TaxTMI 
TaxTMI 
2000 (4) TMI 759
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....s) Act, 1992 ('the Act'). Section 3 of the Act enables the Central Government to appoint one or more Custodian for the purposes of the Act. The Custodian has power under sub-section (2) of section 3 to notify the name of any person in the Official Gazette, who has been involved in any offence relating to transactions in securities after the first day of April, 1991 and on/or before 6-6-1992. The effect of a person being so notified was that according to sub-section (3) of section 3, notwithstanding anything contained in the Code of Criminal Procedure or any other law for the time being in force, any property, movable or immovable or both, belonging to any person notified under that sub-section stands attached simultaneously with the issue of the notification. The property so attached is to be dealt with by the Custodian in such manner as the Special Court may direct. 3. The Special Court is established under section 5 of the Act to be presided over by a sitting Judge of a High Court. The Special Court is to take cognizance of or to try such cases as are instituted before it or transferred to it. It is this Court which, under section 9A, has the jurisdiction to exercise such powe....
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....banker receipts. How this shortfall happened, was not known to the higher officials of the appellant bank till 10-5-1992. Thereafter enquiries were made by the appellant bank to ascertain the shortfall and efforts were made to recover the same. According to the appellants to shortfall was ascertained to be in the region of approximately Rs. 1300 crores. It was alleged that there were meetings between the officials of the appellants and Hiten Dalal wherein the said notified party admitted and acknowledged his liability and he had given various proposals for re-payment and delivery of various stocks in which there was a shortfall. According to the appellants Hiten Dalal did not fulfil his commitments to deliver cash or stock. Hiten Dalal is alleged to have agreed to and deliver, between 11-5-1992 and 13-5-1992, various shares, securities, bonds and debentures (for the sake of convenience as 'shares'). On 14-5-1992 the Manager Legal Services of the Bank, advised that a letter should be obtained from Hiten Dalal in order to eliminate the possibility of his subsequently claiming that the said shares had been delivered by way of safe custody. A letter containing the understanding between....
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....oceeds towards partial satisfaction of the outstanding liability of Hiten Dalal of Rs. 1253 crores. The appellants thus claimed that as pledgees they were entitled to have the shares transferred in their names without the process of certification. By an amendment in 1996, another alternative claim put-forth by the appellants was that the said shares, debentures, bank receipts, bonds and securities and the rights and bonus received by the appellant bank stood mortgaged to it. The appellants claimed that a sum of Rs. 3,00,40,885.00 expended by the appellant bank on purchase of rights shares and for preservation of the mortgaged security formed part of the mortgage debt. The appellants thus claimed that they were entitled to retain the mortgaged shares and securities and the accretions received in respect of thereof. 10. The custodian in its written statement did not admit the correctness of the facts stated in the plaint. According to the custodian, Hiten Dalal was a notified party and the shares worth Rs. 145 crores which were in the custody of the appellants were the property of the said notified party. By virtue of the provisions of the Act these shares stood attached as on the....
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....pellants herein had suffered a loss as claimed or at all; (ii) whether respondent No. 2 had given the said shares as securities and/or the same were taken from him forcibly; (iii) if the said shares were given as securities then the question would also be as to whether it was by way of pledge or mortgage; and (iv) whether rights and bonus shares, dividend and interest on the said shares formed part of secured assets. 13. It may here be noted that before the Special Court counsel for the appellants stated that he was not pressing the plea of pledge with right of appropriation. He contended that the appellants were only pressing that in respect of the shares in question which they had in their possession there was either a mortgage or pledge in respect thereof. 14. When the Special Court was framing issues relating to the question as to how the appellants had been able to prove the loss caused to them by Dalal and if so to what extent, the counsel for the appellants had contended that Dalal had admitted his liability in the said letter of 11-5-1992 and other documents and, therefore, it was not necessary for him to prove the loss. The Special Court over-ruled this submission bu....
