TaxTMI 
TaxTMI 
2003 (10) TMI 383
X X X X Extracts X X X X
X X X X Extracts X X X X
....ried by the Special Judge appointed under the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992, hereinafter referred to as 'the Act'. 2. During 1991-92, Reserve Bank of India noticed that large scale irregularities and mal practices were committed in transactions in both the Government and other securities, by some brokers in collusion with the employees of various banks and financial institutions. The said irregularities and mal practices led to the diversion of funds from banks and financial institutions to the individual accounts of certain brokers. To deal with this situation and, in particular, to ensure speedy recovery of the huge amount involved and to punish the guilty and restore confidence in and maintain the basic integrity and credibility of the banks and financial institutions, this Act was enacted for establishment of Special Courts to be presided over by a sitting Judge of the High Court to be nominated by the Chief Justice of the High Court within the local limits of whose jurisdiction the Special Court is situated, with the concurrence of the Chief Justice of India. The Act provided for appointment of one or more Custod....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Office (for short 'PDO') of the Reserve Bank of India an account into which its purchase of the Government of India Securities were credited and whenever it desires to sell any Government securities, instead of physically handling the papers, it merely issues a SGL transfer form which can roughly be equated to a non-negotiable account payee cheque in favour of the transferee. A SGL has to be issued in favour of a named person and no blank SGL transfer form can be issued under the Regulations governing the use of SGL transfer form framed by PDO of the Reserve Bank of India. 7. Citi Bank on 27th May, 1991 presented the SGL transfer form to the Reserve Bank of India but the same was dishonoured for want of sufficient balance. An endorsement to that effect was made on the SGL form. It was presented once again on 6th June, 1991 when it was again dishonoured for want of balance. 8. On 18 & 19th September, 1991, Citi Bank agreed to sell to SCB 11.5% GOI 2009 Bonds of the face value of Rs. 42 crores and Rs. 8 crores respectively against receipt of the purchase price paid by the SCB to the Citi Bank. Since the bonds were not ready, the Citi Bank issued two Bankers Receipts (fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....same was received from a third party whose name was not disclosed in the plaint by the SCB. Citi Bank's SGL form of the value of Rs. 5,00,95,000/- was duly encashed by the SCB and there is no dispute about it. 11. On 17th June, 1992 SCB addressed their advocate's letter to the Citi Bank calling upon the Citi Bank to forthwith handover to SCB the consideration of Rs. 44.8505 crores paid to the Citi Bank with further interest in respect of the said bonds as they had not received delivery of the said bonds from CMF in spite of the lapse of over nine months from the date of giving of the SGL of CMF. Advocate for the Citi Bank sent a reply to the advocate's notice of SCB refuting the claim of the SCB. According to the Citi Bank, the liability of the Citi Bank to deliver the securities (11.5% of GOI 2009 Bonds) under the contract of sale between the Citi Bank and SCB stood discharged and the Citi Bank ceased to be liable to carry out any further obligation in respect of the said transactions. 12. On 8th October, 1992 SCB filed a suit against the Citi Bank in the Federal Court at New York claiming consideration paid by the SCB to the Citi Bank. SCB also filed a suit bear....
