TaxTMI 
TaxTMI 
2013 (3) TMI 390
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.... two other individuals who are stated to be residents of village Khabra and Samaspur of Punjab but the same has been really contested by the appellant No.1 whom we will hereinafter refer to as 'PGF Limited'. 2. The appellant, known as Pearls Green Forests Limited and called PGF Limited from 1997, is having its registered office at S.C.O. No.1042-43, Sector 22-B, Chandigarh and its Head Office at 2nd Floor, Vaishali Building, Community Centre, Paschim Vihar, New Delhi. Though the Memorandum and Articles of Association of the Company provide for carrying on very many activities by way of business operations, we are only concerned with three of the activities of the PGF Limited, namely, sale of agricultural land, sale and development of agricultural land and joint venture schemes. Of the above three operations, when the writ petition was heard by the Division Bench of the High Court it was reported on 28.05.2004 by the learned counsel for the appellants that the PGF Limited took a decision to disband all its schemes, other than its operations relating to the business connected with sale of agricultural land and/or sale and development of agricultural land. Based on the said represent....
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....PGF Limited not to collect any money from investors nor to launch any new scheme with a further direction to refund the money collected under the schemes, which were due to the investors as per the terms of the offer within a period of one month from the date of its order and failing which threatened to initiate actions as available under the SEBI Act and SEBI (Collective Investment Schemes) Regulation, 1999. 5. Aggrieved by the said order of the second respondent dated 06.12.2002, the appellants preferred the writ petition before the High Court of Punjab and Haryana in CWP No.188 of 2003 wherein the order impugned dated 26.07.2004 came to be passed. Before the Division Bench of the High Court, on behalf of the appellants herein, two contentions were raised, namely, that apart from its joint venture business, its other business activities, namely, sale of agricultural land and sale and development of agricultural land, would not fall within the category of collective investment schemes as specified under Section 2(ba) read with Section 11AA of the SEBI Act and consequently the order impugned dated 06.12.2002 cannot be sustained. 6. Apart from challenging the order dated 06.12.200....
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....ies of certain sale deeds between the vendor and the investors, submitted that once the joint venture operations carried on by the PGF Limited, were stopped by them on and from 01.02.2000, its other activity of sale of agricultural land nor the sale and development of agricultural land can be brought within the category of collective investment schemes. The learned senior counsel by referring to the definition of 'security' under the Securities Contracts (Regulation) Act, 1956, which definition was adopted for the purpose of application of SEBI Act as mentioned in Section 2(1)(i), contended that the application form or the development agreement cannot be construed as an 'instrument' in order to state that the sale and development activity of the PGF Limited can be brought within the category of collective investment schemes. 9. The learned senior counsel contended that none of the terms and conditions of the agreement contemplated any return while operating the activity of development of the agricultural land of the investors that since return is sine qua non for any collective investment scheme, the activity of sale and development of agricultural land cannot be construed as a co....
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.... expression 'investor protection' and thereby governed by Entry 97 of List I of the Seventh Schedule read along with Article 248 of the Constitution was wholly misconceived and, therefore, on the ground of legislative competence, Section 11AA of the SEBI Act is liable to be struck down. In support of the said submission learned senior counsel also made detailed reference to various State enactments dealing with the protection of rights of depositors in financial establishments and contended that having regard to such initiatives taken by various State Governments, if at all, any protection were to be extended to the investors, namely, the customers of the PGF Limited whose rights qua the agricultural lands transferred in their favour, could have been validly enacted only in exercise of the powers vested with the respective State Governments under Entry 18 of List II of the Seventh Schedule and such exercise of power of legislation could have never been carried out by the first respondent. 12. Learned senior counsel further contended that the judgment of the Division Bench of the High Court in upholding the validity of Section 11AA of the SEBI Act resulted in various incongruities ....
