SVKMs NMIMS

School of Law, Mumbai

Project Submitted
On
WILLFUL DEFAULT
In compliance to partial fulfillment of the marking
scheme, for Trimester 7 of 2016-2017, in the subject of
Interpretation of Statutes and Principles of Legislation

Submitted
To
Professor Ishnoor Arora
for evaluation

ARNAV DAS
A026
BBA LLB (H)

INDEX
SR.NO

PARTICULARS

1.
2.
3.
4.

ABBREVIATIONS
TABLE OF CASES
INTRODUCTION
DIFFERENCE BETWEEN

5.
6.
7.

MORTGAGE AND CHARGE

LITERATURE REVIEW
CONCLUSION
BIBLIOGRAPHY

ABBREVIATIONS
1. C.P.C.
2. V.
3. S.
4. U/S
5. AIR
6. SCC
7. SC
8. ILR
9. SLP
10. Cr.L.J
11. Bom.
12. Q.
13. SCR
14. r/w
15. Ltd.
16. Pvt.

- Civil Procedure Code

- Versus
- Section
- Under Section
- All India Reporter
- Supreme Court Cases
- Supreme Court
- Indian Law Reporter
- Special Leave Petition
- Criminal Law Journal
- Bombay
- Queen
- Supreme Court Reporter
-Read with
-Limited
-Private

TABLE OF CASES
1. KOTAK MAHINDRA BANK LIMITED V. HINDUSTAN NATIONAL
GLASS & INDUSTRIES LIMITED & ORS.
2. SUNDARAM PILLAI V. PATTABIRAMAN
3. JAGAT SINGH VS WEALTH TAX OFFICER

INTRODUCTION
Willful default is a conscious abstention by an obligor from doing that which
reasonably and under the terms of the obligation he should have done. The words
"willful default" imply more than negligence or carelessness. The word willful
means intentional and the word default means transgression.
Willful default, as the term is used in a trust instrument means more than
involuntary, inadvertent, negligent, mistaken, careless, or accidental default. It
means an intentional designing failure to do or not to do something required, an
affirmative wrong. Willful default means intentionally making away with the trust
property and a willful neglect means such reckless indifference to true interests of
the trust as to amount to or partake of a willful violation of duty.

KOTAK MAHINDRA BANK LTD. V.

HINDUSTAN NATIONAL GLASS &
INDUSTRIES LTD.
In Kotak Mahindra Bank Limited v. Hindustan National Glass & Industries
Limited & Ors.1 (Ruling), the Supreme Court of India (Supreme Court)
considered whether the RBI Master Circular dated July 1, 2008, on Willful
Defaulters2 (Master Circular) would be applicable to defaults on derivative
transactions.3 This issue arose in appeals in three separate cases presenting an
interesting scenario with the Calcutta High Court ruling that that the Master
Circular was not applicable to derivative transactions (Calcutta Case)4 and the
Bombay High Court ruling that the Master Circular applied to derivative
transactions (Bombay Case).5 Analyzing the provisions of the Reserve Bank of
India Act, 1934 (RBI Act) and the powers of the Reserve Bank of India (RBI)
set out in the RBI Act and the Banking Regulation Act, 1949 (Banking Act), the
Supreme Court held that the Master Circular applied to derivative transactions and
that the Master Circular would also apply to non-funded obligations, such as a
guarantee. The Supreme Court noted that the Master Circular was an initiative
taken at the instance of the Central Vigilance Commission (CVC) to ensure that
there was greater coordination among banks regarding willful defaulters.
Consequently, the Master Circular would have to be interpreted in the context of
the purpose it sought to achieve, namely, sharing of credit information relating to
defaulters and preventing access of finance to such defaulters.
BACKGROUND
In three separate and distinct transactions, three different entities6 (the
Company) entered into a foreign currency derivative transaction and executed a
Swaps and Derivatives Association Master Agreement (Derivatives Agreement)
with three different banks7 (the Bank). The Company was sanctioned limits
under the Derivatives Agreement and when the Derivative Agreements lapsed, the

