9911796707
TMI Blog2006 (1) TMI 257X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The 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 corproate entities, a partnership firm and three HUFs. However, out of the said 29 entities, only Late Harshad Mehta and two of his younger brothers were cited as accused in various criminal cases filed against them. The properties of Late Harshad Mehta and the Appellants, herein being notified persons stood attached in terms of the provisions of the Act. Proceedings before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate on which the custodian sends them communication asking them to vacate the flats, on sale of the flats being sanctioned by the Court. The 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 on. In case on 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 Mics. petition No. 41 of 1999." Contentions of the parties Appellants 6. 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: (i)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 corpo-rate incorporated and registered under the Indian Companies Act, the doctrin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (iii)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 Kedarnath Jute Mfg. Co. Ltd. v. CIT [1972] 3 SCC 252. (iv)The Appellants 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 Appellant hereinbefore 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of certain brokers. (2) 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 6-6-1992. 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." 9. 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 6-6-1992 (the Statutory Period), notify the name of such person in the Official Gazette. Sub-section ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. (2) The following liabilities shall be paid or discharged in full, as far as may be, in the order as under: (a )all revenues, 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; (b)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 11. The Act provides for stringent measures. It was enacted for dealing with an extraordinary 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 notif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 assessed'. In regard to Question No. 2, it was opined: "Every 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." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity to be paid out of the funds in the hands of the Custodian." 15. 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. 16. So far as 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: "If 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 liabilitie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ences 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 costs." (p. 519) Attachment of properties 20. The Appellants herein are notified persons in terms of the provisions of the Act. Therefore, all the properties belonging to them stand attached. 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. 21. In Tejkumar Balakrishna Ruia v. A.K. Menon [1997] 9 SCC 123, this Court held: "In 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 simultan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Special Court as not a part of Harshad Mehta Group. (iii)Whether the tax liabilities could not have been held to be due as the order of assessments did not become final and binding. (iv)Whether the commercial properties could have been sold in auction. (v)Whether the residential properties should have been released from attachment. 23. Before 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 assessments 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. Application for de-notification 24. The 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 Specia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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. 29. The 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.'s case (supra). 30. 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 any dispute that the Appellants have such a right. A corporate veil indisputally can be lifted on several grounds. Lifting the corporate veil 31. The principal 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demands have been set aside. 33. It is 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. 34. The 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 disapproved 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 Court, such contentions have been raised. 35. A sur-rejoinder thereto was filed on 15-10-2003 and in paragraphs 1 to 6 thereof, the said statements were denied and disputed. 36. Our attention has also been drawn to a letter dated 7-10-2003 addressed by all the Appellants ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 her liabilities. Mr. 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 : "Chart showing comparison of payables as on 8th June, 1992 : As per Custodian's Affidavit As per Books of Account As per Auditor's Report M/s. Harshad S. Mehta (Payable as on 8-6-1992) 25,44,68,654 9,70,18,916 9,70,18,916 M/s. Ashwin S. Mehta (Payable as on 8-6-1992) 2,68,47,613 1,02,35,942 1,02,35,942 M/s. Jyoti H. Mehta (Payable as on 8-6-1992) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. 43. 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice that the learned Special Court relied upon a decision in Custodian v. Union of India [Misc. Petition No. 64 of 1998, dated 17-8-2000 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's case (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. 48. This 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. 49. In Kedarnath Jute Mfg. Co. Ltd.'s case (supra), this Court has held : ". . . Although 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 21-11-1957, during the pendency of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he correctness or otherwise thereabout. 54. In any 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's case (supra). 55. In 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 aside. 56. Furthermore, 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. 57. In Board of Control for Cricket in India v. Netaji Cricket Club [2005] 4 SCC 741 this Court held : "It 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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. (Smt.) Jaswant Kaur [1994] 2 SCC 368. 62. In Janak Raj v. Gurdial Singh [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. 63. In Padanathil Ruqmini Amma v. P.K. Abdulla [1996] 7 SCC 668, this Court making a distinction between decree-holder auction purchaser himself and a third p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 67. We, 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 68. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the date. (viii)The learned Judge, Special Court shall allow the parties to make brief oral submissions with pointed reference to their written submis- sions. 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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