TaxTMI 
TaxTMI 
2011 (5) TMI 929
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....i H. Mehta, widow of late Shri Harshad S. Mehta and six others against the judgment and order dated 13.03.2009 passed by the Special Court in approving Report No. 19 of 2008 filed by the Custodian in respect of outstanding dues towards Flat Nos. 32A, 32B, 33, 34A, and 34B on the Third Floor and 44A, 44B and 45 on the Fourth Floor together with terrace area on the Third Floor and eight car parking space in Madhuli Cooperative Housing Society Limited, Worli belonging to late Harshad S. Mehta as well as other related notified entities of the Harshad Mehta Group. 3) Civil Appeal No. 4764 of 2010 has been filed by Smt. Rasila S. Mehta challenging the order dated 07.05.2010 passed by the Special Court in approving Report No. 23 of 2009 of the Custodian on outstanding dues of Madhuli Cooperative Housing Society Limited, Worli as on 31.03.2009 towards Flat No. 31 on the Third Floor belonging to her being a notified party. 4) Since all the parties in the above appeals are family members of late Harshad S. Mehta and the orders challenged were of the Special Court, the same are being disposed of by the following common judgment. 5) Brief Facts: a) ....
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....s under Section 102 of the Code of Criminal Procedure (in short `the Code) on all the bank accounts of Smt. Rasila S. Mehta and Smt. Rina S. Mehta on the ground that the appellants are recipients of monies diverted by M/s Harshad S. Mehta from banks and financial institutions. This was a preventive measure taken by the CBI which powers are normally invoked pending investigation to bring within their fold, any property which is the subject- matter of an offence. Since then, all the charge-sheets came to be filed by the CBI after thorough investigation and trial has been completed in several cases. Based on the provisions of the Act, on 08.06.1992, the Custodian notified 29 entities except the appellants (Smt. Rasila S. Mehta and Smt. Rina S. Mehta) in the Mehta family comprising four brothers, the wives of three brothers, their three HUFs, a partnership firm, three brokerage firms in the family and 15 corporate entities promoted by them. These persons were notified on the basis of information/complaint received from the Ministry of Finance in which the Janakiraman Committee report was cited and relied upon. e) On 25.01.1994, an amendment was carried out in the Act, where....
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.... learned counsel for the appellants, Mr. Subramonium Prasad, learned counsel for the Custodian, Mr. K.K. Venugopal, learned senior counsel for intervenor/Standard Chartered Bank and Mr. Tushad Cooper, learned counsel for intervenor/State Bank of India. 7) Mr. Syed, learned counsel for the appellants after taking us through the relevant provisions of the Act, Rules and the materials available with the Custodian as well as the reasonings of the Special Court raised the following contentions: (i) The impugned notification is non-reasoned and non- speaking. The validity of a statutory order must be judged by a court of law by the reasons mentioned in the order itself and a statutory order cannot be explained and supplemented by fresh reasons in the shape of affidavit or otherwise whereas in the present case the Special Court accepted the same which is contrary to settled law. (ii) Delay of 15 years in passing the order of notification is unreasonable. The explanation offered for delay is also unacceptable. (iii) Material relied upon in passing the order of notification i.e. Canfina's letter dated 28.12.2006 is not supported by an affidavit which could not have been r....
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....Vinod K. Aggarwal and Company coupled with materials placed and discussed, the impugned decision of the Special Court cannot be faulted with. (iv) From the materials placed, it is clear that the appellants are nothing but front benamidars of Harshad S. Mehta and there is no acceptable material to show that the appellants were having sufficient funds in their hands due to the purchase and sale of shares by placing acceptable materials such as income-tax returns etc. Inasmuch as the Special Court is manned by or presided over by a sitting Judge of High Court, sufficient safeguards are provided in the Act and, in any event, the appellants have no way prejudiced. (v) As per the provisions of the Act and interpreted by this Court on various occasions, it is for the appellants to make out a case before the Special Court that they are not involved in any offence or that they have no nexus. 9) Mr. K.K. Venugopal, learned senior counsel for intervenor/Standard Chartered Bank and Mr. Tushad Cooper, learned counsel for intervenor/State Bank of India assisted the Court by highlighting the object and salient features of the Act as well as huge financial implications on the banks ....
