is FGFSL zrs one of the notified persons. Apublic notic(.was zrlso issued by the Custodian informinglhat all thc propcrties of the notifred person have beenzlttached art<l asking all thosc including Banks, Financiallnstitutions, Mutu:rl Fund. \vho had dealings with thenotifiL-d pcrs, )ns to intimatc thc Custodian the details ofsuch propert es hcld by thenr ir the name of the notifiedpersons .rs on the dilte of n()tification, jointly or on bchalfof tl-lc noLifi( d l)ers()r1s as rrlso the detatls of value o[slrarcs / 1;r>nd s. held as coilalt'ral security furnished by thcnotificd so ls.l)cr )) ) \ 10. Thc asscssee \r'as onc o[ thc eflcctccl partit:s [o[']I992 Scam and had advanced [mone-v ]to M/s [FGFSL. ][onc]of the notified parties ard it was for:nd thert somc o[ [tl-t ][t:]securities delivered by M/s FGFSL werc forgcd/ fabricated.On 3 8-1992 the assessee filed a Misc. Petition No.6 bcforethe Special Court mentioning therein that as against [thc]total payment of Rs.236.78 crores, M/s FGFSI- hadclelivered securitics worth Rs.266.03 crores to the [asscssec]and out of this, securities worth Rs.205.12 crores wereforged and were tampered with or not genuine; that onfurther negotiations, M/s FGFSL had handed over certainsecurities worth Rs. 101.57 crores and offered collatera-lsecurity for certain shares worth Rs. 1l1.87 crores; that asgiven in annexure-C to the petition the assessee hassecurities witll face value of Rs. 42 crores, which havebeen purchased by the assessee before the notihcaLionperiod. In this petition, the assessee has prayed the Courtto declare it as absolute owner of the equity shares aldPSU Bonds and beneficial owner of the equity shares andbonds receivable for realizing the outstanding demand.Out of the total paJ.ment of Rs.236.78 crores the [assessee]has reduced Rs.4O.83 crores being the cost of aforesaiddisputed 5 Bonds and had shown Rs.195.94 crores [as ]theamount outstanding against M/s FGFSL as on [3 ][1-3- ]1993in its balance sheet. As an alternative the assessee [prayed]that in case the Court came to the conclusion that theappellalt was not entitled to the declaration of ownershipof the aforesaid securities and tronds, M/s FGFSL might [be]directed to pay the entire sum of Rs.236.78 [crores ][along]with interest thereon at the contract rates and furtherinterest thereon at the rate of 24o/o per annum from 3orhJune, 1992 till payment and/or realisation. The Custodian ) J f-ilc-d an ii lldar rr lr, lort ht. Special Court contending thatsincc rltr: ilsscssc(. ltlrrl cntr.rr:d ir.rto ccrtarirr transactionson rcird\ lbr$rucl l>.rsr-. u.trl.r M/s. FCFSI- and cert:rinon rcird\ lbr$rucl l>.rsr-. u.trl.r M/s. FCFSI- and cert:rinSharcs arrd Sci:Lrritii,s lLild becn h;rnded over to theappcll:rnt its sccLrritr rrr corlncction with some rcadyforuirrrl l] iutsir( ltolrs :rnrl ;rs ll-re ready lorward transactionforuirrrl l] iutsir( ltolrs :rnrl ;rs ll-re ready lorward transactionwas illcg;rl l;r' rr.rsoninr ,,i titc pror,isions of the Sec.l3 ofthe Sccurr ies ( ontrzrr.l \rl. no rights rvhatcver had llccncreatccl in farrrLrr ol- thc rtpl;cllalt in respect of the saidthe Sccurr ies ( ontrzrr.l \rl. no rights rvhatcver had llccncreatccl in farrrLrr ol- thc rtpl;cllalt in respect of the saidSecurities ,urd rlrt silrn( \\ ()Llld continue to beiong to thenotificd pt',-son. [t wtrs :,Lrbmitled that even if the Courtnotificd pt',-son. [t wtrs :,Lrbmitled that even if the Courtheld that (lre bcncfir.ral ii-ti.resl in respect ofcertain sharesbelonging ro FC.I.SL .rnrt i)attded-over prior to 2"a July,belonging ro FC.I.SL .rnrt i)attded-over prior to 2"a July,1992 :rnd l)asscd 1lr(: Crrsrodiarl right under Sec. 4 of theSpecinl Cou rt Ar-.t should lrc orotected.Specinl Cou rt Ar-.t should lrc orotected. 18.2. Further ['lribunaLl ]nored that insofar the assessee isconcerned, the transactions were entered into prior tointroduction of the Spccral Court Act. Assessee hadpurchased the bonds prior to the notifred date and hadtaken delivery thereof. It, thus, became property of theassessee ald could not bc construed to be property of thenotified person. Tribunal hclcl as follows: I3. [n llre present cast.. lltc transactions were enteredinto lty the irsst,ssc<' 1;rior 1o ir-rtroduction of the SpccialAct. Adrni c(11-r. ll.rc asscsscc had purchased the bondsprior to thc notilird <l:rtc ru:r:l h:rs taken delivery thereof. Itbecamc propcrt] of the irss('ssee before that date, a]1d It \ thcrefore, they [cannot ][be ][propcrty ][of ][tlle ][notificd ][persorr']Ttris t'as thc stand of [assessee ][right from ][lleginning']Ag.,un, :rs obscn'ed [b1' ][the ][CIT(A), ][it ][is ][only ][in ][the ][Mis