Court quashes freezing of bank accounts, emphasizes due process

Lal Mahal Ltd. Versus Union of India & Ors.

Lal Mahal Ltd. Versus Union of India & Ors. - 2017 (355) E.L.T. 243 (Del.) Issues Involved:
1. Legality of the freezing of the petitioner's bank accounts by the Directorate of Revenue Intelligence (DRI).
2. Applicability of Sections 110, 111, and 121 of the Customs Act, 1962.
3. Impact of the freezing of accounts on the petitioner's business operations.
4. Requirement of show cause notice prior to freezing bank accounts.
5. Provision of security by the petitioner for de-freezing the accounts.

Detailed Analysis:

1. Legality of the freezing of the petitioner's bank accounts by the Directorate of Revenue Intelligence (DRI):
The petitioner sought the quashing of letters dated 23.12.2016 and 26.12.2016, which directed the banks to cease all banking activities of the petitioner's accounts. The petitioner argued that no show cause notice was issued prior to the freezing of the accounts, and the letters were silent about the legal provisions under which they were issued. The court noted that the DRI's letters did not specify any provision of law for freezing the accounts, and no formal order was passed or communicated to the petitioner.

2. Applicability of Sections 110, 111, and 121 of the Customs Act, 1962:
The DRI contended that the petitioner diverted duty-free imported gold into the open market instead of exporting it, resulting in a shortage of 430 kg of gold. The DRI relied on Sections 110(3), 111, and 121 of the Customs Act to justify the freezing of accounts, arguing that the sale proceeds of the diverted gold might be deposited in the petitioner's bank accounts. However, the court found that the DRI did not produce any order or decision showing a reasonable belief that the bank accounts were liable to be confiscated or were relevant to any proceedings under the Act.

3. Impact of the freezing of accounts on the petitioner's business operations:
The petitioner argued that the cessation of banking activities led to a standstill in business operations, as the accounts were cash credit accounts with a credit limit of Rs. 1000 crore but only had a balance of Rs. 1.69 crore. The court noted that the freezing of these accounts had a cascading effect on the business, and there was no denial from the respondents regarding the nature of the accounts.

4. Requirement of show cause notice prior to freezing bank accounts:
The court observed that no show cause notice was issued to the petitioner before the accounts were frozen, and the DRI's letters lacked any reference to the legal provision under which the action was taken. The court cited previous judgments, including VIKAS GUMBER VERSUS UNION OF INDIA, which held that Section 110 of the Customs Act does not enable the proper officer to attach bank accounts without a show cause notice or formal order.

5. Provision of security by the petitioner for de-freezing the accounts:
The petitioner offered to provide a security of Rs. 10 crore in the form of property, in addition to Rs. 7.5 crore in the form of gold and currency already seized by the DRI. The court accepted this offer and directed the petitioner to furnish the security within one week.

Conclusion:
The court quashed the impugned letters dated 23.12.2016, in so far as they related to the cash credit accounts, and directed the banks to de-freeze these accounts. The petitioner was permitted to operate the accounts upon furnishing the security of Rs. 10 crore. The order was made without prejudice to the DRI's right to take further steps in accordance with the law regarding the investigation of the alleged diversion of duty-free imported gold.