AI Drafter - (New and Powerful) 
Generate professional replies, appeals, opinions to Show Cause Notices, assessment orders, audit objections, and other legal communications using TaxTMI's AI Drafter. 
TaxTMI 
TaxTMI 
2026 (4) TMI 507
X X X X Extracts X X X X
X X X X Extracts X X X X
....Sr. Adv., Mr. Suryaksh Manot, Adv., Mr. Randeep Sachdeva, Adv., Mr. Shivang Gupta, Adv., Mr. Dhruv Pande, Adv., Mr. Akshaja Singh, Adv., Mr. Alok Dubey, Adv., Ms. Veda Singh, Adv., Mr. Prasad Hegde, Adv., Mr. N Sai Kaushal, Adv., Mr. Pallav Pal, Adv., Mr. Venkatesh Dhond, Sr. Adv., Mr. Ramesh Babu M. R., AOR Ms. Nisha Sharma, Adv., Mr. Prasad Shenoy, Adv., Mr. Rohan Kelkar, Adv., For the Intervenor: Ms. Purti Gupta, AOR Ms. Henna George, Adv., Ms. Sunidhi Sah, Adv., Ms. Pooja, Adv., Ms. Khushi Sharma, Adv., JUDGMENT PER K.V. VISWANATHAN, J. 1. Six decades ago, it was aptly proclaimed that principles of natural justice cannot be cut and dried or nicely weighed and measured (Ridge vs. Baldwin 1964 AC 40). This Court rightly described it as a flexible concept, to be adapted to circumstances. Its elasticity, however, has been tested to its limits in several cases. We are here confronted with one such. While the Reserve Bank of India (for short "RBI") and the appellant-Banks contend that a notice, an opportunity to reply, and a reasoned order should serve the ends of justice, the borrowers implore that they are entitled to a "personal hearing" before classifying their accoun....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n in person and further that the Forensic Audit Report should be supplied to the borrower. The Court held that the borrower should be allowed to represent his case before the authority, by way of a personal hearing and, thereafter, the order ought to have been passed. The Writ Petition was allowed in the above terms. The appellant-Bank carried the matter in appeal to the Division Bench. The Division Bench, by its judgment dated 12.03.2025 dismissed the appeal and did not interfere with the directions of the learned Single Judge. Aggrieved, the appellant-Bank is before us. FACTS IN CIVIL APPEAL ARISING OUT OF SLP(C) NO.38805/2025:- 8. On 27.03.2012, the appellant-Bank of India classified the account of M/s Liliput Kidswear Limited, of which the respondent No. 1 was the representative/promoter, as a Non-Performing Asset under the prudential norms of the RBI. Thereafter, the first forensic audit was carried out. On 18.08.2023, a show cause notice was issued calling upon respondent No. 1 to show cause on the findings in the Forensic Audit Report. Respondent No. 1 was informed that in case no reply is received within 15 days of the communication, it shall be presumed that they hav....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sel for the borrowers. We have also perused the written submissions filed by them, including the written submissions filed by Ms. Purti Gupta, learned Counsel for the intervenor. MASTER DIRECTIONS OF RBI:- 13. In this case, we need to discuss both the Master Directions-2016 as well as the Master Directions-2024. In Civil Appeal arising out of SLP(C) Nos. 20618-20619/2025, the entire proceedings leading to the classification of the account as "fraud" commenced and culminated before the Master Directions-2024 came into force. Insofar as Civil Appeal arising out of SLP(C) Diary No. 55628/2025, while the show cause notice and reply came on record when the Master Directions-2016 held the field, by the time the order was passed the Master Directions-2024 had come into force. Further, the Master Directions-2016 were directly in issue in Rajesh Agarwal (supra). The RBI, expressly, in the 2024 guidelines refers in the footnote to the judgment in Rajesh Agarwal (supra). Hence, the determination of what the scenario was under the Master Directions-2016; what was the holding in Rajesh Agarwal (supra); and what are the terms of Master Directions-2024 assume significance. 14. The Master....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ions-2016 sets out as its purpose in Clause 1.3 that the directions were to provide a framework to banks to detect and report frauds early and take timely consequent actions. The timely consequent actions would include reporting to the investigative agencies so that fraudsters are brought to book early; examining staff accountability and ensuring effective fraud risk management. Further, these directions were aimed to enable faster dissemination of information by RBI to banks on the details of frauds, unscrupulous borrowers and related parties. This would ensure that necessary safeguards / preventive measures by way of appropriate procedures and internal checks can be introduced and caution exercised while dealing with such parties by the banks. Clause 2.2 of the Master Directions-2016 and Clause 6.1 of the Master Directions-2024 read together broadly categorized the following incidents as fraud:- "(i) Misappropriation of funds and criminal breach of trust; (ii) Fraudulent encashment through forged instruments; (iii) Manipulation of books of accounts or through fictitious accounts, and conversion of property; (iv) Cheating by concealment of facts....