# ASHWIN S. MEHTA AND ANR v. CUSTODIAN AND ORS

- **Citation:** [2006] 1 S.C.R. 56
- **Court:** Supreme Court of India
- **Decided:** 2006-01-03
- **Case number:** Civil Appeal Nos. 667-671 of 2004
- **Bench:** S.B.Sinha, P.P.Naolekar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/ashwin-s-mehta-and-anr-v-custodian-and-ors-21122
- **Pages:** 37

## Headnote

Special Courts (Trial of Offences Relating to Transactions in Securities)
Act, 1992: Sections 3 and 9-A.
Notified persons-liabilities-Notified persons consisted of four brothers,
their wives and their widowed mother-These notified persons were related to
late Harshad Mehta-Properties of late Harshad Mehta and the notified persons
stood attached in terms of the provisions of the Act-Notified persons purchased
nine residential flats in a building-Special Court allowed the applications
D filed by the Custodian seeking permission for the sale of residential premises
and commercial premises of eight notified persons-However, the Special
Court dismissed the applications filed by the notified persons for releasing of
the residential flats as well as the commercial premises from attachmentCorrectness of-Held: The properties of the notified persons stood automatically
attached-Any other income from such attached properties would also stand
E attached-For that purpose it is not necessary that they should be accused of
commission of an offence as such-Special Court is directed to consider afresh
the matters regarding tax liabilities of the notified persons, the auction sales
in respect of commercial and residential properties Qnd whether individual
liabilities of the notified persons ought to have been separately considered by
F the Special Court as not a part of Harshad Mehta Group-Notified persons
are entitled to inspection of all the documents in the Custodian's power or
possession-Assistance from a Chartered or Cost Accountant may be taken by
both parties-Matter remitted to Special Court.
The appellants who were related to one Harshad S. Mehta (since
G deceased) purchased nine residential flats in a building. The family of the
appellant consisted of four brothers, their wives, children and their
widowed mother.
The appellants and the said late Harshad S. Mehta were persons
notified in terms of the Special Courts (Trial of Offences Relating to
H
56
··---1.
!
ASHWIN S. MEllTA "· CUSTODIAN
57
Transactions in Securities) Act, 1992. The properties of late Harshad S. A
Mehta and the appellants stood attached in terms of the provisions of the
Act.
The Special Court allowed the applications filed by the respondentCustodian seeking permission for the sale of residential premises and
commercial premises of eight notified entities. However, the Special Court B
dismissed the applications filed by the appellants for releasing of the
\'
residential nats as well as the commercial premises from attachment.
Hence the appeal.
The following questions arose before the Court:-
c
(i) Whether the appellants being not involved in offences in
transactions in securities could have been proceeded against in terms of
the provisions of the Special Courts (Trial of Offences Relating to
Transactions in Securities) Act, 1992?
(ii)Whether individual liabilities of the appellants ought to have been D
separately considered 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?
E
(iv) Whether the commercial properties could have been sold in
auction?
(v) Whether the residential properties should have been released
from attachment?
F
Disposing of the appeal, the Court
HELD: I. Both the parties have raised several contentions before
this Court which have not precisely been raised before the Special Court.
Several subsequent events have also been brought to the notice of this G
Court. The parties have also filed several charts before this Court showing
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individual assets and liabilities. It has further been contended that various
best judgment assessmen~s 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. (77-H; 78-Af
H
58
SUPREME COURT REPORTS
12006] I S.C.R.
A
l.S. Synthetics ltd. v. Fairgrowth Financial Services

## Text

_Characters 0–39,872 of 83,906. This is a partial read: ask again with offset=39872 for what follows._

A
B
c
ASHWIN S. MEHTA AND ANR.
v.
CUSTODIAN AND ORS.
JANUARY 3, 2006
[S.B.SINHA AND P.P.NAOLEKAR, JJ.]
Special Courts (Trial of Offences Relating to Transactions in Securities)
Act, 1992: Sections 3 and 9-A.
