Interest and Penalty Is Not Tax Under SEC. 2(43) Of Income Tax Act: The Supreme Court

The Supreme Court in the case of Harshad Shantilal Mehta v. Custodian (1998) 231 ITR 871/99 Taxman 216 (SC)/ (1998) 5 SCC 1 held that Interest and penalty is not tax under sec. 2(43) of Income tax act


Special Acts include the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, sometimes known as “the Act.” It examines cases in which brokers fraudulently acquire exceptionally large quantities of money from banks and other financial organizations. Unfortunately, the proceedings before the Special Court, which was established for expeditious prosecution or adjudication of claims, have become mired in unusual legal and interpretive complications as a result of the sloppy drafting of the Act, which leaves a great deal to judicial expertise and common sense. The statute intended to delegate the majority of duty for interpreting its provisions to the courts.

The Special Court has concluded that its operations have been continuous since June 1992. In the cases of the Harshad Mehta Group and Fairgrowth Financial Services Ltd., the time given for the distribution of their respective businesses’ assets in line with Section 11 is nearing its conclusion. Given the several possible interpretations of section 11, the Special Court has raised some questions regarding the appropriate legal principles. The Special Court has offered its replies to these concerns in the challenged judgment, which is worded in a manner reminiscent of an Initial Summons, after hearing from all relevant parties.

In interpreting and applying the requirements of section 11, the custodian has raised a few additional concerns.


Whether the term “taxes,” as used in section 11 of the Special Court (Trial of Offences Connected to Transactions in Securities) Act, 1992, refers only to the amounts payable as and by way of taxes, or if it also includes penalties and interest, if applicable.


According to the Act, tax, penalty, and interest are individually independent categories. According to section 2(43), “penalty” and “interest” are excluded from the definition of “tax.” Similar language may be found in section 157, which says that if any tax, interest, penalty, fine, or other amount is due as a result of an order granted under this Act, the Assessing Officer must serve the assessee with a notice of demand following the established procedures. The rules governing the imposition of fines and interest are distinct from those governing the collection of taxes. After reviewing several precedents, the Learned Special Court Judge, in this case, concluded in paragraphs 51 to 70 of his Decision that neither the penalty nor the interest may be considered to be tax under section 11(2)(a) of the Act.


The Income Tax Act divides tax, penalties, and interest into several categories. The phrases “penalty” and “interest” are not included in the definition of “tax” under section 2(43) of the Income Tax Act of 1961. According to paragraph 11(2)(a) of the Special Court (Trial of Offences Related to Transactions in Securities) Act, 1992, neither the fine nor the interest may be considered a tax. [Cabinet Application No. 5326 (Date: 13 May 1998) ]


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