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....y and another [2012] 10 SCC 575, Naga People's Movement of Human Rights v. Union of India [1998] 2 SCC 109, Union of India v. Shri Harbhajan Singh Dhillon [1971] 2 SCC 779, S.P. Mittal v. Union of India and others [1983] 1 SCC 51, Kartar Singh v. State of Punjab [1994] 3 SCC 569, Mohinder Singh Gill and another v. The Chief Election Commissioner, New Delhi and others [1978] 1 SCC 405 and Commissioner of Police v. Gordhandas Bhanji [1952] SCR 135. 16. Mr. Luthra, learned Additional Solicitor General appearing for the Union of India after referring to the judgment of the Division Bench and the directions ultimately issued to the PGF Limited to refund all the monies collected from the investors, contented that the source of power to the Parliament to introduce Section 11AA of the SEBI Act was Entry 97 of List I read along with Article 248 of the Constitution and not Entry 48 of List I or Entry 18 of List II. By relying upon the recent decision of this Court in Sahara India Real Estate Corporation Limited and others v. Securities and Exchange Board of India and another [2013] 1 SCC 1, learned Additional Solicitor General contended that the object of SEBI Act itself was mainly for the ....
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....t simplicitor by the gullible public under the guise of sale and development of agricultural land and, therefore, Section 11AA of the SEBI Act was valid in law and the PGF Limited is bound to comply with the requirements of the SEBI Act in order to protect the interests of the investors. 18. While highlighting the salient features, the learned senior counsel referred to the application to be submitted by the investors and the various stipulations contained in the agreement of the PGF Limited, which disclose that while the sale of agricultural land in units of 150 sq. yrds. (1350 sq. ft.) was not immediately made, the same was dependent on certain other time bound contingencies. The learned senior counsel then pointed out that various terms contained in the application and the agreement disclose that the PGF Limited continued to retain absolute control over the land in question, which is sold in fragmentation to different parties and created a bondage with the PGF Limited, which virtually deprived of those investors to have absolute control over the land purchased by them. According to him, the so called development of the land by various investors was collectively retained by the ....
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....the alleged promise of distribution of return was from out of the investment, from new investors. In the light of the above features contained in the application and the agreement placed before the Court, it was contended that the activity of the PGF Limited was not a mere sale and purchase of land, but in actuality was an investment scheme wherein land was being used only as a resource, which was promised to be worked on and developed by the PGF Limited and the exploitation of the land would result in return to the investors. It was, therefore, submitted that in reality the business of the PGF Limited was purely an investment scheme and consequently governed by the definition of collective investment scheme as defined under Section 2(ba) read along with Section 11AA of the SEBI Act. 21. With regard to the legislative competence, the learned senior counsel submitted that having regard to the nature of business transaction of the PGF Limited, in pith and substance, it was a collective investment scheme of the PGF Limited along with the investors and, therefore, as rightly claimed by the respondent the introduction of Section 11AA of the SEBI Act by the Parliament was governed by th....
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....Blue Sky Laws', which was carried out in the interest of the investors, who were lured to part with their hard earned savings under the disguised promise of the PGF Limited to provide a higher value for the investment, by way of development and, therefore, the second respondent as a statutory authority had every duty to ensure that such schemes were controlled and regulated by the Regulation of 1999. The learned senior counsel, therefore, contended that the PGF Limited cannot be allowed to wriggle out of the control of SEBI Act by contending that it was dealing only with agricultural lands governed by Entry 18 of List II and hence its activities cannot be called as collective investment scheme falling under the provision of the SEBI Act. 24. Having heard Mr. A.K. Ganguli, learned senior counsel for the appellants, Mr. Sidharth Luthra, learned Additional Solicitor General for respondent No.1 & Mr. Parag P. Tripathi, learned senior counsel for respondent No.2, having perused the numerous paper books and compilations placed before us and having bestowed our serious consideration to the various submissions before us, at the very outset, we state that the present litigation by way of w....
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.... of the appellants, we find that the submission was fivefold. According to the appellants while the appellants as a company provided in the Memorandum and Articles of Association, various objects and business ventures, it was actually involved in the business of joint venture schemes, sale of agricultural lands and sale and development of agricultural lands. While the sale of agricultural land and sale and development of agricultural land was continued to be operated upon, according to the PGF Limited, its business of joint venture schemes were brought to an end on and from 01.02.2000. In fact, the said stand was made at the time when the second respondent extended its opportunity prior to the passing of the impugned order dated 06.12.2002. Certain details were also furnished before the second respondent as to what were the extent of monitory transactions carried on in respect of the joint venture schemes and also the action taken by the PGF Limited after stopping its joint venture activities on and after 01.02.2000. Before this Court also certain details were furnished as to what extent monies were refunded to those who were part of the joint venture schemes and certain funds, whi....