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.... custodians for attaching the property of the offenders with a view to prevent diversion of such properties by the offenders." 12) It is settled law that the objects and reasons of the Act are to be taken into consideration in interpreting the provisions of the statute. It is incumbent on the court to strive and interpret the statute as to protect and advance the object and purpose of the enactment. Any narrow or technical interpretation of the provisions would defeat the legislative policy. The Court must, therefore, keep the legislative policy in mind while applying the provisions of the Act to the facts of the case. It is a cardinal principle of construction of statute or the statutory rule that efforts should be made in construing the different provisions, so that each provision may have effective meaning and implementation and in the event of any conflict a harmonious construction should be given. It is also settled law that literal meaning of the statute must be adhered to when there is no absurdity in ascertaining the legislative intendment and for that purpose the broad features of the Act can be looked into. The main function of the Court is to merely interpret th....
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....perty shall stand attached under this Act: Provided that no contract or agreement shall be cancelled except after giving to the parties to the contract or agreement a reasonable opportunity of being heard. (2) Any person aggrieved by a notification issued under sub- section (2) of section 3 or any cancellation made under sub- section (1) of section 4 or any other order made by the Custodian in exercise of the powers conferred on him under section 3 or 4 may file a petition objecting to the same within thirty days of the assent to the Special Court (Trial of Offences Relating to Transactions in Securities) Bill, 1992 by the President before the Special Court where such notification, cancellation or order has been issued before the date of assent to the Special Court (Trial of Offences Relating to Transactions in Securities) Bill, 1992 by the President and where such notification, cancellation or order has been issued on or after that date, within thirty days of the issuance of such notification, cancellation or order, as the case may be; and the Special Court after hearing the parties, may make such order as it deems fit." Section 9 speaks about procedure and powers of Spec....
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....s 9-A and 11 of the Act. Section 3(3) of the Act provides for an automatic attachment of all properties as a consequence of Notification. The object provides the attachment of all properties of the offender with a view to prevent diversion of such properties. The said provision is a preventive provision. 17) Section 11 provides for disposal and sale of attached properties extinguishing the rights and title of a notified party, which is a punitive provision. Section 3 of the Act provides for appointment and functions of the Custodian. Sub-section (2) of Section 3 postulates that the Custodian may, on being satisfied on information received that any person has been involved in any offence relating to transactions in securities after the 1st day of April, 1991 and on and before 06.06.1992 (the statutory period), notify the name of such person in the Official Gazette. Sub-section (3) of Section 3 contains a non obstante clause providing that on and from the date of notification under sub-section (2), any property, movable or immovable, or both, belonging to any person notified under that sub-section shall stand attached simultaneously with the issue of the notification and sub....
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.... "Had the provision been confined to Section 3, sub-sections (2) and (3), the argument which is advanced before us would have had considerable force. It is undoubtedly true that neither in sub-Section (2) nor in (3) is there any provision for any hearing being given to the person who may be notified; nor is there any provision for any reasoned order being passed by the Custodian at the time when he notifies such a person. There is, however, a further sub-Section, namely, sub-Section (4) of Section 3 which provides as follows: Section 3 (4) : The property attached under sub-Section (3) shall be dealt with by the Custodian in such manner as the Special Court may direct. This sub-section clearly contemplates that the power of the Custodian to deal with the property of a person who has been notified is subject to the orders and directions of the Special Court. Now, in the first place, the Special Court under the Ordinance is a Court presided over by a sitting Judge of a High Court. This itself is a check on any arbitrary exercise of powers by the Custodian. Secondly, the power of the Special Court to give directions to the Custodian in respect of any attached property must nec....
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....bay High Court appears to have merely held that in appropriate cases the Special Court would have the power to direct the Custodian to release such property from attachment, in the event, it is found that the property which is attached has no nexus with the illegal dealings in securities belonging to banks and financial institutions during the relevant period and/or there are no claims or liabilities which have to be satisfied by attachment and sale of such property. Once it is held that a debt can be the subject-matter of attachment, the provisions of sub-section (3) of Section 3 of the said Act would squarely be applicable in view of the fact that the same was the property belonging to a notified person. This position in law is not disputed. Such attached property, thus, if necessary, for the purpose of discharging the claims and liabilities of the notified person indisputably would stand attached and can be applied for discharge of his liabilities in terms of Section 11 of the said Act." 21) In paragraphs 45, 46 and 47 of Jyoti Harshad Mehta & Ors. vs. Custodian & Ors. (2009) 10 SCC 564 this Court held as under: "45. It is contended by the learned counsel for the app....
