Jyoti Harshad Mehta Vs Custodian .

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.5176 OF 2009@ D-25207 OF 2008

Mrs. Jyoti Harshad Mehta and others …. Appellants

Versus

The Custodian and others ….Respondents

J U D G M E N T

S.B. SINHA, J.

Interpretation and/or application of the provisions of the Special

Court (Trial of Offences Relating to Transactions in Securities) Act,

1992, (hereinafter, for the sake of brevity, referred to as ‘the Special Act’)

is involved herein.

It arises out of an order dated 25th July, 2008 passed by the learned

Judge, Special Court at Mumbai in Misc. Petition No.41 of 1999.

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HISTORICAL BACKGROUND

The history as well as the purpose and object for which the Special

Act was enacted, in view of the several decisions rendered by this Court,

is now well-settled. The Reserve Bank of India in course of an

investigation conducted by it, had inter alia opined that Harshad Mehta

(since deceased), alongwith his other associates had diverted a huge

amount of public funds belonging to Public Sector Banks and Financial

Institutions for short term investments in the securities market.

An Inquiry Committee was thereafter constituted under the

Chairmanship of Shri Janakiraman. The said Committee in its report had

noticed a large number of gross malpractices and irregularities in

transactions of both Government and other securities, pursuant whereto

and in furtherance whereof the Special Act was enacted providing inter

alia for the constitution of a Special Court for trial of criminal offences,

as also civil disputes, arising therefrom during the period between 1st

April, 1991 to 6th June, 1992, hereinafter referred to as the “window

period”.

Around this time, the family members of late Harshad Mehta had

purchased movable, immovable properties and shares. Out of these

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properties, there were nine residential flats purchased, in a building called

“Madhuli”, in Worli, Mumbai. These flats were merged and redesigned

for joint living of the entire family and these properties are the subject

matter of this lis.

HISTORY OF THE PROCEEDINGS

In terms of the said Special Act, a Custodian was appointed. The

Custodian notified Harshad Mehta as also the appellants herein; pursuant

whereto all their properties stood attached. Some of the appellants had

filed applications for de-notifications. The same were, however, not

pressed and were later withdrawn. It has been claimed by the appellants

in an Affidavit dated 28.07.2009 that they had filed their denotification

applications registered as M.A. Nos. 50 to 55 of 2009, however they

withdrew the same again with a liberty to file afresh by an order dated

12.06.2009.

In the aforementioned premise a question came up before the

learned Judge, Special Court in regard to sale of movable and immovable

properties belonging to the notified persons. The learned Judge, Special

Court, on an application filed by the custodian inter alia directed sale of

flats purported to be belonging to the appellants.

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The learned Judge, Special Court, by his judgment and order dated

17th October, 2003 directed sale of the said flats. The aforementioned

order came to be challenged before this Court by way of appeals

preferred under Section 10 of the Special Act. They were registered as

Civil Appeal Nos. 667-71 of 2004 and 672 to 681 of 2004. This Court by

its judgment and order dated 3rd January, 2006 allowed the said appeals

and remitted the matter back to the Special Court with some directions.

That decision of this Court has since been reported in Ashwin S. Mehta

and another v. Custodian and others, [ (2005) 2 SCC 385 ].

The matter was taken up thereafter by the learned Judge, Special

Court which passed the impugned judgment.

INVOLVEMENT OF CHARTERED ACCOUNTANTS

The findings of Chartered Accountants have a major role to play in

this case. We may notice that during pendency of the proceedings before

the Special Court M/s Vyas & Vyas, Chartered Accountant, was

appointed in respect of assets and liabilities of Harshad Metha on 16th

October, 2003. They submitted a report upon auditing the Accounts of

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Late Harshad Mehta for the financial year ending 31.03.1992 and for the

period ending 08.06.1992 on 17th January, 2006. The notified parties

have contested this, in an affidavit dated 28th July, 2008, by stating that

the Custodian had actually received the same on 30.11.2005.