Company failed to pay the Bank as per the Derivatives Agreement. The Bank
issued a notice to the Company classifying it as a willful defaulter under the Master
Circular. The Company challenged the classification before the Banks Grievance
Redressal Committee, which upheld the classification. The Company challenged
the classification before the jurisdictional High Court in a writ petition. In the
Calcutta Case, the High Court held that the Master Circular would not cover default
on the Derivatives Agreement. The Calcutta High Court reasoned that the Master
Circular applied only to lending transactions (since the Master Circular used the
expression lender) and hence was not applicable to derivative transactions.
In contrast, in the Bombay Case after an analysis of RBI Act, Banking Act and
circulars on prudential norms, asset classification, non-performing assets etc.8, the
court concluded that the Master Circular applied to derivative transactions.
The Supreme Court had to reconcile two conflicting judgments and the relevant
laws. In the Ruling, the Supreme Court did not examine whether Company was in
fact a willful defaulter the scope of examination was restricted exclusively to
whether the Master Circular would apply to derivative contracts and consequently,
the Supreme Court did not consider facts specific to the Calcutta Case or the
Bombay Case.
C ON T E N T I O N S O F T H E C O M PAN Y
1.

The Company contended that the Master Circular applied only in lenderborrower transactions. Company contended that banks were permitted to
engage in two kinds of transactions under the Banking Act, namely, core
banking services and miscellaneous services and therefore, the Master Circular
would apply only in the context of core banking activities and not miscellaneous
services.9 Further, Supreme Court had recognized this distinction in the activities
of a bank.

2.

Since Master Circular had severe consequences, it had to be strictly /

narrowly followed / interpreted and consequently, would not apply in context of
derivatives.10

3.

The Company argued that even though RBI had provided an interpretation,
the same was not binding on the Supreme Court and Supreme Court had to

independently interpret the Master Circular. In this context, since there was no
lender-borrower relation and the Master Circular would not apply.
4.

Powers of RBI were only in respect of credit information and this

information was only in context of lending and borrowing and could not be in
context of derivatives as this was not credit information as per the Credit
Information Regulation Companies Act, 2005.

C ON TEN TI ON S OF BA N K AN D RBI
1.

Object of the Master Circular was to address non-performing assets and

willful defaulters and hence it was applicable in all situations of default. .

2.

As per Foreign Exchange Management (Foreign Exchange Derivative

Contracts) Regulations, 2000 (FEMA Derivative Regulations), foreign
exchange derivative contract had been defined to mean a financial transaction or
arrangement in whatever form and by whatever name called and hence a default
in respect of the same would result in non-payment by a customer of dues to the
bank.

3.

Supreme Court should defer to interpretation of RBI as RBI itself issued the
Master Circular. Banks and RBI argued that since the definition put forth was by
RBI, this definition should be accepted as the correct interpretation of what the
Master Circular intended and whether it applied to derivative transactions.

SUPREME COURT DECISION

The Supreme Court held that the Master Circular applied to derivative transactions.
More importantly the court held that although RBI had articulated its interpretation,
ultimately, it was incumbent on the court to interpret the Master Circular. The
Supreme Court rejected the narrow approach in the Calcutta Case and the wide
approach in the Bombay Case and held that the Master Circular had to be read in
the context of the subject matter 11, namely, Banking Act and the RBI Act. The
Ruling noted that the purpose of the Master Circular was to have a system to
disseminate credit information pertaining to willful defaulters among banks and
financial institutions so that no further finance is available to such entities. The
Supreme Court relied on a CVC letter, dated November 27, 1998, on the subject
improving vigilance administration in banks to ensure that RBI had all
8

