Foundational facts and proportionality are essential before imposing a drastic interim restraint in suspected circular routing cases.
A drastic interim restraint in securities proceedings cannot rest on suspicion or timing proximity alone; the regulator must first establish foundational facts showing a prima facie sham or circular transaction. On the materials described, contemporaneous commercial documents, GST records, invoices and approvals supported genuine dealings, and the entities were not shown to be related in the manner alleged. The evidentiary basis for treating the fund movements as round tripping was therefore not established, and the continued ex parte restraint was found disproportionate because no urgency, obstruction, tampering, or other necessity was shown.
Issues: (i) Whether the material relied upon by the regulator established, on the requisite foundational facts, that the impugned fund movements amounted to circular routing or round tripping warranting interim restraint. (ii) Whether the ex parte ad interim restraint order and its continuation were justified and proportionate.
Issue (i): Whether the material relied upon by the regulator established, on the requisite foundational facts, that the impugned fund movements amounted to circular routing or round tripping warranting interim restraint.
Analysis: The available documents showed long-standing commercial arrangements, agreements, invoices, GST records, audit committee approvals, and other contemporaneous material supporting the first leg of the transactions. On the facts accepted, two entities were found to be independent and not shown to be related or associate entities in the manner assumed by the regulator, and the evidentiary foundation for treating all movements as a single sham circuit was not established. Mere proximity of timing and bank statement entries, without more, was held insufficient to displace genuine documentary evidence at this stage. The burden to establish the alleged circular routing therefore remained unmet.
Conclusion: The allegation of round tripping and sham routing was not established on the material before the Tribunal.
Issue (ii): Whether the ex parte ad interim restraint order and its continuation were justified and proportionate.
Analysis: Interim preventive action was held to require an established factual basis and a rational nexus with the object sought to be achieved. The Tribunal found no material showing obstruction of investigation, tampering of evidence, or urgency warranting such a drastic restraint after the lapse of time. The continued restraint was found excessive in light of the limited evidentiary foundation, the nature of the documents produced, and the availability of ordinary investigative processes. The doctrine of proportionality was held to have been misapplied.
Conclusion: The restraint order was not justified and was disproportionate.
Final Conclusion: The impugned restraint was unsustainable and was set aside insofar as it concerned the appellant, who was left to cooperate with the ongoing investigation.
Ratio Decidendi: A drastic interim restraint in securities proceedings cannot be sustained on suspicion or proximity of timing alone unless the regulator first establishes the foundational facts showing a prima facie sham or circular transaction and demonstrates that the measure is necessary and proportionate to the investigative purpose.
TaxTMI 
AI Drafter ✕
TaxTMI 
