TaxTMI 
TaxTMI 
2019 (1) TMI 387
X X X X Extracts X X X X
X X X X Extracts X X X X
....ife of Appellant No.1 and Appellant No.3 - Anuj Pravin Jain is the son of Appellant No.1. Respondent No.1 - Diastar Jewellery Private Limited is the Company concerned (hereafter referred as 'Company'). Respondent No.2 - Pramod Jain is brother of Appellant No.1 and Managing Director of Respondent Company. Respondent No.3 - Rachna Srimal is another Director in the Company. The Company is in the business of manufacturing and exporting wholesale jewellery made of gold, silver, platinum and some precious metals and materials. The Company Petition claimed that the Petitioners held 24,02,000 shares in their individual capacity in the Company and further owned 40,77,600 shares which were earlier owned by father of Appellant No.1, namely Kishanlal Jain. The Company had approved the transfer of these shares of Kishanlal Jain to Appellant Nos.2 and 3 but the Respondents failed to update the records. 2.2 The Company Petition gave details as to how the Company got incorporated and was allotted Gala No.G-5 at SEEPZ SEZ, Andheri (East), Mumbai. Respondent No.2 is citizen of United States of America. The Petition gave particulars regarding shareholding as in 2007. According to the Appellants, t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....A failed and neglected to remit the export proceeds. The Company was suffering losses because of the conduct of Respondents 2 and 3 (hereafter referred as 'Respondents'). The Respondents failed to meet statutory commitments and pay provident fund, gratuity, professional tax and income tax dues. The Petition referred to huge amounts outstanding on these counts and claimed that the Respondents have imposed heavy losses on the Company. b) The Respondents have defrauded shareholders and the Government and Revenue Authorities. Facts are evident from the Annual Report for the years 2008 - 2009, copy of which was enclosed with the Petition. 2.6 The Appellants claimed in the Petition that the Diastar Inc. has initiated bankruptcy proceedings against itself and Respondent No.1 without initiating recovery proceedings has written off all its receivables from Diastar Inc. USA, and money has been siphoned, through Diastar Inc. 2.7 The Appellant claimed that the Respondents were trying to discharge liabilities of Diastar Inc. utilizing assets of Respondent Company. They were systematically excluding Petitioners from management and affairs of the Company, although Appellants - Petitio....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uently visited India. Appellant No.1 was entrusted with all the administration and finance of the Respondent Company since incorporation till June, 2004 with a gap of 3 years of 2001 to 2004. The Appellant No.1 was supported by Appellant No.2 - Mrs. Bharti Jain as Director and Kishanlal Jain - the father and Chairman of Respondent No.1 Company. According to the Respondents, around June, 2004, due to Appellant No.1 suffering illness of brain stroke, the Chairman called upon Respondent No.2 to look after the business and matters of the Company. Consequently, Appellant No.1 was relieved/suspended from Management Directorship in Extra Ordinary General Meeting. The Respondent No.2 was called from USA to look after the business. The Reply annexed copy of the EOGM Resolution dated 19.06.2004. 3.2 According to the Respondents, after death of Kishanlal Jain on 7th April, 2009, Appellant No.1 started writing nasty letters and e-mails to the Respondents which he attached with the Petition. The said letters and e-mails were bad in law and not correct. In view of mental condition of the Appellant, Respondent No.2 remained quiet. According to the Respondents, the intention of the Appellants i....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of shares from Late Kishanlal as shares (40,77,600) held by Respondent No.2 - Pramod Jain and his wife - Anita Jain claiming that Appellants were wrongly showing the same to be in their favour. 3.4 The Reply has given particulars of Managing Directors to show that Kishanlal Jain was earlier Managing Director and then continued as Director and Chairman. The Reply claimed that the Appellant No.1 was working as MD till 31.07.2001 and then again appointed as Chairman and MD on 02.04.2004 and relieved in a couple of days on 19.04.2004. The Respondents accepted that Pramod Jain - Respondent No.2 was appointed as Additional Director and Vice Chairman on 06.12.2002 and Managing Director on 01.04.2010. Respondent No.3 - Rachna Srimal is stated to have been appointed Director on 21.02.2004 and had continued as Director, however, she could not get the DIN number. 3.5 According to the Respondents, Kishanlal Jain had already executed a Gift Deed of 40,77,600 equity shares of the Company in favour of Respondent No.2 - Pramod Jain and his wife Mrs. Anita Jain on 10th December, 2002. The share transfer deed was executed on 24th April, 2003 and the shares were transferred in joint name of Res....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ime and after his demise, the shares would be given to P1 (Petitioner No.1) as the shares had already been gifted to Respondents 2 and 3, but were by then not registered as transferred to R2 and 3 under Foreign Exchange Management Act. The NCLT found fault with the Appellants for not lodging the shares between 2007 to 2010. The NCLT observed that the dispute between the Appellants and Respondents regarding title over the shares of their father would be a matter for Civil Court to decide. For such and other reasons as recorded which can be seen in the Impugned Order, the NCLT was not with the Appellants and did not find the Appellants entitled to the shares of Late Kishanlal Jain. 5.1 Regarding the alleged financial irregularities, NCLT was of the view that Diastar Inc. run by Respondents 2 and 3 became bankrupt whereby loans given to Diastar Inc. were written off in the books of Respondent No.1 Company. It was of the view that solely because of such writing off, it cannot be said that Respondents conducted the affairs of the Company in prejudicial manner. Regarding the issue of creating third party interest over the assets of the Company, even this issue did not find favour with....
