Case: Jyoti Harshad Mehta Vs. Custodian

HISTORICAL BACKGROUNDThe 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 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 PROCEEDINGSIn 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 The same were, however, not pressed and were later withdrawn.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.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 ACCOUNTANTSThe 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 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, "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 COURTThe 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 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."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.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 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.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 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 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."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 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."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."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

Reasoning:
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(1) of Section 4 of the Special Act shallhas 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 Methathe appellants was, thus, not a third party.ISSUE OF DENOTIFICATIONAppellants 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 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 ILLEGALSECURITIES TRANSACTIONItis 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 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 therefrom.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 subsection (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. Thespecifically 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 saiddoes not provide for any qualification that the properties which 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. 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 PERIODIt 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 theperiod, 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 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 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 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 theof mind of the learned Judge, Special Court. He was required to weigh the submissions andof both the parties in his proper perspective and then arrive at a well reasoned opinion, which doesnt 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".