TaxTMI 
TaxTMI 
2008 (5) TMI 418
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.... bidders for submitting bids after publication of the notice inviting bids? (ii)Whether it will be admissible to break up the shares into appropriate groups and to give options to the bidders to bid either for whole lot or for a limited number of groups? The Custodian was further directed to take legal and professional opinion in relation to the liability to pay Capital Gains Tax. The learned Judge further directed that if the notified parties wanted to make any submission on the above questions, the same may be submitted to the Custodian within the period of 4 days and such submissions would be transmitted by the Custodian to the Disposal Committee for its consideration, and after the opinion of the Disposal Committee is given, the Custodian shall take steps in accordance with the said opinion, as also in accordance with the legal and professional advice. The learned Judge further directed that the Custodian would be free to approach the Court and seek appropriate orders. With these directions, the learned Judge disposed of the report of the Custodian, as also the applications made by the parties. All the applicants are the family members of late Sh. Harshad S. Mehta, while ....
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....4 objections. It firstly noted its order dated 17-8-2000, whereby, a scheme was framed for the sale of the attached shares and a Committee of experts known as Disposal Committee was constituted and the sale of shares was conducted under the supervision of that Committee. The learned Judge also took the stock of the arguments before him that before issuing advertisements inviting the offers, the Custodian had not consulted the said Disposal Committee regarding the appropriate time to be given for submitting the offers. The learned Judge also took the notice of the earlier order dated 23-8-2001 passed by this Court regarding sale of shares, wherein, this Court had permitted even the private parties to submit their offers for the purchase of shares and, therefore, the learned Judge observed that the Custodian should have sought the opinion of the Disposal Committee. 5. Further, the learned Judge also observed that in the order passed by this Court, it was expressed that there was no provision for breaking up the bulk shares into groups and for selling each group separately, so as to invite the best price. The learned Judge, therefore, held that the opinion of the Disposal Committee....
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....bjection is being raised to the effect that the Custodian or the Special Court have not examined nor given a finding with respect to the involvement of the appellants with late Sh. Harshad S. Mehta, nor has the Custodian examined the claim inter se between the entities within the so-called group. In short, the appellants have challenged the very concept of the sale of shares. The further contention raised now is that the assets of the appellants were appreciating, therefore, it would not be advisable to effect the sale of the assets. The appellants suggested that in the past also, the Custodian had sold the shares, the value of which were appreciating and, therefore, loss of Rs. 6,500 crores was caused to the appellants. The further objection raised in the appeal is that the Special Court is acting contrary to the directions issued by this Court, whereby, it was mandated that Special Court should arrive at a firm conclusion as regards the involvement of the individuals with late Sh. Harshad S. Mehta. The appellants dubbed the impugned order as a step towards the sale of assets of the appellants without any liabilities having been established against the appellants. It is also said ....
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....an, on being satisfied that any person is involved in any offence relating to the transactions of securities between the period 1-4-1991 and 6-6-1992, can notify the name of such person in the Official Gazette. Section 3(3) provides that any property movable or immovable or both belonging to any person notified under section 3(2) stands attached simultaneously with the issue of the notification, and such attached properties would be dealt with by the Custodian in such a manner as the Special Court may direct. Under section 4(1), the Custodian is empowered to cancel any contract or agreement entered into between two aforementioned dates by the notified person. Section 4(2) provides for hearing as regards the correctness or otherwise of the notification under section 3 notifying any person, on an application being made within 30 days of the issuance of notification. The Special Court is established under section 5 and has exclusive jurisdiction conferred upon it under section 7 for any prosecution pending in any court and such prosecution stands transferred to the Special Court under that provision. The Special Court is also conferred with the jurisdiction in respect to the civil mat....
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....ications were disposed of by an order dated 11-3-1996 passed by this Court. By the said order, this Court directed a scheme to be drafted in respect of the sale of shares from time to time. The Custodian was directed to forward the scheme to the Union of India for approval and on such approval being obtained, the said scheme was directed to be placed before this Court again. In compliance of the order dated 11-3-1996, the scheme for the sale of attached shares was proposed. Civil Appeal No. 5225 of 1995 was heard along with the other allied appeals like Civil Appeal No. 5326 of 1995, 5147, 5325, 6080 of 1995, 12574 of 1996 and T.C. (C) No. 5 of 1998 (the transferred writ petition) were disposed of by this Court by a judgment dated 13-5-1998 in Harshad Shantilal Mehta v. Custodian [1998] 5 SCC 1^1. The transfer case was in respect of constitutional validity of section 11 of the Act by a writ petition filed before the Delhi High Court which was got transferred by this Court itself. In its judgment disposing of all these appeals, this Court considered the three questions formulated by the Special Court :- "1.Whether the priority created by section 11 of the Special Court (Trial of ....