After the order of this Court in Ashwin Mehta (supra) another

Chartered Accountant, M/s. Vinod K. Aggarwala & Co. was appointed

by the custodian for preparation of “Realistic Estimates of the Assets and

Liabilities”. The report of the said Chartered Accountant was based on

the Report of the three firms of Chartered Accountants appointed by the

court. This report was submitted on the 27.02.2006. The Realistic

Estimates of Assets and Liabilities of the Harshad Mehta Group as on

01.01.2007 was prepared by Vinod K. Aggarwala & Co. and was

submitted on 26th April, 2007.

We may also place on record that M/s Vyas & Vyas, Chartered

Accountant had categorically stated that the said books of accounts were

not complete. This can be seen through excerpts mentioned in their own

report,

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“19.6 Due to the compelling nature of limitations on our work and unreliable nature of the books of accounts, we are unable to accept responsibility for the accuracy and completeness of the information/particulars provided to us nor do we accept such responsibility.”

“…Therefore, we are unable to comment about the true and fair state of affairs of HSM and M/s HSM for the year ended 31st March, 1991, 31st March 1992 and for the period ended as on 8th June, 1992”.

IMPUGNED JUDGEMENT OF THE SPECIAL COURT

The Special Court in the impugned judgment noticed that it was

to decide the issues in accordance with the directions of this court in

Ashwin Mehta (supra), wherefor it quoted in extenso the conclusions

and directions issued. We shall proceed to deal with each of the eleven

directions that had been given by the this Court in Ashwin Mehta

(supra) while remitting the matter back to the learned Judge, Special

Court and how accordingly the Special Court went on to deal with

them.

Direction No. 1 of this Court in Ashwin Mehta (supra) was:-

“(i) The contention of the Appellants that they being not involved in offences in transactions in securities could not have been proceeded in terms

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of the provisions of the Act cannot be accepted in view of the fact that they have been notified in terms thereof.”

The Special Court noted that this Court, as regards the first

direction, had itself recorded a finding against the appellants and

therefore nothing further was to be done by it in that regard.

Direction No. 2 of the court, which is most relevant for our

purposes reads as under:-

“(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 that appropriate applications in this behalf are pending consideration before the learned Special Court. The question as regard intermingling of accounts by the Appellants, herein with that of the Harshad Mehta Group and/ or any other or further contentions raised by the parties hereto before us shall receive due consideration of the learned Judge, Special Court afresh in the light of the observations made hereinbefore.”

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The learned Judge, Special Court, considered the said direction into

three parts.

The first part of the direction being that the appellants being

notified persons, all their personal properties stood automatically attached

and any other income from such attached properties would also therefore

get attached.

As regards this part the learned Judge, Special Court noted that this

was a finding recorded against the appellants and accordingly no orders

were necessary to be passed by it in that respect.

The second part of the said direction being that the question that

the appellants could have been considered to be part of Harshad Mehta

Group by the learned Special Court need not be determined by the

Supreme Court, in view of the fact that appropriate applications in this

behalf were pending consideration before the learned Special Court.

8

In regard to the said direction the learned Special Judge, Special

Court noted that the applications referred to in the said direction issued

by the Supreme Court were a reference to the applications for de-

notification filed by members of the Harshad Mehta Family. The court

thereafter having made reference to Sudhir S Mehta v. Custodian & Ors,

[(2008) 12 SCC 84] noted that there were no applications for de-

notifications pending before the Special Court, as all applications had

been withdrawn and therefore there was no further steps required to be

taken by the learned Judge, Special Court.

However in the alternative, again referring to Sudhir Mehta

(supra), the learned Judge, Special Court also noted that the contention

whether the appellants should be treated as a ‘group’ or not would not be

relevant unless they were able to show that some prejudice had been

caused to them thereby.

The third and the final part of the said direction dealt with the

question as regards intermingling of accounts by the Appellants, herein

with that of the Harshad Mehta Group which in the opinion of this Court

9

were required to be dealt with by the Special Court afresh in the light of

the observations made therein.

This part of the direction in the opinion of the learned Judge

Special Court was the main question, which was required to be

considered by him.

He went on to note the observations of this court in Sudhir Mehta

(supra) as regards the finding that the claim of the notified parties that

their assets exceeded their liabilities was not correct. In Sudhir Mehta

(supra) the court had accepted the submissions of the custodian that even

the individual liabilities of the notified parties far exceeded their assets.