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ower before declaring the account as "fraud" account. Before we deal with Rajesh Agarwal (supra), it should be pointed out that in the Master Directions-2024, in Chapter-II, Clause 2.1.1.1 to 2.1.1.4 set out the procedure through which an account is classified as "fraud". The Master Directions-2024 in the footnote refers to the judgment of this Court in Rajesh Agarwal (supra). Clause 2.1 which consists of four sub-paras is extracted hereinbelow:- "2.1 Governance Structure in banks for Fraud Risk Management 2.1.1 There shall be a Board approved Policy on fraud risk management delineating roles and responsibilities of Board / Board Committees and Senior Management of the bank. The Policy shall also incorporate measures for ensuring compliance with principles of natural justice in a time-bound manner which at a minimum shall include: 2.1.1.1 Issuance of a detailed Show Cause Notice (SCN) to the Persons, Entities and its Promoters /Whole-time and Executive Directors against whom allegation of fraud is being examined. The SCN shall provide complete details of transactions / actions / events basis which declaration and reporting of a fraud is being contemplated....
X X X X Extracts X X X X
X X X X Extracts X X X X
....4 crores. The note indicates that these are only data in respect of frauds of Rs.1 lakh and above which are reported. The chart, as produced, is set out hereinbelow:- Fraud Details from RBI Annual Report 2024-25 Frauds Cases - Area of Operations (Amount in Rs. crore) Area of Operation 2022-23 2023-24 2024-25 Number of Frauds Amount Involved Number of Frauds Amount Involved Number of Frauds Amount Involved 1 2 3 4 5 6 7 Advances 4,021 17,542 4,118 10,072 7,950 33,148 (29.8) (92.4) (11.4) (82.4) (33.2) (92.1) Off-balance Sheet 13 280 11 256 8 270 (0.1) (1.5) - (2.1) - (0.7) Forex Transactions 13 12 19 38 23 16 (0.1) (0.1) (0.1) (0.3) (0.1) - Card/Internet 6,699 278 29,082 1,457 13,516 520 (49.7) (1.5) (80.6) (11.9) (56.5) (1.4) Deposits 652 259 2,002 240 1,208 527 (4.8) (1.4) (5.6) (2.0) (5.0) (1.5) Inter-Branch Accounts 3 0 29 10 14 26 &nbs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er of Frauds Amount involved Number of Frauds Amount involved 1 2 3 4 5 6 7 Public Sector Banks 3,331 12,557 7,460 9,254 6,935 25,667 (24.7) (66.2) (20.7) (75.6) (29.0) (71.3) Private Sector Banks 8,971 5,206 24,207 2,722 14,233 10,088 (66.4) (27.4) (67.2) (22.3) (59.4) (28.0) Foreign Banks 804 292 2,899 154 1,448 181 (6.0) (1.5) (8.0) (1.3) (6.0) (0.5) Financial Institutions 9 888 1 1 2 13 (0.1) (4.7) - - - - Small Finance Banks 311 31 1019 64 1,217 58 (2.3) (0.2) (2.8) (0.5) (5.1) (0.2) Payments Banks 68 7 472 35 113 6 (0.5) - (1.3) (0.3) (0.5) - Local Area Banks 0 0 2 0 5 1 - - - - - - Total 13,494 18,981 36,060 12,230 23,953 36,014 (100.0) (100.0) (100.0) (100.0) (100.0) (100.0) Nil/Negligible Note: 1. Figures in parentheses represent the percentage share of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he making of a reasoned order. According to the learned senior counsel, Rajesh Agarwal (supra) did not, by any measure, mandate a personal/oral hearing. On the contrary, according to the learned senior counsel, Rajesh Agarwal (supra) made it explicit that personal/oral hearing was not mandatory and that the principle of audi alteram partem is sufficiently met if the written/documentary response of the borrower/noticee is duly considered and a speaking order passed. 28. Learned senior counsel submits that "opportunity of a hearing" or "opportunity of being heard" contemplated in Rajesh Agarwal (supra) is not a "personal/oral" hearing. Learned senior counsel submitted that since unlike the 2024 directions, the 2016 directions did not have explicit clauses providing for notice, reply and the making of a reasoned order, the challenge to the 2016 directions were on not being given an opportunity to present a defence. Learned senior counsel relies on State Bank of India vs. Jah Developers Private Limited and Others (2019) 6 SCC 787, and Gorkha Security Services vs. Government (NCT of Delhi) and Others (2014) 9 SCC 105, which, in turn, were relied on in Rajesh Agarwal (supra) to conten....