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....al (vide C.B. Gautam v. Union of India [1992] 65 Taxman 440). 13.The directions, therefore, for disposal under section 11(1) can be given only after the Special Court has satisfied itself that the property under attachment is the property which belongs to the notified person. The directions for disposal can only be in respect of the right, title and interest of the notified person in the attached property. If, therefore, any application is filed before the Special Court by a third party claiming the property so attached and/or for releasing the right, title and interest of a third party in the property from attachment, the Special Court will have to decide the application before proceeding under section 11." (p. 549 of SCL) 15. In paragraph 15, this Court took the note of the words in section 11(2) 'in order as under' and held that before the amounts can be paid to banks or financial institutions under section 11(2)(b), the liabilities under section 11(2)(a) are required to be discharged. This Court reframed the questions framed by the Special Court in paragraph 16, which are :- "1.What is meant by revenues, taxes, cesses and rates due? Does the word 'due' refer merely to ....
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....t came out with an order dated 17-8-2000. The learned Judge then considered the whole scheme in extenso. Arguments were raised challenging the sale of the shares at that point of time. It was noted that the main objection of the notified parties was that the time for distribution of assets had not yet arrived and, therefore, the scheme of the sale of shares should neither be framed nor implemented. The learned Judge took the note of this scheme and the suggestions made therein on setting up a Disposal Committee. It was also noted that under the scheme, modality of sale of shares was provided for. Three questions were framed by the learned Judge, they being :- A.Whether the time to frame the Scheme for sale of attached shares belonging to the notified parties has arrived? B.Challenge to the validity of scheme? C.Implementation of the scheme? 18. It was specifically urged before the learned Judge that until the date of distribution is imminent, there would be no question of selling the attached shares, which though attached, remain the property of the notified parties. It was also contended that the sale and distribution were not separate events and, therefore, the sale o....
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....udgment on 13-5-1998 in the case of Harshad Mehta v. Custodian [1998] 5 SCC 1. Therefore, at the time of delivering the interim order on 11-3-1996, the question as to when the sale and distribution took place, remained unanswered. However, he contended that in view of the final judgment of the Supreme Court in the above case of Harshad Mehta, this Court should proceed on the basis of the final judgment of the Supreme Court. The learned counsel contended that in view of the judgment of the Supreme Court, the stage for sale and distribution of the assets under section 11 of the Act arise only after completion of examination of all civil claims under section 9A of the Special Court Act and only after the assessment orders of the Revenue Department reached finality and only after they became binding i.e., when the assessee has exhausted all statutory remedies under the Act and since the process of examination of claims under section 9A has not commenced, the Scheme is premature. It was contended that on a proper and legal assessment, the actual tax liability of Harshad Mehta Group would be marginal and a large portion of the amounts would have to be refunded by the revenue. He contende....
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....s the satisfaction of the Special Court before it gives directions for disposal to the effect that the attached property belonged to the notified parties. The learned Judge, therefore, held that there was a dichotomy between the sale and distribution, which was accepted by this Court. The learned Judge then noted that the scheme was not for distribution and it was not under section 11(2). The scheme instead was under section 11(1) for sale and, therefore, the arguments regarding the sale being premature, as the distribution point had not arrived at, was liable to be rejected. The learned Judge then went on to hold, on the basis of this Court's judgment, that section 11(2) could not be restrictive only to the tax liability during the statutory period and it covers all assessed taxes due for pre-statutory period and post-statutory period. Further, the learned Judge observed :- "However, in answering the last contention of the notified parties that the liability should have been ascertained on the date of distribution, the Supreme Court observed that the date of distribution arrives when the Special Court completes the examination of claims under section 9A and any tax liability fo....
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....s finally payable." 21. By way of a second question, which pertained to the challenge of the validity of scheme, the learned Judge held the scheme to be valid and further considered the objections raised against the scheme and rejected the same. The objections were more particularly related to the modality to be adopted for sale of some shares. The learned Judge then decided the norms in respect of the bulk shares: (1) Norms for preparation of lots of bulk shares; (2) Norms for sale of bulk shares; (3) Norms for lot preparation in respect of controlling block of shares; (4) Norms for sale of controlling block of shares; (5) Norms in respect of routine shares. The learned Judge also decided upon procedure to be followed by the Custodian for registration/dematization of shares before implementation of the above norms. 22. Ultimately, the learned Judge approved the scheme with the modifications. Undoubtedly, the following points are clear from the above judgment :- (1)That the existence and the treatment of Sh. Harshad Mehta and his relatives and some concerns as Harshad Mehta Group was neither objected to nor contradicted and the learned Judge was addressed by all those enti....
