TMI Blog2008 (5) TMI 418X X X X Extracts X X X X X X X X Extracts X X X X ..... 6-5-2008 - S.B. SINHA AND Y.S. SIRPURKAR, JJ. Mahesh Jethmalani and Ms. Kamini Jaiswal for the Appellant. Arvind Kumar Tewari and Abhishek Tewari for the Respondent. JUDGMENT V.S. Sirpurkar, J. - These appeals are by way of a challenge to the order dated 2-11-2007 passed by the Special Court of Bombay constituted under the Special Courts (Trial of Offences Relating to Transactions in Securities) Act (hereinafter referred to as the Act ). By the impugned common order, Miscellaneous applications filed by Mr. Sudhir S. Mehta, Ms. Deepika A. Mehta, Mr. Ashwin B. Mehta, Gromore Research Assets Management Ltd., Ms. Jyoti S. Mehta and Mr. Hitesh S. Mehta, as also Ms. Pratima Mehta were disposed of by the learned Single Judge. In that order, the Special Court directed the Custodian under the Act to refer two questions for the opinion of Disposal Committee. They were : ( i )What would be the appropriate time to be given to the bidders for submitting bids after publication of the notice inviting bids? ( ii )Whether it will be admissible to break up the shares into appropriate groups and to give options to the bidders to bid either for whole lot or for a limi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stage, the objections were raised by way of the Miscellaneous Applications before the Special Court at the instance of the appellants herein. The common grievances made in these objections- cum -applications were : ( i )that the time given in the advertisements for making offers was too short for the intended investors considering the huge number of shares and the prevailing market price of the shares. ( ii )that the shares could fetch more price if the Custodian had divided the shares into appropriate groups and given the option to the offerers to make offer for the whole lot or one or more groups. ( iii )that in fact, this was not an appropriate time to sell the shares considering the prevailing market conditions. ( iv )that if the shares were to be sold privately as was being done, the capital gains tax would be required to be paid and, therefore, the shares should have been sold at the stock exchange. 4. The Special Court dealt with all the 4 objections. It firstly noted its order dated 17-8-2000, whereby, a scheme was framed for the sale of the attached shares and a Committee of experts known as Disposal Committee was constituted and the sale of shares was conduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... keep their offer open. The learned Judge, therefore, decided not to accept the report of the Disposal Committee recommending the sale in favour of the LIC of India and issued the directions which we have already mentioned above. 6. It is, therefore, obvious that, firstly, there is no immediate possibility of the sale of the shares as was intended by the Custodian unless the directions given by the learned Judge are complied with. So also, since as many as 6 months have elapsed, the whole situation regarding the market has drastically changed and, therefore, the Disposal Committee would again be required to decide afresh as to whether the Reliance Shares should be sold and/or when they should be sold. It is also an admitted position that the legal opinions regarding the tax liability has also not been obtained by the Custodian and, therefore, the matters have not been crystallized and are still in a fluid state. 7. However, by these appeals, the basic objection is being raised to the effect that the Custodian or the Special Court have not examined nor given a finding with respect to the involvement of the appellants with late Sh. Harshad S. Mehta, nor has the Custodian exam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid that the Custodian in any manner failed to do anything that was expected of him. Further, the Custodian had asserted that the appellants are trying to wake up the dead issues and non-issues without there being any occasion for the same. 9. Shri Jethmalani appearing for the appellants mainly stressed on the judgment of this Court in Ashwin S. Mehta s case ( supra ). Heavy reliance was placed on paragraphs 36, 41, 42, 46, 47, 50, 51, 52 and 77 and it was expressed that all these directions were never complied with by the Special Court nor were the individual liabilities were ever considered as was directed by this Court in that judgment. 10. Some basic facts were brought before us. Basic facts 11. After the huge scam broke out in respect of the shares and securities, which was almost of oceanic proportion, the Central Government came out with the aforementioned Act. 12. Section 3 of the Act provides for the appointment and functions of the Custodian. The Custodian, on being satisfied that any person is involved in any offence relating to the transactions of securities between the period 1-4-1991 and 6-6-1992, can notify the name of such person in the Officia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ves of late Sh. Harshad S. Mehta like the appellants, so also the other entities including the one which is before us today, i.e., the Fairgrowth Financial Services Ltd. The shares belonging to late Sh. Harshad Mehta, as also the appellants herein and the entities were of various companies. On 20-2-1995, in Misc. Application No. 107 of 1993 and other similar Misc. Applications, the Special Court formulated certain questions. On the interpretation of section 11 of the Act, more particularly, in respect of the priorities created under that section, the learned Judge presiding the Special Court directed the Custodian to move to the Supreme Court and hence, the appeal being Civil Appeal No. 5525 of 1995 came to be filed by the Custodian before this Court. In the same appeal all the notified persons were joined as the parties and they also filed their say. Not only that, but the notified parties also filed Civil Applications before this Court which were clubbed together and all these Civil Applications were disposed of by an order dated 11-3-1996 passed by this Court. By the said order, this Court directed a scheme to be drafted in respect of the sale of shares from time to time. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... notification under section 3. The only right which the Custodian has, in respect of the rights of third parties in such properties, is conferred by section 4 under which, if the Custodian is satisfied that any contract or agreement which was entered into by the notified party within the statutory period in relation to an attached property, is fraudulent or entered into for the purpose of defeating the provisions of the Special Court Act, he can cancel such contract or agreement. There is no other provision under the Special Court Act which affects the existing rights of a third party on the date of attachment, in the property attached. The attached property also does not vest in the Custodian. In this regard, the position of a Custodian is different from that of an official liquidator of a company in winding up. Had the Act provided for the extinguishment of any subsisting rights of other persons in the attached property, the Act could well have been considered as arbitrary or unconstitutional ( vide C.B. Gautam v. Union of India [1992] 65 Taxman 440). 13.The directions, therefore, for disposal under section 11(1) can be given only after the Special Court has satisfied itsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on proper material and pertains to the statutory period , the Special Court may not reduce the tax claimed and pay it out in full. In paragraph 40, the Court made reference to the order dated 11-3-1996, whereby, the Court had directed the Custodian to draft a scheme in respect of the shares held by the Custodian whereby such shares can be sold from time to time. The Court further noted that the Custodian was directed to forward the scheme for the approval of the Union of India and after the approval, the final scheme incorporating the modifications by the Union of India was filed in this Court. The Court specifically directed that the Special Court shall consider the scheme and the appropriate orders may be passed by the Special Court in respect of the scheme so submitted. The Court also upheld the consti- tutional validity of section 11 read with section 3(3) of the Act, and that is how, the earlier appeals were disposed of. 17. In pursuance of the order, to consider the scheme, the Special Court came out with an order dated 17-8-2000. The learned Judge then considered the whole scheme in extenso. Arguments were raised challenging the sale of the shares at that point of tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mehta group and Fairgrowth Financial Services Ltd. and, therefore, the scheme should not be applied to Dhanraj Mills. The learned Judge then observed : "The above arguments were adopted by Mr. Jethmalani, the learned counsel for Respondent Nos. 3 to 27 (Harshad Mehta Group). The said arguments were also adopted by the counsel for other notified parties. However, Mr. Jethmalani added that in the Order of Variava, J. (as he then was) dated 20-2-1995, three questions of law were settled. In the said ruling the learned Judge has set out the time for distribution under section 11 and, it was on that basis, that the Supreme Court proceeded to give its interim order for drafting the Scheme of sale of shares ( see Order dated 11-3-1996 being the interim order in Civil Appeal No. 5326 of 1995). The Supreme Court till then had not considered the question as to when the stage for distribution arises under section 11. It was contended that the said issue was settled finally when the Supreme Court delivered the judgment on 13-5-1998 in the case of Harshad Mehta v. Custodian [1998] 5 SCC 1. Therefore, at the time of delivering the interim order on 11-3-1996, the question as to when th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the benami and unregistered shares. The learned Judge then noticed that there were in all 6.65 crores of shares. The learned Judge then observed : ". . . the position which has emerged is that the notified parties have not brought before the authorities/accountants appointed by the Court the relevant documents. It is for this reason that even the income-tax department has ultimately proceeded to assess some of the assessee-notified parties under best judgment assessment. During the said period none of the notified parties have come before the Court claiming that the assets are more than the liabilities. Their only contention is that the liabilities have not been crystallized. Their only contention is that till final adjudication is carried out by all the authorities under the Income-tax Act by way of appeals, the assessment is not final and binding." 20. After noting these preface facts, the learned Judge examined the judgment of this Court and noted that the only condition prescribed by the judgment vide paragraph 13 was the satisfaction of the Special Court before it gives directions for disposal to the effect that the attached property belonged to the notified parties. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest from the assessee under section 11(2)( c ). Therefore, there is no merit in the contention that the funds of some of the notified parties with the Custodian are far in excess of the tax demand and, therefore, they should not be brought within the Scheme for sale of shares. ( d )In view of the provisions of the Special Court Act, it is not necessary for this Court to postpone, in any event, the sale of shares till the claims against the notified parties are finally adjudicated upon. Looking to the income-tax demands, the decrees passed in various suits by this Court, it is clear that the liabilities of the notified parties exceed the attached assets and, therefore, one need not wait till all pending claims are finally adjudicated upon. ( e )The words taxes due in section 11(2)( a ) only refers to the liability, which is completed in accordance with the provisions of the Income-tax Act. In other words, the expression taxes due would mean assessed tax, which are presently payable. The said expression does not contemplate taxes as finally payable." 21. By way of a second question, which pertained to the challenge of the validity of scheme, the learned Judge held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e affirm the said directions with minor changes." 