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rds, stock statements and security valuations which are all within the knowledge of the borrower. Learned senior counsel submits that the classification is an internal administrative decision of the banks, required by regulatory guidelines to trigger mandatory reporting, asset preservation and immediate systemic risk mitigation. Learned senior counsel submits that insisting on oral hearing would convert a swift administrative process into a protracted procedure causing significant delays. According to the learned senior counsel, borrowers would then resort to demand for cross examination and all these dilatory tactics would severely impede prompt reporting to law enforcement. 33. This delay will provide borrowers an opportunity to dissipate assets, destroy evidence or even abscond resulting in the grave prejudice to public interest. Learned senior counsel submits that the charts only reflect concluded cases where accounts have been classified and do not reflect the cases that are underway. According to the learned senior counsel, imposing a personal hearing will cause significant logistical and infrastructural burden. According to the learned senior counsel, as per the procedure....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... borrower. According to the learned Solicitor General, the procedure prescribed is in conformity with the principles of natural justice. 36. Learned Solicitor General reiterated the point that grant of a personal hearing will defeat the purpose behind the master directions and cause prejudice to the banks by creating stumbling blocks for early and timely detection of reporting of fraud; early and timely reporting to the investigative agencies; faster dissemination to banks the details of fraud and fraudulent borrowers, and taking of safeguards and preventive measures by banks. Learned Solicitor General submits that large banks handled hundreds of potential fraud alerts involving multiple lenders and complex borrower groups. According to the learned Solicitor General, banks not only deal with corporate borrowers but also deal with retail accounts where frauds occur. 37. Learned Solicitor General submits that imposing a compulsory layer of personal hearing in every case would inevitably lead to an increased case load on the banks and delay decision-making including the reporting of frauds. Learned Solicitor General highlighted the aspect that multiple directors may each seek pe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the bank to report the bank status on the CRILC platform so that other banks are alerted. Thereafter, the fraud has to be reported to RBI and also to the CBI/Police. Learned Solicitor General submits that in consortium lendings, the individual bank which has red flagged the account of detected fraud would ask the consortium leader or the largest lender under the Multiple Banking Arrangements [MBA] to convene a meeting of the Joint lending Forum [JLF] to discuss the issue. Based on the majority of at least 60% share, the account should be red-flagged by all the banks and would be subjected to a forensic audit commissioned/initiated by the consortium leader or the largest lender under the Multiple Banking Arrangements. 41. Learned Solicitor General highlighted all these aspects to drive home the point that the decision involves officials from top level management after necessary forensic audits. Learned Solicitor General submits that an oral/personal hearing would act as a forewarning to the fraudsters and would give an opportunity for the borrower to delay/abscond, secret assets and siphon off funds from other banks and hamper investigation by the law enforcement agencies. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it report would meet the ends of justice and that since no clarification was made on the same, it would mean that furnishing the full report was mandatory. 46. According to the learned senior counsel, the appellant-Banks are only re-agitating the issue and that the appellant is cherry-picking since in other cases too where the State Bank of India is a party, personal hearing was held to be mandatory by the High Court and those judgments have not been challenged by the appellant-Banks. Learned senior counsel submitted that a party, similarly situated, is entitled to the benefit of judicial pronouncement on the principle of parity. 