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....equired to be discharged, the notified persons may raise a contention inter alia for the purpose of establishing that the properties held and possessed by them are sufficient to meet their liabilities. In terms of the provisions of the Act, the Special Court had been conferred a very wide power." 23) Section 9-A was inserted by an amendment dated 25.01.1994 conferring jurisdiction, powers, authority and procedure of Special Court in civil matters. In view of this amendment, this Court in paragraph 41 of Harshad Mehta's case (supra) observed as under: "41. ......... If, according to any of the banks or financial institutions, any of the properties attached belongs to the bank or financial institution concerned, it is open to that bank or financial institution to file a claim before the Special Court in that connection and establish its right to the property attached or any part thereof in accordance with law. Obviously, until such a claim is determined, the property attached cannot be sold or distributed under Section 11........" 24) This Court in Ashwin S. Mehta's case (supra), in paragraphs 51 and 52 observed as under: "51. ........It was, thus, necessary for t....
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.... 26) The Custodian filed Misc. Petition No. 20 of 2006 on 21.07.2006 against the appellants for the recovery of the money alleged to have been advanced by the three brokerage firms i.e., M/s Harshad S. Mehta, M/s Ashwin Mehta and M/s J.H. Mehta to the appellants and prayed that the appellants be declared benami/front of late Harshad S. Mehta and/or his group, and the assets be utilized for discharging the liabilities of late Harsahd S. Mehta and/or his group. On 04.01.2007, the Custodian notified the appellants and subsequently on 23.01.2007 withdrew the said M.P. No. 20 of 2006 after the notification. 27) The appellants filed Misc. Petition Nos. 1 & 2 of 2007 challenging the validity of the Notification dated 04.01.2007 before the Special Court. The Special Court dismissed the said petitions and granted the prayer in Misc. Petition No.20 of 2006 filed by the Custodian. 28) This Court in L.S. Synthetics (supra) in paragraphs 35, 36 and 42 held as under: "35. S.N. Variava, J. in A.K. Menon, Custodian whereupon the learned Special Court has placed reliance, observed: "19. It is thus that the said Act lays down a responsibility on the Court to recover the properties. ....
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.... needed for redemption and not beyond the same. What should be kept uppermost in the mind of the Court is to see that the liabilities are discharged and not beyond the same. It is with that end in view that the powers of the Special Court contained in Sections 9A and 11 must be construed." 30) Whether there are sufficient provisions for pre and post decisional hearing thereby ensuring Rules of Natural Justice? Section 3(2) of the Special Courts Act confer power to Custodian to notify a person in the Official Gazette on being satisfied on information received that such person was involved in any offence relating to transactions in securities during the statutory period 01.04.1991 to 06.06.1992. Though Mr. Syed contended that the appellants are entitled to hearing even at the stage of Section 3(2), we are unable to accept his claim. Section 3(2) does not give any right of personal hearing to the person being notified. In the absence of any such right there is no pre-decisional hearing The provisions of the Act do not provide for a pre-decisional hearing before notification but contains an impeccable milieu for a fair and just post decisional hearing. The fact that it d....
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....pplied) 31) Attachment of property is a natural consequence of notification and not sale of the property. The power to order a sale of the property lies only with the Special Court under Section 11 and at this instance where the notified person can be adversely affected, Section 4(2) provides that any person aggrieved by the notification can file a petition objecting the same within 30 days of the date of the issuance of the notification. The Special Court is presided over by a sitting Judge of the High Court. All material before the Custodian is placed before the Special Court which independently analyses all the material while deciding the application filed by the notified party challenging the notification. This amounts to post decisional hearing satisfying the principles of natural justice. Also a pre-decisional hearing would frustrate the entire purpose of the Act. If there is time given to Show Cause why a person should not be notified, that time could practically be utilized to further divert the funds, if any, so that it becomes even more difficult to trace it. 32) Notification of the appellants: As stated earlier that some time in 1992, it was noticed that f....
