REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APEPAL NO. 2447 OF 2007

Commnr. of Customs (Preventive) …Appellant

Versus

M/s Aafloat Textiles (I) Pvt.Ltd. and Ors. …Respondents

J U D G M E N T

Dr. ARIJIT PASAYAT, J.

1. Challenge in this appeal is to the order passed by the Customs, Excise

and Service Tax Appellate Tribunal, West Zonal Bench at Mumbai (in short

the  ‘CESTAT’).  Challenge  before  the  CESTAT  was  to  the  order  of

Commissioner  of  Customs  who  confirmed  the  duty  demand  of

Rs.6,69,40,149/-  on  9  consignments  of  gold  and  silver  imported  by M/s

Aafloat  Textiles  (India)  Ltd.  (Formerly known as  M/s  Akai  Impex Ltd.)

under Section 28 alongwith appropriate interest under Section 28AB of the

Customs Act, 1962 (in short the ‘Act’).  The benefit of exemption in terms

of Notification No.117/94-Cus. Dated 27.4.1997 was denied and liability of

the  goods  to  confiscation  under  Section  111(d)  and  (o)  of  the  Act  was

upheld.  But  since  the  goods  were  not  available,  confiscation  was  not

ordered. Penalty equal to duty amount on the importer under Section 114A

of the Act was imposed and Rs.50 lakhs was imposed on Shri Mahendra

Shah and Rs.25 lakhs each on four other appellants before the CESTAT.  

2. Case  of  the  department  that  the  Special  Import  License  (in  short

‘SIL’) purchased by the importer  from brokers for clearance of gold and

silver  was  forged  and,  therefore,  was  not  valid  for  the  consignments  in

question.  

3. Background facts as emerging from the Commissioner's order are that

the office premises of one M/s. Gazebo and M/s. Mahavir Corporation, were

searched by officers of DRI and copy of SIL No.3536539 dated 6.8.1997

issued to M/s. Track Industries, Kanpur, was recovered. The Joint Director

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General of Foreign Trade, Kanpur informed that no such licence had been

issued  and  that  the  signature  and  security  seal  of  their  Foreign  Trade

Development Officer had been forged. The proprietor of M/s  Gazebo, Shri

R.T. Shah stated on 19.1.1998 that he had purchased the above bogus SIL

from one Shri Sushil Kumar Lohia who, in turn admitted that the SIL was

given  to  him by one  Shri  Manoj  Kumar  Jain  and  that  he  had  obtained

several  bogus  SILs  from  one  Naresh  Sheth  and  Shri  Dinesh  Buchasia,

whose  residential  premises  were  searched  and  certain  documents  were

recovered and his statement was recorded, wherein he stated that  he had

only  dealt  in  7  SILs which  he bought  at  low premium from one  Rajesh

Chopra  and  that  the  SILs  were  forged.  Shri  Shinivas  Pannalal  Kalantri,

General Manager of the importer company stated that gold/silver had been

imported under SIL during the year 1996-97 and 1997-98,  that  one M/s.

Lalbhai  Trading  Co.  and  two  others  were  the  clearing  agents;  that  Shri

Prakash Mohta of Finance Department looked after the purchase of SILs.

The  Chairman  of  the  importer  company  stated  that  he  looked  after

negotiation and purchase of bullion and sale of bullion; that Shri Prakash

Mohta  looked  after  purchase  of  licences,  clearance  of  goods,  delivery,

payment to supplier etc. and that licence brokers through whom SILs were

purchased and whom he knew, were Mr. Pachisia and Mr. Ketan Shah. The

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statement of Shri Prakash Mohta, was also recorded in which he confirmed

that  he  was  looking  after  purchase  of  SILs  for  import  of  bullion  and

subsequently selling them in the local market. Shri Mahendra Shah stated

that he had sold bogus SILs to the importer company. Shri Rasiklal Mehta

stated that he and one AtuI Garodia met one Shri D.R. Gulati in Bombay

who told that he could provide bogus SIL for which he would charge 3% to

4% premium, that Shri Gulati  used to provide bogus SILs and Shri Garodia

used to sell them in market and give them a premium of 3%.  

4. The demand was confirmed under the proviso to Section 28(1) of the

Act. The stand of the revenue that since the licenses were forged and were

void, the buyer cannot have better title than the seller. CESTAT in appeal

was of the view that the appeal could be disposed only on the ground of

limitation without going into the merits of the matter. It was observed that

there was no evidence to show that the importer had knowledge about the

SIL being non- genuine.  

5. It was also stated that the period of limitation is not to be reckoned

from  the  date  of  discovery  of  the  forgery.  Accordingly,  the  demands

including the penalty imposed were cancelled.

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6. In support of the appeal, learned counsel for the appellant submitted

that  since  the  SIL  involved  was  established  to  be  forged  there  was  no

question of denying the extended period of limitation.