47. Learned senior counsel invited attention to the judgment of the High Court of Telangana at Hyderabad which was called in question in Rajesh Agarwal (supra). Drawing the attention to para 70.4 of the High Court judgment, learned senior counsel submits that a direction to grant "opportunity of personal hearing" was ordered. Learned senior counsel submitted that this Court in Rajesh Agarwal (supra) upheld the judgment of the Telangana High Court. Hence, opportunity of personal hearing ought to be afforded. Learned senior counsel referred to a large ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....material had nexus to the decision. According to the learned senior counsel, the forensic audit report is a central investigating material and not a peripheral document. Learned senior counsel submits that the concurrent findings of the learned Single Judge and the Division Bench that the declaration of fraud cannot stand without supply of the forensic audit report was a fact sensitive application of these decisions. Learned senior counsel submitted that civil consequences are grave for an account holder inasmuch as it blacklists the borrower from institutional finance; is inextricably linked to criminal proceedings and exposes the borrower to insolvency and bankruptcy proceedings. According to the learned senior counsel, all these constitute "civil death" and serious reputational stigma and hence the bank should be subjected to rigorous procedural standards like a personal hearing. 51. Learned senior counsel submits that the contention that the process of personal hearing would "paralyze the entire process" is a completely untenable submission. According to the learned senior counsel, banks have been routinely granting personal hearing under the wilful defaulter directions, sin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... senior counsel submitted that "hearing in Rajesh Agarwal (supra) meant personal hearing". Learned senior counsel submitted that the specific argument of the banks before this Court in Rajesh Agarwal (supra) was that the borrowers had no right to personal hearing. Learned senior counsel drew specific attention to para seventy-five of the judgment in Rajesh Agarwal (supra) and highlighted the use of the phrase "reply and representation" separately. Learned senior counsel submits that the judgment sets out a three-stage process: notice; opportunity to explain, and representation (personal hearing). Learned senior counsel submits that if reply and representation meant only written submission, the use of the word "representation" was otiose. 55. Learned senior counsel submitted that banks ought to disclose the audit reports and referred to para 95 of Rajesh Agarwal (supra) to reinforce the point. Learned senior counsel inviting attention to the Miscellaneous Application filed by the State Bank of India for clarification in Rajesh Agarwal (supra) and submitted that clarification was sought on three aspects: that hearing contemplated in the judgment did not include personal hearing; t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ents advanced by the RBI and the banks to negate personal hearing like there being no right of a personal hearing and that it can only be considered on case by case basis; that the documents are the basis for proceeding; that there are a large number of cases and that time is of essence are all not valid arguments compared to the consequences that will ensue to the borrower. HOLDING IN RAJESH AGARWAL (SUPRA):- 60. Time is ripe now to make a brief analysis of the judgment in Rajesh Agarwal (supra). In Rajesh Agarwal (supra), this Court dealt with four Civil Appeals and a Writ Petition. Three Civil Appeals arose out of the judgments from the High Court of Telangana at Hyderabad, one Civil Appeal arose from a judgment of the High Court of Gujarat and the Writ Petition was by the petitioner in the Gujarat High Court who had challenged the validity of the Master Directions of 2016 before this Court. Of the three judgments of the Telangana High Court, in the lead case namely, Rajesh Agarwal (supra), the High Court had read the principles of natural justice into the Master Directions of 2016. Hence, the State Bank of India was in appeal to this Court. In the two other Appeals from T....
X X X X Extracts X X X X
X X X X Extracts X X X X
....They contended that since the classification of account as fraud entailed significant civil consequences, hence the principles of natural justice ought to be read into the master directions on frauds. 63. The Court clarified, at the outset, that 'Audi Alteram Partem' depended on the facts and circumstances of the case, the express language and basic scheme of the statute under which the administrative powers is exercised as well as the nature and purpose for which the power is conferred and the final effect of the exercise of that power (Para 36). The Court thereafter held that civil consequences ensued to the borrower (Para 50.3). 64. Thereafter, the Court dealt with the judgment of Jah Developers (supra), wherein a procedure for consideration by the first Committee, prior to the issuance of Show Cause Notice and how the first Committee was mandated under the circular pertaining to willful defaulters to consider the submissions before recording the finding of fact of willful default. The Court observed that if the Committee deemed it necessary it could also provide a personal hearing to the borrower and the promoters/whole time director of the borrowing company in the case o....