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....y Trust Co. New York also under the Immunity Scheme, 1991. As Shri Niranjan J Shah had narcotic and hawala business links, it was suspected that the said remittances were arranged through him." In accordance with the recommendations of the Joint Parliamentary Committee a group known as Inter Disciplinary Group (IDG) for tracing the end use of funds was set up by the Reserve Bank of India. The findings of the IDG read as under: "3.5.2 On the basis of reliable and specific information, action under Section 132 of the Income Tax Act was taken on 23.07.1993, during which shares valued at Rs. 22.69 crores were seized. Records of Income Tax investigations indicated that investment in these shares had been made in the names of dummy companies and individuals at the behest of the HMG. About 30 defunct Private Limited Companies appear to have been `purchased' and the shares transferred in their names. Further enquiries led to identification of further 50 dummy companies and over 40 individuals. Enquiries have revealed that they were apparently fronts, since they were located in chawls, shops, etc. and prima facie could not have been made such huge investments. Considerable assista....
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.... - Transactions with banks/financial institutions whose investment account was maintained by the same routing bank was difficult to analyze as the payments and receipts were netted and only the net effect reflected in the bank accounts. One to one correspondence between security transactions and payments was difficult to establish as entries did not reflect true details of the transactions. - Accounts of the brokers had not been prepared." 33) Mr. Syed heavily contended that the Custodian and the Special Court ought not to have based reliance on these reports since the appellants were not afforded opportunity to go through the contents of the same. This objection is liable to be rejected. First of all, there is no criminal prosecution against these appellants and in the event of prosecution, all documents relied on by them could be furnished. These are all materials from various bodies constituted by the Reserve Bank of India/Government of India about the scam created at the instance of Harshad Mehta. These bodies consist of experts in various fields, particularly, from the financial side. The Special Court is fully justified in relying on these Reports. 34) This Court ....
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....he accounts of the 1st Respondent from 1st April, 1990. The auditors will be entitled to obtain all requisite information and documents from the Respondents or any other person in possession of the same. They will be entitled to use the computers of Respondent no.1 and the requisite hard discs and floppy discs will be made available to the auditors by Respondents No. 2 and/or 3. The remuneration of the auditors will be determined by the Custodian. The persons named in Clause 2 will assist the auditors. The auditors will complete the work and submit a report to court as expeditiously as possible and preferably within 3 months. The auditors will be entitled to furnish reports from time to time as the work is completed. 5. The remuneration payable to the auditor to be released from the bank account of the Respondent No.1. 6. Liberty to apply." 36) The Special Court vide its order dated 03.02.1994 appointed M/s Kalyaniwalla & Mistry, M/s Kapadia Damania & Co. and M/s Natwarlal Vepari & Co., Chartered Accountants firms for the purposes of preparing Statements of Accounts and liabilities of the notified parties i.e. the Harshad Mehta Group for the period 01.04.1990 to 08.0....
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....ough cheques or payments made on my behalf. The other way of borrowing is through enjoying a running current account with the brokerage firms in my family of M/s Harshad S. Mehta, M/s Ashwin S. Mehta and M/s Jyoti Mehta which are partly paid-unpaid. Under this arrangement for transactions undertaken by me at these respective brokerage firms my account is debited and credited for each and every transaction, i.e. for every purchase made by me my account gets debited and for every sale effected by me my account with these brokerage firms gets credited. I state that barring a few exceptions payments for these transactions have not been exchanged on a transaction to transaction basis and the account is in the nature of a running account. I state that for the borrowings effected under both the methods. I have agreed to pay interest to the lender. I state that the same is computed on the basis of deliveries performed for purchase and sale of shares. I state that in cases where I have purchased the shares for delivery and the delivery has not been tendered to me, for the purposes of computation of interest the debit will not be reckoned. I say that thus on the net outstanding balance....