The Special Court in the impugned judgment then went on to deal

with the contention that the properties in question had been purchased

before the statutory period or window period prescribed under the said act

being 01.04.1991 to 06.06.1992 and they were therefore not liable to be

attached.

10

It noted that the properties of the notified parties held by them on

the date of their notification got statutorily attached and became liable to

be sold for discharging the liability of the notified parties, therefore, the

previous contention does not stand.

It, thereafter, went on to deal with the argument that the properties

in question had no nexus with the illegal securities transactions and the

flats had been purchased by the notified parties at the relevant time by

taking interest bearing loan from M/s Harshad S Mehta. These loans had

been repaid either fully or substantially.

As regards this contention the Special Court again referred to

Sudhir Mehta (supra) to note that properties of the notified persons stood

attached irrespective of the fact whether those properties were bought by

using tainted funds or not. Therefore the nexus to the illegal security

transactions was irrelevant.

It also came to the conclusion that all the residential properties had

been funded by Harshad S Mehta and they could therefore be disposed of

accordingly. In this regard the Special Court relied on the report of the

auditors, M/s. Vyas and Vyas who had considered the flow of funds from

Harshad Mehta to various other notified parties. This was the fact that

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the funds had specifically been transferred for purchase of the properties

just before the purchase. There was also a huge amount outstanding in

the accounts of the notified parties to Harshad Mehta on the 1st of April,

1990 and 1991.

The Special Court also noted that one of the flats in Madhuli, being

No. 34-A was owned by M/s Aatur Holding Pvt. Ltd. In regard to the

said company the Special Court found it necessary to pierce the corporate

veil. This was based on the fact that even though the paid up capital of

the said company was only Rs. 10,000/- and the highest salary paid by the

company was only a meager Rs. 4,000/- p.m., the company had entered

into trading security transactions running into crores of rupees. It

therefore opined that the real owner of the said company was none other

than Shri Harshad Mehta.

In conclusion it was opined that the business and dealings of

various individuals who held flats in Madhuli and the company M/s Aatur

Holding were nothing but fronts of Harshad Mehta and the money that

was invested for buying the flats was that of Harshad Mehta. Harshad

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Mehta, therefore, had merely used the names of various individuals who

were related to him for buying the said flats.

Direction No. 3 of this Court in Ashwin Mehta (supra) reads as

under :-

“(iii) As regard the tax liabilities of the Appellants, herein, we would request the learned Judge, Special Court to consider the matter afresh in the light of the observations made hereinbefore. The learned Judge, Special Court, in this behalf, having regard to the fact that several orders of 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 Shantilal Mehta v. Custodian & Ors. 1998 (3) SCALE 556.”

As regards this direction the Special Court noted that the order had

already been made on applications which were filed by the decree holder

bank by it and the said matter was pending before this Court.

Direction No 4 of this Court reads as under:-

“(iv) The learned Special Court shall proceed to pass appropriate orders as regard confirmation of the auction sales in respect of commercial properties.”

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As regards this direction the Special Court noted that the necessary

orders had already been passed.

The next direction, being Direction No 5 reads:-

“(v) As regard, sale of residential properties, an appropriate order may be passed by the learned Judge, Special Court in the light of the observations made hereinbefore.”

In respect of this direction the Special Court directed the custodian

to sell Flats No. 32 A, 32 B, 33, 33A, 33 B, 44 A, 44 B and 45 in

‘Madhuli’ by following the procedure laid down by the Special Court

itself for sale of the property belonging to the notified parties. It also

directed the custodian to seek directions, if necessary, from it in this

behalf.

Direction Nos. 6, 7 and 8 are as under:-

“(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 therefor to the Appellants jointly. As the Appellants have been represented in all the proceedings jointly, only one of them would be

14

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 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 documents should be supported by affidavits. Both the parties shall be entitled to inspect such documents and filed 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 date.

(viii) The learned Judge, 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. (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 therefore.”

15

As regards these three directions the Special Court noted that the

Custodian had already complied with the said directions and allowed for

the necessary inspection. The Special Court further noted that there were

no complaints made before it that the said directions had not been

complied with.

Direction No 9 reads:-

“(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 therefore.”

As regards this the Special Court noted that necessary orders had

already been passed.