Notified persons-liabilities-Notified persons consisted of four brothers,
their wives and their widowed mother-These notified persons were related to
late Harshad Mehta-Properties of late Harshad Mehta and the notified persons
stood attached in terms of the provisions of the Act-Notified persons purchased
nine residential flats in a building-Special Court allowed the applications
D filed by the Custodian seeking permission for the sale of residential premises
and commercial premises of eight notified persons-However, the Special
Court dismissed the applications filed by the notified persons for releasing of
the residential flats as well as the commercial premises from attachmentCorrectness of-Held: The properties of the notified persons stood automatically
attached-Any other income from such attached properties would also stand
E attached-For that purpose it is not necessary that they should be accused of
commission of an offence as such-Special Court is directed to consider afresh
the matters regarding tax liabilities of the notified persons, the auction sales
in respect of commercial and residential properties Qnd whether individual
liabilities of the notified persons ought to have been separately considered by
F the Special Court as not a part of Harshad Mehta Group-Notified persons
are entitled to inspection of all the documents in the Custodian's power or
possession-Assistance from a Chartered or Cost Accountant may be taken by
both parties-Matter remitted to Special Court.
The appellants who were related to one Harshad S. Mehta (since
G deceased) purchased nine residential flats in a building. The family of the
appellant consisted of four brothers, their wives, children and their
widowed mother.
The appellants and the said late Harshad S. Mehta were persons
notified in terms of the Special Courts (Trial of Offences Relating to
H
56
··---1.
!
ASHWIN S. MEllTA "· CUSTODIAN
57
Transactions in Securities) Act, 1992. The properties of late Harshad S. A
Mehta and the appellants stood attached in terms of the provisions of the
Act.
The Special Court allowed the applications filed by the respondentCustodian seeking permission for the sale of residential premises and
commercial premises of eight notified entities. However, the Special Court B
dismissed the applications filed by the appellants for releasing of the
\'
residential nats as well as the commercial premises from attachment.
Hence the appeal.
The following questions arose before the Court:-
c
(i) Whether the appellants being not involved in offences in
transactions in securities could have been proceeded against in terms of
the provisions of the Special Courts (Trial of Offences Relating to
Transactions in Securities) Act, 1992?
(ii)Whether individual liabilities of the appellants ought to have been D
separately considered 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?
E
(iv) Whether the commercial properties could have been sold in
auction?
(v) Whether the residential properties should have been released
from attachment?
F
Disposing of the appeal, the Court
HELD: I. Both the parties have raised several contentions before
this Court which have not precisely been raised before the Special Court.
Several subsequent events have also been brought to the notice of this G
Court. The parties have also filed several charts before this Court showing
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individual assets and liabilities. It has further been contended that various
best judgment assessmen~s 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. (77-H; 78-Af
H
58
SUPREME COURT REPORTS
12006] I S.C.R.
A
l.S. Synthetics ltd. v. Fairgrowth Financial Services Ltd., 120041 11
SCC 456, Fairgrowth, B.C. Dalal v. Custodian (CA No. 2795 of 2004), The
Kedarnath Jute Mfg. Co. ltd. v. The Commissioner of Income Tax, ( 19721 3
SCC 252, Harshad Shanti/al Mehta v. Custodian, 1199815 SCC I, Fairgrowth
Investments Ltd. v. Custodian, 120041 I I SCC 472 and Tejkumar Balakrishna
B Ruia v. A.K. Menon. 119971 9 SCC 123, referred to.
Hitesh Shanii/al Mehta v. Union of India, (1992) 3 Born CR 716,
approved.
2. It is no doubt true that the law of limitation bars a remedy but
C not a right. 178-EI
Bombay Dyeing & Manufacturing Co. Ltd. v. The State of Bombay, AIR
(I 958) SC 338, relied on.
Savitra Khandu Beradi v. Nagar Agricultural Sale and Purchase
D Cooperative Society ltd .. AIR (1957) Born 178 and Hari Raj Singh v.
Sanchalak Panchayat Raj, AIR 119681 All 246, approved.
3. There cannot be any doubt whatsoever that the appellants being
notified persons, all their properties would be deemed to be automatically
attached as a consequence thereto. For the said purpose, it is not necessary
E that the appellants should be accused of commission of an offence as such.