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....ording to learned counsel, even if the activities of the PGF Limited based with land sold and its further development, if at all any legislation could be passed, the same could have been done only by the State Legislature and not under Section 11AA of the SEBI Act. 28. It was then contended that having regard to the fact that agricultural land, which was the subject matter of development of PGF Limited's business activity along with the incidence of sale, the same being governed by Entry 18 of List II of the Seventh Schedule, the very promulgation of Section 11AA of the SEBI Act by the Parliament was invalid and ultra vires of the Constitution on the ground of lack of competence and consequently the second respondent could not have proceeded against the PGF Limited for non-compliance of the provisions contained in the said Section. 29. It was lastly contented that the approach of the Division Bench of the High Court in having gone into the nature of transactions entered into by the PGF Limited with the investors, was incorrect as the sale deeds executed in favour of the investors were all not the subject matter of investigation, even by the second respondent, while passing its or....
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....ore this Court. These State enactments in order to protect the depositors being duped under the garb of granting extraordinary returns, were sought to be protected by providing certain machineries, including certain prosecuting machinery and appropriate judicial forum for redressing their grievances. According to the PGF Limited it is not a financial institution and was not collecting any deposits and that its sole activity apart from sale of agricultural land was development of such lands sold to its customers. The extreme contention of the PGF Limited was that if Section 11AA of the SEBI Act was to be upheld, it would virtually set at naught those various State enactments, which in our considered opinion can only be stated as an argument of desperation and has absolutely no nexus whatsoever to the question raised with regard to the validity of Section 11AA of the SEBI Act and hence, does not in any way impinge upon the said Section. Moreover, the said submission was never raised or focused before the Division Bench and is now sought to be raised before this Court for the first time and we find no substance in the submission while examining the validity of Section 11AA of the SEBI....
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....fund whatever money collected from those customers or investors. It is, therefore, imperative and worthwhile to examine at the threshold as to whether such challenges made are bonafide and do require a consideration at all by the writ courts by applying the principle of 'lifting the veil' and as to whether there is any hidden agenda in perpetrating such litigation. With that view, we lay down some of the criteria to be kept in mind whenever a challenge to a provision of law is made before the Court. 32. The Court can, in the first instance, examine whether there is a prima facie strong ground made out in order to examine the vires of the provisions raised in the writ petition. The Court can also note whether such challenge is made at the earliest point of time when the statute came to be introduced or any provision was brought into the statute book or any long time gap exist as between the date of the enactment and the date when the challenge is made. It should also be noted as to whether the grounds of challenge based on the facts pleaded and the implication of provision really has any nexus apart from the grounds of challenge made. With reference to those relevant provisions, th....
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.... business activity of the PGF Limited. 34. As far as the main contention is concerned, when we test the said submission, we find that the said submission is wholly misconceived. In order to appreciate the first contention, it will be worthwhile to extract Section 11AA which reads as under: "11AA. Collective investment scheme-(1) Any scheme or arrangement which satisfies the conditions referred to in sub-section (2) shall be a collective investment scheme. (2) Any scheme or arrangement made or offered by any company under which- (i) the contributions, or payment made by the investors, by whatever name called, are pooled and utilized for the purposes of the scheme or arrangement; (ii) the contributions or payments are made to such scheme or arrangement by the investors with a view to receive profits, income, produce or property, whether movable or immovable from such scheme or arrangement; (iii) the property, contribution or investment forming part of scheme or arrangement....
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....r offered by any company by which the contribution, or payment made by the investors, by whatever name called, are pooled and utilized for the purposes of scheme or arrangement; contributions or payments are made by the investors with a view to receive profits, income, produce or property, whether movable or immovable, based on the scheme or arrangement, any property, contribution or investment which forms part of the scheme or arrangement is identifiable or not is managed by someone on behalf of the investors shall be collective investment scheme. Further the investors should not have day to day control over the management and operation of the scheme or arrangement. A detailed analysis of sub-section (2) of Section 11 AA, which defines a collective investment scheme disclose that it is not restricted to any particular commercial activity such as in a shop or any other commercial establishment or even agricultural operation or transportation or shipping or entertainment industry etc. The definition only seeks to ascertain and identify any scheme or arrangement, irrespective of the nature of business, which attracts investors to invest their funds at the instance of someone else who....