X X X X Extracts X X X X
X X X X Extracts X X X X
....1994 pleaded and contended that as SCB had on its own volition asked for and took the SGL of CMF which was in its possession and returned the two BRs duly discharged and therefore the Citi Bank was no longer under any obligation to either pay any sum or to deliver any securities much less to refund the money. That SCB returned two BRs duly discharged in exchange of the SGL of CMF at its express desire. The obligation to deliver bonds under BRs was substituted by delivery of the SGL of CMF. Citi Bank similarly claimed complete discharge in its own suit. Citi Bank in its suit claimed for a decree against CMF in case a decree was passed against the Citi Bank in the Suit filed by SCB. The defence taken by the CMF in the two suits was more or less common. In substance it was that all these transactions were part of Hiten Dalal's transactions with SCB and that CMF as well as Citi Bank were merely used as a conduit to pay monies from the Bank of Karad which was basically a Hiten Dalal's account to SCB and from SCB to the Bank of Karad and that all these transactions were in pursuance of an arrangement which Hiten Dalai had with SCB under which SCB used to "Park" funds with Hiten D....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ferred funds to himself using Defendant No. 3 as a conduit? 7. Whether claim against Defendant Nos. 3A to 3G personally is barred by limitation? 8. Whether Defendant Nos. 3A to 3G are personally liable for the claim in the Suit? 9. Whether the Plaintiffs claim against Defendant Nos. 3 to 3G is not maintainable in view of the facts and circumstances set out in paragraphs 5(a) to 5(h) of the Written Statement of Defendant Nos. 3A to 3G? 16. In Suit No. 22 of 1994 issues were framed between the plaintiff SCB and Citi Bank, defendant No. 2. No issues were framed between SCB and the CMF. The same were as follows: ISSUES IN SUIT NO. 22 OF 1994 1. Whether the Plaintiffs have no cause of action against Defendant No. 1 as alleged in Paragraph 1 of the Plaint. 2. Whether for the reasons mentioned in paragraph 3 of their written statement Defendant No. 1 stands discharged of all their obligations. 3. Whether Defendant No. 1 gave any express or implied warranty of the nature alleged in para 13 of the plaint. 4. Whether there is any failure of consideration as alleged in pa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n the interest accrued was ordered to be paid. The trustees of CMF i.e. defendant Nos. 3 to 3G were discharged from their personal liability. The decree was made contingent depending upon the result in Suit No. 22 of 1994 filed by SCB against Citi Bank. 20. Issues in Suit No. 22 of 1994 were answered in the following terms. Issues Nos. 1 & 2 were answered in the negative i.e. in favour of the SCB and against the Citi Bank, It was held that SCB had a cause of action against the Citi Bank and the Citi Bank was not discharged of its obligations towards the SCB. Issues Nos. 3 & 5 were not pressed. Issue No. 4 was answered in the negative. Issue Nos. 6, 7 and 8 were answered as per order. SCB's suit was decreed for Rs. 54,07,24,676.93 p. with interest at 20 % per annum on Rs. 44,79,44,864/- from the date of the suit till payment for the reasons set out in the judgment dated 7th July, 1995 in the issues between Citi Bank and the SCB in Suit No. 20 of 1994. 21. On 10th of July, 1995 SCB filed an application for dropping defendants Nos. 2 to 9 (CMF and its trustees) in Suit No. 22 of 1994. This was opposed by the CMF. Court permitted the CMF and its trustees to be dropped from th....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 1991 in the sum of Rs. 42 crores and Rs. 8 crores being the cost of securities/debentures/bonds of 11.5% GOI 2009 Bonds issued by the Citi Bank and handed over to the SCB is jointly marked as Exhibit 'A'. On the reverse of these two receipts there is a stamp of SCB and signatures of an officer of the bank. Then there is a letter dated 19th September, 1991 written by the SCB to the Citi Bank requesting the Citi Bank to give the SCB SGL's of Canbank Mutual Fund in exchange of the two BRs. On receipt of this letter, Citi Bank handed over the original SGL forms of 11.5% GOI 2009 Bonds received by it from the CMF dated 27th May, 1991 face value of which was Rs. 44,58,05,000/- and its own SGL in the sum of Rs. 5,4.1,95,000/- making a total of Rs. 50 crores in return for the two BRs of equivalent amount bearing Nos. 0912611410 & 0912621480 in the sum of Rs. 42 crores and Rs. 8 crores. Then there is Advocate's letter of SCB dated 17th June, 1992 addressed to the Manager, Citi Bank asking for securities of the face value of Rs. 44,58,05,000/- instead of SGL of Canbank Mutual Fund of the same amount in the form of 11.5% GOI 2009 Bonds or in the alternative to make payment of....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the SGL of CMF knowing full well that it had been dishonoured by the Reserve Bank of India and it is not transferable. That these admitted and established facts clearly bring the case of Citi Bank under Section 63 of the Indian Contract Act. That SCB asked for and accepted the SGL of CMF as satisfaction which it deemed fit for the obligation of the Citi Bank to deliver GOI bonds of the face value of Rs. 44,58,05,000/- and therefore the Citi Bank stood discharged from its obligation to deliver the Bonds under Section 63 of the Indian Contract Act. That the contention of the SCB that SGLs were 'useless or worthless' was not tenable as it accepted the dishonoured SGLs of CMF without any protest and also received interest from an undisclosed third party thus treating itself a beneficial owner of SGL which clearly points that SGL was not 'useless or worthless' as is being sought to be made out now. The letter of 8th October, 1991 written to CMF asking to give SGL in favour of SCB also shows that SCB knew that the securities could not be delivered on the strength of SGL form taken by it from Citi Bank. Plea put forth that Citi Bank had given 'useless or worthless'....