179-B-CI
4. 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 transaction made during the Statutory Period
F cannot be accepted as, all the appellants being notified, the attachment of
the assets would be automatic. 179-C-DI
L.S. Synthetics Ltd \'. Fairgrowth Financial Services Ltd, 120041 I I
sec 456, relied on.
5. The principle of lifting the corporate veil, however, ipso facto
G 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 the acquisition of
properties in the name of others. A transaction of Benami indisputably
can be a subject matter of a /is in terms of Section 4(1) of the Special
H Courts (Trial of Offences Relating to Transactions in Securities) Act, I 992.
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ASHWIN S. MEHTA v. CUSTODIAN
59
As and when such a question is raised, the same may have to be dealt with A
by the Special Court appropriately. However, nexus between sev~~al
persons in dealing with the matter may be established by the Custodian.
179-F-GI
6. It is open to the appellants to show that even if they continued to
be notified, the Custodian was not right in clubbing all the i11dividual B
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 have since been released from attachment. (80-Hf
7. The Special Court should have analyzed the respective contentions C
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. f82-A-Bf
8. A clear picture as to the correctness or otherwise of the affidavit
I
filed by the Custodian vis a vis the Books of Accounts which have been
maintained by the appellants themselves as well as the Auditor's Report
D
has not been given. The Special Court merely accepted tbe figures
mentioned in the affidavit of the Custodian and relied thereupon without
discussing the contentions and arguments raised on behalf of the E
appellants. Therefore, in the interest of justice, it is necessary to give
another opportunity of hearing to the appellahts. f83-C-Df
9. It is true that horrendous figures as regards the liabilities ·of
Harshad Mehta have been projected before this Court, but the same had
been shown to be of the entire Group. If the liabilities of the individual F
entities are not treated as those 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 oth.erwise must be dealt with separately. f83-Ef
·10. A finding of fact arrived at upon discussing and analyzing the
respective contentions could have gone a long way in assisting this Court
G
J.
in arriving at a correct conclusion. The Special Court 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 H
60
SlJPREME COURT REPORTS
j1006] I S.C'.R.
A Group. Even in this behalf, it was necessary for the Special Court to assign
sufficient and cogent reasons. 184-A-Bl
11. A question may further arise as to whether the Special Court
was correct in considering the individual liabilities of the notified parties
as the liabilities of the Group. If those individuals, who had no connection
B 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
C were required to be sold irrespective of their individual involvement. It
was, thus, necessary for the Special Court to arrive at a firm conclusion
as regards the involvement of the individuals with Harshad Mehta, if any,
and the extent of his liability as such. 184-C-DI
12. The Special Courts (Trial of Offences Relating to Transactions
D in Securities) Act, 1992 confers wide power upon the Custodian and the
Special Court and, in that view of the matter, having regard to the
principles of natural justice, the judgment and order of the Special Court
should have furthermore been supported by sufficient and cogent reasons.
184-H; 85-AI
E
13. It is 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 the best judgment assessment. The contention
of the appellant to the effect that the income tax dues should have been
F considered at the point of time when they become recoverable cannot be
accepted. 185-BI
8. C '. Dalal v. Custodian, (CA No. 2795 of 2004, relied on.
14. The Special Court having not dealt with the question as regard
G the mode and manner of disbursements of the amount so far as the tax
liabilities of the appellants are concerned elaborately, the same require
fresh determination. 187-81
The J\.edarnath .lute Mfg Co. Ltd. v. The Commissioner of Income Tax.
119721 3 SCC 252 and Harshad Shanti/al Mehta v. Custodian 119981 5 SCC
H I, relied on.
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ASH WINS. MEHTA v. CUSTODIAN
61
15. Furthermore, the orders of the appellate authority have been A
passed during pend ency 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. 187-CI
Board of Control for Cricket in India v. Netaii Cricket Club, (2005) 4
sec 741, relied on.