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Audi alteram partem, therefore, entails that an entity against whom evidence is collected must : (i) be provided an opportunity to explain the evidence against it; (ii) be informed of the proposed action, and (iii) be allowed to represent why the proposed action should not be taken. Hence, the mere participation of the borrower during the course of the preparation of a forensic audit report would not fulfil the requirements of natural justice. The decision to classify an account as fraud involves due application of mind to the facts and law by the lender banks. The lender banks, either individually or through a JLF, have to decide whether a borrower has breached the terms and conditions of a loan agreement, and based upon such determination the lender banks can seek appropriate remedies. Therefore, principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the findings in the forensic audit report, and to represent before the account is classified as fraud under the Master Directions on Frauds." (Emphasis supplied) 68. The argument of learned Senior Counsel for the borrowers is that since the Co....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he decision classifying the borrower's account as fraudulent must be made by a reasoned order. 98.7. Since the Master Directions on Frauds do not expressly provide an opportunity of hearing to the borrowers before classifying their account as fraud, audi alteram partem has to be read into the provisions of the directions to save them from the vice of arbitrariness." 71. Much was made out of the fact that in the penultimate paragraph of Rajesh Agarwal (supra), this Court upheld the judgment of the High Court of Telangana at Hyderabad and set aside the judgment of the High Court of Gujarat. We have hereinafter explained in the context of the doctrine of merger as to which decree would operate as the final pronouncement. 72. Rajesh Agarwal (supra) resulted in an application for clarification filed by the State Bank of India with the following prayers:- "a) clarify that the hearing contemplated in the judgment dated 27.03.2023 passed in C.A. No. 7300 of 2022 & batch is not understood to be personal hearing and that the banks can decide the time frame of adjudication depending upon the urgency of the matter; b) Clarify that providing relevant extract....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d, to a great extent, on the facts and circumstances of the case, the framework of the law under which the enquiry is held and the constitution of the tribunal or the body of persons appointed for that purpose. In A.K. Kraipak and others v. Union of India and others (1969) 2 SCC 262, this Court held as follows:- "20. The aim of the rules of natural justice is to secure justice or to put it negatively to prevent miscarriage of justice. These rules can operate only in areas not covered by any law validly made. In other words they do not supplant the law of the land but supplement it. The concept of natural justice has undergone a great deal of change in recent years. In the past it was thought that it included just two rules namely: (1) no one shall be a judge in his own case (Nemo debet esse judex propria causa) and (2) no decision shall be given against a party without affording him a reasonable hearing (audi alteram partem). Very soon thereafter a third rule was envisaged and that is that quasi-judicial enquiries must be held in good faith, without bias and not arbitrarily or unreasonably. But in the course of years many more subsidiary rules ca....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t-matter to be dealt with and so forth. Can the courts supplement the statutory procedures with requirements over and above those specified? In order to ensure a fair hearing, courts can insist and require additional steps as long as such steps would not frustrate the apparent purpose of the legislation. 27. In Lloyd v. McMahon, Lord Bridge observed: "My Lords, the so-called rules of natural justice are not engraved on tablets of stone. To use the phrase which better expresses the underlying concept, what the requirements of fairness demand when any body, domestic, administrative or judicial, has to make a decision which will affect the rights of individuals depends on the character of the decision-making body, the kind of decision it has to make and the statutory or other framework in which it operates. In particular, it is well established that when a statute has conferred on any body the power to make decisions affecting individuals, the courts will not only require the procedure prescribed by the statute to be followed, but will readily imply so much and no more to be introduced by way of additional procedural safeguards as will ensure the attainment of fairne....
