S. Mehta and Anr Vs. Custodian & Ors  Insc 5 (3 January 2006)
Sinha & P.P. Naolekar
Civil Appeal Nos. 672-675, 676-680 And 681 Of 2004 S.B. Sinha, J :
appeals are directed against a judgment and order dated 17.10.2003 passed by
the Special Court constituted under the Special
Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992
(for short "the Act") in Misc. Application Nos. 41 of 1999, 4 of
2001, 265, 266 and 275 of 2003.
Appellants herein who are related to one Harshad S. Mehta (since deceased)
purchased nine residential flats in a building called Madhuli Apartments in Worli
area of Mumbai. The family of the Appellants consists of four brothers, their
wives, children and their widowed mother. The eldest among them, Harshad S.
Mehta, has since expired. The said nine flats, it is said, were merged and
redesigned for joint living of the entire family.
Appellants herein and the said late Harshad Mehta were persons notified in
terms of the Act which was enacted to provide for the establishment of a Special Court for the trial of offences relating
to transactions in securities and for matters connected therewith. In terms of
the provisions of the Act, along with late Harshad Mehta, the Custodian had
notified 29 entities in terms of Section 3 of the Act, comprising three of his
younger brothers, wife of late Harshad Mehta, wives of two of his younger
brothers and other corporate entities, a partnership firm and three HUFs.
out of the said 29 entitles, only Late Harshad Mehta and two of his younger
brothers were cited as accused in various criminal cases filed against them.
properties of Late Harshad Mehta and the Appellants, herein being notified
persons stood attached in terms of the provisions of the Act.
BEFORE THE SPECIAL
the learned Special
Court, the parties
herein filed several applications which can be sub-divided in three categories,
as would be noticed shortly hereinafter. It is not in dispute that the learned
Special Court on or about 3.08.1993 issued directions in various proceedings
before it appointing auditors to prepare and audit the books of accounts of all
notified persons for the period 1.4.1990 and 8.06.1992, i.e., the date of the
notification. Three firms of Chartered Accountants were appointed to prepare
statement of accounts and liabilities of each of the Appellants, herein.
Chartered Accountants' Firm was appointed by the learned Special Judge by an
order dated 17.9.2003 to represent all notified entities in the family of late Harshad
Mehta for the purpose of ascertaining their tax liabilities.
may, at this juncture, notice the nature of the applications filed by the
parties, herein before the learned Special Court:
the Custodian filed an application being Misc.
No. 41 of 1999 seeking permission of the Special Court for sale of residential premises commonly known as Madhuli
of eight notified entities.
Application being 4 of 2001 was filed by the Custodian praying for the sale of
herein filed several Misc. Applications praying for lifting of attachment on
their residential premises on the ground that the same had been purchased much
prior to 1.4.1991 and the same had no nexus with any illegal transactions in
securities. Alternatively, it was prayed that since their asset base was
greater than genuine liabilities, the said residential premises should be
released from attachment.
reason of the impugned order dated 17.10.2003, the learned Special Judge
allowed Misc. Applications Nos. 4 of 2001 and 41 of 1999.
Misc. Applications filed by the Appellants herein for release of the
residential flats as well as the commercial premises from attachment were
dismissed. It was directed:
case, all adult members of the family of late Shri Harshad Metha, who are
presently occupying the abovereferred flats, file an undertaking in this Court
within a period of four weeks from today undertaking to vacate the flat
occupied by them and hand over peaceful possession thereof to the custodian
within a period of four weeks from the date on which the custodian sends them
communication asking them to vacate the flats, on sale of the flats being
sanctioned by the Court.
custodian shall permit the members of family of late Shri Harshad Mehta to
occupy the flats during the time that the process of the sale of the flats goes
case no such undertakings are filed by the adult members as directed above,
within the aforesaid period, the custodian shall stand appointed as receiver of
the flats which are described in Exh. 8 and Exh. 8-1 to Misc. Petition No. 41
of 1999." CONTENTIONS OF THE PARTIES Appellants Mr. Mahesh Jethmalani,
learned senior counsel appearing on behalf of the Appellants in assailing the
said judgment of the learned Special Court
inter alia raised the following contentions:
Some of the
entities having their asset base much more than actual liability, the impugned
judgments are unsustainable. There was no occasion for the Custodian to club
all the notified entities in one block so as to be termed as Harshad Mehta
Group and/or to club their assets and liabilities jointly. Although in relation
to a body corporate incorporated and registered under the Indian Companies Act,
the doctrine of lifting the corporate veil would be applicable, but the same
cannot be applied in case of individuals.
Having regard to
the fact that only three entitles out of eight were involved in the offences,
the liability of Harshad Mehta could not have been clubbed for the purpose of
directing attachment and consequent sale of the properties which exclusively
belong to them.
of Harshad Mehta, who was a sui generis, could have been recovered from the
properties held and possessed by him or from the companies floated by him but
not from the individual entities; at least two of whom being medical
practitioners have their income from other sources.