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... in the above context and the following points emerge from a plain reading of the letter and establish that SCB required a SGL of CMF in favour of SCB and not the one in favour of Citi Bank. That the BRs were enclosed with the letter and therefore SCB gave them first and only thereafter received the SGLs. The BRs were for Rs. 50 crores and not for Rs. 44.58 crores; latter was the value of the SGL of CMF. By return of the BRs of Rs. 50 crores, SCB cannot be understood to have asked for a dishonoured third parry's SGL of Rs. 44.58 crores. That the word "SGLs" in plural shows that SCB did not want the single dishonoured SGL of CMF. That the words "issued by you" in the letter referring to Citi Bank's BR are not followed by the words "in our favour". Similarly, SCB's request for SGLs of CMF is not followed by the words "in our favour'. The words "in our favour" are obviously intended in both situations and ought to be read into the letter. That the letter does not show SCB had knowledge of CMF's SGL in favour of Citi Bank. That the words "in exchange" only shows that SCB was substituting one "step in aid" for another "step in aid" of delivery of securities. That the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... unduly enriched and SCB would lose Rs. 45 crores apart from the interest accrued thereon. Such a result would be contrary to all notions of justice. Under the circumstances irrespective of any view this Court may form, in order to do complete justice between the parties, in exercise of its power under Article 142 of the Constitution of India the Court should maintain the decree in favour of SCB and if need be the SCB can be made to reimburse the Citi Bank to the extent of Rs. 12,94,66,022.41p. That this Court in exercise of its power under Article 142, keeping in view the practicality and reality of the situation, should see to it that nobody is allowed to have its own pound of flesh unjustly against the other. 30. Learned counsel for the parties have been heard at length. 31. As per stipulation in the BRs the Citi Bank had agreed to deliver 11.5% Government of India 2009 Bonds when ready "in exchange for this receipt duly discharged and in the meantime the same will be held on account of Standard Chartered Bombay." On the same day, i.e., on 19th September, 1991 SCB wrote a letter returning the two BRs with a request "to give us SGLs of Canbank Mutual Fund in exchange of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... custody of the Citi Bank. The possession of two BRs with the Citi Bank would raise a rebuttable presumption of discharge of the two BRs. Onus to rebut the presumption was upon the SCB. SCB has failed to rebut the presumption by leading any evidence that the obligation under the two BRs did not stand discharged. Finding recorded by the Special Court that there was nothing on the record to show that there was an absolute discharge granted by the Citi Bank to the SCB cannot be accepted because the two BRs were returned with the stamp of SCB duly signed by an officer of the SCB authenticating that it had been discharged. 33. What is the effect of production of documents by promisor from its custody was considered in Chaudhri Mohammad Mehdi Hasan Khan vs. Sri Mandir Das ,: (1912)14BOMLR1073 . In the said case, a suit was filed on the basis of mortgage deed for the recovery of Rs. 62,000/- by way of sale of the mortgage premises. At the time of institution of the suit the plaintiff produced only a copy of the document, alleging that the original had been lost. The defendant in his written statement admitted the execution of the document but alleged that the debt has been discharged. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the SCB to the effect that if these facts were disclosed it would have been proved that SCB had taken the SGL of CMF for its own benefit or at the behest of the third person from whom it had received the interest. That third person treated the SCB as the beneficial owner of Bonds and therefore entitled to interest on it. 36. Illustration (g) of Section 114 of the Indian Evidence Act provides that Court may presume 'that evidence which could be and is not produced would, if produced, be unfavourable to the person who holds it'. Privy Council in T.S. Murugesan Pillai v. ,M.D. Gnana Sambandha Pandara Sannadhi and Ors., held: "A practice has grown up in Indian procedure of those in possession of importance documents or information lying by, trusting to the abstract doctrine of the onus of proof, and failing accordingly to furnish to the courts the best material for its decision. With regard to third parties, this may be right enough; they have no responsibility for the conduct of the suit; but with regard to the parties to the suit it is, in their Lordship's opinion, an inversion of sound practice for those desiring to rely upon a certain state of facts t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to buy the