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Dissecting the principles laid down by SC in Disproportionate Assets case - Part I

Disproportionate Asset Case - Supreme Court

This is the First part of the article on the Disproportionate Asset Case judgement of the Supreme Court.  Published in Tax Sutra in February 2017.

Introduction:

No case has created as much sensation in recent times as that of the Disproportionate Wealth Case in Tamilnadu.  The twists and turns in the case has finally come to an end with the verdict of the Supreme Court.  Coming after 20 long years, the judgment itself has not come a day too soon.

While speculation about the case and its consequences occupy the attention of a majority, there are certain key take-aways from the Supreme Court judgment.  Coming as it does from the highest judicial authority in the land, the doctrines laid down, referred and distinguished by the Supreme Court can be useful for those dealing with or proposing to deal with cases involving public servants.  The judgment lays down many principles including the evidentiary value of returns of income filed, instances when the corporate veil can be lifted, whether windfall gains can constitute lawful sources etc.  An understanding of these principles, culled out from several decisions of the Supreme Court, can help in dealing appropriately with public servants many of whom may not be above board.

Who is a Public Servant - Possibility for expansive interpretation

The issue as to whether the first accused in this case was a public servant was never in question.  Hence no legal principles in this regard were laid down.  However, it is considered important to dwell a little on the scope of the term 'public servant' as there is an increasing tendency on the part of the judiciary to interpret the term 'public servant' in a broader sense.

A public servant as commonly understood is not just a person in the service of the Government, or receiving pay from the Government, a local authority, a government corporation or a government company.   In fact, far from covering just politicians elected to the Parliament or State Legislative Assembly, or Judges or Arbitrators, a Public Servant under the Prevention of Corruption Act, 1988 (PCA) covers as many as 12 different persons.   For instance, a reading of section 2(c)(xi) of the PCA will show that even a Vice-Chancellor of a University or member of any governing body, Professor, Reader, Lecturer or any other teacher or employee of any University and any person whose services have been availed of by a University or any other public authority in connection with holding or conducting examinations fall under the definition of public servant.  Thus, a University is a 'pubic authority' and those associated in the above capacities are public servants who are governed by the PoCA.  Will those similarly associated with 'Deemed Universities' also be covered? A popular view could be that they would not be covered, as a 'deemed university' is referred in section 3 of the UGC Act 1956 as any Institution for higher education, 'other than a University'.  Thus, the distinction between a University and Deemed University under the UGC Act can save the day for many specified persons associated with Deemed Universities.  But the relief may be short-lived for at least two reasons.  The same section 3 provides that once a deemed university status is accorded, the Institution shall be subject to all the provisions of the UGC Act as if it were a University.  This can lead to an inference that it would be a University for all intents and purposes.  Secondly, let us not forget that clause (viii) of section 2(c) provides that 'any person who holds an office by virtue of which he is authorized or required to perform any public duty' is also a public servant.'  Public duty itself is defined in section 2(b) to mean 'a duty in the discharge of which the State, the public or the community at large has an interest'.  It was based on a conjoint reading of Sec 2(b) and sec 2(c)(viii) that the Supreme Court in CBI, Bank Securities and Fraud Cell v Ramesh Gelli & Others, found even a Chairman and Managing Director of a Private Bank as a 'public servant'. Is the office of a Vice-Chancellor of a deemed university any the less responsible than that of a University when it comes to discharge of duty to the State, the public or the community at large as provided in section 2(c)(viii) above?  An argument that is clearly not easy to answer. But with the Special Investigation Team constituted by the Supreme Court having recommended that management of colleges and schools should be covered under the definition of 'public servants', it is only a matter of time before those managing educational institutions - deemed universities, colleges, schools - are expressly brought under section 2 obviating the need to embark on any interpretations of the section.

Section 13(1)(e):

It would be necessary to place the relevant extract of section 13(1)(e) of the PoCA before we discuss the principles laid down by the Supreme Court.