The books of
accounts and other documents on the basis whereof the auditor's report had been
made having not been allowed to be inspected by the Appellants herein on the
plea that they had the knowledge thereabout, the same could not have been taken
into consideration for the purpose of passing of the impugned order or otherwise.
having preferred appeals against the income tax orders of assessment passed by
the authority and the same having been set aside, no liability to pay income
tax by the Appellants as of now being existing, the residential properties
could not have been sold.
attention to a representative chart showing the discrepancies in the accounts
of Mrs. Deepika A. Mehta as shown in (a) affidavit by the Custodian; (b) Books
of Accounts maintained by the Appellants; and (c) Auditor's Report, it was
submitted that the Auditor's Report could not have been relied upon.
A copy of the
Auditor's Report having only been supplied during pendency of these appeals,
the learned Special Judge committed a serious error in passing the impugned judgment
relying on or on the basis thereof.
Mr. Ashok H. Desai, learned senior counsel appearing on behalf of the
Custodian, on the other hand, would, inter alia, submit:
In view of the
decision of this Court in L.S. Synthetics Ltd. v. Fairgrowth Financial Services
Ltd. and Another [(2004) 11 SCC 456] all properties belonging to the notified
persons being subject to automatic attachment, could be applied for discharge
of the joint liabilities of the Harshad Mehta Group in terms of Section 11 of the
for de-notification filed by the Appellants herein having been withdrawn, the
contention raised by the Appellants that they are not liable in terms of the
provisions of the Act are not open to question, particularly, in view of the
fact that no application for de- notification could be filed subsequently as
they had become barred by limitation.
The order of
assessment under the Income Tax Act having become final and binding as on the
date when the orders of assessment were passed and, thus, mere filing of
appeals, were not sufficient for raising a contention that the taxes did not
become due. Reliance in this behalf has been placed on B.C. Dalal v. Custodian
[Civil Appeal No. 2795 of 2004] and The Kedarnath Jute Mfg. Co. Ltd. v. The Commissioner of Income Tax, (Central), Calcutta [(1972) 3 SCC 252].
herein, apart from the corporate entity which is a front company of late Harshad
Mehta, have received large loans, advances and credits from the Harshad Mehta
Group and there had been intermingling of the assets to the tune of crores of
rupees, they cannot escape their liabilities under the Act. The affidavit filed
by the Appellants herein before the Special Court clearly shows that the liabilities exceed the assets in all
cases. Even in the case of Dr. Pratima Mehta wherein some excesses has been
shown, if the interest is calculated for the last over 13 years of the amount
received, the liabilities would exceed the assets.
The assets and
liabilities of each of the entities having been audited by the Chartered
Accountants, it is evident from the reports that in all cases liabilities
exceed the assets.
amount against the Harshad Mehta Group also would exceed Rs. 4339 crores and,
thus, the assets held by the Appellants are wholly insufficient to meet the
Appellants are also unable to maintain their residential properties as the
Custodian had to pay a sum of Rs. 1.06 crores towards the maintenance of the
said residential properties. The assets of the Harshad Mehta Group are valued
at Rs. 972 crores apart from the income tax dues whereas the aggregate amount
of income tax dues exceed Rs. 13,800 crores.
Dr. Hitesh Mehta
and Dr. Pratima Mehta who are medical practitioners by profession having
affirmed affidavits admitting that the share broking and investment businesses
which were part of family businesses were undertaken and conducted by late Harshad
Mehta and they had no knowledge thereabout nor were they involved therewith,
they at this stage cannot be permitted to turn round and contend that they have
nothing to do with the liabilities of Late Harshad Mehta.
The sale of
commercial property had never been seriously contested by the Appellants and in
fact the contention of the Appellants herein before the Special Court was that if the commercial
properties were sold, there would be no need to sell the residential
properties. Even before this Court, the sale of commercial properties had not
been questioned. A large number of commercial properties having already been
sold and third party rights having been created, this Court should not
interfere with the impugned judgment.
Statement of Objects and Reasons for enacting the Act reads as under:
In the course of
the investigations by the Reserve Bank of India, large scale irregularities and malpractices were noticed in
transactions in both the Government and other securities, indulged in by some
brokers in collusion with the employees of various banks and financial
institutions. The said irregularities and malpractices led to the diversion of
funds from banks and financial institutions to the individual accounts of
To deal with the
situation and in particular to ensure speedy recovery of the huge amount
involved, to punish the guilty and restore confidence in and maintain the basic
integrity and credibility of the banks and financial institutions the Special
Court (Trial of Offences Relating to Transactions in Securities) Ordinance,
1992, was promulgated on the 6th June, 1992. The Ordinance provides for the
establishment of a Special
Court with a sitting
Judge of a High Court for speedy trial of offences relating to transactions in
securities and disposal of properties attached. It also provides for
appointment of one or more custodians for attaching the property of the
offenders with a view to prevent diversion of such properties by the
offenders." 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 6th June, 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 such attached properties may be dealt with by
the Custodian in such manner as the Special Court may direct. In the Ordinance
which preceded the Act, there was no provision for giving post facto hearing to
a notified person for cancellation of notification, but such a provision has
been made in the Act, as would appear from Section 4(2) thereof:sub-section (1)
of Section 4 of the Act reads as under:
entered into fraudulently may be cancelled.-- (1) If the Custodian is
satisfied, after such inquiry as he may think fit, that any contract or
agreement entered into at any time after the 1st day of April, 1991 and on and
before the 6th June, 1992 in relation to any property of the person notified
under sub-section (2) of section 3 has been entered into fraudulently or to
defeat the provisions of this Act, he may cancel such contract or agreement and
on such cancellation such property shall stand attached under this Act;
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." Sub-section (2) of Section 4, however, provides for a hearing as
regard correctness or otherwise of the notification notifying a person in this
behalf, in the event, an appropriate application therefor is filed within 30
days of the issuance of such notification. Section 5 provides for establishment
of the Special Court. Section 7 confers exclusive
jurisdiction upon the Special
prosecution in respect of any offence referred to in sub-section (2) of Section
3 pending in any Court is required to be transferred to the Special Court. Section 9 provides for the
procedure and powers of the Special Court.