SGLs of Canbank Mutual Fund otherwise they would not have written the letter on 19th September, 1991 itself. Proximity of these two dates and the manner in which whole transaction was completed indicates that it was done with a purpose or a design. It has not been explained as to how did SCB know that the Citi Bank had in its possession the SGL of CMF. SCB must have known, being a big banking business company, that the SGL issued by the CMF in favour of the Citi Bank was non-transferable. It could not provide any security to them. It had also been dishonoured. Still. SCB asked for and accepted the dishonoured SGL of CMF. If the SGL given to them by the Citi Bank was 'useless' and 'worthless' then why did SCB gladly accept the same without any protest. If it was their case that the SGL of CMF given to them was 'useless' or 'worthless' it should have refused to accept it; far from doing so, the SCB not only accepted it but also acted upon it. It received interest from the third party. It has not been explained as to why third patty paid interest of the SCB, Basically, it was for the SCB to explain and answer all these questions which it has ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aid two Bank Receipts and in exchange for the same you gave to our clients (a) your SGL for Rs. 5,41,95,000/- and (b) a SGL of Canbank Mutual Fund for Rs. 44,58,05,000/-drawn in your favour. We understand that when the aforesaid SGL for Rs. 44,58,05,000/- had been presented by you earlier on 27th May 1991 the same was dishonoured by the Reserve. Bank of India. Our clients accepted documents at (a), and (b) above..." [emphasis supplied] The words "our clients accepted documents A and B" clearly indicate that the SGLs were accepted in the exchange of two BRs without any protest thereby relieving the Citi Bank of its liability to give the 11.5% GOI 2009 Bonds. Another point which needs to be highlighted from this letter is that the Citi Bank feigned its ignorance of having written the letter dated 19th September, 1991 asking for the SGL of CMF in exchange for two BRs. It has not been denied that such a letter was written but it was stated; "...We note that you have failed to produce a copy of this letter, but even assuming that it exists we fail to see how this carries the matter further as the debt owed to our clients is not affected." Nothing hinges on it but....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ase of novatio does not arise for consideration. Shri Andhyarujna, the learned senior counsel for Citi Bank has also not seriously pressed for the Citi Bank's case being considered by reference to Section 61 abovesaid. 48. Citi Bank pleaded in paras 8 & 9 of its plaint (in Suit No. 22 of 1994) that it was discharged of its obligation to deliver the bonds on the delivery of SGLs of CMF to SCB at its own request and therefore ceased to be liable to SCB in respect of the agreement to deliver 11.5% GOI 2009 bonds. Learned Special Court in para 62 held that there was no unconditional discharge pleaded by the Citi Bank and for this reliance was placed on the contents of para 9 of the plaint. In para 9 Citi Bank has stated that SGLs of CMF were taken by the SCB voluntarily and unconditionally at their own request and returned the BRs issued by the Citi Bank, duly discharged, and, therefore, the remedy of the SCB, if any, is against the CMF or its trustees and not against the Citi Bank. That the Citi Bank was filing the suit to safeguard its interest so that in the event a decree is passed against the Citi Bank in the suit filed by the SCB then the, Citi Bank will be entitled to cla....
X X X X Extracts X X X X
X X X X Extracts X X X X
....m i.e. from the promisor as well as third party. It does not give a cause of action to the promise, but, to the promisor, to contend that the promise who has accepted satisfaction from the third party cannot insist of the satisfaction of its claim from the promisor as well. No case under Section 41 of the Contract Act has been pleaded by the Citi Bank. It no where pleaded that CMF had delivered the bonds to SCB and, therefore, SCB cannot enforce its demand for delivery of bonds against the Citi Bank. Privy Council in Har Chandi Lal and Ors. v. Sheoraj Singh and Ors. held that Section 41 of the Contract Act applies only where a contract has in fact been performed by some person other than the person bound thereby. What is required by Section 41 is actual performance of the original promise and not a substituted promise. In Chegamull Suganmull Sowcar v. V. Govindaswami Chetty and Ors.,: AIR1928Mad972 , it was held that actual performance has to be there for importing the applicability of Section 41. It was held: "...Much more than a bare promise is necessary under the Section. What it contemplates is actual performance of the original promise. According to the section,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....isfied with neither the bonds nor the monies thereof, but with SGLs which admittedly had no value or significance. According to him the interpretation put on the letter dated 19th September, 1991 be interpreted in a commercial sense so that it serves the commercial purpose. To substantiate this, he placed reliance upon paragraphs 777, 782, 921, 951, 952, 953 and 955 of Halsbury's Laws of England, 4th Edition, Vol. 9, wherein it has been observed that the courts can interpret the mercantile contracts in a way that it makes good commercial sense or to give efficacy to a contract to emancipate one side from all the chances of failure, and to make each party to perform its parts of the promise. He has relied upon certain observations made in Hillas & Co. Ltd. v. Arcos Ltd. 1932 All ER 494, Investors Compensation Scheme Ltd. v. West Bromwich Building Society 1998 (1) All ER 98, Stocznia Gdanska SA v. Latvian Shipping Co. and Ors. 1998 (1) All ER 883, Antaios Cia Naviera SA v. Salen Rederierna AB 1984 (3) All ER 229 and Union of India v. D.M. Revri & Co. [1977]1SCR483 . We do not find any merit in this submission. 