7. Learned counsel for the respondents on the other hand submitted that

the department has not established that the buyer had knowledge about the

forgery. The mens rea being one of the ingredients to avail extended period

of limitation the CESTAT was justified in its conclusions.  

8. As noted above, the CESTAT has not gone into the question whether

the SIL involved was genuine or not. It was of the view that the department

has not  established that  buyer had knowledge that there was any forgery

involved.  

9. “fraud”  means  an  intention  to  deceive;  whether  it  is  from  any

expectation of advantage to the party himself or from the ill will towards

the  other  is  immaterial.   The  expression  “fraud”  involves  two elements,

deceit  and injury to the person deceived.  Injury is  something other than

economic  loss,  that  is,  deprivation  of  property,  whether  movable  or

immovable or of money and it will include and any harm whatever caused

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to any person in body, mind, reputation or such others. In short, it is a non-

economic or non-pecuniary loss.  A benefit or advantage to the deceiver,

will almost always call loss or detriment to the deceived. Even in those rare

cases  where  there  is  a  benefit  or  advantage  to  the  deceiver,  but  no

corresponding loss to the deceived, the second condition is satisfied.  (See

Dr.  Vimla v.  Delhi  Administration (1963  Supp.  2  SCR 585)  and  Indian

Bank v. Satyam Febres (India) Pvt. Ltd. (1996 (5) SCC 550).   

10. A  “fraud”  is  an  act  of  deliberate  deception  with  the  design  of

securing something by taking unfair advantage of another.  It is a deception

in  order  to  gain  by  another’s  loss.  It  is  a  cheating  intended  to  get  an

advantage.  (See S.P. Changalvaraya Naidu v. Jagannath (1994 (1) SCC 1).

11. “Fraud” as is well known vitiates every solemn act.  Fraud and justice

never dwell together.  Fraud is a conduct either by letter or words, which

includes the other person or authority to take a definite determinative stand

as a response to the conduct of the former either by words or letter.  It is

also  well  settled  that  misrepresentation  itself  amounts  to  fraud.  Indeed,

innocent  misrepresentation  may  also  give  reason  to  claim relief  against

fraud.   A  fraudulent  misrepresentation  is  called  deceit  and  consists  in

leading a man into damage by willfully or recklessly causing him to believe

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and act on falsehood. It is a fraud in law if a party makes representations,

which  he  knows  to  be  false,  and  injury  ensues  therefrom although  the

motive from which the representations proceeded may not have been bad.

An  act  of  fraud  on  court  is  always  viewed  seriously.   A  collusion  or

conspiracy with a view to deprive the rights of the others in relation to a

property would render the transaction void ab initio. Fraud and deception

are synonymous.  Although in a given case a deception may not amount to

fraud, fraud is  anathema to all  equitable principles  and any affair tainted

with  fraud  cannot  be  perpetuated  or  saved  by  the  application  of  any

equitable  doctrine  including  res  judicata.   (See  Ram Chandra  Singh v.

Savitri Devi and Ors. (2003 (8) SCC 319).

12. “Fraud” and collusion vitiate even the most solemn proceedings in

any civilized system of jurisprudence.  It is a concept descriptive of human

conduct.  Michael Levi likens a fraudster to Milton’s sorcerer, Comus, who

exulted in his ability to, ‘wing me into the easy hearted man and trap him

into snares’. It has been defined as an act of trickery or deceit. In Webster’s

Third New International Dictionary “fraud” in equity has been defined as an

act  or  omission  to  act  or  concealment  by  which  one  person  obtains  an

advantage against conscience over another or which equity or public policy

forbids  as  being  prejudicial  to  another.   In  Black’s  Legal  Dictionary,

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“fraud” is defined as an intentional perversion of truth for the purpose of

inducing  another  in  reliance  upon  it  to  part  with  some  valuable  thing

belonging  to  him or  surrender  a  legal  right;  a  false  representation  of  a

matter  of  fact  whether  by  words  or  by  conduct,  by  false  or  misleading

allegations, or by concealment of that which should have been disclosed,

which deceives and is intended to deceive another so that he shall act upon

it to his legal injury.  In Concise Oxford Dictionary, it has been defined as

criminal  deception,  use  of  false  representation  to  gain  unjust  advantage;

dishonest  artifice  or  trick.  According  to  Halsbury’s  Laws  of  England,  a

representation  is  deemed  to  have  been  false,  and  therefore  a

misrepresentation, if  it  was at the material  date false in substance and in

fact.  Section 17 of the Indian Contract Act,  1872 defines “fraud” as act

committed by a party to a contract with intent to deceive another.  From

dictionary meaning or even otherwise fraud arises out of deliberate active

role  of  representator  about  a  fact,  which  he  knows  to  be  untrue  yet  he

succeeds in misleading the representee by making him believe it to be true.