Section 9-A, which was inserted by Act 24 of 1994 with effect from 25th
January, 1994, confers all such jurisdiction, powers and authority as were
exercisable, immediately before such commencement by any Civil Court in relation
to the matter specified therein. Section 11 of the Act reads as under:
11. Discharge of liabilities.
anything contained in the Code and any other law for the time being in force,
the Special Court may make such order as it may deem
fit directing the Custodian for the disposal of the property under attachment.
liabilities shall be paid or discharged in full, as far as may be, in the order
taxes, cesses and rates due from the persons notified by the Custodian under
sub-section (2) of Section 3 to the Central Government or any State Government
or any local authority;
all amounts due
from the person so notified by the Custodian to any bank or financial
institution or mutual fund; and (c) any other liability as may be specified by
the Special Court from time to time." ANALYSIS
OF THE STATUTORY PROVISIONS The Act provides for stringent measures. It was
enacted for dealing with an extra-ordinary situation in the sense that any
person who was involved in any offence relating to transaction of any security
may be notified whereupon, all his properties stand attached. The provision
contained in the Act being stringent in nature, the purport and intent thereof
must be ascertained having regard to the purpose and object it seeks to
achieve. The right of a person notified to file an application or to raise a defence
that he is not liable in terms of the provisions of the Act or in any event,
the properties attached should not be sold in discharge of the liabilities can
be taken at the initial stage by filing an application in terms of Sub-section
(2) of Section 4 of the Act. But, at the stage when liabilities are required to
be discharged, the notified person may inter alia 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
AS REGARD SCOPE OF THE ACT
and / or interpretation of the Act came up for consideration before this Court
in Harshad Shantilal Mehta v. Custodian and Others [(1998) 5 SCC 1] wherein the
following questions were framed:
What is meant by
revenues, taxes, cesses and rates due? Does the word "due" refer
merely to the liability to pay such taxes etc., or does it refer to a liability
which has crystallised into a legally ascertained sum immediately payable?
Do the taxes [in
clause (a) of Section 11(2)] refer only to taxes relating to a specific period
or to all taxes due from the notified person?
At what point of
time should the taxes have become due?
Does the Special Court have any discretion relating to the
extent of payments to be made under Section 11(2)(a) from out of the attached
include penalty or interest? (6) Whether the Special Court has the power to absolve a notified person from payment of
penalty or interest for a period subsequent to the date of his notification
under Section 3. In the alternative, is a notified person liable to payment of
penalty or interest arising from his inability to pay taxes after his
notification?" As regard, Question No. 1, it was held:
In the present case, the words "taxes due" occur in a section dealing
with distribution of property.
this stage the taxes "due" have to be actually paid out. Therefore,
the phrase "taxes due" cannot refer merely to a liability created by
the charging section to pay the tax under the relevant law. It must refer to an
ascertained liability for payment of taxes quantified in accordance with law.
In other words, taxes as assessed which are presently payable by the notified
person are taxes which have to be taken into account under Section 11(2)(a)
while distributing the property of the notified person. Taxes which are not
legally assessed or assessments which have not become final and binding on the assessee,
are not covered under Section 11(2)(a) because unless it is an ascertained and
quantified liability, disbursement cannot be made. In the context of Section
11(2), therefore, "the taxes due" refer to "taxes as finally
regard to Question No. 2, it was opined:
kind of tax liability of the notified person for any other period is not
covered by Section 11(2)(a), although the liability may continue to be the
liability of the notified person. Such tax liability may be discharged either
under the directions of the Special Court under Section 11(2)(c), or the taxing
authority may recover the same from any subsequently acquired property of a
notified person (vide Tejkumar Balakrishna Ruia v. A.K. Menon) or in any other
manner from the notified person in accordance with law. The priority, however,
which is given under Section 11(2)(a) to such tax liability only covers such
liability for the period 1-4-1991 to 6-6-1992." In respect of the Question No. 3, it was opined that
the date of distribution arrives when the Special Court completes the
examination of claims under Section 9-A and if on that date, any tax liability
for the statutory period is legally assessed, and the assessment is final and
binding on a notified person, that liability would be considered for payment
under section 11(1)(a), subject to what follows.
as Question No. 4 is concerned, this Court despite upholding the contention of
the Custodian that no question of any reopening of tax assessments before the
Special Court would arise and the liability of the notified person to pay the
tax will have to be determined under the machinery provided by the relevant tax
the Special Court can decide how much of that
liability will be discharged out of the funds in the hands of the Custodian.