24. This Court then gave certain directions for the sale of bulk shares and modified the order dated 17-8-2000, holding that it would be more appropriate that the offer of the shares be not restricted only to the institutional buyers, and the non-institutional buyers including the management of the company may also be offered the shares of all the appellant-company. It observed that in that way, the best price would be realized. As regards the controlling block of shares, the Court directed that it would be open to the Special Court to decide whether to have the sale of the controlling block of shares either by inviting bids for purchase of controlling block as such or by selling the said shares according to the norms fixed for the sale of bulk shares or by the norms fixed in respect of routine shares. With these words, the order of the learned Special Judge was totally confirmed. It is only on the basis of this order, that ultimately, the advertisements came to be issued. However, there is one more development, which we must refer to. 25. On 26-4-1999, the Custodian had filed an application being Misc. Application No. 41 of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. ( 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 to now being existing, the residential properties could not have been sold. ( vi )Drawing our attention to a representative chart showing the discrepancies in the accounts of Mrs. Deepika A. Mehta as shows in ( a ) affidavit by the custodian; ( b ) books of account maintained by the appellants; and ( c ) auditor s report, it was submitted that the auditor s report could not have been relied upon. ( vii )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. 26. On behalf of the respondents, it was pointed out that all properties belonging ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Mehta, the denotification applications were filed by individual and corporate appellants, and by order dated 14-7-2000, those applications were permitted to be withdrawn with the permission to refile the same. In paragraph 31, the Court expressed that the said applications were pending for consideration before the Special Court and since those applications were to be decided by the Special Court particularly in respect of the limitation and jurisdiction etc., the Court will refrain itself from adverting to the said question. In paragraph 41, the Court observed that it was open to the appellants to show that even if they continue 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. The Court noted that a property belonging to the mother of Harshad Mehta was released from attachment. The Court then went on to consider the liabilities against the notified parties as also the valuation of immovable properties. The Court also disapproved the accep- tance by the learned Judge, of the figures mentioned in the affidavit of the Custodian and stated that the learned Judge had relied upon the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e due consideration of the learned Judge, Special Court afresh in the light of the observations made hereinbefore. ( iii )to ( v )****** ( vi )We direct the Custodian to permit the appellants to have inspection of all the documents in his power or possession in the premises of the Special Court in the presence of an officer of the court. Such documents must be placed for inspection for one week continuously upon giving due notice therefore 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 any may make notes therefrom for their use in the pending proceeding. ( vii )The appellants shall file their objections to the said report, if any, within ten days thereafter. The Custodian may also take assistance and/or further assistance from a chartered accountant of his choice. A reply and/or rejoinder thereto shall be filed within one week from the date of the receipt of the copy of the objection. The parties shall file their respective documents within one week thereafter. Such d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the aforementioned judgment dated 3-1-2006 in Civil Appeal No. 667-81 of 2004 (hereinafter called Ashwin S. Mehta s case ( supra ) and more particularly, in paragraphs 41, 42, 46, 47, 51, 52 and 53, the whole arguments turns practical on this very issue. (2)that there was no reason for the Special Court to have ordered the sale of shares, and the Custodian as well as the Special Court have failed to justify the decision to put the shares on auction and distribute the liabilities. (3)that such decision is arbitrary and the sale of the shares shall lead to serious loss to the notified persons. The liabilities were only of late Sh. Harshad S. Mehta and not of the other notified parties and since the assets of the notified parties can meet their liabilities, the sale of the shares by auction was not justified. This is all the more true in view of the fact that the Custodian has not yet found the inter se liabilities of the notified parties, when their applications for denotification are not decided and pending before the Special Court. (4)it was also submitted by the learned counsel that because of the earlier sale of the shares, the parties were put to the loss of Rs. 6,5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he tax liability also, the learned Judge had directed the Custodian to seek legal and professional advice, and for that purpose, practically wiped out the effect of the auction by directing the compliance of his directions. Thus, for all the practical purposes, one thing was certain that the shares were not to be sold unless all the directions were complied with. However, the appellants did not wait and rush to this Court even before the Disposal Committee had given its opinion on the various issues and even before the Custodian was able to get the legal and professional opinions regarding the tax liability. 34. It is obvious that the Disposal Committee would now have to again take a decision whether at this point of time, the shares should be sold or not. The Disposal Committee consists of the experts who would know best, whether the shares should at all be sold at this point of time. However, the appellants have come before this Court insisting that the shares should not be sold at all, which stand was conspicuously absent when the matters were argued firstly before the Special Court or even before this Court, as we do not find any trace of the said contentions in the argumen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pplications pending consideration before the Special Court nor are any such applications pending today also. Hence, an objection to the sale, on that ground, must be rejected. This answers contention No. 3. 