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The Appellants herein and the said FAC |
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 FAC |
In terms of the provisions of the Act, along with late Harshad Mehta, the Custodian had notified 29 entities in terms of S. 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 FAC |
However, 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 FAC |
The properties of Late Harshad Mehta and the Appellants, herein being notified persons stood attached in terms of the provisions of the Act FAC |
PROCEEDINGS BEFORE THE SPECIAL COURT FAC |
Before the learned Special Court, the parties herein filed several applications which can be sub-divided in three categories, as would be noticed shortly hereinafter FAC |
It is not in dispute that the learned Special Court on or about 3.August.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.April.1990 and 8.June.1992, i.e., the date of the notification FAC |
Three firms of Chartered Accountants were appointed to prepare statement of accounts and liabilities of each of the Appellants, herein FAC |
A Chartered Accountants' Firm was appointed by the learned Special Judge by an order dated 17.September.2003 to represent all notified entities in the family of late Harshad Mehta for the purpose of ascertaining their tax liabilities FAC |
We may, at this juncture, notice the nature of the applications filed by the parties, herein before the learned Special Court: (i FAC |
On 26.April.1999, the Custodian filed an application being Misc FAC |
Application No. 41 of 1999 seeking permission of the Special Court for sale of residential premises commonly known as Madhuli of eight notified entities FAC |
ii Ratio |
A Misc FAC |
Application being 4 of 2001 was filed by the Custodian praying for the sale of commercial premises FAC |
iii Ratio |
The Appellants herein filed several Misc FAC |
Applications praying for lifting of attachment on their residential premises on the ground that the same had been purchased much prior to 1.April.1991 and the same had no nexus with any illegal transactions in securities FAC |
Alternatively, it was prayed that since their asset base was greater than genuine liabilities, the said residential premises should be released from attachment FAC |
IMPUGNED JUDGMENT RLC |
By reason of the impugned order dated 17.October.2003, the learned Special Judge allowed Misc FAC |
Applications Nos FAC |
4 of 2001 and 41 of 1999 FAC |
The Misc FAC |
Applications filed by the Appellants herein for release of the residential flats as well as the commercial premises from attachment were dismissed FAC |
It was directed: "In 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 custodia... |
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 FAC |
In 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 FAC |
8 and Exh FAC |
8-1 to Misc FAC |
Petition No. 41 of 1999 FAC |
CONTENTIONS OF THE PARTIES Appellants 9 ARG |
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 ARG |
Some of the entities having their asset base much more than actual liability, the impugned judgments are unsustainable ARG |
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 ARG |
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 ARG |
ii) 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 ARG |
The liabilities 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 ARG |
iv RLC |
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... |
v) The Appellants 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 ARG |
vi) Drawing our 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 ARG |
Auditor's Report, it was submitted that the Auditor's Report could not have been relied upon ARG |
vii Ratio |
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 ARG |
Respondents ARG |
Mr. Ashok H. Desai, learned senior counsel appearing on behalf of the Custodian, on the other hand, would, inter alia, submit ARG |
i)In view of the decision of this Court in L.S. Synthetics Ltd. v. Fairgrowth Financial Services Ltd. and Another [(2004) 11 SCC 456] 2004 Indlaw SC 715 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 Gr... |
ii)The applications 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 subseque... |
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 ARG |
Reliance in this behalf has been placed on B.C. Dalal 2005 Indlaw SC 1826 v. Custodian ARG |
Civil Appeal No. 2795 of 2004] and The Kedarnath Jute Mfg ARG |
Co. Ltd. v. The Commissioner of Income Tax ARG |
Central), Calcutta [(1972) 3 SCC 252] 1971 Indlaw SC 841 ARG |
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 ARG |
The affidavit filed by the Appellants herein before the Special Court clearly shows that the liabilities exceed the assets in all cases ARG |
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 ARG |
v) 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 ARG |
vi)The decretal amount against the Harshad Mehta Group also would exceed Rs ARG |
4339 crores and, thus, the assets held by the Appellants are wholly insufficient to meet the liabilities ARG |
vii)Furthermore, the Appellants are also unable to maintain their residential properties as the Custodian had to pay a sum of Rs ARG |
1.06 crores towards the maintenance of the said residential properties ARG |
The assets of the Harshad Mehta Group are valued at Rs ARG |
972 crores apart from the income tax dues whereas the aggregate amount of income tax dues exceed Rs ARG |
13,800 crores ARG |
viii)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 involv... |
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 ARG |
ix)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 ARG |
Even before this Court, the sale of commercial properties had not been questioned ARG |
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 ARG |
THE ACT ARG |
The Statement of Objects and Reasons for enacting the Act reads as under: "(1) 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 employe... |
The said irregularities and malpractices led to the diversion of funds from banks and financial institutions to the individual accounts of certain brokers STA |
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) Ordi... |
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 STA |
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 STA |
S. 3 of the Act provides for appointment and functions of the Custodian STA |
Sub-s STA |
2) of S. 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 Gazett... |
3) of S. 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 ma... |
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 S. 4(2) thereof STA |
1) of S. 4 of the Act reads as under: "Contracts entered into fraudulently may be cancelled.-- 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 ... |
2) of s. 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 STA |
Provided 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 STA |
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 STA |
S. 5 provides for establishment of the Special Court STA |
S. 7 confers exclusive jurisdiction upon the Special Court STA |
Any prosecution in respect of any offence referred to in sub-s STA |
2) of S. 3 pending in any Court is required to be transferred to the Special Court STA |
S. 9 provides for the procedure and powers of the Special Court STA |
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 STA |
S. 11 of the Act reads as under: "Discharge of liabilities STA |
Notwithstanding 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 STA |
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-s STA |
2) of S. 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 STA |
ANALYSIS OF THE STATUTORY STA |
PROVISIONS STA |
The Act provides for stringent measures Ratio |
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 Ratio |
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