Direction No 10 of the court in Ashwin Mehta (supra) was:-

“(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, the learned Judge shall not grant any adjournment to either of the parties.”

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As regards the said direction the Special Court noted after the said

matter had been taken up by them for hearing, the notified parties had

given their consent for initiating the process of sale of the flats. This

process was set in motion and at the request of the parties, both were

granted time to submit their pleadings and documents.

The last Direction of the Court, being No 11:-

“(xi) The learned Judge, 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 of copy of this order. If in the meanwhile orders of assessment are passed by the Income Tax Authorities, the Custodian shall be at liberty to bring the same to the notice of the learned Special Court which shall also be taken into consideration by the learned Judge, Special Court.”

As regards this direction the Special Court noted that necessary

orders had already been passed.

SUBMISSIONS

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Mr. I.H. Syed, learned counsel appearing on behalf of the

appellants contended :-

(i) That the learned Judge, Special Court misconstrued and

misread the directions issued by this Court in Ashwin

Mehta (supra).

(ii) That he failed to take into consideration that the properties

belonging to the appellants were not and could not have

been treated as the benami properties of Harshad Mehta.

(iii) In such an event the provisions of the Benami

Transactions (Prohibition) Act, 1988, should have been

invoked or in any event Sub-section (1) of Section 4 of the

Special Act which deals with transactions to defeat the

provisions of the Act was attracted. These provisions

provide for an opportunity of hearing to be given.

(iv) That Sub-section (1) of Section 4 of the Special Act

postulates that the notified persons must acquire property

in the name of another from the tainted money during the

window period and having regard to the findings of the

Auditors that Harshad Mehta had purported to have

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advanced amounts by way of loans or otherwise to the

appellants herein much prior thereto, the impugned

judgment is wholly unsustainable.

(v) That the right to keep property being a Constitutional as

well as Human Right and furthermore the provisions of

the Special Act being penal in nature, they deserve a

strict construction.

(vi) No finding having been arrived at, that the properties in

question had any nexus with the tainted funds received

from the illegal security transactions, they should have

been released from attachment by the Custodian.

(vii) That the properties having not been acquired within the

‘window period’ i.e. during 1st April, 1991 to 6th June,

1992, the order of the learned Special Court for auction

sale thereof must be held to be wholly illegal.

(viii) The learned Judge, Special Court, committed a serious

illegality in so far as he relied upon the Janakiraman

Reports and other reports, which are wholly inadmissible

as evidence.

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(ix) The appellants being notified persons are responsible for

discharging their own liabilities from their own assets and

not those of Harshad Mehta and/or any other person and

therefore it was not proper on the part of the learned

Judge, Special Court to club the appellants herein as part

of the Harshad Mehta Group.

(x) The learned Judge, Special Court seems to have

reproduced large amounts of the Custodians’ report in the

Judgment, this raises the question as to whether he took

into account the arguments of the appellants in the case.

Mr. Arvind Kumar Tewari, learned counsel for the custodian, on

the other hand, contended :-

(i) As the appellants were notified persons, Section 4(1) of

the Special Act has no application as all their properties

stood attached in terms of Section 3 of the Act and as such

they could have been appropriated for discharge of the

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liabilities of Harshad Mehta and group under the scheme

of the latter provision.

(ii) Appellants having not filed any application for their de-

notification and the Custodian and/or the Special Court

having all along proceeded with the case against the

appellants and the late Harshad Metha as one group, it is

too late in the day to contend that they are not bound to

discharge the liability of Harshad Mehta and should

instead be treated individually.

(iii) In a case of this nature where Section 3 would apply and

not the sub-section (1) of Section 4; properties can be sold

in discharge of the liabilities of all the notified persons

irrespective of the fact whether they had been acquired

from the tainted money or acquired during the window

period or not.

(iv) The learned Judge, Special Court, having proceeded to

determine the issues raised before it by the parties on the

basis of the Audit Reports filed by M/s. Vyas & Vyas, the

impugned judgment is unassailable.

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(v) Harshad Metha was not acting alone. There were various

corporate entities, firms etc. involved and the appellants

were in one way or the other involved actively in the said

companies and/or the firms. It was in that sense the

custodian proceeded on the basis that the appellants

should be clubbed together as a part of the same group.