B
16. Evidently creation of any third party interest is no longer in
dispute nor is the same subject to any order of this Court. In any event,
ordinarily, a bona fide purchaser for value in an auction-sale is treated
differently than a decree-holder purchasing such properties. In the former c
event, even if such a decree is set aside, the interest of the bona fide
purchaser in an auction-sale is saved. 188-E-FI
Zain-ul-Abdin Khan v. Muhammad Asghar Ali Khan, 15 IA 12 and
Gwjoginder Singh v. Jaswant Kaur. 119941 2 SCC 368, referred to.
17. That part of the order whereby and wherewith the auction-sale, D
as regards the commercial properties, had been directed by the Special
Court need not be interfered with. The Special Court may, therefore,
proceed to pass an appropriate order as regards the confirmation of the
sale of such properties. 189-EI
E
Janak Raj v. Gurdial Singh, 119671 2 SCR 77 and Padanthil Ruqmini
Amma v. P.K. Abdulla, 119961 7 SCC 668, relied on.
18. Admittedly, 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. F
The liabilities of the appellants are required to be considered afresh by
the Special Court. The purchasers have also filed applications for their
impleadment in these appeals. However, the purchasers have not been
heard as the question as to whther the auction-sale of the said flats will
be confirmed or not will depend upon the ultimate finding of the Special G
Court upon consideration of the matter afresh. 189-H; 90-AI
19.(i). The contention of the appellants that they, being not involved
in offences in transactions in securities, could not have been proceeded
with in terms of the provisions of the Special Courts (Trial of Offences
Relating to Transactions in Securities) Act, 1992 cannot be accepted in H
62
SUPREME COL:R'r REPORTS
(2006 J I S.C. R.
A view of the fact that they have been notified in terms thereof. (90-DI
(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
B by the Special Court need not be determined by this Court in view of the
fact that appropriate applications in this behalf are pending consideration
before the Special Court. 190-E-FI
(iii) As regards the tax liabilities of the appellants, the Special Court
C is requested to consider the matter afresh. The Special Court, in this
behalf, having regard to the fact that several orders of the 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
Shanti/al Mehta. (90-H; 91-A(
D
HarshaJ Shanti/al Mehta v. Custodian, 119981 5 sec I, relied on.
(iv) The Special Court shall proceed to pass appropriate orders as
regards confirmation of the au~l.ion sales in respect of commercial
properties. (91-BI
E
(v) As regards sale of residential properties, an appropriate order
may be passed by the Special Court. (91-Ci
(vi) The Custodian is directed 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
F 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 proceedings jointly, only one of thein 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 pending proceedings. (91-D(
G
(vii) The appellants shall file their objections to the said report, if
any, within ten days thereafter. The Custodian may also take the assistance
and/or further assistance from a Chartered Accountant of his choice. A
reply and/or rejoinder theret{) shall be filed within one week from the date
H of the receipt of the copy of the objection. The parties shall file their
ASHWIN S. MEHTA 1·. CUSTODIAN
63
respective documents within one week thereafter. Such documents should A
be supported by affidavits. Both the parties sha II be entitled to inspect such
documents and file their responses.thereto within one week thereafter. The
parties shall file the written submissions filed before this Court together
with all charts before the Special Court within eight weeks from the date
of this judgment. 191-E-GI
(viii) The Special Court shall allow the parties to make brief oral
submissions with pointed reference to their written submissions. Such
hearing in the peculiar facts and circumstances of this case should continue
from day to day. 191-G-HI
B
(ix) The Special Court while headng the matter in terms of this order C
shall also consider as to whether the auction-sale should be confirmed or
not. It will also be open to the Special Court to pass an interim order or
orders, as it may think fit and proper, in the event any occasion arises
therefor. 192-AI
(x) The Special Court is requested to complete the hearings of the
matter, keeping in view the fact that auction-sale in respect of the
residential premises is being considered, as expeditiously as possible and
not later than twelve weeks from the date of the receipt of the copy of
D
this judgment. Save and except for sufficient or cogent reasons, the Special
Court shall not grant any adjournment to either of the parties. 192-B-CI E
(xi) The 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 this judgment. If in the meanwhile orders of
assessment are passed by the Income Tax Authorities, the Custodian shall F
be at liberty to bring the same to the notice of the Special Court whic.h
shall also be taken into consideration by, the Special Court. 192-DI
CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 667-671 of
2004.