37. The second aspect, which we would like to consider is the objection which is now raised to the nomenclature Harshad Mehta Group . We do not want to go to that aspect, because for the decision of this case, that is not a relevant aspect whether any appellant is referred to as a group or not. The very fact that such appellant is a notified person would be enough for the attachment of his/her property because of the section 3(2) of the Act. In our opinion, there would be no necessity to consider the individual liability of any such appellant being a notified person. Unless any appellant is denotified, there would be no question of raising of these defences regarding individual liability. It is obvious, that the notification covers all the properties including the shares and securities of the notified persons and, therefore, comes into the hands of the Custodian. There would, therefore, be no question of raising the issues that the individual liability of such a notified pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd legal assessment, the actual tax liability of Harshad Mehta Group would be marginal and a large portion of the amounts would have to be refunded by the revenue. He contended that in case of Harshad Mehta Group, the demands made by the Department are based on the best judgment assessments, which are highly exaggerated. He contended that the assessment orders are ex parte in nature. He contended that Harshad Mehta Group is contesting the demands before the Appellate Authorities ." [Emphasis supplied] 40. It was, therefore, obvious that at that juncture, when the question was as to whether the shares should be sold or not, the move was objected to by the appellants formulating themselves as Harshad Mehta Group. No such objection to form and treat the relatives as a group was raised before the Special Court in the year 2000 when the question of sale of shares fell for consideration for the first time. At any rate, unless it is shown as to what prejudice would be caused by treating them to be a group, this contention has no basis. We, therefore, do not think that the argument in this behalf has any basis. 41. In paragraphs 46 and 47, this Court has criticized that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, who had no connection with Sh. Harshad Mehta, they could not have been proceeded against for meeting the liabilities of Sh. Harshad Mehta jointly or severally and a clear finding was required to be arrived at. Only because there had been large intermingling and flow of funds from Sh. 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 and it was, therefore, necessary for the learned Special Court to arrive at a firm conclusion as regards the involvement of the individuals with Sh. Harshad Mehta, if any, and the extent of his liability as such." No such argument seems to have been advanced before the Special Judge at all in respect of the shares and the securities in respect of which this Court had finalized the issue. 43. Paragraph 52 refers so-called contradictory stand taken by the Custodian regarding the liabilities which were treated to be joint liabilities of the Harshad Mehta Group and further, inconsistency on the part of the Custodian to treat the liabilities of the notified entities also as their separate liabilities. Such que ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... luding the appellants. The affidavit dated 22-3-2006 is filed before us. It is the stand of the Custodian that he has already worked out the position of the assets and liabilities separately for individual members of the family and it is reflected in the affidavit dated 1-3-2006. The Custodian further submits that these accounts show that for the present, all the notified entities of the Harshad Mehta Group are in excess of their assets. It is thus, pointed out that all these materials were already available before the Special Court passed the orders. The Custodian further argues that these facts are known to the appellants, and there is an attempt to mislead the Special Court as well as this Court on the part of the appellants. It is then submitted that all the accounts, which are audited and reviewed by the Chartered Accountants have been prepared by the notified parties themselves and it is, therefore, that the liabilities shown therein, have been taken as admitted liabilities. In our opinion, this argument on the part of the Custodian must be accepted. It has already been shown in the earlier part of the judgment that all these contentions were only raised before the Special Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that it was opportune time for the sale of Reliance Shares. The Custodian argues that the instant sale of Reliance Shares was being carried out strictly in compliance with the procedure laid down by the Special Court and this Court in the earlier referred judgments. It is pointed out by the Custodian that between 12-12-2000 to 1-11-2007, 12.12 crores shares valued at Rs. 1,792.77 crores were sold. Out of these, the shares worth Rs. 1,463.96 crores belonged to the various entities of Harshad Mehta Group including the appellants. The learned counsel very surprisingly did not refer to these facts during his arguments, instead, it was suggested that there was a loss of 6,500 crores of rupees because of the sale. Such figure apart from being imaginary, has no basis. We cannot ignore that the Special Court is dealing with the scam which shook the whole financial world of India. We again cannot ignore the fact that the decision to sell the shares in 2005 was taken by the Disposal Committee, which consisted of the experts of the financial world who were well-experienced in the sale of shares and securities and who had a thorough study of the share markets. No mala fides were ever alleg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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