This is because the tax liability of a notified person having priority under
Section 11(2)(a) is only tax liability pertaining to the "statutory
period". Secondly payment in full may or may not be made by the Special Court depending upon various
circumstances. The Special
Court can, for this
purpose, examine whether there is any fraud, collusion or miscarriage of
justice in assessment proceedings.
who is before the Special
Court, is a person
liable to be charged with an offence relating to transactions in securities. He
may not, in these circumstances, explain transactions before the Income Tax
authorities, in case his position is prejudicially affected in defending
criminal charges. Then, on account of his property being attached, he may not
be in a position to deposit the tax assessed or file appeals or further
proceedings under the relevant tax law which he could have otherwise done.
Where the assessment is based on proper material and pertains to the
"statutory period", the Special Court may not reduce the tax claimed and pay it out in full. But
if the assessment is a "best judgment" assessment, the Special Court
may examine whether, for example, the income which is so assessed to tax bears
comparison to the amounts attached by the Custodian, or whether the taxes so
assessed are grossly disproportionate to the properties of the assessee in the
hands of the Custodian, applying the Wednesbury Principle of Proportionality.
The Special Court may in these cases, scale down the
tax liability to be paid out of the funds in the hands of the Custodian."
In regard to Question No. 5, this Court agreed with the finding of the Special Court that neither penalty nor interest
can be considered as tax under Section 11(2)(a) of the Act.
Question No. 6 is concerned, it was held that the remedy of a notified person
who is assessed to penalty or interest, after the notified period, would be
entitled to move the appropriate authority under the taxing statute stating:
it is open to him under the relevant taxing statute to contend that he was
unable to pay his taxes on account of the attachment of all his properties
under the Special Court Act, and that there is a valid reason why penalty or
interest should not be imposed upon him after the date of notification, the
authorities concerned under the taxing statute can take notice of these
circumstances in accordance with law for the purpose of deciding whether
penalty or interest can be imposed on the notified person. The Special Court is
required to consider this question only from the point of view of distributing
any part of the surplus assets in the hands of the Custodian after the
discharge of liabilities under Sections 11(2)(a) and 11(2)(b). The Special Court has full discretion under Section
11(2)(c) to decide whether such claim for penalty or interest should be paid
out of any surplus funds in the hands of the Custodian." We must, however,
notice that reliance was sought to be placed on paragraph 14 of the said
judgment wherein reference was made to a Bombay High Court judgment in Hitesh Shantilal
Mehta v. Union of India [(1992) 3 Bom CR 716] wherein it was held:
the person ... approaches the Special Court and makes out, for example, a case
that the property which is attached has no nexus of any sort with the illegal
dealings in securities belonging to banks and financial institutions during the
relevant period and/or that there are no claims or liabilities which have to be
satisfied by attachment and sale of such property, in our view, the Special
Court would have the power to direct the Custodian to release such property
from attachment." But, the said observation was held to be not laying down
a law by a 3- Judge Bench of this Court in L.S. Synthetics Ltd. v. Fairgrowth
Financial Services Ltd. and Another [(2004) 11 SCC 456] holding:
A notified party
has the requisite locus to bring the fact to the notice of the Special Court that certain sum is owing and due
to him from a third party whereupon a proceeding can be initiated for recovery
thereof by the Custodian and consequent application thereof in discharge of the
liability of the notified person.
of Section 3 should be literally construed and so construed, all properties
belonging to the notified person shall be subject to attachment which may,
consequently, be applied for discharge of his liabilities in terms of Section
11 of the said Act.
of the Limitation Act, 1963 have no application in relation to the proceedings
under the said Act." The ratio of the said decision as regard
applicability of the Limitation Act was further considered by a Division bench
of this Court in Fairgrowth Investments Ltd. v. Custodian [(2004) 11 SCC 472]
wherein it was held that Section 5 of the Limitation Act will have no
application in relation to an application falling under Sub-section (2) of
Section 4 of the Act stating:
is enough for the purpose of this appeal to hold that Section 29(2) of the Limitation
Act, 1963 does not apply to proceedings under Section 4(2) of the Special Court (Trial of Offences Relating to
Transactions in Securities) Act, 1992. Since the appellant's petition of
objection had been filed much beyond the period prescribed under that section,
the Special Court was right in rejecting the petition
in limine. The appeal is accordingly dismissed but without any order as to
Appellants herein are notified persons in terms of the provisions of the Act.
Therefore, all the properties belonging to them stand attached.
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.
Balakrishna Ruia v. A.K. Menon and Another [(1997) 9 SCC 123], this Court held:
our view, the terms of sub-section (3) of Section 3 are clear. By reason
thereof, the property that belongs to a notified person stands attached
simultaneously with the issue of the notification that makes him a notified
party. The words "on and from the date of notification" indicate the
point of time at which the attachment takes effect; this is reiterated by the
words "shall stand attached simultaneously with the issue of the
notification". This also indicates that no separate notification or order
in regard to the attachment is necessary.
the words "on and from the date of notification" nor the word
'property' lead to the conclusion that what is attached is not only that
property which the notified person owned or was possessed of on the date of the
notification but also all such property as he might acquire at any time
thereafter. The intention to attach property which did not belong to the
notified person on the date of the notification but which he might acquire
later would, had it been there, have been clearly expressed and sub-section (3)
would have stated that such property would stand attached the moment it was
acquired by the notified person.