From the Judgment and Order dated 17. I 0.2003 of the Special Court
(Trial of offences relatiRg to Transactions in Securities at Bombay) in the
Misc. Application No. 41 of 1999 and Misc. Application No. 4/2001 and
Misc. Applications 265 and 266/2003.
G
H
A
B
64
SUPREME COURT REPORTS
[20061 I S.C.R.
WITH
C.A. Nos. 6721675, 676-680 and 681 of 2004.
Mahesh Jethmalani, Arvind K. Nigam, Ms. Kamini Jaiswal, Mrs.
Shomila Bakshi and Ms. Rani for the Appellants.
Ashok V. Desai, Gaurav Joshi, Jay Kishor Singh, Abhay Kumar, Gopal
Krishnan, Subramonium Prasad, A. Subba Rao, Mahesh Agrawal. E.C.
Agrawala, Ms. lndu Malhotra, Ms. Savita Sinha, Ms. B. Vijayalakshmi Menon,
Ms. Sunita and Shiv Kumar Suri for the Respondents.
C
The Judgment of the Court was delivered by
S.B. SINHA, J. These 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,
1991 (for short "the Act") in Mis~. Application Nos. 41 of 1999. 4 of 2001,
D 265, 266 and 275 of 2003.
BACKGROUND FACTS
The Appellants herein who are related to one Harshad S. Mehta (since
deceased) purchased nine residential flats in a building called Madhuli
E 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.
F
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
G of late Harshad Mehta, wives of two of his younger brothers and other
corporate entities, a partnership firm and three HUFs. 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.
H
The properties of Late Harshad Mehta and the Appellants. herein being
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ASllWIN S. MEHTA v. CUSTODIAN !SINHA . .I.I
65
notified persons stood attached in terms of the provisions of the Act.
A
PROCEEDINGS BEFORE THE SPECIAL COURT
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. It is not in dispute that the k1rn<'<.l Special Court on or B
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 E.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.
A 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.
c
We may. at this juncture. notice the nature of the applications filed by D
the parties, herein before the learned Special Court:
(i)
On 26.04.1999. the Custodian filed an application being Misc.
Application No. 41 of 1999 seeking permission of the Special
Court for sale of residential premises commonly known as
Madhuli of eight notified entities.
(ii) A Misc. Application being 4 of 2001 was filed by the Custodian
praying for the sale of commercial premises.
(iii) The Appellants herein filed several Misc. Applications praying
E
for lifting of attachment on their residential premises on the
ground that the same had been purchased much prior to 1.4.1991
F
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
shouli:I be released from attachment.
IMPUGNED JUDGMENT
By reason of the impugned order dated 17.10.2003, the learned Special
Judge allowed Misc. Applications Nos. 4 of 2001 and 41 of 1999.
The Misc. Applications filed by the Appellants herein for release of the
G
H
66
SUPREME COURT REPOR rs
[20061 I S.C.R.
A residential flats as well as the commercial premises from attachment were
dismissed. 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
B
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 9f the flats being sanctioned by the Court.
The custodian shall permit the members of family of late Shri Harshad
c
D
Mehta to occupy the flats during the time that the process of the sale
of the flats goes on.
In case no such undertakings are filed by the adu It 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
E
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:
F
(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 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
G
individuals.
H
(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
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ASHWIN S. MEHTA v. CUSTODIAN [SINHA. J.)
67
exclusively belong to them.
(iii) 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
A
·practitioners have their income from other sources.
B
(iv) 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 pass[JJ(l_ __ of the impugned C
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 of now being existing, the residential properties could not D
have been sold.
(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) Auditor's Report, it was E
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 F
on the basis thereof.
Respondents
Mr. Ashok H. Desai. learned senior counsel appearing on behalf of the
Custodian. on the other hand, would, inter alia, submit:
G
(i)
In view of the decision of this Court in l.S. Synthetics ltd. v.
FairKrowth Financial Services ltd. and Anr .. [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 H
68
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SUPREME COURT REPORTS
120061 I S.C.R.
I I of the Act.