54. SCB soon after the payment of Rs. 50 crores and receiving the B....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iti Bank for its own purpose or at the behest of an undisclosed third party who paid interest to SCB. In the absence of any explanation as to how the SCB knew that Citi Bank was in possession of SGL of CMF; as to why it had asked for an instrument which on the face of it was unrealizable by it from the debtor; why did it accept and act upon the same, and, further treating itself as a beneficial owner and receiving interest on it, the implied condition or warranty such as it sought to be urged on behalf of SCB cannot be imported in the transaction. The plea of implied warranty is one made in desperation and is clearly an after thought. 55. The plea of implied warranty is also negated by the fact that SCB had pleaded in its plaint in Suit No. 22 of 1994 that Citi Bank has "expressly and impliedly warranted to SCB that Canbank would on the SCB's request transfer the stock" Issue No. 3, namely, "Whether Defendant No. 1 gave any express or implied warranty of the nature alleged in para 13 of the plaint." was framed on this plea. The onus of proving this issue was on the SCB. Far from adducing any evidence the SCB simply instructed its counsel to not to press the issue. Thus the p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the absence of a clear indication to the contrary is, that the payment by means of bill, note or cheque is a conditional payment only. The defendant upon whom the burden lay of establishing such an intention did not choose to lead any evidence on the point and in the absence of any material on the record It was not possible to come to the conclusion that there was such an intention. In Subramniam Chettiar case (supra) the facts were that defendant executed two pronotes A and B and subsequently executed third pronote C for a sum which was total of A and B and endorsing on A and B that in view of C the sums due under A and B have been discharged. Pronote C was insufficiently stamped. It was held that instrument C was invalid and inadmissible in evidence and therefore the promise could rely on the original cause of action and claim the recovery of the amount. None of these cases would be applicable to the facts of the present case. 58. It is well settled that where an instrument, a cheque or negotiable instrument, is given by the debtor and accepted by the creditor, the question whether the instrument was taken as an absolute payment or a conditional payment is one of the fact depe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ue unilaterally and it was not the creditor who had either remitted or accepted the lesser amount in satisfaction of the entire amount. Section 63 of the Indian Contract Act, as was rightly held, did not have any applicability in such cases. Similarly in Union of India's case (supra) the railways in order to meet the claim of the plaintiff by damages for non-delivery of railway consignment sent a cheque for lesser amount with an express stipulation in the letter accompanying the cheque that in case the plaintiff was not prepared to accept the amount he should return the cheque, but, the plaintiff encashed the cheque and brought the suit against the railways for the balance amount. Plea of the railways that acceptance of the lesser amount was evidence of accord and satisfaction was not accepted and, in our view, rightly so. The principle applied was the same as in the earlier two cases, referred to above. In the present case, as stated in the foregoing paragraphs, the SCB had substituted its original satisfaction by asking for and taking the SGL of CMF as deemed fit for its own reason which have not been disclosed to the Court. The cases cited by Mr. Nariman referred to in this ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....iable to SCB. The submission of SCB that since a decree has been passed in the contingent suit, to the extent of decretal amount paid in the contingent decree, SCB's suit should be decreed cannot be accepted. Firstly it is to be decided in SCB's own suit (22 of 1994) whether it is entitled to a decree or not. If that suit is dismissed then the question of passing any decree in Suit No. 20 of 1994 which is a contingent suit would not arise. Acceptance of the submission of the SCB would mean that though SCB's suit does not deserve to succeed but still it be maintained by passing a decree in the contingent suit which cannot be done. It would be travesty of justice rather than doing justice. The submission is, therefore, rejected. 61. For the reasons stated above Civil Appeal No. 7941 of 1995 filed by the Citi Bank is accepted. Judgment and decree passed by the Special Court in Suit No. 22 of 1994 is set aside and the suit is ordered to be dismissed with costs throughout. 62. As a consequence to the aforesaid, Citi Bank becomes entitled to restitution of the total amount paid by it to Standard Chartered Bank (principal and interest) along with interest @ 12% p.a. from....