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.... is one more development, which we must refer to. 25. On 26-4-1999, the Custodian had filed an application being Misc. Application No. 41 of 1999, seeking permission of the Special Court for sale of the residential premises commonly known as Madhuli of eight notified entities. A miscellaneous application being Misc. Application No. 4 of 2001 was filed by the Custodian praying for the sale of commercial premises. Some of the notified persons filed several miscellaneous applications for lifting of attachment on their residential premises on the ground that the same had been purchased much prior to 1-4-1999 and the same had no nexus with any illegal transactions in securities. All these applications were disposed of by the Special Judge by his judgment dated 17-10-2003, who held that if an undertaking is given by the adult members of the family of late Sh. Harshad S. Mehta (by then Sh. S. Harshad Mehta, as already expired), in the Special Court within a period of 4 weeks to vacate the flat occupied by them and hand over peaceful possession thereof to the Custodian within a period of 4 weeks from the date on which the Custodian sends them communication, the Custodian shall permit th....
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....gment relying on or on the basis thereof. 26. On behalf of the respondents, it was pointed out that all properties belonging to the notified persons, could be applied for discharge of the joint liabilities of the Harshad Mehta Group in terms of section 11 of the Act in view of the ruling in L.S. Synthetics Ltd. v. Fairgrowth Financial Services Ltd. [2004] 11 SCC 456^1. It was secondly, contended that applications for denotification by the appellants were already withdrawn and, therefore, they could not raise the contention that they were not liable in terms of the provisions of the Act, and they could not also file fresh applications for denotification, as such applications would be barred by time. It was further contended that the tax liability have become final. It was also suggested that the appellants apart from the corporate entities, had received large loans, advances and credits from the Harsahd Mehta Group and that there had been intermingling of the assets to the tune of crores of rupees, and as such, they could not escape their liabilities into the Act and, therefore, liabilities exceed the assets. Some other grounds on merits were also raised. Lastly, it was contended....
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.... mentioned in the affidavit of the Custodian and stated that the learned Judge had relied upon the same without discussing the contentions and arguments raised on behalf of the appellants. The Court observed that it was necessary to give another opportunity of hearing. In para 51, the Court observed that if any notified party had no connection with late Sh. Harshad Mehta, they could not have been proceeded against for meeting the liabilities of late Sh. Harshad Mehta jointly or severally and a clear finding was required to be arrived at. The Court, further, observed :- ". . . It was, thus, necessary for the learned Special Court to arrive at a firm conclusion as regards the involvement of the individuals with Harshad Mehta, if any, and the extent of his liability as such." (p. 404) 28. In paragraph 55, the Court noted the judgment dated 17-8-2000 passed by the Special Court by Hon'ble Kapadia, J. (as he then was), as also the fact that the appeal against the same was dismissed by this Court. The question of sale of commercial properties was considered from paragraphs 67 to 73 and that of the sale of residential properties in subsequent three paragraphs i.e., paragraph Nos. 74....
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....objection. The parties shall file their respective documents within one week thereafter. Such documents should be supported by affidavits. Both the parties shall be entitled to inspect such documents and file their responses thereto within one week thereafter. The parties shall file the written submissions filed before this Court together with all charts before the learned Special Judge, Special Court within eight weeks from date. (viii)The learned Judge, Special Court shall allow the parties to make brief oral submissions with pointed reference to their written submissions. Such hearing in the peculiar facts and circumstances of this case should continue from day-to-day. (ix)The learned Judge, Special Court while hearing the matter in terms of this order shall also consider as to whether the auction-sale should be confirmed or not. It will also be open to the learned Judge, Special Court to pass an interim order or orders, as it may think fit and proper, in the event any occasion arises therefor. (x)We would, however, request the learned Special Judge, Special Court to complete the hearings of the matter, keeping in view the fact that auction sale in respect of the reside....
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.... because of the earlier sale of the shares, the parties were put to the loss of Rs. 6,500 crores and that though the objections for denotifications were pending before the Special Court, the same have not yet been disposed of and, therefore, the decision to sell the shares belonging to the notified parties is wholly incorrect. (5)that the whole decision to put the shares for sale by auction is jurisdictionally, procedurally, as well as financially not correct. 31. It will be, therefore, our task to test these propositions on the anvil of the judgment in Ashwin S. Mehta's case (supra) which is treated to be the backbone of the arguments of the appellants herein. 32. First of all, we must point out even at the cost of repetition that the decision to sell the shares was taken in the last part of the year 2007. The notice itself was issued in the month of October. That was of course, on the basis of advice by the Disposal Committee. On the objections having been taken, the learned Judge had given certain directions, but before giving those directions, the learned Judge has practically wiped out the effect of the auction. It must be remembered that in that auction, the LIC of I....