X X X X Extracts X X X X
X X X X Extracts X X X X
....unless he has been given an opportunity to make his representations against the comments, if any, received from the State Government or other authority. The said opportunity need not necessarily be by personal hearing. It can be by written representation. Whether the said opportunity should be by written representation or by personal hearing depends upon the facts of each case and ordinarily it is in the discretion of the tribunal. The facts of the present case disclose that a written representation would effectively meet the requirements of the principles of natural justice.... ." (Emphasis supplied) 80. Elucidating on the difference between a right to a personal hearing in the noticee and the discretion of the authority to grant one in a given case and further explaining how it was not an incident of natural justice that personal hearing must be given (except in proceedings in courts of law) a Constitution Bench of this Court in Union of India v. Jyoti Prakash Mitter (1971) 1 SCC 396, speaking through Chief Justice J.C. Shah observed as under:- "26. Article 217(3) does not guarantee a right of personal hearing. In a proceeding of a judicial nature, the basic ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ich have to be mentioned in the prescribed application form are very elaborate and complete. The provisions in the Code read along with the instructions given by the State in the circular letter, dated October 5, 1965, refer to various relevant and material factors that had to be taken into account for the purpose of deciding whether the application is to be granted or not. As we have already pointed out it is not the case of any of the writ petitioner that these relevant factors have not been considered by the District Committees. Nor is it their case that the reasons given for rejection of the applications are not covered by the provisions contained in the Code. Clauses (1) and (2) of Rule 3 are not to be read in isolation as has been done by the High Court. On the other hand, they must be read along with the other various clauses contained in the same rule as well as the detailed instructions given by the Government in the circular letter, dated October 5, 1965. It follows that the reasoning of the High Court that these two sub-clauses violate Article 14 cannot be accepted." (Emphasis supplied) 82. In Union of India and Another v. Jesus Sales Corporation (1996) 4 SCC....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ourt reiterating the holding in Gorkha Security Services (supra) held as under in Jah Developers (Supra). "15. The next question that arises is whether an oral hearing is required under the Revised Circular dated 1-7-2015. We have already seen that the said circular makes a departure from the earlier Master Circular in that an oral hearing may only be given by the First Committee at the first stage if it is so found necessary. Given the scheme of the Revised Circular, it is difficult to state that oral hearing is mandatory. It is even more difficult to state that in all cases oral hearings must be given, or else the principles of natural justice are breached. A number of judgments have held that natural justice is a flexible tool that is used in order that a person or authority arrive at a just result. Such result can be arrived at in many cases without oral hearing but on written representations given by parties, after considering which, a decision is then arrived at. Indeed, in a recent judgment in Gorkha Security Services v. State (NCT of Delhi) this Court has held, in a blacklisting case, that where serious consequences ensue, once a show-cause notice is issued and opp....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... is not even imperative that written statements should be called for. Disclosure of the prominent circumstances and asking for an immediate explanation orally or otherwise may, in many cases, be sufficient compliance. It is even conceivable that an urgent meeting with the parties concerned summoned at an hour's notice, or in a crisis, even a telephone call, may suffice." (Emphasis in original) PRECEDENTS CITED BY THE BORROWERS:- 84. The decision in State of U.P. And Others v. Maharaja Dharmander Prasad Singh And Others (1989) 2 SCC 505 turned on its own facts, where due to the complexity the Court not only directed grant of the personal hearing but granted opportunity to adduce evidence. The said case has no application to the issue that we are currently considering. 85. In Olga Tellis And Others v. Bombay Municipal Corporation and Others (1985) 3 SCC 545, the reading of para 47 to 49 indicates that the Court was considering the contention of the authorities that notice need not be given of a proposed action. The reference to S.L. Kapoor vs. Jagmohan And Others (1980) 4 SCC 379 only reinforces this aspect. 86. S.L. Kapoor (supra) was a case where the New De....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e discretion of the authority (except of the proceeding in the Court of law or if expressly prescribed) the judgment of the United States Supreme Court in Goldberg (supra) need not detain us any longer. 90. The judgment in Dr. S Sengupta v. CN Holmes [2002] EWCA Civ 1104 and the observations of Lord Justice Laws cited by Sh. Parag P. Tripathi, learned senior advocate is totally inapplicable. Those observations came to be made in a certain context. Lord Justice Laws had made an order refusing permission to appeal to a certain Dr. Sengupta against the judgment of the Administrative Court. Dr. Sengupta had renewed his application and a bench of Simon Brown and Tuckey LJJ had granted permission. Thereafter, the substantive appeal came up before a three-judge bench of Lord Justice Laws, Jonathan Parker and Keene, LJJ. An application was made that Justice Laws having declined leave ought to recuse from the proceeding. In the context of rejecting the recusal application and in the process of explaining how judges do change their mind after hearing oral submissions and how an earlier rejection of leave could not be characterized as leading to bias, observations were made by Lord Justice....