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....rued on the original shares, which had been pledged, as well as the direction to hand over Cantriple Units to the custodian and lastly the strictures passed against certain employees of the appellants, appeal No. 762 of 1999 has been filed. 17. Hiten P. Dalal has filed appeal No. 1878 of 1999 challenging the judgment of the Special Court which had accepted the appellants claim regarding loss amounting to Rs. 280.80 crores. He also challenged the directions regarding handing over of the Cantriple Units by Standard Chartered Bank to the custodian and lastly the challenge is to the costs of Rs. 30 lakhs that had been awarded against him. 18. The four questions, which were considered by the Special Court, are what arise for consideration in these appeals before us. We will first deal with the issue relating to the loss claimed to be suffered by the appellant bank and its right to retain the securities, which were delivered to it. 19. In the suit, which was filed, it was inter alia stated in the plaint that the appellant bank had suffered a loss of about Rs. 1253 crores on its dealing with Dalal. It is on this basis that it sought to retain and appropriate securities worth Rs. ....
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.... cash or by physical delivery of such other assets as the bank might require. The letter also postulated that if on the completion of the re-conciliation, aggregate of the cash paid and the value of the assets delivered exceeded the amount of loss identified, then the Bank was to refund such excess to Dalal. He further confirmed and agreed that the appellant bank was authorised to sell the stocks, shares, debentures etc. which were handed over to the bank and to appropriate the proceeds thereof to partly liquidate his liabilities to the bank. If there was any shortfall after such appropriation, Dalal held himself to be personally responsible to pay to the bank such balance as was outstanding. 20. At this stage, we may notice that Dalal did not deny the execution of this letter. His case in the written statement was that this letter and other documents were got signed by the bank officials under threat or coercion. He had contended that the shares, securities etc. which were listed in Exhibit 'G' had been forcibly taken away by the appellant bank officials. 21. The Special Court, after taking all the evidence into consideration, came to the conclusion that the said shares etc.....
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.... Special Court further came to the conclusion that items 5, 7, 8 & 9 were also disproved or in any event, they could not be relied upon and used for the purpose of calculating loss. It upheld the case of the appellants with regard to items 1 and 10. Lastly, the Special Court, came to the conclusion that on the basis of the evidence produced before it, the appellants had made a payment of Rs. 201 crores for the purchase of units of U.T.I. of the face value of Rs. 15 crores but had not received the said securities. It also accepted the claim of loss of Rs. 79.80 crores which was evident by statement Ex. 19 which was produced in the court by the counsel for the appellants. The Special Court held that this statement Ex. 19 was tendered under section 163 of the Evidence Act and the facts stated therein must be regarded as having been proved or binding on Dalal. 26. It was submitted by Mr. K.K. Venugopal and Mr. K.S. Cooper the learned counsel for the appellants that for this case it was not necessary for the appellants to have established loss of more than Rs. 145 crores. Mr. K.K. Venugopal submitted that the appellants were not contending in these appeals that the shares worth Rs. 1....
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....and shares that securities and shares worth Rs. 145 crores listed in annexure to this letter were pledged to the appellant Bank. 29. The Special Court Act, 1992 contemplates attachment of all movable and immovable properties from the day when the party is notified. The attached property is thereupon to be dealt with by the Custodian in such a manner as the Court may direct. The attached property is to be disposed off by the Custodian under order of the Court and section 11(2) specifies the liabilities of the notified party which are required to be paid or discharged out of the proceeds of the properties of the notified party. It was, therefore, but right that the Court had to be satisfied by positive evidence, and not merely on the basis of the admission of Dalal that the appellant Bank had suffered loss inasmuch as 'purchases aggregating Rs. 1258 crores are not supported by deliveries. . .' with the result that the securities and shares worth Rs. 145 crores had been pledged in favour of the appellant bank. 30. The loss of Rs. 201 crores qua item No. 1 in regard to the non-delivery of Rs. 15 crores units of U.T.I. of the face value of Rs. 150 crores was proved through the evi....
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....ed for these documents and the said counsel, had not taken inspection of the said documents. The Special Court observed that this statement Ex. 19 had to be regarded as having been tendered under section 163 of the Evidence Act and therefore stood proved and was binding on Dalal. The Special Court then examined the said Ex. 19 which showed that the appellants had purchased six crores units of the U.T.I. of the face value of Rs. 60 crores for Rs. 79.80 crores from the Bank of Karad and had made payment of the same by Pay Order No. 231919 for Rs. 37.63 crores. This payment was made after netting of sale of security to Bank of Karad Ex. 19 further shows that in respect of said transaction, the appellants had received a banker receipt No. 18 of the Metropolitan Co-operative Bank Ex. 19 further showed that the money which the appellants paid to the Bank of Karad was credited into the account of one Abhay Narottam in the Bank of Karad and thereafter, from that account, an amount of Rs. 36 crores was transferred/credited to the account of Dalal with Andhra Bank. The Special Court observed that even though the said statement established that Rs. 36 crores had been transferred into the acco....
