2024 (3) TMI 868 - SC - SEBI

Attachment of Properties - Large-scale irregularities committed by some share brokers in collusion with the employees of Banks and Financial Institutions - diversion of funds from the banks/FIs to the individual accounts of certain brokers - Section 10 of the Special Court (Trial of Offences relating to transactions in Securities) Act, 1992 - HELD THAT - The entire case of the Custodian regarding subsisting debts of the appellant towards respondent Nos. 6, 7 and 8 was based on a communication received from the Income Tax Department. The appropriate witness to prove such communication would be the official concerned from the Income Tax Department. However, as has been mentioned above, no witness from the Income Tax Department was examined in support of the recovery application. Even the communication forwarded by the Income Tax Department and relied upon by the Custodian was not proved by proper evidence. The appellants herein took a categoric stand in their depositions that they had returned the amounts borrowed from respondent Nos. 6, 7 and 8, but the books of accounts were not available because of lapse of time. The said plea of the appellants herein could not be treated as unnatural or an afterthought because once the transactions were completed and the loans were repaid, there was no reason for the appellants to have entertained a belief that after a period of about 13 years, they would be required to present the account books pertaining to transactions. It was neither a requirement in law nor could it be expected from the appellants herein to retain the books of accounts after more than a decade of the alleged suspicious transactions. Resultantly, the conclusions drawn and the findings recorded in the impugned judgments passed by the Special Court that the appellants herein failed to prove the fact that the amounts had been repaid to the benami companies of the notified person, namely, Pallav Sheth do not stand to scrutiny and cannot be sustained as being contrary to facts and law. Appeal allowed.

Summary

Issues Involved:
1. Applicability and interpretation of the Special Court (Trial of Offences relating to transactions in Securities) Act, 1992.
2. Determination of liability of garnishees in connection with benami transactions.
3. Burden of proof in establishing the existence of debt and repayment.

Summary of Judgment:

1. Applicability and Interpretation of the Act of 1992:
The appeals arise under Section 10 of the Special Court (Trial of Offences relating to transactions in Securities) Act, 1992. The Act was promulgated to address large-scale irregularities by share brokers in collusion with banks and financial institutions, leading to the diversion of funds. It provided mechanisms for speedy recovery of diverted funds, punishment of offenders, and restoration of public confidence. The Act also established a Special Court for the trial of offences and disposal of attached properties.

2. Determination of Liability of Garnishees:
The case involved Fairgrowth Financial Services Limited (FFSL) and Pallav Sheth, with Sheth being declared insolvent and his properties vested in the Official Assignee. The appellants, Suman L. Shah and Laxmichand Shah, had borrowed sums from companies alleged to be benami entities of Sheth. The Special Court directed the appellants to pay the amounts borrowed to the Custodian with interest, treating them as garnishees of Sheth.

3. Burden of Proof in Establishing the Existence of Debt and Repayment:
The appellants contended that the Special Court erred in holding them liable as garnishees without sufficient evidence. They argued that the loans were taken and repaid long before Sheth was notified under the Act, and the burden of proof lay on the Custodian to establish the existence of the debt. The Custodian's case relied on a communication from the Income Tax Department, which was not properly proved in court.

Judgment:
The Supreme Court found that the Custodian failed to discharge the primary burden of proving the subsistence of the debt. The appellants' plea of repayment was considered reasonable given the lapse of time and the absence of a requirement to retain account books for over a decade. The Court quashed the Special Court's judgments, setting aside the findings that the appellants failed to prove repayment. The appeals were allowed, and the amounts deposited by the appellants were ordered to be reimbursed.