(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
B
application for de-notification could be filed subsequently as they
had become barred by limitation.
c
(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 The Kedarnath Jute Mfg. Co.
ltd. v. The Commissioner of Income Tax, (Central), Calcu//a,
[ 1972] 3 sec 252.
D
(iv) The Appellants herein. apart from the corporate entity which is
E
F
G
H
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 e~cesses
has been shown, if the interest is calculated for the last over 13
years of the amount received, the liabilities would exceed the
assets.
(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.
(vi) The decretal 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 liabilities.
(vii) Furthermore. the Appellants are also unable to maintain their
ri:sidential 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
'"'
ASHWIN S. MEHTA v. CUSTODIAN !SINHA . .I.I
69
aggregate amount of income tax dues exceed Rs. 13,800 crores. A
(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 B
they involved therewith, they at this stage cannot be permitted to
tum round and contend that they have nothing to do with the
liabilities of Late Harshad Mehta.
(ix) The sale of commercial property had never been seriously
contested by the Appellants and in fact the contention of the c
Appellants here.in 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
D
party rights having been created, this Court should not interfere
with the impugned judgment.
THE ACT
The Statement of Objects and Reasons for enacting the Act reads as
~~
E
"(I) 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 certain brokers.
F
(2) To deal with the situation and in particular to ensure speedy
recovery of the huge amount involved, to punish the guilty and restore G
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 H
70
SllPREME COURT REPORTS
[20061 I S.C.R.
A
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
B being satisfied on information received that any person has been involved in
any offence relating to transactions in securities after the I st 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
C 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
D of notification, but such a provision has been made in the Act, as would
appear from Section 4(2) thereof.
E
F
G
H
Sub-section (I) of Section 4 of the Act reads as under:
'"4. Contracts entered into fraudulently may be cancelled.~
(I) 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 I st
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 t~e provisions of this
Act, he may cancel such contract or agreement and on such
cancellation such property shall stand attached under this Act:
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."
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 Court.
-4 ,
-
I .~
ASHWIN S. MEHTA v. CUSTODIAN !SINHA . .l.j
71
Any prosecution in respect of any offence referred to in sub-section (2) of A
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 B
relation to the matter specified therein. Section 11 of the Act reads as under:
".11. Discharge of liabililies.-( 1) 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.
C
(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 D
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 E
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 F
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 G
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 tenns 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 H
72
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120061 I S.C.R.
A meet their liabilities. In terms of the provisions of the Act. the Special Court
had been conferred a very wide power.
PRECEDENTS AS REGARD SCOPE OF THE ACT
Constitutionality and/or interpretation of the Act came up for
B consideration before this Court in Harshad Shanti/al Mehta v. Custodian and
Ors., [ 1998) 5 SCC I wherein the following questions were framed:
c
"(I) 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"
(2) Do the taxes [in clause (a) of Section 11 ('.!)) refer only to taxes
relating to a specific period or to all taxes due from the notified
person?
D
(3) At what point of time should the taxes have become due?
(4) Does the Special Court have any discretion relating to the extent
of payments to be made under Section I I (2 )(a) from out of the attached
funds/property?
E
(5) Whether taxes 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
F
his inability to pay taxes after his nliltification""
As regard, Question No. I, it was held:
.. In the present case, the words "taxes due" occur in a section dealing
with distribution of property. At this stage the taxes "due" have to be
G
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
H
which have to be taken into account under Section I 1(2)(a) while
·~
ASllWIN S. MEHTA 1·. CUSTODIAN !SINHA, J.)
73
\
distributing the property of the notified person. Taxes which are not A
legally assessed or assessments which have not become final and
binding on the assessee, are not covered under Section I I (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".
B
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 I I (2)(a), although the liability may continue
to be the liability of the notified person. Such tax liability may be c
discharged either under the directions of the Special Court under
Section I 1(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 I 1(2)(a) to such tax liability only covers such D
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 E
person, that liability would be considered for payment under section 11 (I )(a),
subject to what follows.
So far 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 F
t
notified person to pay the tax will have to be determined under the machinery
l
provided by the relevant tax law, observed:
"But 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
G
because the tax liability of a notified person having priority under
J.,
Section I 1(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.