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....ian, also submitted that section 163 of the Evidence Act had been wrongly invoked in the present case. 35. We are not inclined to go into the correctness of the decision of the Special Court regarding the applicability of section 163. Mr. Rustomjee, the learned counsel submitted that as far as Custodian is concerned, he had chosen to accept the decision of the Special Court wherein it had accepted the losses qua item no. 1 stated to have been suffered by the appellant bank for a sum of Rs. 201 crores. No appeal has been filed by the Custodian challenging the correctness of the decision of the Special Court accepting the loss of Rs. 79.80 crores. If the Custodian had felt aggrieved an appeal should have been filed. This not having been done it is not open to Mr. Rustomjee to submit that this part of the judgment of the Special Court should be reversed. 36. As far as Dalal is concerned, once the Special Court has come to the conclusion that there was no coercion or undue influence in his signing letter dated 11-5-1992, Ex. 'G', it is then not open to him to contend and challenge the findings of the Special Court which has accepted the claim of the appellant bank with regard to ....
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....22-5-1992. These notes are signed by Dalal. In addition thereto, there was to be conversion of bank receipts of Canstars having valued at Rs. 10 crores. According to the appellant bank, no such delivery took place. The appellant bank, however, did not lead any evidence to prove that either in respect of the shares and securities mentioned in Ex. 'E' or in respect of items mentioned in Ex. G, except for items 1 and 10, any payment had in fact been made by the appellants. The claim of loss in excess of Rs. 280.80 crores cannot be accepted. 38. The Special Court, on the basis of the evidence before it, came to the conclusion that except for sum of Rs. 280.80 crores, the balance claim of the appellants stood 'dis-proved'. As we have already noticed, the suit was filed by the appellant bank because it had in its possession shares and securities which had been lodged by Dalal as a notified party with the appellant bank between 11 and 15-5-1992. The appellants had been asked by the Custodian to establish its right to retain the said shares and securities and this is the reason why the suit was filed. Even though in the plaint, it was said, and that is noted in Ex. 'G' itself that the a....
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....hey are not accretions and no issue arises whether they should be handed over to the appellant bank or to Dalal. It was submitted that as bonus share in only a piece of paper it has no intrinsic value. Reliance was placed on the following passage from the decision of this Court in CIT v. Dalmia Investment Co. Ltd. 1964(7) SCR 210 when in relation to the issue of bonus shares it was observed as follows : ". . . it takes nothing from the property of the corpus and adds nothing to the interest of the shareholder. Its property is not diminished and their interests are not increased. The proportional interest of each shareholder remains the same. The only change is the evidence, which represents that interest, the new shares and the original shares together representing the same proportional interest that the original shares represented before the issue of the new ones. The corporation is no poorer and the stockholder is no richer than they were before. What has happened is that the plaintiffs old certificates have been split up in effect and have diminished in value to the extent of value of the new." This decision was followed by this Court in Hunsur Plywood Works Ltd. v. CIT 19....
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....nus shares] are clearly accessions to the shares expressly pledged or hypothecated, and the pledger or his representative, the present plaintiff, is entitled to recover the same.' Applying the same logic it must follow that the dividend and interest which was received by the plaintiffs and which was relatable to the pledged stocks must also be regarded as accretions thereto. 45. It was then contended by Mr. Cooper that the bonus shares, dividend and interest, if they are regarded as accretions to the pledged stocks then they must also be regarded as forming part of the pledged property which could not be ordered to be handed over unless redemption takes place. In other words, the submission was that the Special Court could not have permitted the appellant bank to have retained the stocks originally pledged but at the same time directed that the accretions thereto should be handed over to the custodian. 46. Section 172 of the Contract Act provides that the bailment of goods as security or payment of a debt or performance of a promise is called pledge. Bailor being the pawnor and pawnee being the bailee. What is bailment is defined by section 148 which, inter alia, provides tha....