The representation to become fraudulent must be of fact with knowledge

that it was false. In a leading English case i.e. Derry and Ors. v. Peek (1886-

90) All ER 1 what constitutes “fraud” was described thus: (All ER p. 22 B-

C) “fraud” is proved when it is shown that a false representation has been

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made (i)  knowingly, or  (ii)  without  belief in  its  truth,  or (iii)  recklessly,

careless whether it be true or false”.  But “fraud” in public law is not the

same as “fraud” in private law.  Nor can the ingredients, which establish

“fraud” in commercial transaction, be of assistance in determining fraud in

Administrative Law.  It has been aptly observed by Lord Bridge in Khawaja

v.  Secretary  of  State  for  Home Deptt. (1983)  1  All  ER 765,  that  it  is

dangerous to introduce maxims of common law as to effect of fraud while

determining fraud in relation of statutory law.  “Fraud” in relation to statute

must be a colourable transaction to evade the provisions of a statute. “If a

statute has been passed for some one particular purpose, a court of law will

not countenance any attempt which may be made to extend the operation of

the Act to something else which is quite foreign to its object and beyond its

scope. Present day concept of fraud on statute has veered round abuse of

power or mala fide exercise of power. It may arise due to overstepping the

limits of power or defeating the provision of statute by adopting subterfuge

or the power may be exercised for extraneous or irrelevant considerations.

The colour of fraud in public law or administration law, as it is developing,

is  assuming  different  shades.   It  arises  from a  deception  committed  by

disclosure of incorrect facts knowingly and deliberately to invoke exercise

of power and procure an order from an authority or tribunal.  It must result

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in exercise of jurisdiction which otherwise would not have been exercised.

The misrepresentation must be in relation to the conditions provided in a

section on existence or non-existence of which the power can be exercised.

But non-disclosure of a fact not required by a statute to be disclosed may

not amount to fraud.  Even in commercial transactions  non-disclosure of

every fact does not vitiate the agreement. “In a contract every person must

look for himself and ensures that he acquires the information necessary to

avoid bad bargain. In public law the duty is not  to deceive. (See  Shrisht

Dhawan (Smt.) v. M/s. Shaw Brothers, (1992 (1) SCC 534).

13. In that case it was observed as follows:

“Fraud and collusion vitiate even the most solemn proceedings in  any  civilized  system  of  jurisprudence.   It  is  a  concept descriptive of human conduct. Michael levi likens a fraudster to  Milton’s  sorcerer,  Comus,  who  exulted  in  his  ability  to, ’wing me into the easy-hearted man and trap him into snares’. It has been defined as an act of trickery or deceit.  In Webster’s Third  New International  Dictionary fraud in  equity has  been defined as an act or omission to act or concealment by which one  person  obtains  an  advantage  against  conscience  over another  or  which  equity  or  public  policy  forbids  as  being prejudicial  to  another.   In Black’s Legal  Dictionary, fraud is defined as an intentional perversion of truth for the purpose of inducing another in reliance upon it to part with some valuable thing  belonging  to  him  or  surrender  a  legal  right;  a  false representation  of  a  matter  of  fact  whether  by  words  or  by conduct, by false or misleading allegations, or by concealment of that which should have been disclosed, which deceives and is intended to deceive another so that he shall act upon it to his legal injury.  In Concise Oxford Dictionary, it has been defined

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as criminal deception, use of false representation to gain unjust advantage; dishonest artifice or trick.  According to Halsbury’s Laws  of  England,  a  representation  is  deemed  to  have  been false, and therefore a misrepresentation, if it was at the material date false in substance and in fact.  Section 17 of the Contract Act defines fraud as act committed by a party to a contract with intent  to deceive another.   From dictionary meaning or  even otherwise  fraud  arises  out  of  deliberate  active  role  of representator about a fact which he knows to be untrue yet he succeeds in misleading the representee by making him believe it to be true.  The representation to become fraudulent must be of  the  fact  with  knowledge  that  it  was  false.   In  a  leading English case Derry v. Peek [(1886-90) ALL ER Rep 1: (1889) 14 AC 337 (HL)] what constitutes  fraud was described thus: (All Er p. 22 B-C)

‘Fraud is proved when it is shown that a false representation has been made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly, careless whether it be true or false’.”

14. This aspect of the matter has been considered by this Court in Roshan

Deen v. Preeti Lal (2002 (1) SCC 100) Ram Preeti Yadav v. U.P. Board of

High School and Intermediate Education (2003 (8) SCC 311), Ram Chandra

Singh’s case (supra) and Ashok Leyland Ltd. v.  State of T.N. and Another

(2004 (3) SCC 1).

15. Suppression of a material document would also amount to a fraud on

the court. (see Gowrishankar v. Joshi Amba Shankar Family Trust (1996 (3)

SCC 310) and S.P. Chengalvaraya Naidu’s case (supra).