(vi) All the appellants are notified persons. Proceedings

started against them in 1992. They were proceeded

against as the Harshad Mehta Group and not in their

individual capacity. Indisputably they had acted as a part

of this group, whatever might have been their individual

contribution in regard to the acts of omission and

commission towards defrauding the banks and the

financial institutions for the purpose of making investment

in the security transactions.

(vii) In the absence of any proof that they have no connection

with the said business they should be treated as belonging

to the said group.

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(viii) That the flow of fund from one member to the other, as

reflected from their own books of accounts, clearly

establish that they are part of the same group and/or it is

the contribution of Harshad Mehta alone which enabled

the appellants to purchase the flats in their individual

names.

USE OF SECTION 4(1) OF SPECIAL ACT

As regards intermingling of accounts of the appellants with that of

the Harshad Mehta Group and/or any other or further contentions raised

by the parties, it was directed by this Court in Ashwin Mehta (supra) that

the same shall receive due consideration of the learned Judge, Special

Court afresh in the light of the observations made therein.

On a plain reading of sub-section (1) of Section 4 of the Special

Act it would appear that the same applies to the third parties and not any

notified party. It is only when a property has been purchased in the name

of a third party by a notified party from the tainted funds acquired by him

during the window period, that the provisions of sub-section (1) of

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Section 4 would would apply. But in a case where the properties have

been purchased by the notified parties themselves as members of a group

in the name of one or the other, the rigours of sub-section (1) of Section 4

shall not apply. Section 3 of the Special Act, on the other hand,

postulates automatic statutory attachment of the properties of the notified

party. The acquisition of the properties whether prior to the window

period, during the window period or thereafter can be attached for the

discharge of liabilities.

Indisputably, a statute which seeks to take away a person’s right in

property deserves strict construction. However, it is also well settled that

the courts are required to give purposive construction to a statute to see

that the purpose and object thereof is fully attained. This Act is a Special

statute. It is a complete Code in itself. The purpose and object for which

it was created was to punish the persons who were involved in the acts of

criminal misconduct in respect of defrauding banks and financial

institutions. Its object was to see that the properties of those who were

involved shall be appropriated for discharge of liabilities not only of

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banks and financial institutions but also other governmental agencies

including the Income-tax Department.

It is, however, not an expropriatory legislation as such. The Act

provides for sufficient safeguards in the matter of sale of properties by

auction or otherwise towards discharge of debts of the notified persons.

It provides for grant of full opportunity of hearing to the notified persons.

Notified persons have special knowledge of the facts relating to their

assets and liabilities and, therefore, can always show that they have been

notified wrongly or that their properties are not liable for sale either

because their liabilities can otherwise be discharged or the quantum of

liabilities projected by the Custodian is not correct.

In construing the statute of this nature the Court should not always

adhere to a literal meaning but would construe the same, keeping in view

the larger public interest. For the said purpose the Court may also take

recourse to the basic rules of interpretation, namely ut res magis valeat

quam pereat to see that a machinery must be so construed as to effectuate

the liability imposed by the charging section and to make the machinery

25

workable. [See Indian Handircrafts Emporium and others v. Union of

India and others, (2003) 7 SCC 589 ].

In Balram Kumawat v. Union of India and others, [ (2003) 7 SCC

628 ] this Court preferred a dictionary meaning of the word “ivory” in

preference to the technical meaning stating :-

“20. Contextual reading is a well-known proposition of interpretation of statute. The clauses of a statute should be construed with reference to the context vis-à-vis the other provisions so as to make a consistent enactment of the whole statute relating to the subject-matter. The rule of “ex visceribus actus” should be resorted to in a situation of this nature.”

It was furthermore held :-

“23. Furthermore, even in relation to a penal statute any narrow and pedantic, literal and lexical construction may not always be given effect to. The law would have to be interpreted having regard to the subject-matter of the offence and the object of the law it seeks to achieve. The purpose of the law is not to allow the offender to sneak out of the meshes of law. Criminal jurisprudence does not say so.”