X X X X Extracts X X X X
X X X X Extracts X X X X
....and even statutory dues are not being paid. Counsel pointed out Form 18 (Page - 361 of Appeal) of Respondent No.1 - Diastar Jewellery Pvt. Ltd. and referred to the address. He then pointed out another Form 18 (Page - 370 of Appeal) to point out that at same address now some "Diastar India Pvt. Ltd." is shown as operating and Form 32 (Page 372) shows some Gour and others as Directors. Thus he argued that Respondents are hiding facts and transactions. 7. Against this, the Respondents have supported the defence put up by them in NCLT and the reasons recorded by NCLT in the Impugned Order. According to the Respondents, the Appellants failed to prove siphoning of funds by the Respondents and the allegations are vague. The shares claimed by the Appellants of Late Kishanlal Jain were already transferred to the Respondent No.2 and his wife by way of absolute gift and the transfer forms had been executed on 24.04.2003 and Respondent No.2 and his wife were shown as joint holders in the shares with beneficial interest to them. Board Resolution was also passed in this regard and filed with ROC and reflected in Annual Returns for year ending 2004. According to the learned Counsel for Respond....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sequently Kishanlal Jain could not have deleted the names of Respondent No.2 and his wife to add the names of Appellants 2 and 3 as done vide Gift Deed dated 16.10.2007 and Resolution dated 16.10.2007. The Counsel submitted that Respondent No.2 was not aware of passing of any such Resolution at the instance of Late Kishanlal Jain. Diastar Inc. went into liquidation and the Respondents were bound to write off the dues in the circumstances and siphoning cannot be alleged. 9. We have gone through the record and heard Counsel for both sides. It appears from the record and the submissions made that Late Kishanlal Jain, the promoter of the Company who was Director and continued to be Chairman in the Company till his death, was looking after day-to-day operations of the Company during his lifetime. Appellants and Respondent No.2 appear to have let Late Kishanlal manage the affairs of the Company out of regards and at will, he could ask Appellant Nos.1 and 2 to step aside and to call back Respondent No.2 to take over management and could execute different Gift Deeds and get Board Resolutions passed so that once he added Respondent No.2 and his wife as joint holders in his shares and lat....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... filed as Board Resolution at Page - 133 of the Appeal), vide which Late Kishanlal Jain joined Appellants 2 and 3 as joint holders with him and which also appears to have been bearing signature of Respondent No.3. Gift Deed dated 10th December, 2002 10. It would be now appropriate to consider the Gift Deed dated 10th December, 2002 on which the Respondents have relied in NCLT and which was accepted by the learned NCLT. 11. Copy of this Gift Deed is at Page - 228 of the appeal. It is unregistered Gift Deed. Although the Gift Deed in para - 2 claims that it was an absolute Gift from Kishanlal Jain - the donor in favour of Respondent No.2 - Pramod Jain and also claimed that the donor has delivered the donee share certificates, para - 3 of the Gift Deed reads as under:- "3. The Donee has duly signed the said transfer forms as a Transferee as acceptance of the said gift and has also agreed to take effective steps to get the same transferred in the records of the Company after taking permission from Reserve Bank of India as required by provisions of Foreign Exchange Management Act, 1999." In the subsequent paragraph marked as 1, the document read as under:- 1. Pursuant ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or the Respondents argued that when permission was not received, Late Kishanlal Jain on 26th April, 2003 executed Share Transfer Form (Page - 234) and in Board Meeting (copy at Page - 235), the names of Respondent No.2 and his wife - Anita Jain were added as Joint holders after the name of Kishanlal. From the Board Resolution dated 26th April, 2003, Resolution - 4 needs to be reproduced. It reads as under:- "4. Transfer of shares: Shri B.L. Tiwari Director placed before the Board letter received from Shri Kishan Lal Jain, as shareholder of the company requesting to add the name of his son and daughter in laws in the 40,77,600 Equity shares held by him, and as part of the family settlement the joint holder of the shares shall be the beneficial owner of the shares after his death. He further informed that due to old age he is intending to add the name of his son Mr. Pramod Kumar Jain as Joint holder. The Board after some discussion considered the request of Shri Kishan Lal Jain. Being an interested Director Shri Kishan Lal Jain and Shri Pramod Kumar Jain neither participated in discussion nor voted for the same. Mr. B.L. Tiwari, placed before the Board, transfer deed duly si....