2006 Supreme(SC) 2

2006(1) Supreme 115
Supreme Court of India
[From Special Court (Trial of Offences Relating to Transactions in Securities at Bombay)]
S.B. Sinha & P.P. Naolekar, JJ.
Ashwin S. Mehta & Anr. —Appellants
versus
Custodian & Ors. —Respondents
Civil Appeal Nos. 667-671 of 2004
With
Civil Appeal Nos. 672-675, 676-680 and 681 of 2004
Decided on 3-1-2006
Counsel for the Parties :
For the Appellants : Mahesh Jethmalani, Sr. Advocate, Arvind K. Nigam, Ms. Kamini Jaiswal, Mrs. Shomila Bakshi and Ms. Rani, Advocates.
For the Respondents : Ashok V. Desai, Sr. Advocate, Gaurav Joshi, Jay Kishor Singh, Abhay Kumar, Gopal Krishnan, Subramonium Prasad, A. Subba Rao, Mahesh Agrawal, E.C. Agrawala, Ms. Indu Malhotra, Ms. Savita Sinha, Ms. B. Vijayalakshmi Menon, Ms. Sunita and Shiv Kumar Suri, Advocates.

Important point
All the properties belonging to notified persons stand attached and such attachment being automatic, no finding was required to be arrived at that the same had been acquired either during the notified period or the appellants were involved in offences in transactions in securities.

Headnote:Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992—Sections 3, 4, 5, 7, 9, 9A, 11—Notified Persons—Attachment of properties—Challenged—Appellants are involved in offences in transactions in securities—Appellants are related to Harshad S. Mehta (since deceased)—Family of appellants consists of four brothers, their wives, children and their widowed mother—Eldest among the four brothers, has since expired—Appellants had purchased nine residential flats in a building—Those nine flats were merged and redesigned for joint living of the entire family—Appellants and late Harshad Mehtra were persons notified in terms of the Act—Special Court issued directions in various proceedings before it appointing auditors to prepare and audit books of accounts of all notified persons—Appellants case that statement prepared by the Custodian was based on material all of which were not connected to appellants—Appellants denied the asset and liability position as arrived at by the Custodian—Properties belonging to mother of Harshad Mehta has since been released from attachment—Special Court directed to analyse respective contentions of parties in greater details and in particular in regard to assets and liabilities of separate entities.

       Held : We, therefore, have not been given a clear picture as to the correctness or otherwise of the affidavit filed by the Custodian vis-a-vis the Books of Accounts which have been maintained by the Appellants themselves as well as the Auditor’s Report. The learned Judge merely accepted the figures mentioned in the affidavit of the Custodian and relied thereupon in paragraphs 9 to 11 of the judgment without discussing the contentions and arguments raised on behalf of the Appellants, herein. We, therefore, are of the opinion, in the interest of justice, that it is necessary to give another opportunity of hearing to the Appellants. It is true that horrendous figures as regard the liabilities of Harshad Mehta have been projected before us but the same had been shown to be of the entire Group. If the liabilities of the individual entities are not treated as that of the group, for one reason or the other, indisputably, liability of those who have nothing to do with the dealings of Harshad Mehta either in their individual capacities or as Directors of some company or otherwise must be dealt with separately. The contention raised on behalf of the Appellants is that the Harshad Mehta should be considered to be sui generis and the Custodian may realize his dues from his personal assets as also of those with which he was concerned together with the assets of his front companies but such liability should not be fastened upon others who had nothing to do therewith. As regards liabilities of Harshad Mehta, the Appellants contended that since his expiry in the year 2001 his legal interests are not being defended both in the court as well as before the revenue, as a result, liabilities have been foisted upon him a large part which is on account of interest and penalties. His death has also forced upon him bankruptcy. On the other hand, the contention of the Custodian is that the Appellants had not only taken huge loans or advances from Harshad Mehta in one capacity or the other but also even transactions and shares were made by Harshad Mehta on their behalf. Further contention of the Custodian is that even Dr. Hitesh Mehta and Dr. Pratima Mehta have admitted that they had no knowledge about the transactions. This may be so, but then the effect of the rival contentions was required to be gone into by the learned Special Court. A finding of fact arrived at upon discussing and analyzing the respective contentions could have gone a long way in assisting this Court in arriving at a correct conclusion. The learned Judge proceeded on the basis that the assets and liabilities, joint and collective, of all those who are related with Harshad Mehta as also the corporate entities in which he was a Director or had some other interest must be considered as a group. Even in this behalf, it was necessary for the Special Judge to assign sufficient and cogent reasons. (Paras 43 & 44)