Act would also have made provision for a subsistence allowance or the like for
the notified person. It seems to us that to give to Section 3(3) the wide
meaning that has been ascribed to it in the judgment and order under appeal
would render it perilously close to being held unconstitutional, for it would
deprive the notified person, so long as he remained a notified person, from
earning a livelihood. Even to say that such interpretation would reduce a
notified person to beggary would not be accurate (sic in accurate) because the
alms that he received, being his property, would stand attached.
apprehension expressed by the Special Court
does not appear to be well founded: if what a notified person obtains by way of
purported income or gift or inheritance is really his own money, such money
would, upon establishment of the fact, stand attached automatically under the
provisions of Section 3(3). In any event, it is for Parliament to enact a law
that meets all contingencies. The courts must interpret the law as it reads.
While a purposive interpretation is permissible where two interpretations are
possible, the purposive interpretation must be such as preserves the
constitutionality of the provision." It has further been held that the
property, be shares, dividends and bonus and rights shares, would also be
Appellants being not involved in offences in transactions in securities could
have been proceeded against in terms of the provisions of the Act.
individual liabilities of the Appellants ought to have been separately
considered by the Special
Court as not a part
of Harshad Mehta Group.
Whether the tax liabilities
could not have been held to be due as the order of assessments did not become
final and binding.
commercial properties could have been sold in auction.
residential properties should have been released from attachment.
adverting to the questions raised herein, we may notice that both the parties
have raised several contentions before us which have not precisely been raised
before the learned Special Judge. Several subsequent events have also been
brought to our notice. The parties have also filed several charts before us
showing individual assets and liabilities. It has, as noticed hereinbefore,
further been contended that various best judgment assessment passed by the
Assessing Authority against some of the Appellants have been set aside in
appeal and the matters are pending reassessment before the Assessing Authority.
Appellants' case is that the individual and corporate Appellants other than Harshad
Mehta, Ashwin Mehta and Sudhir Mehta filed applications, within the prescribed
period, before the Special
Court praying for
their de-notifications. However, by an order dated 14.07.2000, the said
applications were permitted to be withdrawn with a permission to re-file the
not in dispute that the said applications are pending for consideration before
the Special Court. They have not been heard. What
would be the effect of the jurisdictional question as regard maintainability of
the said application, being barred by limitation, would indisputably fall for
consideration before the Special
Court. We, therefore,
as at present advised, refrain ourselves from adverting to the said question.
question, however, before us is as to whether any contention which may not have
a direct bearing with the question as to whether the Special Court could entertain their applications
for de-notifications could be raised by way of defence. It is no doubt true
that the law of limitation bars a remedy but not a right. [See Bombay Dyeing & Manufacturing Co. Ltd.
v. The State of Bombay and others, AIR 1958 SC 338, Savitra Khandu Beradi v. Nagar
Agricultural Sale and Purchase Co-operative Society Ltd.
and others [AIR 1957 Bom 178, para 6] and Hari Raj Singh v. Sanchalak Panchayat
Raj U.P. Govt. Lucknow and others [AIR 1968 All 246, paras 14 and 15], but as
observed hereinbefore, it would not be proper for us to consider as to whether
such a remedy being not available, in terms of Section 4(2) of the Act can
still be determined if raised by way of defence.
L.S. Synthetics Ltd. (supra), this Court observed:
statute of limitation bars a remedy and not a right. Although a remedy is
barred, a defence can be raised. In construing a special statute providing for
limitation, consideration of plea of hardship is irrelevant. A special statute
providing for special or no period of limitation must receive a liberal and
broader construction and not a rigid or a narrow one. The intent and purport of
Parliament enacting the said Act furthermore must be given its full effect. We
are, therefore, of the opinion that the provisions of the Limitation Act have
no application, so far as directions required to be issued by the Special Court relating to the disposal of
attached property, are concerned." 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 consequent thereto. For the said purpose, it is not necessary
that they should be accused of commission of an offence as such.
contention of the Appellants to the effect that their properties should have
been attached only towards the liabilities incurred by the parties in respect
of the transactions made during the Statutory Period, cannot be accepted as all
the Appellants being notified, the attachment of the assets would be automatic.
[L.S. Synthetics Ltd. (supra)] However, the contention of the Appellants that
the properties held by them otherwise are sufficient to meet their liabilities
was required to be gone into, as, in our considered opinion, there cannot be a
any dispute that the Appellants have such a right.
corporate veil indisputably can be lifted on several grounds.
THE CORPORATE VEIL
principle of lifting the corporate veil, however, ipso facto would not apply to
the individuals. The Custodian in a case of this nature may, however, show that
the transactions entered into apparently by Harshad Mehta were intimately
connected with acquisition of properties in the name of others. A transaction
of Benami indisputably can be a subject matter of a lis in terms of Section
4(1) of the Act as and when such a question is raised, the same may have to be
dealt with by the Special
nexus between several persons in dealing with the matter may be established by
OF THE APPELLANTS DETERMINATION
fact, however, remains that the copies of the documents, books of accounts and
other records on the basis whereof the Auditors appointed by the Court filed
their reports had not been shown to the Appellants herein, on the premise that
they were in know of the things. As the said question has not been gone into by
the learned Judge, Special
Court, it is
necessary that the same be considered and appropriately dealt with. The
Appellants, however, raised the following contentions:
statement prepared by the Custodian and Exhibited as 'C' to his affidavit in
rejoinder dated 1.10.2003 was based on material, at least, all of which were
not connected to the Appellants as were pointed out before the Court. The
learned Special Judge has accepted the figures stated by the Custodian at face
value without probing the basis on which the statement was prepared, even
though the Appellants in their sur-rejoinder asserted that the figures in the
statement were contrary to both the books of accounts drawn by them as also the
In Para 14 of the sur-rejoinder, the Appellants denied the
asset and liability position as arrived at by the Custodian. According to the
Appellants, the Custodian has under-estimated the assets and exaggerated and
overstated their liabilities. A triable issue had been raised and the
Custodian's petition should have been converted into a suit. This was not done.
