Case: Ashwin S. Mehta  Vs. Custodian

The Appellants herein who are related to one Harshad S. Mehta (since deceased) purchased nine residential flats in a building called Madhuli Apartments in Worli area of Mumbai. The family of the Appellants consists of four brothers, their wives, children and their widowed mother. The eldest among them, Harshad S. Mehta, has since expired. The said nine flats, it is said, were merged and redesigned for joint living of the entire family.3. The Appellants herein and the said late Harshad Mehta were persons notified in terms of the Act which was enacted to provide for the establishment of a Special Court for the trial of offences relating to transactions in securities and for matters connected therewith. In terms of the provisions of the Act, along with late Harshad Mehta, the Custodian had notified 29 entities in terms of Section 3 of the Act, comprising three of his younger brothers, wife of late Harshad Mehta, wives of two of his younger brothers and other corporate entities, a partnership firm and three HUFs. However, out of the said 29 entitles, only Late Harshad Mehta and two of his younger brothers were cited as accused in various criminal cases filed against them.4. The properties of Late Harshad Mehta and the Appellants, herein being notified persons stood attached in terms of the provisions of the Act.

Court's reasoning:
33. It is not in dispute that the said applications are pending for consideration before the Special Court. They have not been heard. What would be the effect of the jurisdictional question as regard maintainability of the said application, being barred by limitation, would indisputably fall for consideration before the Special Court. We, therefore, as at present advised, refrain ourselves from adverting to the said question.34.The question, however, before us is as to whether any contention which may not have a direct bearing with the question as to whether the Special Court could entertain their applications forcould be raised by way of defence.It is no doubt true that the law of limitation bars a remedy but not a right. [See Bombay Dyeing & Manufacturing Co. Ltd. v. The State of Bombay and others, AIR 1958 SC 338, Savitra Khandu Beradi v. Nagar Agricultural Sale and PurchaseSociety Ltd. Ahmednagar and others [AIR 1957 Bom 178 , para 6] and Hari Raj Singh v. Sanchalak Panchayat Raj U.P. Govt. Lucknow and others [AIR 1968 All 246 , paras 14 and 15], but as observed hereinbefore, it would not be proper for us to consider as to whether such a remedy being not available, in terms of Section 4(2) of the Act can still be determined if raised by way of defence.Although, we do not intend to enter into the correctness or otherwise of the said contention of the Appellants at this stage, however, there cannot be any doubt whatsoever that they being notified persons, all their properties would be deemed to be automatically attached as a consequent thereto. For the said purpose, it is not necessary that they should be accused of commission of an offence as such.36. The contention of the Appellants to the effect that their properties should have been attached only towards the liabilities incurred by the parties in respect of the transactions made during the Statutory Period, cannot be accepted as all the Appellants being notified, the attachment of the assets would be automatic. [L.S. Synthetics Ltd. (supra)]38. However, the contention of the Appellants that the properties held by them otherwise are sufficient to meet their liabilities was required to be gone into, as, in our considered opinion, there cannot be a any dispute that the Appellants have such a right.In arriving at the said finding, no contention of the parties raised in their respective affidavits had been adverted to nor any material filed before it was analysed. In our opinion, the learned Judge, Special Court should have analysed the respective contentions of the parties in greater details and in particular in regard to assets and liabilities of the separate entities and having regard to the contentions raised by them that they are not part of the Harshad Mehta Group and their individual liabilities can be met from the assets held and possessed by them separately.49. The statement annexed to the affidavit of the Custodian showed individualand in that view of the matter the net asset picture of each individual of the Appellants herein on individual basis and the effect thereof, in our opinion, should have received serious consideration at the hands of the learned Special Court.We, therefore, have not been given a clear picture as to the correctness or otherwise of the affidavit filed by the Custodianthe Books of Accounts which have been maintained by the Appellants themselves as well as the Auditors Report. The learned Judge merely accepted the figures mentioned in the affidavit of the Custodian and relied thereupon in paragraphs 9 to 11 of the judgment without discussing the contentions and arguments raised on behalf of the Appellants, herein. We, therefore, are of the opinion, in the interest of justice, that it is necessary to give another opportunity of hearing to the Appellants.52. It is true that horrendous figures as regard the liabilities of Harshad Mehta have been projected before us but the same had been shown to be of the entire Group. If the liabilities of the individual entities are not treated as that of the group, for one reason or the other, indisputably, liability of those who have nothing to do with the dealings of Harshad Mehta either in their individual capacities or as Directors of some company or otherwise must be dealt with separately. The contention raised on behalf of the Appellants is that the Harshad Mehta should be considered to be sui generis and the Custodian may realize his dues from his personal assets as also of those with which he was concerned together with the assets of his front companies but such liability should not be fastened upon others who had nothing to do therewith. As regards liabilities of Harshad Mehta, the Appellants contended that since his expiry