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....een raising capital from investors through schemes which are in the form of collective investment schemes. However, there is not an adequate regulatory framework to allow an orderly development of this market. In order that the interests of investors are protected, it has been decided that the Securities and Exchange Board of India would frame regulations with regard to collective investment schemes. It is, therefore, proposed to amend the definition of "securities" so as to include within its ambit the derivatives and the units or any other instrument issued by any collective investment scheme to the investors in such schemes." 37. Therefore, the paramount object of the Parliament in enacting the SEBI Act itself and in particular the addition of Section 11AA was with a view to protect the gullible investors most of whom are poor and uneducated or retired personnel or those who belong to middle income group and who seek to invest their hard earned retirement benefits or savings in such schemes with a view to earn some sustained benefits or with the fond hope that such investment will get appreciated in course of time. Certain other Section of the people who are worstly affected ar....
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.... schemes or arrangements governed by other statutes to be excluded from the operation of Section 11AA, one can easily visualize that the purport of the enactment was to ensure that no one who seeks to collect and deal with the monies of any other individual under the guise of providing a fantastic return or profit or any other benefit does not indulge in such transactions with any ulterior motive of defrauding such innocent investors and that having regard to the mode and manner of operation of such business activities announced, those who seek to promote such schemes are brought within the control of an effective State machinery in order to ensure proper working of such schemes. 40. It will have to be stated with particular reference to the activity of the PGF Limited, namely, sale and development of agricultural land as a collective investment scheme, the implication of Section 11AA was not intended to affect the development of agricultural land or any other operation connected therewith or put any spokes in such sale-cum-development of such agricultural land. It has to be borne in mind that by seeking to cover any scheme or arrangement by way of collective investment scheme eit....
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....her monies on litigations, ultimately prefer to ignore their investments cursing themselves of their fate. More than 90 per cent of such investors would rather prefer to forget such investments than making any attempt to secure their money back. Thereby, the promoters put to unlawful gain who always thrive on other peoples money. 42. Therefore, in reality what sub-section (2) of Section 11AA intends to achieve is only to safeguard the interest of the investors whenever any scheme or arrangement is announced by such promoters by making a thorough study of such schemes and arrangements before registering such schemes with the SEBI and also later on monitor such schemes and arrangements in order to ensure proper statutory control over such promoters and whatever investment made by any individual is provided necessary protection for their investments in the event of such schemes or arrangements either being successfully operated upon or by any mis-fortune happen to be abandoned, where again there would be sufficient safeguards made for an assured refund of investments made, if not in full, at least a part of it. 43. By no stretch of imagination the above factors, which weighed with t....
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....ting down the desire of the investor for purchase of the number of units/plots based on the payment plan, the agreement in the forefront states that the PGF Limited would arrange for the allotment of the land within a reasonable period and not exceeding 270 days in respect of cash down payment plan and not exceeding 90 days after the receipt of 50 per cent of consideration in respect of installment payment plans. It is worthwhile to note that while money is received either by way of cash down or 50 per cent through installment facility only an allotment will be intimated by way of a letter without any assurance as to when the sale deed in favour of such applicant customer would be executed. After the allotment letter without prescribing any specific time stipulation, the agreement mentions that sale deed would be executed in favour of the customer and will be duly registered. Such execution was, however, to the condition that if transfer of such small plot of land as prescribed by law is not otherwise possible, practicable or feasible, even such transfer of title would be in favour of a customer by way of joint holding with other customers, by way of a joint sale deed and the origi....