In fact, according to the Appellants, there are gross errors in the material
relied upon by the Custodian. The said contention must be properly adjudged.
charts have been filed before us by the Appellants to show:
been exaggerated by the Custodian. No credit for Rs.
released to revenue on interest are given by the Custodian.
been shown in relation to unperformed contracts.
given for relief obtained from Income Tax. Subsequent to the filing of the
present appeal in a large number of cases the revenue demands have been set
open to the Appellants, herein to show that even if they continued to be
notified, the Custodian was not right in clubbing all the individual members of
the family as a single entity styled as Harshad Mehta Group. It is interesting
to note that the properties belonging to the mother of Harshad Mehta has since
been released from attachment.
learned Special Court, despite, such a contention having
been raised by the Appellants in their affidavit in reply did not advert
thereto. It is furthermore not in dispute that pursuant to or in furtherance of
the directions issued by the learned Special Court, the accounts of all
entities, be it corporate or individual, were drawn up separately which
approach had not been dis-approved by the Auditor appointed by the Special
Court. Even in the rejoinder filed by the Custodian, e.g., paragraphs 14, 20,
21 and 22, before the Special
contentions have been raised.
thereto was filed on 15.10.2003 and in paragraphs 1 to 6 thereof, the said
statements were denied and disputed.
attention has also been drawn to a letter dated 7.10.2003 addressed by all the
Appellants to the Office of the Custodian wherein the attention of the
Custodian was drawn to the fact that all the documents relied upon by him had
not been permitted to be inspected and he was requested to forward a report
prepared by the Chartered Accountants in respect of the individual addressors
of the letters. The said letter was replied by the Custodian by his letter
dated 10.10.2003 wherein none of the queries contained in paragraphs 3 to 8 of
the said letter was even attempted to be answered. The Appellants, herein
contended that the Custodian did not furnish the requisite particulars thereof
and inspection was refused on the grounds stated therein.
learned Special Court, in paragraph 9 of the impugned
the grand total
of the admitted liability, thus, comes to Rs. 7,279,127,317.15.
the amount of
priority demand of Income Tax liabilities comes to Rs. 18,297,576,248.
value of the immovable properties of this group is Rs. 184,030,038.
Thus, the total
value of the assets as per the affidavit filed on behalf of the Custodian of Harshad
Mehta Group is Rs. 9,727,332,166.94.
into consideration the total of the decretal amount and the income-tax
liability, it is clear that the total assets of Harshad Mehta group would be
far below the liabilities.
arriving at the said finding, no contention of the parties raised in their
respective affidavits had been adverted to nor any material filed before it was
analysed. In our opinion, the learned Judge, Special Court should have analysed
the respective contentions of the parties in greater details and in particular
in regard to assets and liabilities of the separate entities and having regard
to the contentions raised by them that they are not part of the Harshad Mehta
Group and their individual liabilities can be met from the assets held and
possessed by them separately.
statement annexed to the affidavit of the Custodian showed individual break-up
and in that view of the matter the net asset picture of each individual of the
Appellants herein on individual basis and the effect thereof, in our opinion,
should have received serious consideration at the hands of the learned Special Court.
Custodian in terms of the directions issued by the learned Special Court had affirmed an affidavit putting
on record the assets and liabilities of each of the members of the so-called Harshad
Mehta Group on an individual basis. Allegedly, therein it was shown that the
individuals had received large loans, advances, credits from the Harshad Mehta
Group and there had been intermingling of the assets to the tune of crores of
rupees. Before us, Mr. Desai had filed a chart for showing the same. The said
chart, however, shows that at least Mrs. Deepika Mehta held assets more than
Desai contended that if interest is calculated, liabilities would be more than
assets. But, the said chart has been drawn up on the basis of the audited accounts,
the correctness whereof is itself in dispute. Before us a chart has been
produced by the Appellants herein as regards Mrs. Deepika Mehta to show her
liabilities payable as on 8th June, 1992
which are as under:
showing comparison of payables as on 8th June, 1992 As per Custodian's Affidavit As per
Books of Accounts As per Auditor's Report M/s. Harshad S.
(Payable as on 8.6.92) 25,44,68,654 9,70,18,916 9,70,18,916 M/s. Ashwin S.
Mehta (Payable as on 8.6.92) 2,68,47,613 1,02,35,942 1,02,35,942 M/s. Jyoti H.
Mehta (Payable as on 8.6.92) 1,45,28,332 55,39,083 55,39,083 Interest payable
towards three brokerage firms as on 8.6.1992 6,14,86,640 2,34,42,444 2,34,42,444"
We, therefore, have not been given a clear picture as to the correctness or
otherwise of the affidavit filed by the Custodian vis-`-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
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
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.