information relating to willful defaults and not just defaults by borrowers. The
Master Circular was to put in place a system to disseminate credit information
pertaining to willful defaulters.. and hence the purpose of the Master Circular was
to share information and ensure that no credit was provided to defaulters. The
Ruling noted that clause of 2.6 of the Master Circular covered even guarantee
transactions and thus, the Master Circular also covered non-funded transactions. In
conclusion, the Ruling also rejected the contention of violation of privacy and sets
out the power of RBI to call for information for the purpose of regulating credit and
monetary policy. In this regard, the Ruling has held that the Master Circular does
not have the effect of blacklisting a client.
A N A LYS I S
The Ruling highlights the approach to be followed by RBI in interpreting
notifications released by RBI a notification should be applied in the context of the
subject of the relevant notification and the relevant parent laws. Although this
interpretation has been given in the context of RBI, it is arguable that a similar
approach is to be followed in the context of other regulators such as the Telecom
Regulatory Authority of India, Securities and Exchange Board of India etc.
Therefore, the exercise of powers must be in relation to the subject notification and
cannot extend beyond that.
From the perspective of the law on derivative transactions, the Ruling examined
FEMA Derivative Regulations but did not examine derivative transactions either
from an accounting perspective or with reference to the underlying transaction. It is
possible that a closer examination of the underlying transaction or the derivative
transaction could have led the court to a different conclusion based on the funding
principle. The Supreme Court has instead proceeded on the basis of an overarching
principle that a derivative transaction creates a payment obligation12 and the object
of the Master Circular. Interestingly, the International Monetary Fund has explained
derivative transactions to be instruments unlike debt instruments in respect of
which no principal is to be repaid.
Companies must therefore take into account the above principle of interpretation of
statutory notifications while engaging in transactions. Specifically, companies

should be aware of the considerations that weigh with the RBI while evaluating
whether the Master Circular would cover a non-funded transaction.

CONCLUSION
In this case, three separate and distinct transactions, three different entities6 (the
Company) entered into a foreign currency derivative transaction and executed a
Swaps and Derivatives Association Master Agreement (Derivatives Agreement)
with three different banks7 (the Bank). This issue arose in appeals in three
separate cases presenting an interesting scenario with the Calcutta High Court
ruling that that the Master Circular was not applicable to derivative transactions
(Calcutta Case)4 and the Bombay High Court ruling that the Master Circular
applied to derivative transactions (Bombay Case). The golden rule of
interpretation has been used because they did not stick to the literal meaning and
widened the scope and also advanced justice.

10

SUNDARAM PILLAI V. PATTABIRAMAN

BACKGROUND
This case arose from the clubbing of seven appeals of which
only six were heard by the Supreme Court, which involve
more or less an identical point of law relating to the
interpretation of the term 'willful default' appearing in the
proviso to Section 10(2) of the Tamil Nadu Buildings (Lease
and Rent Control) Act, 1960 (hereinafter referred to as the
'Act') coupled with the Explanation which seeks to explain
the intent of the proviso.

Civil appeal No. 6211 of 1983- respondent-tenants- on a

monthly rent- appellants-landlord filed a suit for evictionwillful default- Rent Controller , Chief Judge, City Small
Causes Court and the High Court held that held there was
willful default and ordered eviction.

Civil Appeal No. 1992 of 1982, the respondent-landlord filed

an eviction petition against the appellant-tenant on the
grounds of willful default.. The respondent also issued a
notice demanding the dues. The appellant sent a Bank Draft
which was not encased by the respondent and returned to
the appellant subsequent to the filing of an eviction petition
The Rent Controller held there was willful default But the
Appellate Authority reversed the finding of the Rent
Controller. In revision, the High Court restored the finding of
the Rent Controller and ordered the eviction.

Civil appeal No. 1659 of 1982- respondent-landlord filed an

eviction petition against the appellant-tenant in respect of
willful default- Rent Controller, Appellate Authority and the

11

High Court held there was willful default in payment of rent

and ordered eviction.

Civil appeal No. 3668 of 1982- Appellant tenant -monthly

rent - The respondent-landlord filed an eviction petition for
committing a willful default- Rent Controller, Appellate
Authority and the High Court held there was willful default in
payment of rent and ordered eviction

Civil appeal No. 2246 of 1982- The respondent landladies let

out the premises on monthly rent to appellant tenants. The
respondents filed an eviction petition on the ground of willful
default for non payment of rent. The Rent Controller found
that the default in payment of rent was not willful and
therefore dismissed the application of the landladies. On
appeal, the Appellate Authority reversed the finding of the
Rent Controller, which was then upheld by the High Court
which ordered the eviction.