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....rshad Mehta in his letter and declarations to the Income Tax Authorities in which the appellant Rasila Mehta is a signatory had admitted that the family is a joint Hindu family where all are living together and that the business is such that it requires very close control at the operational level. 41) It is relevant to note that in a letter dated 21.01.1991 late Harshad S. Mehta informed the following particulars about source of payments for acquisition of flats in Madhuli, Worli by the entities of his family to the Deputy Director of Income Tax (Investigation), Mumbai. "My transactions in the Capital and Money markets, especially the latter, result in a continuous stream of funds and securities moving in and out. These transactions result in large but transient positive balances in my bank accounts on any given day. Running up of such current liabilities constitutes payables to my clients/constituents which include, inter alia, corporates and banks. Such funds, though transient in nature, tend to acquire semi- permanency in view of the daily operations in the Money Market and result in a pool of funds float. This float of funds has been utilized for acquisition of flats as w....
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.... the most important factors that has contributed to the growth of our business. Our business is such that it requires very close control at the operational level. The different members of the family have taken charge of various areas of crucial importance in our business e.g. Research, On-the-floor, trading, dealing in Money Market, Share Handling, Accounts, Finance, etc. My wife Mrs. Jyoti Mehta and Ashwin's wife Mrs. Deepika Mehta while handling other functions in the office, also work as authorized clerks and hold the necessary badge for entry into the trading floor of the Stock Exchange, Bombay. ..... ... ... " 43) It is also useful to refer the letter of Smt. Rasila S. Mehta dated 25.06.2007 addressed to Mukund M. Chitale & Co., Chartered Accountants, Mumbai wherein she admitted that during the relevant period i.e. in 1990s she and all her family members actively associating in the brokerage firms and companies promoted by them jointly. She also admitted that she had a running account with brokerage firms of M/s Harshad S. Mehta, M/s Ashwin Mehta and M/s J.H. Mehta. 44) All the above details clearly show their association with brokerage firms being handled by H....
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....t of corporate entity was evolved to encourage and promote trade and commerce but not to commit illegalities or to defraud people where therefore the corporate character is employed for the purpose of committing illegality or for defrauding other the corporate character should be ignored and will look at the reality behind the corporate veil. 12.5 We have found that these corporate bodies are merely cloaks behind which lurks HSM and/or member of his family are involved and the device of incorporation was really a ploy adopted for committing illegalities and/or to defraud revenue and other people. Finally to get protection by law, in case HSM gets exposed the property belonging to his family members may be protected. 12.6 Further we have studied the accounts of Smt. Rasila Mehta and Reena Mehta who is not notified parties and their accounts were not subject to audit. The total balances outstanding in the books of M/s HSM of both the entities are as under as on 8/6/92: Smt. Rasila Mehta 10,82,65,860.74 Dr Smt. Reena Mehta 6,33,35,834.69 We are enclosing the copies of accounts of Smt. Rasila Mehta and Reena Mehta appearing in the books of M/s HSM. From the accounts we observe....
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....p; 388805373.24 LESS CREDITS: 1990-91 71135919.00 1991-92 195090538.50 8TH June 1992 16948055.00 283174512.50 Debit balance as on 08.06.1992 105630860.74 ADD: Loans & Advances due to M/s Harshad S. Mehta as per Balance Sheet as on 08.06.1992. 2635000.00 Total Debits &n....
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....p; 120399544.00 Mrs. Jyoti H. Mehta Opening Balance as on 01.04.1990 179550.00 ADD: i) Shares purchased NIL ii) Funds transferred ....
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....bsp; 12950447.41 Mr. Ashwin S. Mehta Opening Balance as on 01.04.1991 NIL ADD: i) Shares purchased 204085.50 ii) Funds transferred NIL Total Debits &nb....
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.....03.1992(as per the copy of client control accounts as on 08.06.1992.) 63335834.69 Mr. Harshad S Mehta Opening balance as on 01.04.1991 NIL ADD: i) Shares purchased NIL ii) Funds transferred 3500000.00 Total Debits 3500000.00 LESS CREDITS: NIL Total Debits Balance as on 08.06.1992 is the same as on 31.03.1992 (As per trial balance as on 08.06.1992) 3500000.00 M/s Jyoti H. Mehta Opening balance as on 08.06.1992 ....