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ld befit the circumstances herein, one has to necessarily keep in mind the purpose and objective of the directions of the RBI. A well laid out system has been prescribed in the master directions. When there was a deafening silence on the aspect of natural justice in the 2016 directions, this Court stepped in, and in Rajesh Agarwal (supra) read into the circular the principle of natural justice. We have analyzed the judgment in Rajesh Agarwal (supra) earlier and we have concluded that the Court did not hold that the borrowers have a right of personal hearing, when the Court held that principles of natural justice like issuance of a Show Cause Notice, supply of the relied upon material and the obligation to pass a reasoned order were essential. 93. We are persuaded to accept the stand of the RBI that the procedure of issuing a show cause notice, furnishing of the evidentiary material, eliciting a reply and the obligation to pass a reasoned order will meet the requirements of fairness and also thwart mis-carriage of justice. The RBI considering the fact that frauds in accounts are of various hues has opined that granting a right of personal hearing to each and every borrower would ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tory authority like the RBI unless the policy is contrary to the constitutional principles or ultra vires any statute, a Court interpreting the policy will defer to the views of the experts. In Akshay N. Patel v. Reserve Bank of India and Another (2022) 3 SCC 694, this Court explained the principle thus. "62. Thus, it is settled that RBI is a special, expert regulatory body that is insulated from the political arena. Its decisions are reflective of its expertise in guiding the economic policy and financial stability of the nation. Adverting to the facts of this case, RBI is empowered by FEMA to manage, regulate, and supervise the foreign exchange of India. It is trite law that courts do not interfere with the economic or regulatory policy adopted by the Government. This lack of interference is in deference to the democratically elected Government's wisdom, reflecting the will of the people. As held by a three-Judge Bench of this Court in Internet & Mobile Assn. 46, the regulations introduced by RBI are in the nature of statutory regulation and demand a similar level of deference that is accorded to executive and Parliamentary policy." 98. Equally, for this reason, w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o time, and (b) where the borrower or a guarantor committing the wilful default is a company, its promoters and the director (s), subject to the provisions of Paragraph 5(14), or (c) in case of an entity (other than a company), persons who are in charge and responsible for the management of the affairs of the entity." 99. It has been rightly contended that contrasted with the categories of fraud as set out in Clause 6.1 of the 2024 Master Directions read with Clause 2.2 of the 2016 Master Directions (see Para 16 hereinabove), it will be clear that in the case of fraud, there is an element of criminality. In the case of a wilful default, though it may involve financial default, there is not as yet an element of criminality. This, in any event, is the perception of the regulator. If the regulator, keeping in mind the various factors decides to give personal hearing before classifying an account as a wilful default account and decides not to grant a hearing as of right in the case of a 'fraud accounts' and instead grants an opportunity to file a representation after issuance of a show cause notice and the supply of evidentiary material and further mandates the pas....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in Rajesh Agarwal (supra) as reiterated in the master direction of 2024 more than meets the requirements to ensure fairness and saves miscarriage of justice. That procedure evolved is a proportionate response to the situation. Hence, the argument based on Article 19(1)(g) is also misconceived since the procedure to classify accounts, evolved to protect money of public, is after all a reasonable restriction. Similarly, in view of what we have held the argument based on the theory of non-retrogression also lacks merit. 104. In their effort to persuade us that Rajesh Agarwal (supra) has mandated personal hearing to the borrower, Mr. Parag Tripathi and K. Parameshwar, learned senior Counsels read and reread and minutely scanned the said judgment. Realizing that not once in the judgment containing ninety-eight Paragraphs did the Court use the word personal hearing, as part of this Court's holding, learned Senior Counsels were still undeterred. They then fell back upon the judgment impugned in Rajesh Agarwal (supra) passed by the High Court of Telangana. Pointing to the very last paragraph, in a chorus, they exclaimed, 'Eureka' and submitted that the word 'personal hearing' has been e....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of personal hearing. 109. Considerable arguments were advanced on how different High Courts have ordered the grant of personal hearing and banks have not appealed against the same. We are here concerned with interpreting the Circulars and laying down the correct legal position. Our interpretation cannot depend on conduct of banks in individual cases. Similarly, the argument that on facts in the present two cases banks have taken considerable time to initiate proceedings and they could have granted personal hearing also lacks merit, for stray instances cannot form the foundation for interpreting the legal position. DISCLOSURE OF THE AUDIT REPORT:- 110. In Civil Appeal arising out of SLP (C) Nos. 20618-20619/2025 the High Court has categorically held that in terms of directions in Rajesh Agarwal (supra), the writ petitioner was entitled to the copies of the Forensic Audit Reports which were referred to in the Show Cause Notices and which were relied upon by the appellant-Bank in the proceedings to classify the accounts of the borrower as a fraud account. As discussed earlier, Para 95 of the Judgment in Rajesh Agarwal (supra) categorically held as under:- "In the l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eld, that the right to disclosure was not absolute and the disclosure of information may affect other third party interest and the stability and orderly functioning of the securities market. 