Civil appeal No. 4012 of 1982- the Appellant tenant on

monthly rent -The respondent filed an eviction petition
against the appellant on the ground of willful default. The
Rent Controller held that the default was not willful. On
appeal, the Appellate Court came to the conclusion that the
tenant had committed willful default. In revision, the High
Court agreed with the findings of the Appellate Court and
confirmed the eviction of the appellant on the ground of
willful default.

The aggrieved parties therefore filed these appeals in the

Apex Court for final adjudication.

CONTENTIONS OF THE TENANT

12

Despite the Explanation it is open to the Court on an

appraisement

of

the

circumstances

of

each

case

to

determine whether or not the default was willful and in

doing so it cannot be guided wholly and solely by the
Explanation, which is merely clarificatory in nature. If the
Court in the circumstances of each case find that the default
is not willful then it can come to this finding despite the
Explanation

Mere nonpayment of arrears of rent after issue of two

months' notice cannot in all circumstances automatically
amount to a willful default if ingredients of willful default are
not satisfied.

If the term willful default is given such a strict meaning in

accordance with the explanation, it would be extremely
harsh and penal in nature because if, after receipt of the
notice, the tenant is not able to pay the rent due to
circumstances beyond his control, it will be putting a serious
premium or handicap on the right of the tenant.

Such an interpretation is put on the Explanation then the

entire

provisions

of

the

Proviso

become

otiose

thus

rendering the said Proviso nugatory.

CONTENTIONS OF THE LANDLORD

The very purpose of the Explanation is to bring about

uniformity in court decisions laying down a conclusive
yardstick in the shape of the Explanation. the Explanation is
to be read into the proviso so that the word 'willful' will have
to be defined and interpreted in accordance with the
criterion laid down by the said Explanation, i.e., 'issue of two
months' notice.

13

Once it is proved that after issue of two months' notice if the

tenant does not pay the arrears within the stipulated period
of two months he is liable to be ejected straightaway.

Even if a notice under the Explanation is given that does not

take away the jurisdiction of the proviso to determine
whether or not the default has been willful if it contains the
qualities and attributes referred to above because what the
Explanation does is merely to incorporate an instance of a
willful default and is not conclusive on the point and would
have to be construed by the court in conjunction with the
conditions mentioned in the proviso.

The legislature has not used the expression default to pay or

the landlord claiming the rent shall construe tender rent as
willful only if the default by the tenant in the payment or
tender of rent continues after the issue of two months
notice.

JUDGMENT
The majority judgment was delivered by Justice S. Murtaza Fazal
Ali for himself and Justice A.Varadarajan:

Civil appeal No.6211 of 1983- The order of eviction passed

by the High Court is confirmed, and the appeal is allowed.

Civil appeal No.1992 of 1982- Allowed the appeal and set

aside the order of the High Court evicting the tenant.

Civil appeal No.1659 of 1982- The order of the High Court

evicting the tenant is affirmed and appeal is dismissed.

Civil appeal No.3668 of 1982- The order of the High Court

evicting the tenant is affirmed and appeal is dismissed.
14

Civil appeal No.2246 of 1982- Allowed the appeal and set

aside the order of the High Court directing eviction of the
tenant.

Civil appeal No.4012 of 1982- Held that the High Court was
fully justified in holding that the default was willful. The
appeal is accordingly dismissed

CRITICAL ANALYSIS
HOLDINGS

OF THE

REASONING

OF THE MAJORITY JUDGMENT AND

OF THE JUDGMENT

REASONING:-

Meaning of Willful Default:- After referring to numerous

authorities like 'A Dictionary of Law' by L.B. Curzon, 'Words and
Phrases', Volume 11A (Permanent Edition), volume III of
Webster's Third New International Dictionary, Vol. I of Webster's
Third New International Dictionary and Black's Law Dictionary
(4th Edn.), the Supreme Court came to the conclusion that in
order for a default to be willful, it must be intentional,
deliberate, calculated and conscious, with full knowledge of
legal consequences of such an act. This has been laid down as
the test for deciding whether a default is willful or not.