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... a couple of shares. The back side of the front page of the share certificates shows endorsements of 26th April, 2003 on which the Respondents are relying and also endorsement stamped as 16th October, 2007 on which the Appellants are relying. The shares which were initially in exclusive name of Kishanlal Jain have endorsement of 26th April, 2003 showing the names of transferees in the following order:- Mr. Kishanlal Jain Mr. Pramod Jain Mrs. Anita Jain The certificates have the stamp of the Company with authorized signatory signing the same. Similarly, the endorsement dated 16th October, 2007 has following names:- Mr. Kishanlal Jain Mrs. Bharti Pravin Jain Mr. Anuj Pravin Jain Even this entry in the share certificates has stamp of the Company with signatures which appear to be of the present Respondent No.3 who is now siding with the Respondents. We may state that the entries and endorsements appear to be in the ordinary course of business. Gift Deed dated 16.10.2007 13. Now we come to the Gift Deed dated 16th October, 2007 relied on by the Appellants. The document of Gift deed is at Page - 128. This is also unregistered Gift deed, executed by Kishanla....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sent to Mr. Pravin kumar Jain, Pramodkumar Jain and Pradeepkumar Jain. b) Note regarding revocation of the Gift of shares made to Mr. Pramodkumar Jain and Mrs. Anita Pramodkumar Jain (U.S. citizen) c) Copy of the Gift deed and affidavit executed by Shri Kishanlal Jain in favour of Mrs. Bharati Pravinkumar jain and Master Anuj Pravinkumar Jain for the shares held by him in the company. d) Transfer deed duly signed by him in favour of himself jointly with Mrs. Bharati P. Jain and Master Pravinkumar Jain (through his father and natural guardian Mr. Pravinkumar Jain) He further explained the board that in view of non arrival of family settlement among the three sons he decided as per his personal wish to have the shares transferred jointly in the name of Mrs. Bharti Pravinkumar Jain and Master Anuj Pravinkumar Jain. He also informed that he will continue as first shareholder till his life time and after his demise the shares will be given to Master Anuj Pravinkumar Jain, Grand son. Since Mr. Pramodkumar Jain and Mr. Pradeepkumar Jain, both have opted for US citizenship, shares could not be transferred or gifted under Foreign Exchange Management Act, (FEMA). He further ex....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Respondent Company do show the Will of Late Kishanlal Jain that after his demise, his shares shall be owned by Appellants 2 and 3. Although the Respondents disputed such transfer of 2007, Respondents who are in management of the Company since 2002 - 2004 and have custody of records did not bring on record original Transfer Register of Company maintained in Ordinary Course to show that in the Company records in 2007, such entries were not recorded. 15. If the Gift of 2002 could not be acted upon for want of permission from RBI to transfer the shares of Late Kishanlal Jain in favour of Respondent No.2 and his wife - Anita Jain, both US citizens, merely by adding their names as joint holders in 2003 would also be hit for want of necessary permission. In the absence of permission, the joint names added of Respondent No.2 and his wife in 2003 could not be legally recognized. The transactions of 2002 and 2003 in favour of the Respondent No.2 and his wife were conditional and there was a caveat of Late Kishanlal Jain that the rights would flow in favour of Respondent No.2 and his wife only after his death. He did not even handover the shares, a movable property, to Respondent No.2....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of 2001 was so heavy that the Company was unable to come out of the problems even till 2010. Vaguely blaming the earlier management which went out more than 9 years earlier cannot be simply taken on the face value. 