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.... 56286357.50 Mrs. Deepika A. Mehta Opening Balance as on 08.06.1992 (As per Trial Balance of Mrs. Deepika A. Mehta) 8300.00 After perusing the Report of M/s Vyas & Vyas, the Special Court came to a conclusion that the appellants are only fronts of late Harshad S. Mehta. It further concluded that the appellants are only housewives and were given loan by the brokerage firms for purchase of shares. The Special Court, therefore, rightly held that the money and assets were diverted to the appellants by the brokerage firms who were notified parties. Mr. Syed objected to the order of the Special Court for fully relying on the Auditor's report. We reject his objection for the following reasons. First of all, the issue relates to accounting of several persons. Several volumes of accounts relating to various members of late Harshad Mehta's fami....
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....liamentary Committee and the Inter Disciplinary Group (IDG); and also the fact that 28 members of the M/s Harshad S. Mehta group including his family members/entities were notified under the Special Act Ordinance itself. The above factual matrix was sufficient for the satisfaction of the Custodian to notify the Appellants. The object of the Act is not merely to bring the offender to book but also to recover what are ultimately public funds. Even if there is a nexus between a third party, an offender and/or property the third party can also be notified. The word "involved" in Section 3(2) of the Special Court Act has to be interpreted in such a manner so as to achieve the purpose of the Act. This Court in Ashwin S. Mehta vs. Custodian & Ors., (2006) 2 SCC 386 has observed as under: "Although, we do not intend to enter into the correctness or otherwise of the said contention of the appellants at this stage, however, there cannot be any doubt whatsoever that they being notified persons, all their properties would be deemed to be automatically attached as a consequence thereto. For the said purpose, it is not necessary that they should be accused of commission of an offence as....
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.... Parliament has achieved nothing by the language it used when it is tolerably plain what it seeks to achieve. 50) Whether Canfina is a Financial Institution and whether the complaint filed by Canfina is invalid? The complaint has been received from Canfina which is a 100% subsidiary of Canara Bank, a nationalized bank. The term financial institution has not been defined under the Act. It became necessary to enact the Special Court Act because of the large scale irregularities which came to light as a result of the investigations by the Reserve Bank of India into the affairs of various banks and financial institutions whose monies were siphoned out. Thus the Statement of Objects and Reasons makes it clear that the purpose and the object of the Act was to recover and return monies to those banks and financial institutions from whom the monies were siphoned out. It is thus clear that the bodies which were sought to be covered were the banks and financial institutions whose affairs were investigated into by the Reserve Bank of India. The investigation was conducted by the Reserve Bank of India through Janakiraman Committee; the Joint Parliamentary Committee, and the Inte....
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....ected: (g) any other source including reports and proceedings before the Special Court established under the Act or any Court or Tribunal for the time being in force as the Custodian may deem fit at any point of time. Provided that the information or complaint sent by any person referred to in clauses (e) and (f) shall not be entertained by the Custodian if it is not accompanied by an affidavit signed by that person and duly verified by a Magistrate or a Notary Public." Thus the claim of Canfina falls under Section 11(2)(b) of the Act and their complaint falls under Rule (2)(b). Thus the fact that it was not accompanied by an affidavit signed by that person and duly verified by a Magistrate or a Notary Public, does not make it an inappropriate complaint for consideration by the Custodian. 54) Further, Rule 3 illustrates situations whereby the Custodian may reject a certain complaint which is not accompanied by copies of documents referred to in the information or complaint, or is vague or does not contain the name and address of the sender. This rule also does not make it mandatory on the Custodian to reject a complaint if it does not accompany the above details. If ....
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.... attached properties does not get depreciated and that they may fetch best market value as and when the same are permitted to be sold by the Special Court so as to pay the liabilities of the Government, Banks, Financial Institutions as well as other decree holders under the provisions of Section 11(2) of the Act. 57) It was highlighted by the Custodian that as per the rules and bye-laws of the Cooperative Housing Societies in Mumbai, which are incorporated under the provisions of the Maharashtra Cooperative Societies Act, all the owners of the residential properties/flats, as the members of the Housing Society are liable to pay such amount as may be determined by the Society towards the upkeep, maintenance and repairs of the flats as well as common areas and amenities in the housing complex. In view of the same, the Cooperative Housing Societies are entitled to recover all the arrears and charges from the members who have not paid the society in time. 58) The appellants herein are notified parties who are the owners of the attached properties and have failed to pay to the Madhuli Cooperative Housing Society Limited their contribution towards the maintenance charges, int....