Scope of a Proviso:- With the aid of many authorities like

Craies in his book 'Statute Law' (7th Edn.), Odgers in
'Construction of Deeds and Statutes' (Fifth Edn.), Vepa Sarathis
'Interpretation

of

Statutes

and

various

judicial

pronouncements, the Apex Court laid down 4 functions for

which a proviso is drafted:-

qualifying or excepting certain provisions from the main

enactment;

15

it may entirely change the very concept of the intendment

of the enactment by insisting on certain mandatory
conditions to be fulfilled in order to make the enactment
workable;

it may be so embedded in the Act itself as to become an

integral part of the enactment and thus acquire the tenor
and colour of the substantive enactment itself; and

it may be used merely to act as an optional addenda to the

enactment with the sole object of explaining the real
intendment of the statutory provision.

Ambit

of

Explanation

to

statutory

provision:-

Resorting to different authorities like Swarups 'Legislation and

Interpretation', Bindras 'Interpretation of Statutes' (5th Edn.)
and numerous judicial precedents, the majority judgment laid
down 5 features/objectives of an Explanation:-

to explain the meaning and intendment of the Act itself,

where there is any obscurity or vagueness in the main

enactment, to clarify the same so as to make it consistent
with the dominant object which it seems to sub serve,

to provide an additional support to the dominant object of

the Act in order to make it meaningful and purposeful,

an Explanation cannot in any way interfere with or change

the enactment or any part thereof but where some gap is
left which is relevant for the purpose of the Explanation, in
order to suppress the mischief and advance the object of
the Act it can help or assist the Court in interpreting the
true purport and intendment of the enactment, and

it cannot, however, take away a statutory right with which

any person under a statute has been clothed or set at
16

naught the working of an Act by becoming an hindrance in

the interpretation of the same.

Interpretation of explanation and proviso to section

10(2) of the Act:-

If no notice, as required by the Explanation, is given to the

tenant, the Controller or the court can certainly examine
the question whether the default has been willful having
regard to the four conditions spelt out by us i.e., the proviso
and its provisions will prevail. To such a case the
Explanation would have no application.

Where the landlord chooses to issue two months' notice

and the rent is not paid, then that would be a conclusive
proof of the default being willful and the Controller would
have no discretion to decide the question of willful default
unless the tenant proves his incapability of paying the rent
due to unavoidable circumstances.

There is a clear difference in law between default and willful

default and that non-payment of rent within the time specified
by the Act, though would amount to default, cannot by itself be
treated as willful default.

For default to be regarded as willful default, the conduct of the

tenant should be such as to lead to the inference that his
omission was a conscious violation of his obligation to pay the
rent or reckless indifference. If the default was due to accident
or inadvertence or erroneous or false sense of security based
upon the conduct of the landlord himself, the default cannot be
said to be willful default.

The line between adjudication and legislation:- It is a

well known and established principle of constitutional law that
the 3 organs of government, namely, legislature, judiciary and
17

executive shouldnt cross the boundaries of the functions

allotted to each. Such excessive encroachment is against the
rule of Separation of Powers. When it comes to the boundary
of legislature and judiciary, it is the judiciary that has to be
more conscious of maintaining and limiting their acts to its
boundaries. The role of the latter is interpretation of the laws
made by the legislature and not to make laws. So the line
between adjudication and legislation needs to borne in mind
while the judges write their judgments. According to Felix
Frankfurter in his article Some Reflections on the Reading of
Statute, the judges should be alert and their expediency and
wisdom should help them to develop the reluctance to cross
that line. Therefore, the judges while interpreting the statutes
should be careful so as not to attach any unnecessary
inferences and meaning to the existing provisions unless there
is any ambiguity in the wordings of the provisions. Here, the
wordings of the explanation to the proviso of section 10(2) is
clear and unambiguously defines the term willful default. So
the court cannot infer any other situations other than that
provided by the explanation for the construction of the term
willful default. So in this case, the majority judgment has
violated the principle of Separation of powers and crossed the
line of adjudication and reached the forte of the parliament.
Also, the explanation was added to bring uniformity to the
judicial decisions on this matter by giving clearly just one
instance of when the default becomes willful. If the judges
were given the freedom to decide what a willful default is,
according to the circumstances of each case, then there will
be no uniformity and the principle of stare decisis will be
immersed down.