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....e this Court, as we do not find any trace of the said contentions in the arguments before the Special Court. The old theory of not selling the shares at all unless individual liabilities were fixed one way or the other was wreaked up in this appeal and very surprisingly, though the order of the learned Special Judge was completely confirmed by this Court which also meant that the shares were bound to be sold. Completely giving a go by to the judgment of this Court dated 23-8-2001, by which the judgment of the Special Court was confirmed, the appellants are now saying that the shares cannot be sold. This would be impermissible now. 35. While doing so, some factual incorrect statements have also been made before us, as they were made before this Court in Ashwin S. Mehta's case (supra) that the applications for denotifications were pending. In fact, the argument which was pressed in service in the Court was that since the denotification applications were pending, and had not been finally decided upon, the properties belonging to the notified persons should not be sold. We have before us, the current status of such applications from which it is seen that each and every notified appe....
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....he issues that the individual liability of such a notified person should be arrived at first. We say this, particularly, because the claim of the notified persons that their assets exceeds the liability, is also not correct. That is a clear cut finding given by Hon'ble Kapadia, J. in his judgment dated 17-8-2000, which is later on confirmed by this Court. The Custodian argues before us and not without any reasons that the tables prepared by the Custodian shows that the liability of the notified persons does exceed assets, we shall not go into that aspect at this juncture. However, the fact remains that there would be no question of any individual liability being arrived at before the shares are sold. The judgment of the learned Special Judge for selling the shares having been confirmed by this Court, whereby, the decision to sell the shares has been confirmed by the three-Judge Bench of this Court concluding the issue. The same is binding. Therefore, it cannot be said at this juncture at least, that on that account, the sale of the shares should be postponed, till such time, as the question of individual liability viz-a-viz. Harshad Mehta is decided upon. 38. We have already sho....
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....nd 47, this Court has criticized that the Special Court should have analysed the respective contentions of parties in greater details and in particular, in regard to the assets and liabilities of the separate entities, having regard to the contentions raised by them that they are not part of Harshad Mehta Group and their individual liabilities can be met from the assets held and possessed by them separately. We must immediately point out that these observations did not relate to the sale of shares. These observations obviously related to the sale of the immovable properties, regarding which the appeal was filed. The proceedings in that case emanated out of miscellaneous application No. 41 of 1999, seeking permission of the Special Court for sale of residential premises commonly known as Madhuli of eight notified entities, as also for the sale of the commercial premises and the only objection raised there was that the attachment should be lifted on the ground that the same properties had been purchased prior to 1-4-1991 and the same had no nexus with any illegal transactions in securities. It was also objected to on the ground that the asset base was greater than genuine liabilities....
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....eir separate liabilities. Such question was not addressed in the Special Court. We have already shown that the observations would not apply to the sale of shares as the issue was concluded by this Court on 23-8-2001. 44. This Court had directed the Custodian in Ashwin S. Mehta's case (supra) to permit the appellants to have inspection of all the documents in his power or possession in the premises of the Special Court in the presence of an officer of the court. In compliance thereof, the Custodian argues before us, that such inspection was to be allowed for one week continuously and all the documents in possession of the Custodian were laid open for a period of one week. The Custodian further points out that the directions in these paragraphs 41, 42, 46, 47, 51, 52 and 53 were dealt with by the Custodian in his affidavits dated 1-3-2006 and 22-3-2006 filed in miscellaneous petition No. 49 of 1999, and in these affidavits, the Custodian had taken into account the assets and liabilities position of each of the notified entities as on 31-12-2005 and those statements were also annexed to those affidavits. It is further pointed out that in each case, the liability was more than asset....
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....raised before the Special Court, particularly, when the objections were raised. We do find some traces of these objections in the petition, but it is obvious that these questions were never pressed into service before the Special Court, perhaps because the appellants knew the futility thereof. We, therefore, leave the matters at that, in view of the final order that we propose to pass. 46. This is apart from the fact that before us also, not even a distant reference was made to these affidavits dated 1-3-2006 and 22-3-2006. A bald statement was made that there was no compliance of this Court's order in Ashwin S. Mehta's case (supra). We are certain that if these arguments had been addressed before the Special Court, the Special Court would have taken note thereof. The Special Court chose to go-by the judgment of this Court confirming the earlier judgment regarding the sale of shares passed by the Special Court [Hon'ble Kapadia, J. (as he then was)] and in our opinion, that was a right approach since the controversy involved, related to the sale of shares and securities. At this juncture, we cannot ignore the fact that in 2005 itself, in pursuance of the judgment dated 17-8-2000 ....