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16. “Fraud” is  a conduct  either  by letter  or  words,  which  induces  the

other person or authority to take a definite determinative stand as a response

to the conduct of the former either by words or letter.  Although negligence

is not fraud but it can be evidence on fraud; as observed in   Ram Preeti

Yadav’s case (supra).

17. In  Lazarus Estate Ltd. v.  Beasley (1956) 1 QB 702, Lord Denning

observed  at  pages  712  & 713,  “No judgment  of  a  Court,  no  order  of  a

Minister can be allowed to stand if it  has been obtained by fraud. Fraud

unravels everything.”  In the same judgment Lord Parker LJ observed that

fraud vitiates all transactions known to the law of however high a degree of

solemnity. (page 722)

18. These aspects were highlighted in the  State of Andhra Pradesh and

Anr. v. T.  Suryachandr Rao (2005 (5) SCALE 621) and  Bhaurao Dagdu

Paralkar v. State of Maharashtra and Ors. (2005 (7) SCC 605)   

19. It was for the buyer to establish that he had no knowledge about the

genuineness or otherwise of the SIL in question.  

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20. The  maxim  caveat  emptor is  clearly  applicable  to  a  case  of  this

nature.  As per  Advanced Law Lexicon by P.  Ramanatha  Aiyar,  3rd Edn.

2005 at page 721:  Caveat emptor means “Let the purchaser beware.” It is

one of the settled maxims, applying to a purchaser who is bound by actual

as  well  as  constructive  knowledge  of  any defect  in  the  thing  purchased,

which is obvious, or which might have been known by proper diligence.  

21. “Caveat emptor does not mean either in law or in Latin that the buyer

must take chances. It means that the buyer must take care.” (See Wallis v.

Russell (1902) 21 R 585, 615).

22. “Caveat emptor is the ordinary rule in contract. A vendor is under no

duty to communicate the existence even of latent defects in his wares unless

by act or implication he represents such defects not to exist.” (See William

R. Anson, Principles of the Law of Contract 245 (Arthur L. Corbin Ed.3d.

Am. ed.1919) Applying the maxim, it was held that it is the bounden duty of

the purchaser to make all such necessary enquiries and to ascertain all the

facts  relating to the property to be purchased prior to committing in any

manner.  

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23.  Caveat emptor, qui ignorare non debuit quod jus alienum emit. A

maxim meaning "Let a purchaser beware; who ought not to be ignorant that

he is purchasing the rights of another.  Hob. 99; Broom; Co., Litl.  102 a: 3

Taunt. 439.

24. As the maxim applies, with certain specific restrictions, not only to

the quality of, but also to the title to, land which is sold, the purchaser is

generally bound to view the land and to enquire after and inspect the title-

deeds; at his peril if he does not.   

25. Upon a sale of goods the general rule with regard to their nature or

quality is  caveat emptor,  so that in the absence of fraud, the buyer has no

remedy against the seller for any defect in the goods not covered by some

condition or warranty, expressed or implied. It is beyond all doubt that, by

the general rules of law there is no warranty of quality arising from the bare

contract of sale of goods, and that where there has been no fraud, a buyer

who has not  obtained an express warranty, takes all  risk of defect  in the

goods,  unless  there  are  circumstances  beyond the mere fact  of  sale from

which a warranty may be implied.  (Bottomley v. Bannister, [1932]  1  KB

458 : Ward v. Hobbs, 4 App Cas 13}. (Latin for Lawyers)

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26. No one ought in ignorance to buy that which is the right of another.

The buyer according to the maxim has to be cautious, as the risk is his and

not that of the seller.  

27. Whether the buyer had made any enquiry as to the genuineness of the

license  within  his  special  knowledge.  He  has  to  establish  that  he  made

enquiry and took requisite precautions to find out about the genuineness of

the SIL which he was purchasing. If he has not done that consequences have

to  follow.  These  aspects  do  not  appear  to  have  been  considered  by  the

CESTAT in coming to  the  abrupt  conclusion  that  even if  one  or  all  the

respondents  had knowledge that the SIL was forged or fake that was not

sufficient to hold that there was no omission or commission on his part so as

to render silver or gold liable for confiscation.  

28. As noted above, SILs were not genuine documents and were forged.

Since  fraud  was  involved,  in  the  eye  of  law  such  documents  had  no

existence. Since the documents have been established to be forged or fake,

obviously fraud was involved and that was sufficient to extend the period of

limitation.   

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29. In view of this finding the other issues raised by the respondent are of

academic interest.

30.  The appeal is allowed. There shall be no order as to costs.  

……………………………………J. (Dr. ARIJIT PASAYAT)

……………………………………J. (Dr. MUKUNDAKAM SHARMA)

New Delhi, February 16, 2009           

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