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....ed shall not be liable to pay any cost/expense/damage whatsoever in any case other than what has been provided under Clause 13(a) & (b). 48. But when it comes to the question of breach by the customer under Clause 14(A) as many as sub-clauses (a) to (f) are stipulated and if it related to any default before allotment of land under Clauses 14(B) sub-clauses (a) to (e) providing for stringent conditions have been laid down. Under Clause 18 all possible situations are mentioned in order to ensure that under no circumstance PGF Limited will be liable for any consequence for non-performance of its part of the contract. Under Clause 20 it is stipulated that any dispute pertaining to the agreement would be referred for arbitration to a retired judicial officer appointed by the PGF Limited as sole arbitrator and settled in accordance with the Arbitration and Conciliation Act, 1996 and the jurisdiction for any further agitation of legal rights would be only in the Civil Courts at Delhi, to the exclusion of all other Courts. 49. Thus, as rightly pointed out by Shri Tripathi, learned senior counsel for the second respondent, once the customer signs the application form and the agreement, vi....
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....ot disclosed, while the name of the person who drew the sketch alone is mentioned. Thus, in very many respects the genuineness of the document appears to be doubtful. In fact, the Division Bench has dealt with this aspect of the nature of document in extenso in paragraph 56 of the judgment impugned with which observation we fully concern. 51. A conspectus consideration of the scheme of development of the land purchased by the customers at the instance of the PGF Limited and the promised development under the agreement disclose that there was wholesale uncertainty in the transactions to the disadvantage of the investors' concerned. The above factors and the factors, which weighed with the Division Bench in this respect definitely disclose that PGF Limited under the guise of sale and development of agricultural land in units of 150 sq. yrds. i.e. 1350 sq. ft. and its multiples offered to develop the land by planting plant, trees etc., and thereby the customers were assured of a high amount of appreciation in the value of the land after its development and attracted by such anticipated appreciation in land value, which is nothing but a return to be acquired by the customers after mak....
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....cated in different states while the customers are stated to be from different parts of the country it is well-neigh possible for the customers to have day to day control over the management and operation of the scheme/arrangement. In these circumstances, the conclusion of the Division Bench in holding that the nature of activity of the PGF Limited under the guise of sale and development of agricultural land did fall under the definition of collective investment scheme under Section 2(ba) read along with Section 11AA of the SEBI Act was perfectly justified and hence, we do not find any flaw in the said conclusion. 53. We, therefore, hold that Section 11AA of the SEBI Act is constitutionally valid. We also hold that the activity of the PGF Limited, namely, the sale and development of agricultural land squarely falls within the definition of collective investment scheme under Section 2(ba) read along with Section 11AA (ii) of the SEBI Act and consequently the order of the second respondent dated 06.12.2002 is perfectly justified and there is no scope to interfere with the same. In the light of our above conclusions, the PGF Limited has to comply with the directions contained in last ....
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.... without any substantive grounds and in that process prolonged this litigation for more than a decade and thereby provided scope for defrauding its customers who invested their hard earned money in the scheme of sale of land and its development and since we have found that the appellants had not approached the Court with clean hands and there being very many incongruities in its documents placed before the Court as well as suppression of various factors in respect of the so called development of agricultural land, we are of the view that even while dismissing the Civil Appeal, the PGF Limited should be mulcted with the exemplary costs. We also feel it appropriate to quote what Mahatma Gandhi and the great poet Rabindranath Tagore mentioned about the greediness of human being which are as under: "Earth provides enough to satisfy every man's need, but not every man's greed. -Mahatma Gandhi- The greed of gain has no time or limit to its capaciousness. Its one object is to produce and consume. It has pity neither for beautiful nature nor for living human beings. It is ruthlessly ready without a moment's hesitation to crush beauty and life out of them, molding them into money." -Rab....
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....tended to them are deprived of their investments, we feel it just and necessary to direct for proper investigation both by the Central Bureau of Investigation as well as the Department of Income Tax and in the event of any malpractice indulged in by the PGF Limited, to launch appropriate proceedings, both Civil, Criminal and other actions against the PGF Limited, as well as, all those who were responsible for having indulged in such malpractice. We also direct the second respondent to proceed with its investigation/enquiry and inspection of the PGF Limited as well as all its other officers and other premises and after due enquiry to be carried out in accordance with law, take necessary steps for ensuring the refund of the monies collected by the PGF Limited in connection with the sale and development of land to its various customers. In order to enable the second respondent to carry out the various directions contained in this judgment, we direct the PGF Limited to appoint a nodal officer, not below the rank of a Director, of its company who shall be responsible for furnishing whatever information, documents, account books or other materials that may be required by the second respo....