It was observed :-

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“26. The courts will therefore reject that construction which will defeat the plain intention of the legislature even though there may be some inexactitude in the language used. [See Salmon v. Duncombe (AC at p. 634).] Reducing the legislation futility shall be avoided and in a case where the intention of the legislature cannot be given effect to, the courts would accept the bolder construction for the purpose of bringing about an effective result. The courts, when rule of purposive construction is gaining momentum, should be very reluctant to hold that Parliament has achieved nothing by the language it used when it is tolerably plain what it seeks to achieve. [See BBC Enterprises v. Hi-Tech Xtravision Ltd. (All ER at pp. 122-23).]”

Yet again in relation to application of doctrine of strict

construction, it was noticed :-

“34. In State of Maharashtra v. Natwarlal Damodardas Soni this Court was concerned with search and seizure of gold under the Customs Act and the Defence of India Rules. The Court was dealing with smuggling of gold into India affecting the public economy and financial stability of the country and in that context the Court applied the Mischief Rule. While interpreting the words “acquires possession” or “keeping” in clause (b) of Section 135(1) of the Customs Act, this Court observed that they are not to be restricted to “possession” or “keeping” acquired as an owner or

27

a purchaser of the goods, observing: (SCC p. 677, para 22)

“Such a narrow construction — which has been erroneously adopted by the High Court — in our opinion, would defeat the object of these provisions and undermine their efficacy as instruments for suppression of the mischief which the legislature had in view. Construed in consonance with the scheme of the statute, the purpose of these provisions and the context, the expression ‘acquired possession’ is of very wide amplitude and will certainly include the acquisition of possession by a person in a capacity other than as owner or purchaser….”

35. This Court while setting aside a judgment of acquittal passed in favour of the respondents therein on the basis of the interpretation of the Customs Rules observed: (SCC p. 678, para 25)

“… These provisions have, therefore, to be specially construed in a manner which will suppress the mischief and advance the object which the legislature had in view. The High Court was in error in adopting too narrow a construction which tends to stultify the law. The second charge thus had been fully established against the respondent.”

[See also P.K. Arjunan v. State of Kerala (2007) 9 SCC 516, para

11]

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Mr. Syed, therefore, in our opinion is not correct in contending that

the advances made by Harshad Metha to the appellants herein for the

purpose of purchase of properties would amount to benami transactions

whereof sub-section (1) of Section 4 of the Special Act shall apply.

ISSUES REGARDING NOMENCLATURE

In Ashwin Mehta (supra), this Court had specifically asked the ld.

Judge of the Special Court to decide on the issue of nomenclature of the

parties, namely whether to consider them as a whole group or as

individuals. The Special Court in the impugned judgment preferred to

rely on the judgment of this court in Sudhir Mehta (supra) on this issue;

wherein this Court observed:

45. This takes us to the aforementioned paragraphs heavily relied upon by the learned counsel in the judgment of Ashwin Mehta case. In para 41, it was stated that it was open to the appellants 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 the Harshad Mehta Group. We do not find that there was any attempt on the part of the appellants to disassociate themselves from the Harshad Mehta Group. When

29

we see the judgment dated 17-8-2000 passed by the Special Court, it is obvious that the learned counsel arguing that matter had argued it on behalf of the Harshad Mehta Group. It is for this purpose that we have quoted the argument before the learned Special Judge in extenso. We will only quote a sentence which forms a part of the argument:

“It was contended that on a proper and legal assessment, the actual tax liability of the 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 the 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 the Harshad Mehta Group is contesting the demands before the appellate authorities.”

(emphasis supplied) 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 the 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.”

30

Criticism has also been made with regard to the application of the

doctrine of lifting the corporate veil which was not supposed to be made

applicable to the individual. The said doctrine was applied by the learned

Judge of the Special Court in the instant case in respect of the company

M/s. Aatur Holding Pvt. Ltd. The abovementioned company purchased a

flat, although its paid up capital was only Rs.10,000/- and the highest

salary paid to the employee by it was only Rs.4000/- per month. Despite

this the said company allegedly entered into security trading transactions

amounting to crores.

The appellants were members of an H.U.F. and were seen to be

working in tandem. Harshad Metha vis-à-vis the appellants was, thus, not

a third party.