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.
Act confers wide power upon the Custodian and the learned Special Court and in that view of the matter,
having regard to the 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.
not in dispute that the tax liabilities of the Appellants individually were
assessed on the basis of Best Judgment assessment. It is, furthermore not in
dispute that in a large number of cases the appellate authorities have set
aside Best Judgment assessments. The contention of the Appellant to the effect
that the income tax dues should have been considered at the point of time when
they become recoverable cannot be accepted having regard to the 3-Judge Bench
decision of this Court in B.C. Dalal (supra) wherein this Court categorically
held that in absence of any order of stay granted by the higher court, the
liabilities would remain.
further notice that the learned Special Court relied upon a decision in Custodian v. Union of India and
Ors. [Misc. Petition No. 64 of 1998, disposed of on 17th August, 2000] wherein
allegedly a dichotomy between sale and distribution was sought to be resolved
in terms of the decision of this Court in Harshad Shantilal Mehta (supra), the
appeal whereagainst being Civil Appeal No. 5812 of 2000 was dismissed by this
Court by an order dated 4.12.2000 stating that it was in agreement with the
decision of the Special Court which called for no interference.
Court, therefore, has laid down a law that mere filing of an appeal is not
sufficient, particularly, when there is no order of stay on recovery has been
granted and the demand is outstanding.
Jute Mfg. Co. Ltd. (supra), this Court has held:
that liability cannot be enforced till the quantification is effected by
assessment proceedings, the liability for payment of tax is independent of the
assessment. It is significant that in the present case, the liability had even
been quantified and a demand had been created in the sum of Rs 1,49,776 by
means of the notice, dated November 21, 1957,
during the pendency of the assessment proceedings before the Income Tax Officer
and before the finalisation of the assessment. It is not possible to comprehend
how the liability would cease to be one because the assessee had taken
proceedings before higher authorities for getting it reduced or wiped out so
long as the contention of the assessee did not prevail with regard to the
quantum of liability etc." But, in this case, the orders of assessment
have been set aside. If the orders of assessment have been set aside the
liabilities of the Appellants have to be worked out on the basis of the new
orders of assessment. So long, such orders of assessment are not passed by the
competent assessing authorities, it cannot be said that the Appellants are liable
to pay a huge amount by way of income tax dues on the basis of such orders of
assessment which have since been set aside.
chart has been annexed to the additional written submissions filed by Mr.
Desai, which originated from a letter dated 9th December, 2005 issued by the Office of the
Commissioner of Income Tax showing the current status of the liabilities of the
individual members of the Harshad Mehta group in the following terms:
Ashwin Mehta Rs.
Deepika Mehta Rs.
120 crores (even after deducting the amount set aside by ITAT, it exceeds Rs.
Mehta Rs. 11829 crores
Jyoti Mehta Rs.
Hitesh Mehta Rs.
Pratima Mehta Rs.
115 crores (even after deducting the amount set aside by ITAT it exceeds Rs. 35
Sudhir Mehta Rs.
Aatur Holdings Rs.
15.95 crores (even after deducting the amount set aside by ITAT, it exceeds Rs.
2.7 crores)" The Custodian has further brought on records that if the
transactions by or on behalf of corporate entity, viz., Aatur Holdings Pvt.
Ltd. and Dr.
Mehta by way of illustration are taken into consideration, the same would
reveal their modus operandi to the effect that the moneys were diverted from
banks and financial institutions by late Harshad Mehta which were in turn
diverted to his family concerns and family members. These moneys were used for
speculative transactions and securities and the profits generated was used for
learned Special Court, having not arrived at such a
finding, this Court is not in a position to go into the correctness or
view of the matter, the learned Judge, Special Court having not dealt with the question as regard the mode and
manner of disbursements of the amount so far as the tax liabilities of the
Appellants are concerned elaborately, the same requires fresh determination in
the light of the decision of this Court in Harshad Shantilal Mehta (supra).
fact, the Appellants have brought on records various orders passed by Income
Tax Appellate Authorities to show that the demands of the revenue have been set
the orders of the appellate authority have been passed during pendency of this
appeal. This Court, it is trite, can take into consideration the subsequent
events. Such subsequent events could also be taken into consideration for the
purpose of review.
Board of Control for Cricket in India and Another v. Netaji Cricket Club and Others [(2005) 4 SCC 741], this
is also not correct to contend that the Court while exercising its review
jurisdiction in any situation whatsoever cannot take into consideration a
subsequent event. In a case of this nature when the Court accepts its own
mistake in understanding the nature and purport of the undertaking given by the
learned Senior Counsel appearing on behalf of the Board and its correlation
with as to what transpired in the AGM of the Board held on 29-9- 2004, the
subsequent event may be taken into consideration by the Court for the purpose
of rectifying its own mistake." In view of the aforementioned
pronouncement of law, we are of the opinion that it is absolutely necessary to
request the learned Special
Court to consider the
SALE OF COMMERCIAL PROPERTIES
Sale of commercial properties has never
been seriously contested by the Appellants. In fact one of the contentions
raised on behalf of the Appellants had been that if commercial properties are
sold, there would be no need to sale the residential properties. This Court
also in its order dated 5th May, 2004 clarified that the interim order dated
30th January, 2004 shall not be applicable as regard sale of commercial
properties as even before this Court the same had not been questioned. It is,
furthermore, not in dispute that third party rights have since been created by
reason of sale of a large number of commercial properties.