Consequences of Blanket Ban on courts discretion:The effect of such a narrow and plain interpretation to the

18

explanation will be harsh and difficult because if such a

blanket ban is put on the court for not examining the question
of willful default once the conditions laid down in the
Explanation are satisfied then it would undoubtedly lead to
serious injustice to the tenant. A subsidiary consequence of
such an interpretation would be that even though the tenant,
after receipt of the notice, may be wanting to pay the arrears
of rent but is unable to do so because of unforeseen
circumstances like, death, accident, robbery, etc., which
prevent

him

from

paying

the

arrears,

yet

under

the

Explanation he has to be evicted. But this argument doesnt

have much force. According to the words of S.R.Das, J. In CIT,
Agri v Keshab Chandra Mandal1 Hardship or inconvenience
cannot alter the meaning of the language employed by
the legislature if such meaning is clear on the face of
the statute. Therefore, the Supreme Court cannot add any
meaning to the words in order to suppress the hardships
caused otherwise.

Inappropriate use of authority:- The majority judgment

towards its end cite a Madras High Court Judgment; N.
Ramaswami Reddiar v. S.N. Periamuthu Nadar2 wherein
Ratnam, J. Observed Explanation to the proviso of section
10(2) of the act is not exhaustive of all cases of willful default,
but it specifies only one instance where the default should be
construed as willful. This inference drawn in this case is
wrong. As rightly pointed out by Justice Sabyasachi Mukherjee
in his minority judgment, the use of shall be construed
indicates that it will mean only what is described in the
explanation and nothing else. So therefore, the majority

1 AIR 1950 SC 265

2 1980 Law Weekly (vol. 93) p.577

19

judges have relied on a judgment which has drawn a fallacious

inference of a clear statutory provision.

Not well Reasoned:- According to us, the majority judgment

has not been properly reasoned with appropriate authorities.
The reading of the judgment shows that the Supreme Court
has done so much research and reading about the application
of proviso and explanation, but there has not been any
instance in the judgment where the judges have actually
described how the functions of provisos and explanations
which they inferred after referring to various authorities are
linked and has been used for arriving at the final holdings and
principles. So the difficulty in reading the judgment is a big
drawback of the majority judgment.
CONCLUSION
This case arose from the clubbing of seven appeals of which
only the Supreme Court heard six, which involve more or less
an identical point of law relating to the interpretation of the
term 'willful default'. The judgment passed was in favor of the
landlord and the tenant was evicted. The rule of interpretation
used by the Judged of the Supreme Court is the literal rule of
interpretation.

20

JAGAT SINGH VS WEALTH TAX

OFFICER
FACTS
-

Complaints were filed Under Section 35 B of the Wealth Tax Act, for
defaults on the part of the assessed to file returns of wealth as required
Under Section 14(1) and 14(2) of the said Act. Returns were, however,
filed before the completion of the assessment proceedings for the
relevant assessment years. Having been summoned to face the
prosecution the petitioners filed criminal revision petitions for

quashing the complaints on the ground:

(i) the wealth tax returns having been filed before the completion of the
assessment proceedings in consonance with Section 15 of the said Act,
the inference should be drawn that as valid returns had been filed there
was no willful default so as to attract the penal provisions of Section

35B of the said Act;

(ii) no penalty proceedings being brought or penalties being imposed,

the penal provisions of Section 35B of the said Act cannot be invoked;
(iii) there has been no willful default on the part of petitioners in as
much as their Explanations for not filing the wealth tax returns in due
time are of the same mature as had been decepted by Income Tax
authorities while condoning the delay made in filling the Income Tax
returns and the penalties imposed in late filing of the Income Tax
returns and penalties imposed in late filing of the Income Tax returns
having been cancelled by the Appellate Tribunal; and (iv) the
petitioners were wealth-tax assessed known to the authorities and there
could not be any willful default on their part in not filing the wealth-tax
returns in due time.