ISSUE OF DENOTIFICATION

Appellants contend that they had withdrawn the denotification

applications in 2000 although the same had been filed in 1993. The delay

in disposal of the said applications is sought as a reason assigned in

support of the same. We fail to see any justification in the said stand.

Appellants contend that they wanted to file fresh applications. If that be

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so the reason why the earlier applications were withdrawn had not been

properly and sufficiently explained. The reason assigned is hardly a

ground for withdrawal of the applications. We have been informed by the

appellants that fresh applications for denotifications have been filed and

the same have been withdrawn in the year 2009. The same issue may

have to be dealt with by the Special Court. We wonder, why it took nine

years to file these fresh applications.

We may notice that applications for denotification were filed by

Raseela Mehta and Rina Mehta which were rejected by the Special Court.

The order rejecting the same have been challenged before this Court by

way of Appeals which are numbered as Civil Appeal Nos. 2915 of 2008

and 2924 of 2008 and are pending.

NEXUS OF THE PROPERTIES WITH THE ILLEGAL

SECURITIES TRANSACTION

It is contended by the learned counsel for the appellants Mr Syed

that if any of the properties or assets of the notified parties have no nexus

with the illegal security transactions, the same can be released from

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attachment or at least need not be sold. It has further been argued that no

evidence has been adduced that loans given by M/s Harshad S Mehta to

his family members or monies used by Shri Harshad Mehta for purchase

of his flat were acquired from the tainted funds. It is submitted by the

appellants that unless it can be shown that the properties in question were

acquired from the tainted funds they would be liable to be released from

attachment. It is argued that the fact that the properties had been

purchased much before the securities scam would go on to show that they

had no nexus with the funds diverted there from.

In our opinion the arguments advanced on behalf of the appellants

need to be rejected at the outset because a plain reading of the sections of

the Special Act would clearly point otherwise. In our opinion the

attachment of all the properties in terms of sub- section (3) of Section 3

of the Special Act is automatic. The attachment restricts sale of the

properties which have been acquired from illegal securities transaction.

The sub-section specifically mentions that on and from the date of the

notification, ‘any property, movable or immovable, or both’, belonging to

any person notified under the Act shall stand attached. The said sub-

section does not provide for any qualification that the properties which

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are liable to be attached should relate to the illegal securities transactions

in respect of which the Act was enacted. Had the intention of the

Parliament been so, it would have clearly mentioned it. It is well settled

that when the meaning of the words used in an Act is plain and clear,

effect must be given thereto.

This is supported by the decision of this court in LS Synthetics Ltd.

v. Fairgrowth Financial Services Ltd. [ (2004) 11 SCC 465 ]. Therein the

appellants had taken a loan from the respondents, Fairgrowth who had

admittedly been notified under the Act. The respondent therein,

Fairgrowth thereafter filed an application before the Special Court

seeking attachment of the said funds due to them by LS Synthetics. It was

argued on behalf of the debtors, LS Synthetics, that the loans due to the

respondents had no nexus to the nature of securities transactions specified

under the Special Act and they were therefore not liable to be attached.

This Court while rejecting the said contention noted that having regard to

the provisions of the Act, it was not required that the properties in

question must have a nexus to the illegal securities transaction.

Accordingly all assets of the notified parties including the loans advanced

by them in the case at hand were found liable to be attached.

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The Court however in LS Synthetics (supra) was not concerned

with the issue of whether the properties in question had been acquired

before the window period or not. The loans in that case had admittedly

been advanced within the window period and accordingly the only

question before the court was whether the loan would be liable to be

attached despite not having a nexus to the illegal security transactions.

This accordingly brings us to the next submissions as regards the

statutory window period.

STATUTORY WINDOW PERIOD

It was contended on behalf of the Appellants, that the properties in

question had been purchased much before the statutory window period

provided under the Special Act. It is argued that the jurisdiction of the

Special Court is strictly confined to the period from 01.04.1991 to

06.06.1992 and as such the Court would not have the power to investigate

and give any findings pertaining to any transaction entered into prior to

the statutory period. The appellants state that, the fact, no claims have

been received by the custodian from any bank pertaining to the pre-

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statutory period, should be conclusive evidence that no monies were

siphoned off in that period as falsely alleged.