Sec 13:  Criminal misconduct by a public servant. - (1) A public servant is said to commit the offence of criminal misconduct, -

(a)  Xxxx

(b)  Xxxx

(c)  Xxxx

(d)  Xxxx

(e)  If he or any person on his behalf, is in possession or has at any time during the period of his office, been in possession for which the public servant cannot satisfactorily account, of pecuniary resources or property disproportionate to his known sources of income.

Explanation:  For the purposes of this section, 'known sources of income' means income received from any lawful source and such receipt has been intimated in accordance with the provisions of any law, rules or orders for the time being applicable to a public servant.

(2) xxxx

The following paragraphs would now deal with how the Supreme Court in State of Karnataka and others v J. Jayalalithaa and others [TS-53-SC-2017] dealt with the underlined portions in section 13(1) [ above] and more.

Lawful income - Evidentiary value of Income Tax Returns

Referring to Commissioner of Income Tax, Gujarat Vs. S.C. Kothari, (1972) 4 SCC 402, the Supreme Court explained that in the tax regime, the legality or illegality of the transactions generating profit or loss is inconsequential qua the issue whether the income is from a lawful source or not. The scrutiny in an assessment proceeding is directed only to quantify the taxable income and the orders passed therein do not certify or authenticate that the source(s) thereof to be lawful and are thus of no significance vis-à-vis a charge under Section 13(1)(e) of the Act.

Also drawing reference to Vishwanath Chaturvedi Vs. Union of India & Ors., (2007) 4 SCC 380),  the Apex Court emphasized that submission of income tax returns and the assessment orders passed thereon, would not constitute a full proof defense against a charge of acquisition of assets disproportionate to the known lawful sources of income as contemplated under the PC Act and that further scrutiny/analysis thereof is imperative to determine as to whether the offence as contemplated by the PC act is made out or not.

It is important to note that in the instant case, all the returns of income for the check period were filed belatedly, i.e. post 1996.   This coupled with the Court's view that the nature, quantum and source of income disclosed were beyond human probabilities, perhaps was a major influence that turned in favour of the Prosecution.  In the Court's view, no independent evidence of acceptable standard was produced to support the Income Tax Returns.

Principle of Corporate Personality v Lifting the Corporate Veil:

Where the accused had acquired properties in the names of corporate entities, the Supreme Court had to decide if proceedings can be launched against the accused de hors proceedings against the companies that held the properties.

In this regard, the Supreme Court quoted with approval the following passage from Company Law by Pennington - 5th Edition 1985:

 “The concept of 'piercing the veil' in the United States is much more developed than in the UK. The motto, which was laid down by Sanborn, J. and cited since then as the law, is that 'when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons'. The same can be seen in various European jurisdictions.”

The Apex Court also referred to the following synopsis on the subject as entered by the American Professor L. Maurice Wormser in his article “Piercing the veil of corporate entity”:

“When the conception of corporate entity is employed to defraud creditors, to evade an existing obligation, to circumvent a statute, to achieve or perpetuate monopoly, or to protect knavery or crime, the courts will draw aside the web of entity, will regard the corporate company as an association of live, up-and-doing, men and women shareholders, and will do justice between real persons.”.

On this basis, the Court rejected the defense arguments and held all assets held in the name of the companies as held de factoby the accused so that the proceedings were held justified.

Income assessed under section 68

The Supreme Court also made observations on certain incomes being assessed under section 68 in the hands of the accused.  Dealing with the interplay between section 68 and the legality of the income assessed thereunder, the Court observed that the process undertaken by the Income Tax authorities under Section 68 of the Act is only to determine as to whether the receipt is an income from undisclosed sources or not and is unrelated to the lawfulness of the sources or of the receipt. Thus, even if a receipt claimed as a gift is, after the scrutiny of the Income Tax Authorities construed to be income from undisclosed sources and is subjected to income tax, it would not for the purposes of a charge under Section 13(1)(e) of the Act be sufficient to hold that it was from a lawful source in absence of any independent and satisfactory evidence to that effect.

Click here to read part II.

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