2025 (11) TMI 1037 - AT - SEBI

Appeal allowed: SEBI (PFUTP) proceedings set aside for breach of natural justice; fresh hearing ordered

Indra Pratap Singh Versus Securities and Exchange Board of India, Mumbai

The SAT (LB) allowed the appeal, holding the impugned SEBI order-alleging circular trading, reversal trades and violations of SEBI (PFUTP) Regulations-was ... Circular trading and reversal trades and manipulated the share price - non-service of show cause notice - No opportunity to the appellant to defend himself - violation of principles of natural justice - imposing a monetary penalty - violation of Regulations 3(a), (b), (c), (d), 4(1), 4(2)(a), (b), (d), (e), (g) of SEBI (PFUTP) Regulations, 2003 - Appellant pleaded that he had no knowledge about securities market - It was his employer, who was transacting in appellant’s name - employer admitted that he was also operating bank accounts and demat accounts of various persons - HELD THAT:- A combined reading of statement recorded by the Income Tax Department and the order passed by the ITAT, Mumbai prima facie show that Kamal Rathi was making available accommodation entries; he had opened demat account in appellant’s name and in the name of several others. SEBI has filed the speed post acknowledgments to support its assertion with regard to service of notices to the appellant. The postal acknowledgments and affixture certificates produced as Annexure ‘A’ and Annexure ‘F’ show the address of the appellant as 15B, 1st Floor, Hiren Shopping Centre, Goregaon (W), Mumbai, Maharashtra, 400 062. A careful perusal of the address shown in the acknowledgements, the agreement to purchase the said property by Kamal Rathi, his statement recorded by the Income Tax Department and the order in ITA No. 7759 and 7760/MUM/2019 (A.Y. 2011-12) also lead to prima facie inference that appellant was an employee under Kamal Rathi on a monthly salary of Rs. 15,000 and Kamal Rathi was operating his bank and demat accounts. Prayer clause 7(c) is for a direction against the SEBI to reconsider the matter after providing appellant an opportunity of hearing. Thus, we are of the considered view that appellant was not served in accordance with law. Therefore, the impugned order is in violation of principles of natural justice. Appeal is allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the adjudication order imposing penalty for violation of PFUTP Regulations is vitiated for non-service of show cause notice/hearing notices/impugned order thereby violating principles of natural justice. 2. Whether material on record (statements recorded under Income Tax Act and related orders) gives prima facie evidence of misuse of the noticee's identity (benami/demat/bank accounts) by a third party and the legal significance of such material for the purpose of re-adjudication. 3. Whether, in the circumstances, the impugned order should be set aside and remitted for fresh consideration with directions to provide an opportunity of hearing, and on what terms (including appearance/further notice). ISSUE-WISE DETAILED ANALYSIS Issue 1 - Service and Violation of Principles of Natural Justice Legal framework: Principles of natural justice require valid service of show cause notices and fair opportunity of hearing before adjudication causing deprivation of rights; adjudicatory orders based on proceedings in absence of effective service may be set aside. Precedent treatment: The Tribunal considered authorities cited by SEBI on service and notice affixture/publication but analysed service facts on record rather than mechanically applying the precedents; reliance was placed on established law that mail/affixture/publication must be effective and proved. Interpretation and reasoning: SEBI produced speed post acknowledgements and affixture certificates showing notices were sent to an address at Hiren Shopping Centre. However, contemporaneous material (agreement to purchase premises, statement under Section 131/133A by the third party, ITAT order) demonstrated a factual nexus between the third party and the address, and supported a prima facie inference that the third party had control/use of the premises and had been operating accounts in the noticee's name. The Tribunal found that, on the totality of record, the appellant was not served in accordance with law and was thus deprived of opportunity to defend. The Tribunal treated factual disputes about service and identity as material to natural justice rather than technical defects capable of being ignored. Ratio vs. Obiter: Ratio - where service and the right to be heard are contested and material contemporaneous evidence raises real doubt about effective service and the identity/possession of the address, the adjudication is vitiated for denial of natural justice and must be reconsidered. Conclusion: The impugned adjudication order was set aside qua the appellant on the ground of non-service and violation of principles of natural justice; the appellant must be afforded an opportunity to defend before SEBI. Issue 2 - Prima Facie Evidentiary Value of Income-Tax Statements and Related Orders (Benami/Forensic Evidence) Legal framework: Administrative/adjudicatory proceedings may consider contemporaneous records and admissions from other proceedings as relevant material; such material may furnish prima facie inferences but does not necessarily substitute for full adjudication on merits after affording hearing. Precedent treatment: The Tribunal accepted the probative weight of the third party's statements made to Income-Tax authorities and an ITAT order for the limited purpose of drawing prima facie inferences about modus operandi (use of others' KYC/demat accounts) but did not decide the substantive charge of involvement in market manipulation without fresh adjudication. Interpretation and reasoning: The statement of the third party admitted operating multiple concerns, using employees' demat accounts as benami accounts and providing accommodation entries; the ITAT order recorded payments and admissions about monthly salary to the appellant. A combined reading of these records led the Tribunal to infer prima facie that the third party opened and operated accounts in others' names, including the appellant's. However, the Tribunal distinguished prima facie inference from final adjudication - such material justifies further inquiry and a hearing rather than immediate imposition of penalty without the noticee's participation. Ratio vs. Obiter: Ratio - admissions/statements and orders from other statutory processes can constitute prima facie material to question validity of service and to direct re-adjudication; Obiter - finding of guilt or active participation based solely on such material without hearing would be impermissible. Conclusion: The Income Tax statements and ITAT findings were accepted as prima facie evidence of misuse of the appellant's identity by the third party, sufficient to displace any presumption of effective service and to require fresh adjudication after hearing; they did not constitute a substitute for adjudication on merits. Issue 3 - Remedy: Setting Aside Order and Directions on Remand Legal framework: Where principles of natural justice are breached, appellate forum may set aside the order and remit the matter for fresh consideration after affording opportunity; appellate forum may issue directions as to compliance and timetable for appearance. Precedent treatment: The Tribunal applied established remedial principles - setting aside impugned order qua the affected noticee and directing reconsideration by the regulator with an opportunity of hearing - rather than ordering final substantive relief. Interpretation and reasoning: Given the Tribunal's conclusion that service was not in accordance with law and that the appellant was deprived of a chance to defend, the appropriate remedy was to set aside the order insofar as it affected the appellant and direct SEBI to re-consider after granting an opportunity to appear and defend. The Tribunal specified a date for appearance (August 1, 2025) to prevent further prejudice and to provide a clear timetable, but left substantive determination to the adjudicating authority following fresh proceedings. Ratio vs. Obiter: Ratio - where non-service/natural justice breach is found, appellate tribunal should set aside the impugned order as to the affected party and remit for fresh adjudication after providing opportunity to be heard; Obiter - remarks on the strength of the material against the third party remain incidental. Conclusion: The appeal was allowed; the impugned order was set aside qua the appellant and SEBI was directed to reconsider the appellant's case in accordance with law after granting an opportunity of hearing; a date for personal appearance was fixed and no costs were awarded. Cross-References and Interaction of Issues The determination on Issue 1 (non-service and breach of natural justice) was informed by the prima facie evidentiary assessment under Issue 2 (third party's statements and ITAT order). That assessment did not resolve substantive culpability but established sufficient doubt about effective service and identity/possession of the address to require fresh adjudication. The remedy in Issue 3 flows directly from these conclusions.