In our opinion the interpretation advanced by the appellants on the

provisions would be a clear misreading of the Act. We must in this regard

refer to the relevant provisions of the Act.

Provisions of Section 3(2) should not be read into Section 3(3).

Though Section 3 (3) is dependent on Section 3(2) for its operation, but

once Section 3(2) comes into operation, Section 3(3) becomes

independent of it and accordingly the qualifications of Section 3(2)

cannot be read into Section 3(3). We must place emphasis on a plain

reading of the said section. Had it been the intention of the legislature to

attach only those properties acquired within the statutory period, it would

have clearly said so. The statutory window period is only a relevant

criterion for application of Section 3(2) and therefore has no bearing on

the application of Section 3(3).

A plain reading of Section 3(3) would suggest that all properties of

the notified persons on the date of the said notification would

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automatically stand attached irrespective of the fact as to whether they

had been acquired before, during or even after the statutory period. A

logical corollary of this would be that all income accruing or arising from

the said property even after the date of attachment would also

automatically stand attached.

However property acquired by a notified person after the

notification under the Special Act cannot be attached. That property does

not come within the purview of the Section 3(3). [See Tej Kumar

Balakrishna Ruja v. A K Menon, (1997) 9 SCC 123 para 6]

The cut off date for the attachment of the property accordingly is

the date of notification. All properties of the persons on the said date

automatically stand attached. The statutory window period is irrelevant

for the attachment of the property. It would have no bearing on the said

attachment.

It is true that to such an extent all properties would be liable to be

sold which are needed for redemption and not beyond the same. What

should be kept uppermost in the mind of the Court is to see that the

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liabilities are discharged and not beyond the same. It is with that end in

view that the powers of the Special Court contained in Sections 9A and

11 must be construed.

It is an accepted fact that the reports of the Jankiraman Committee,

the Joint Parliamentary Committee and the Inter Disciplinary Group

(IDG) are admissible only for the purpose of tracing the legal history of

the Act alone. The contents of the report should not have been used by

the ld. Judge of the Special Court as evidence.

However, a lot of documents have been filed before us with regard

to Audited Reports. Vyas and Vyas had filed an Audited Report in 2003.

Copies whereof were supplied in 2005. Audited Report of Vyas and

Vyas related only to Harshad Mehta. A Report on the Assets and

Liabilities of the Appellants by M/s. Vinod K. Agarwala and Co. as on

November, 2007 has also been placed on record. It does not appear that

the Special Judge had considered this aspect of the matter in great detail.

The learned Judge, Special Court, should consider the aforementioned

two audit reports so as to arrive at a positive finding with regard to the

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liabilities and assets possessed by them so as to enable to pass appropriate

orders.

The learned Judge, Special Court, in his judgment has mainly dealt

with the contentions raised by the custodian in terms of the written

submission filed on its behalf. The contentions of the appellants have

not been considered in the impugned judgment. It is furthermore

contended on behalf of the appellants, that out of the twenty six

paragraphs of the impugned judgment, 15 paragraphs are near verbatim

reproductions.

In our opinion this clearly shows the non-application of mind of the

learned Judge, Special Court. He was required to weigh the submissions

and counter-submissions of both the parties in his proper perspective and

then arrive at a well reasoned opinion, which doesn’t seem to be the case

before us. It is well settled that “Justice must not only be done, but also

must be seem to be done”.

The Audited Reports and the objections have been filed before us.

We direct the parties to file the same before the learned Judge, Special

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Court, so as to enable him to consider the matter afresh strictly in the

light of the earlier judgment passed in Ashwin Mehtas (supra) as well as

the observations made herein.

For the reasons aforementioned, the impugned judgment is set

aside and the matter is remanded to the learned Judge, Special Court, for

consideration thereof afresh in the light of the observations of this Court

as expeditiously as possible and preferably within a period of six months

from the date of this judgment. The appeal is allowed with the

aforementioned observations. In the facts and circumstances of the case,

there shall be no order as to costs.

…….……………………J. [ S.B. Sinha ]

…….……………………J. [ Deepak Verma ]

New Delhi August 07, 2009

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JYOTI HARSHAD MEHTA Vs CUSTODIAN .

JYOTI HARSHAD MEHTA Vs CUSTODIAN .