order dated 30th
January, 2004, while
admitting the appeals, this Court directed:
learned counsel for the Custodian brings on record the result of the bids and
the order of the Special
17.12.2003 and 20.1.2004. The learned counsel for the Appellants proposes to
offer his comments on the bids and the two orders of the Special Court. Let it be done within two weeks.
process of finalizing the bids according to law may be proceeded ahead by the Special Court. However, the finalization shall be
subject to the result of these appeals." The said order, however, was
modified and clarified by an order dated 5th May, 2004 that the same shall not
apply to the sale of commercial properties in view of the order of the learned
Judge, Special Court dated 17th October, 2003 wherein it was pointed out that
the notified parties did not dispute the commercial properties being put to
sale by the Custodian.
that view of the matter, evidently, creation of any third party interest is no
longer in dispute nor the same is subject to any order of this Court. In any
event, ordinarily, a bona fide purchaser for value in an action sale is treated
differently than a decree holder purchasing such properties. In the former
event, even if such a decree is set aside, the interest of the bona fide
purchaser in an auction sale is saved. [See Zain-ul-Abdin Khan v. Muhammad Asghar
Ali Khan - 15 IA 12]. The said decision has been affirmed by this Court in Gurjoginder
Singh v. Jaswant Kaur (Smt.) and Another [(1994) 2 SCC 368].
Raj v. Gurdial Singh and Anr. [1967 (2) SCR 77], this Court confirmed a sale in
favour of the Appellant therein who was a stranger to the suit being the
auction purchaser of the judgment-debtor's immovable property in execution of
an ex parte money decree in terms of Order XXXI Rule 92, Civil Procedure Code.
Despite the fact that ordinarily a sale can be set aside only under Rules 89,
90 and 91 of Order XXXI, it was opined that the court is bound to confirm the
sale and direct the grant of a certificate vesting the title in the purchaser
as from the date of sale when no application in term of Rule 92 was made or
when such application was made and disallowed and in support thereof Zain-ul-Abdin
Khan (supra) and various other decisions were referred to.
Ruqmini Amma v. P.K. Abdulla [(1996) 7 SCC 668], this Court making a
distinction between decree-holder auction purchaser himself and a third party
bona fide purchaser in an auction sale, observed :
ratio behind this distinction between a sale to a decree-holder and a sale to a
stranger is that the court, as a matter of policy, will protect honest outsider
purchasers at sales held in the execution of its decrees, although the sales
may be subsequently set aside, when such purchasers are not parties to the
suit. But for such protection, the properties which are sold in court auctions
would not fetch a proper price and the decree- holder himself would suffer. The
same consideration does not apply when the decree-holder is himself the
purchaser and the decree in his favour is set aside. He is a party to the
litigation and is very much aware of the vicissitudes of litigation and needs
therefore, do not interfere with that part of the order whereby and wherewith
the auction sale, as regard commercial properties, had been directed by the
learned Judge, Special
Court. The learned
Judge, Special Court, may, therefore, proceed to pass an
appropriate order as regard confirmation of the sale of such properties.
these appeals, we are concerned with sale of eight residential flats in a
building known as Madhuli. The flat belonging to the mother of Late Harshad
Mehta has been released. The flats, however, during pendency of these appeals
have been sold in auction. One of the flats being flat No. 202, Arunachal Bhawan,
Barakhamba Road, is subject matter of a separate
proceeding pending before this Court, viz., Civil Appeal No. 681 of 2004.
appeals, we are not concerned with the said flat.
the flats have been sold subject to the result of these appeals. The flats have
been sold on the basis of the joint liabilities of the Appellants together with
Harshad Mehta and other companies as a group.
liabilities of the Appellants, in view of our findings aforementioned, are
required to be considered afresh by the learned Judge, Special Court. The purchasers have also filed
applications for their impleadment in these appeals. We, however, have not
heard the purchasers as the question as to whether the auction sale of the said
flats will be confirmed or not will depend upon the ultimate finding of the
learned Judge, Special Court upon consideration of the matter afresh in the
light of the observations made hereinbefore.
therefore, would direct that the confirmation of sale of those flats be
considered and appropriate order thereupon may be passed by the learned Special Court while considering the matter
afresh. In the light of the directions issued herein, it would be for the
purchasers of the said flats to wait till a final decision is made or take back
the amount deposited by them, subject to any other or further order (s) that
may be passed by the learned Special Judge.
CONCLUSION: In view of our foregoing
discussions, we are of the opinion that:
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
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.
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.
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).
The learned Special Court shall proceed to pass appropriate
orders as regard confirmation of the auction sales in respect of commercial
As regard, sale
of residential properties, an appropriate order may be passed by the learned
Judge, Special Court in the light of the observations
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
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.
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.
Judge, Special Court shall allow the parties to make
brief oral submissions with pointed reference to their written submissions.
hearing in the peculiar facts and circumstances of this case should continue
from day to day.
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.
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.
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.
the aforementioned observations and directions, these appeals are allowed. The
impugned judgments are set aside and the matter is remitted to the learned
Judge, Special Court for consideration of the matter
afresh. However, the parties shall bear their own costs.