17. The Appellants filed in NCLT copy of the Annual Return of 2008 - 2009. Here also, the Respondent Nos.2 and 3 are shown as Directors and if the Auditors' Report is perused, the Auditors inter alia recorded as under:- "vi. We further report that a) The company has entered in to transactions with parties where the directors of the Company are interested, without prior approval from government as per provisions in section 207(1) of the Companies Act, 1956. The company has applied for the permission, which is awaited. b) The Company during the year had no full time Company Secretary. c) The company has not provided for interest expense due to M/s. Gold Metal Trading amounting to Rs. 62.42 lakhs for the current year and hence profit is over stated to that extent. d) The liability for tax is shortly provided as auditors came across the instances wherein the additional tax liability on Statutory liability expense claimed Rs. 26.08 la....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e are not in a position to quantify the exact amount of such over valuation." Thus, the Auditors recorded that the total write off on account of Diastar Inc. should be of Rs. 1787.05 Lakhs and loss is under stated to that effect by the Company. Now, admittedly, Diastar Inc. was a Company managed by Respondent No.2 in USA. Copy of proceedings from U.S. Bankruptcy Court, District of New Jersey (Newark) (copy of which is at Page 149) and which was filed before NCLT also shows that the Company in USA itself invoked proceedings of bankruptcy. Thus, here we have this Respondent No.2 who is managing Respondent No.1 Company admittedly since 2002 which Company was basically doing business with Diastar Inc. in U.S.A. and same Respondent No.2 was also managing the Company Diastar Inc. in USA. He wrote off dues recoverable from Diastar Inc. worth Rs. 1787 Lakhs because Diastar Inc. has invoked bankruptcy proceedings. If Diastar Inc. had been a Company which had no relations with the Respondent No.1 Company, the matter could have been looked upon differently. But in the present state of facts where Respondent No.2 is in-charge of Respondent No.1 Company and he is also himself in-charge of Di....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed stoic silence and only in the Reply dated 15th April 2010, Respondent No.2 responded that he was thanking for showing interest in the wellbeing of the Company and list of answers will take time and he will get all the Replies by the end of 30th April. The learned Counsel for the Respondents wanted to rely on isolated sentence in the e-mail dated 14th April, 2010 sent by the Appellant No.1 telling Respondent No.2 that he will make his life in USA also miserable by contacting various agencies who would like to investigate his activities in that country. The Respondents claimed that the object of such e-mails was to make life of the Respondents miserable. We find that in Reply filed in NCLT, the Respondents claimed that they remained silent because of what they called the mental condition of the Appellant No.1. What we can see from the e-mails is that when the Appellant No.1 was admittedly shareholder and was raising concerns, he did not get any response. The e-mail dated 14th April, 2010 also records that the Appellant No.1 wanted to take every single step to protect his interest and that of Respondent Company - Diastar. We do not think that single sentence as tried to be torn and....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce. The Appellants claimed that this showed that the Respondents are taking away the business of the Respondent No.1 and making Respondent No.1 Company a paper company. The Counsel for the Appellants pointed out Form - 18 relating to the Respondent Company (Page - 361), which needs to be read with Form - 18 (Page - 370) where some "Diastar India Pvt. Ltd." is shown to be having the same address as of Respondent No.1 Company. Form - 32 of that Company (Page - 372) does not appear to be showing the Respondents as the Directors. The learned NCLT did not consider this material and failed to appreciate that the Respondents were suppressing facts and the Appellants were deprived of information and they were oppressed while the Company was mismanaged. If at the address of the Respondent Company, some other company is shown to be functional, the substratum itself can be stated to be in danger. 21. In the Company Petition, the Appellants by way of Interim Resolution, sought appointment of Commissioner which was granted by CLB, but Hon'ble High Court changed the same so as to appoint Special Auditor which aspect we have discussed. It appears to us that forensic audit in the present matter....