ISSUES
- As far as the question of fact is concerned, whether petitioners had committed

21

willful default in not filing the wealth tax return in due time, the same can only
be gone into during the trial. Prima facie, the mere fact that their Explanations
have been accepted by the Income Tax Appellate Tribunal while condoning the
delay made in filing the Income Tax returns, is not sufficient to hold that in the
present case also the petitioners cannot be held guilty of willful default in not
filing the Wealth-tax returns in time.
- It is a question of fact to be determined in every case as to whether there is any
willful default or not. In the present case prima facie when the wealth tax returns
have not been filed for about five years or so, an inference can be drawn that the
petitioners have been in willful default as contemplated by Section 35B. It is not
the ingredient of Section 35B that there should be any deliberate intention to evade
the tax. The offence is complete if a person willfully fails to furnish the return as
required by Section 14(1) or Section 14(2).
JUDGEMENT
Whether the petitioners had committed willful default in not filing the wealth-tax
return in due time, the same can only be gone into during the trial. Prima facie, the
mere fact that the Income-tax Appellate Tribunal has accepted their explanations
while condoning the delay made in filing the income-tax returns, in my opinion, is
not sufficient to hold that, in the present case also, the petitioners cannot be held
guilty of willful default in not filing the wealth-tax returns in time. The delay made
in filing the income-tax returns was very much less than the delay made in filing
the wealth-tax returns. Counsel for the petitioners has made reference to Gopalji
Shaw v. ITO . It was held in this The Judgment of the the object of launching
criminal prosecution for willful default is to prevent evasion of tax but, in each and
every case, without looking into the gravity of offence and without considering the
attendant circumstances, no prosecution should be launched and unless there is
willful default in filing the return, no prosecution can be launched. It was also held
that if the quasi-criminal proceeding, namely, the proceeding for the imposition of
penalty, cannot be sustained when the Income-tax Officer, while making the
assessment, charges interest, on a parity of reasoning, no criminal proceedings can
be launched in such a case and, in the criminal proceeding, willful default in filing

22

the return has to be established. In this judgment, it was held by a single Bench of
the Calcutta High Court that. By charging interest under section 139(8) of the
Income-tax Act, the Income-tax Officer has impliedly extended the time to file the
return and the question of willful default in filing the return of income does not and
cannot arise. The facts of the case are distinguishable. Here, the Wealth-tax Officer
has not condoned the delay by the petitioners in filing the wealth-tax returns, rather
the prayer of the petitioners for condensation of such delay has been rejected by the
Wealth-tax Officer. So, this judgment is not applicable to the facts of the present
case.
ANALYSIS
-

The petitioner had filed the wealth tax returns before the completion of the
assessment of the proceedings, which is in consonance with section 15 of
the said act, thus there was no willful default and thus he does not attract the

penalty under section 35B of the said act.

Because the petitioner did not attract any penalty under section 35B of the

said act, initiation of penalty proceedings couldnt be invoked.

Also there is no willful default on the part of the petitioners as explained by
the party for not filing the wealth tax returns in due time, which was
accepted by the Income tax authorities by invoking condonation of delay
under section 5 of the limitation act, and thus the penalty imposed was

cancelled by the Appellate Tribunal.

It was also contended that the authorities could have levied interest on the
said delayed payments as they petitioners were wealth tax assessed known
to the authorities and there could not be any willful default on their part in

not filing the wealth tax returns in due time.

Thus the said judgment is justified.

CONCLUSION
In this case complaints were filed Under Section 35 B of the Wealth Tax Act, for
defaults on the part of the assessed to file returns of wealth as required Under
Section 14(1) and 14(2) of the said Act. The issue was whether petitioners had
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committed willful default in not filing the wealth tax return in due time. The
judgment is the object of launching criminal prosecution for willful default is to
prevent evasion of tax but, in each and every case, without looking into the gravity
of offence and without considering the attendant circumstances, no prosecution
should be launched and unless there is willful default in filing the return, no
prosecution can be launched.
The literal rule of interpretation has been used.