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....earned counsel for the respondents, that section 163 mainly provides that the bailee is bound to deliver any increase in profit which may have accrued but the said section does not provide that such delivery is to be made only on accomplishment of the purpose for which the goods are bailed. Had it been the intention that such accessions were to be delivered only at the time of accomplishment of the purpose for which the goods are bailed, the Legislature would have clearly provided for it. To buttress his argument he sought to rely upon sections 63 and 64 of the Transfer of Property Act which provide that where the mortgaged property in possession of the mortgagee has, during the continuance of the mortgage, received any accession, the mortgagor, upon redemption, shall, in the absence of a contract to the contrary, be entitled as against the mortgagor to such accession. It was contended that the words 'upon redemption' are conspicuous by their absence in section 163 of the Contract Act. He further contended that sections 163 to 173 of the Contract Act repeatedly referred to the words 'goods pledged' and indicated that the pawnee's rights including that of sale extended only to the g....
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.... this would be that as the pledge extends to such accretions then when the pledged goods are returned these accretions must also be given back. But if the pledge extends to such natural increase of the pledged goods it must follow that the pledgee would not only have the right to retain the said accretions but also have the right to sell the same along with original shares pledged for the purposes of realising amounts due to it and in respect of which the shares were pledged as a security. Not only will this be in line with the aforesaid observations of this Court in Tejkumar Balakrishna Ruia's case (supra) but in arriving at this conclusion we find support from the Halsbury's Laws of England Vol. 2 para 1524, where dealing with the bailee's duty to account it was observed that 'When the return of the bailed chattel constitutes part of the bailee's obligation, he must restore not only the chattel itself, but also all increments, profits and earnings immediately derived from it' it would follow from the aforesaid that the accretions to the pledged property would continue to be retained by the pawnee and, in the case of a notified party, like in the present case the accretions to the....
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....hereto. The Court came to the conclusion that no payment had been made in respect of these shares and the case which was then sought to be put forth that the said units had been received as security was false. 55. It does appear that the appellant bank has, in respect of Cantriple Units, adopted varying and contradictory stands. While in the letter dated 11-5-1992, the tenor was that payment had been made but these units had not been given, but in the letter dated 20-5-1993, the stand taken was that these Cantriple Units formed part of the pledged securities. In another letter of 16-6-1993, it was stated that these units were purchased and set off against earlier transaction. A witness on behalf of the appellant bank gave evidence to the effect that the units were taken by way of security and were not purchased at all. 56. In the light of the said evidence the Special Court rightly came to the conclusion that the appellant bank had no right to retain these units in their possession. These units had to be regarded as being attached. We may, however, note that in respect of these units Miscellaneous Application No. 36 of 1993 had been filed by Can Bank Financial Services Ltd. b....
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....ustodian and his retention would be subject to the outcome of the other legal proceedings including Miscellaneous Application No. 36 of 1993 and the appellant bank and other parties would be entitled to try and establish their rival claims to get possession of the said Cantriple Units. 59. The learned counsel for the appellant bank also submitted that the observations of the Special Court to the effect that there appeared to be some arrangement which subsisted between the appellant bank and Dalal were unwarranted and uncalled for. We do not intend to make any observation in connection therewith because the Court has itself stated that it was merely a presumption, and not a finding, that the appellant bank had entered into some sort of a transaction in securities with Dalal with the understanding that they would get a fixed return of 15 per cent on those transitions. Once the Court itself observed that 'loss is not a finding but merely a presumption', the said observations cannot in any way adversely affect the appellant bank or reflect as being a positive finding in respect of its business transactions. Perhaps the Special Court could have avoided the said observation but as we ....
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.... C.A. No. 1878 of 1999 has impugned the decision of the Special Court upholding the appellant bank's claim for losses/deficiencies to the extent of Rs. 280.80 crores. The decision of the Special Court in this regard has already been approved by us hereinabove and nothing more need to be said about this. One other contention which requires consideration relates to the awarding of the costs of Rs. 30 lakhs by the Special Court against Hiten Dalal. Arguing the appeal on behalf of Hiten Dalal, Mr. Ganesh contended that he has serious objection to the award of the huge costs of Rs. 30 lakhs to Standard and Chartered Bank. He contended that it was the Standard and Chartered Bank which has led evidence for all along 33 days the Special Court has given special findings that except for PW-4 the other witnesses of the bank had lied or prevaricated and in respect thereto severe strictures had been passed. As many as 11 claims put up by the appellant bank had been rejected by the Special Court and that the Special Court had also found that the appellant bank had constantly shifted their stand. It was contended that the award of costs of Rs. 30 lakhs was grossly excessive and Hiten Dalal should....