115. In T. Takano (supra), this Court held that the authority issuing the show cause notice should prima facie establish that the disclosure of the report would affect the third party rights and the stability and orderly functioning of the securities market. Thereafter, the onus would then shift to the noticee to prove that the information is necessary to discuss its case appropriately. 116. The only justification given for denial of disclosure of the full report, is that the entire audit report would become a subject matter of criminal investigation. We find no merit in this submission. Once the criminal proceedings are launched, Investigating Authority will independently investigate and file a charge sheet/complaint of which the forensic audit report may be a part. 117. In Madhyamam Broadcasting Limited v. Union of India and Others (2023) 13 SCC 401, this Court, highlighting the importance of the disclosure of relevant material, this Court held as under:- "66. MHA disclosed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g, information that is relevant to the dispute, which would with "reasonable probability" influence the decision of the authority must be disclosed. A one-sided submission of material which forms the subject-matter of adjudication to the exclusion of the other party causes a serious violation of natural justice. In the present case, this has resulted in grave prejudice to officers whose careers are directly affected as a consequence." (Emphasis supplied) 118. Hence, we direct that as held in Rajesh Agarwal (supra) the forensic audit reports ought to be disclosed if they are to be considered relevant by the banks in classifying the account as fraud. 119. In T. Takano (supra), relying upon Natwar Singh (supra) which, in turn, relied upon Dhakeswari Cotton Mills Limited. v. Commission of Income Tax, West Bengal (1954) 2 SCC 602, this Court in Paras 37 and 38 held as under:- "37. During the course of the adjudication, the fundamental principle is that material which is used against a person must be brought to notice. As this Court observed : (Natwar Singh case [Natwar Singh v. Director of Enforcement, (2010) 13 SCC 255], SCC p. 269, paras 30-31) "30. Th....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... ... ... ... ... ... ... ... ... ... ... ... ... ... The right of the noticee to disclosure must be balanced with a need to preserve any other third-party rights that may be affected. 57. In Natwar Singh [Natwar Singh v. Director of Enforcement, (2010) 13 SCC 255], this Court has observed that there are exceptions to the general rule of disclosing evidentiary material. This Court held that such exceptions can be invoked if the disclosure of material causes harm to others, is injurious to public health or breaches confidentiality. While identifying the purpose of disclosure, we have held that one of the crucial objectives of the right to disclosure is securing the transparency of institutions. The claims of third-party rights vis-à-vis the right to disclosure cannot be pitted as an issue of public interest and fair adjudication. The creation of such a binary reduces and limits the purpose that disclosure of information serves. The respondent should prima facie establish that the disclosure of the report would affect third-party rights. The onus then shifts to the appellant to prove that the information is necessary to defend his case appropriately. 59. The ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dings. 62.2. The Board under Regulation 10 considers the investigation report submitted by the investigating authority under Regulation 9, and if it is satisfied with the allegations, it could issue punitive measures under Regulations 11 and 12. Therefore, the investigation report is not merely an internal document. In any event, the language of Regulation 10 makes it clear that the Board forms an opinion regarding the violation of Regulations after considering the investigation report prepared under Regulation 9. 62.3. The disclosure of material serves a threefold purpose of decreasing the error in the verdict, protecting the fairness of the proceedings, and enhancing the transparency of the investigatory bodies and judicial institutions. 62.4. A focus on the institutional impact of suppression of material prioritises the process as opposed to the outcome. The direction of the Constitution Bench of this Court in Karunakar [ECIL v. B. Karunakar, (1993) 4 SCC 727 : 1993 SCC (L&S) 1184] that the non-disclosure of relevant information would render the order of punishment void only if the aggrieved person is able to prove that prejudice has been caused to him....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... Takano (supra) which dealt with the securities market, instances will be rare where; in the forensic audit reports of banks where the borrower is associated at the stage of making the report, any claim for privilege of any part of the report may arise. However, in the exceptional cases that they do arise, the above procedure should be followed. 125. The furnishing of findings and conclusion alone would not tantamount to compliance with the principles of natural justice. The reasons for the findings and conclusion will be in the body of the report and a complete sense of the findings and conclusions can be made only after reading to the contents of the report. It is apt to recall the memorable words of this Court in Union of India v. Mohal Lal Capoor And Others (1973) 2 SCC 836 which read as under:- "Reasons are the links between the materials on which certain conclusions are based and the actual conclusions. They disclose how the mind is applied to the subject matter for a decision whether it is purely administrative or quasi-judicial. They should reveal a rational nexus between the facts considered and the conclusions reached. Only in this way can opinions or decisio....