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CONCLUSION
Willful default is a concept, which does not have any standing within the statutes in
India, and was developed through practices and precedents. The courts recognized
this concept as a lacuna in the law, and through wide interpretation from the
pending cases, which came before the judiciary.
After, the period of banking revolution in India, the lending from these banks
increased many folds, which lead to more and more borrowing. People started to
misuse the borrowings and started willfully defaulting on their debts knowing that
the statute did not deal with, willful default. This lead to a developing trend and
recently with the Kingfisher and Mallya debacle, it came out in the open and the
banks now, have come out with lists of willful defaulters, and strict steps are being
taken to fill the loopholes.
The problem of willful default persists in our society and there is a need to make
stringent laws regarding the same. Only then can there be a solution to this
problem.
The project analyses 3 different cases of willful default.
The first case is Kotak Mahindra Bank Ltd. Vs Hindustan National glass ltd. In this
case, three separate and distinct transactions, three different entities (the
Company) entered into a foreign currency derivative transaction and executed a
Swaps and Derivatives Association Master Agreement (Derivatives Agreement)
with three different banks (the Bank). This issue arose in appeals in three
separate cases presenting an interesting scenario with the Calcutta High Court
ruling that that the Master Circular was not applicable to derivative transactions
(Calcutta Case)4 and the Bombay High Court ruling that the Master Circular
applied to derivative transactions (Bombay Case). The golden rule of
interpretation has been used because they did not stick to the literal meaning and
widened the scope and also advanced justice. For the judgment to be passed the
courts not only stayed put to the realated provision but also the context of other
regulators such as the Telecom Regulatory Authority of India, Securities and
Exchange Board of India etc. were looked into.

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The second case Sundaram Pillai v. Pattabiraman, arose from the clubbing of
seven appeals of which only six were heard by the Supreme Court,
which involve more or less an identical point of law relating to the
interpretation of the term 'willful default' appearing in the proviso
to Section 10(2) of the Tamil Nadu Buildings (Lease and Rent
Control) Act, 1960 (hereinafter referred to as the 'Act') coupled
with the Explanation which seeks to explain the intent of the
proviso. The judgment passed was in favor of the landlord and the
tenant was evicted. The rule of interpretation used by the Judged
of the Supreme Court is the literal rule of interpretation because
the decision taken was strictly with respect to the provisions of
the act and wider interpretation was not done to advance the goal
of justice.
The third case Jagat Singh v. Wealth Tax Officer, relates to willful
default in case wealth returns are not filled in due time. In this case
complaints were filed Under Section 35 B of the Wealth Tax Act, for defaults on
the part of the assessed to file returns of wealth as required Under Section 14(1)
and 14(2) of the said Act. The issue was whether petitioners had committed willful
default in not filing the wealth tax return in due time. The judgment is the object of
launching criminal prosecution for willful default is to prevent evasion of tax but,
in each and every case, without looking into the gravity of offence and without
considering the attendant circumstances, no prosecution should be launched and
unless there is willful default in filing the return, no prosecution can be launched.
The court to pass the judgment has used the literal rule of interpretation as the
judgment restricts itself completely to the provisions of the act and there was no
wider interpretation.
The judgments in all 3 cases are justified, according to me, and
the courts have interpreted the cases well without leaving any
loopholes in the judgment.

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BIBLIOGRAPHY
Websites
- http://manupartra.com
- http://westlaw.com
- http://legalservices.com
- http://ssrn.com
Law Journals and Law Reviews
-

Nunnenkamp, Peter, and Hartmut Picht. "Willful default by developing countries in

the 1980s: A cross-country analysis of major determinants."Weltwirtschaftliches
Archiv 125.4 (1989): 681-702.
Sanjeev, Gunjan M. "Bankers Perceptions on Causes of Bad Loans in
Banks." Journal of Management Research 7.1 (2007): 40-46.
Datta, Samar K. An institutional economics approach to the problems of small
farmer credit in India. Indian Institute of Management, 2003.
Chakrabarti, Rajesh. "Banking in India-reforms and reorganization." Available at
SSRN 649855 (2005).
Das, Rituparna. "Managing the Risk of Non Performing Assets in the Small Scale
Industries in India." R Das, Research Methodology in Social Sciences and
Management, Saarbrcken: Verlag Dr. Mller (2010): 978-3639295467.

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