       A question may further arise as to whether the learned Judge was correct in considering the individual liabilities of the notified parties as the liabilities of the group. If those individuals, who had no connection with Harshad Mehta could not have been proceeded against for meeting the liabilities of Harshad Mehta jointly or severally, a clear finding was required to be arrived at. Only because there had been large intermingling and flow of funds from Harshad Mehta and inter se within the group, the same by itself may not justify the conclusion that all of their assets were required to be sold irrespective of their individual involvement. It was, thus, necessary for the learned Special Court to arrive at a firm conclusion as regard the involvement of the individuals with Harshad Mehta, if any, and the extent of his liability as such. Furthermore, the question as regard liability of the parties should have been determined at the stage of Section 9-A of the Act. The Appellants have contended that the Custodian had taken contradictory or inconsistent stand inasmuch as the liabilities of all the entities were treated to be joint liabilities of Harshad Mehta group. He furthermore wanted to treat the liabilities of the notified entities also as their separate liabilities. He has proceeded on the basis that even if the assets and liabilities of all individuals is taken on an individual basis, the liabilities would exceed assets in the case of each individual and corporate entity. It had, however, never been the case of the Custodian that the examination of claims of all the notified parties is complete. It does not appear that claims inter se between the entities within the so-called group had ever been taken into consideration. The Custodian does not appear to have preferred claims before the Special Court on behalf of the largest lender on the so-called group against those he had to recover loans. Such claims may also be preferred. The Act confers wide power upon the Custodian and the learned Special Court and in that view of the matter, having regard to the principles of natural justice, the judgment and order of the learned Judge, Special Court should have furthermore been supported by sufficient and cogent reasons. (Paras 45 to 47)

       In view of our foregoing discussions, we are of the opinion that:

       (i) The contention of the Appellants that they being not involved in offences in transactions in securities could not have been proceeded in terms of the provisions of the Act cannot be accepted in view of the fact that they have been notified in terms thereof.

       (ii) The Appellants being notified persons all their personal properties stood automatically attached and any other income from such attached properties would also stand attached. The question as to whether the Appellants could have been considered to be part of Harshad Mehta Group by the learned Special Court need not be determined by us as, at present advised, in view of the fact that appropriate applications in this behalf are pending consideration before the learned Special Court. The question as regard intermingling of accounts by the Appellants, herein with that of the Harshad Mehta Group and/or any other or further contentions raised by the parties hereto before us shall receive due consideration of the learned Judge, Special Court afresh in the light of the observations made hereinbefore.

       (iii) As regard the tax liabilities of the Appellants, herein, we would request the learned Judge, Special Court to consider the matter afresh in the light of the observations made hereinbefore. The learned Judge, Special Court, in this behalf, having regard to the fact that several orders of Best Judgment Assessment have been passed by the Assessing Authority, may take into consideration the ratio laid down in the decision of this Court in Harshad Shantilal Mehta (supra).

       (iv) The learned Special Court shall proceed to pass appropriate orders as regard confirmation of the auction sales in respect of commercial properties.

       (v) As regard, sale of residential properties, an appropriate order may be passed by the learned Judge, Special Court in the light of the observations made hereinbefore.

       (vi) We direct the Custodian to permit the Appellants to have inspection of all the documents in his power or possession in the premises of the Special Court in the presence of an officer of the court. Such documents must be placed for inspection for one week continuously upon giving due notice therefor to the Appellants jointly. As the Appellants have been represented in all the proceedings jointly, only one of them would be nominated by them to have the inspection thereof. The Appellants shall be entitled to take the help of a Chartered or Cost Accountant and may make notes therefrom for their use in the pending proceeding.

       (vii) The Appellants shall file their objections to the said report, if any, within ten days thereafter. The Custodian may also take assistance and/or further assistance from a Chartered Accountant of his choice. A reply and/or rejoinder thereto shall be filed within one week from the date of the receipt of the copy of the objection. The parties shall file their respective documents within one week thereafter. Such documents should be supported by affidavits. Both the parties shall be entitled to inspect such documents and filed their responses thereto within one week thereafter. The parties shall file the written submissions filed before this Court together with all charts before the learned Special Judge, Special Court within eight weeks from date.

       (viii) The learned Judge, Special Court shall allow the parties to make brief oral submissions with pointed reference to their written submissions. Such hearing in the peculiar facts and circumstances of this case should continue from day to day.

       (ix) The learned Judge, Special Court while hearing the matter in terms of this order shall also consider as to whether the auction sale should be confirmed or not. It will also be open to the learned Judge, Special Court to pass an interim order or orders, as it may think fit and proper, in the event any occasion arises therefor.

       (x) We would, however, request the learned Special Judge, Special Court to complete the hearings of the matter, keeping in view of the fact that auction sale in respect of the residential premises is being consideration, as expeditiously as possible and not later than twelve weeks from the date of the receipt of the copy of this order. Save and except for sufficient or cogent reasons, the learned Judge shall not grant any adjournment to either of the parties.

       (xi) The learned Judge, Special Court shall take up the matter relating to confirmation of the auction sale in respect of the commercial properties immediately and pass an appropriate order thereupon within four weeks from the date of receipt of copy of this order. If in the meanwhile orders of assessment are passed by the Income Tax Authorities, the Custodian shall be at liberty to bring the same to the notice of the learned Special Court which shall also be taken into consideration by the learned Judge, Special Court. (Para 70)