in the year 2001 his legal interests are not being defended both in the court as well as before the revenue, as a result, liabilities have been foisted upon him a large part which is on account of interest and penalties. His death has also forced upon him bankruptcy. On the other hand, the contention of the Custodian is that the Appellants had not only taken huge loans or advances from Harshad Mehta in one capacity or the other but also even transactions and shares were made by Harshad Mehta on their behalf. Further contention of the Custodian is that even Dr. Hitesh Mehta and Dr. Pratima Mehta have admitted that they had no knowledge about the transactions. This may be so, but then the effect of the rival contentions was required to be gone into by the learned Special Court. A finding of fact arrived at upon discussing and analyzing the respective contentions could have gone a long way in assisting this Court in arriving at a correct conclusion. The learned Judge proceeded on the basis that the assets and liabilities, joint and collective, of all those who are related with Harshad Mehta as also the corporate entities in which he was a Director or had some other interest must be considered as a group. Even in this behalf, it was necessary for the Special Judge to assign sufficient and cogent reasons.A question may further arise as to whether the learned Judge was correct in considering the individual liabilities of the notified parties as the liabilities of the group.If those individuals, who had no connection with Harshad Mehta could not have been proceeded against for meeting the liabilities of Harshad Mehta jointly or severally, a clear finding was required to be arrived at. Only because there had been large intermingling and flow of funds from Harshad Mehta and inter se within the group, the same by itself may not justify the conclusion that all of their assets were required to be sold irrespective of their individual involvement. It was, thus, necessary for the learned Special Court to arrive at a firm conclusion as regard the involvement of the individuals with Harshad Mehta, if any, and the extent of his liability as such.54. Furthermore, the question as regard liability of the parties should have been determined at the stage of Sectionof the Act. The Appellants have contended that the Custodian had taken contradictory or inconsistent stand inasmuch as the liabilities of all the entities were treated to be joint liabilities of Harshad Mehta group. He furthermore wanted to treat the liabilities of the notified entities also as their separate liabilities. He has proceeded on the basis that even if the assets and liabilities of all individuals is taken on an individual basis, the liabilities would exceed assets in the case of each individual and corporate entity. It had, however, never been the case of the Custodian that the examination of claims of all the notified parties is complete. It does not appear that claims inter se between the entities within thegroup had ever been taken into consideration. The Custodian does not appear to have preferred claims before the Special Court on behalf of the largest lender on thegroup against those he had to recover loans. Such claims may also be preferred.It is not in dispute that the tax liabilities of the Appellants individually were assessed on the basis of Best Judgment assessment. It is, furthermore not in dispute that in a large number of cases the appellate authorities have set aside Best Judgment assessments. The contention of the Appellant to the effect that the income tax dues should have been considered at the point of time when they become recoverable cannot be accepted having regard to theBench decision of this Court in B.C. Dalal (supra) wherein this Court categorically held that in absence of any order of stay granted by the higher court, the liabilities would remain.This Court, therefore, has laid down a law that mere filing of an appeal is not sufficient, particularly, when there is no order of stay on recovery has been granted and the demand is outstanding.But, in this case, the orders of assessment have been set aside. If the orders of assessment have been set aside the liabilities of the Appellants have to be worked out on the basis of the new orders of assessment. So long, such orders of assessment are not passed by the competent assessing authorities, it cannot be said that the Appellants are liable to pay a huge amount by way of income tax dues on the basis of such orders of assessment which have since been set aside.The learned Special Court, having not arrived at such a finding, this Court is not in a position to go into the correctness or otherwise thereabout.64. In any view of the matter, the learned Judge, Special Court having not dealt with the question as regard the mode and manner of disbursements of the amount so far as the tax liabilities of the Appellants are concerned elaborately, the same requires fresh determination in the light of the decision of this Court in Harshad Shantilal Mehta (supra).In view of the aforementioned pronouncement of law, we are of the opinion that it is absolutely necessary to request the learned Special Court to consider the matter afresh.In that view of the matter, evidently, creation of any third party interest is no longer in dispute nor the same is subject to any order of this Court. In any event, ordinarily, a bona fide purchaser for value in an action sale is treated differently than a decree holder purchasing such properties. In the former event, even if such a decree is set aside, the interest of the bona fide purchaser in an auction sale is saved. [SeeKhan v. Muhammad Asghar Ali Khan15 IA 12]. The said decision has been affirmed by this Court in Gurjoginder Singh v. Jaswant Kaur (Smt.) and Another [(1994) 2 SCC 368] .We, therefore, do not interfere with that part of the order whereby and wherewith the auction sale, as regard commercial properties, had been directed by the learned Judge, Special Court. The learned Judge, Special Court, may, therefore, proceed to pass an appropriate order as regard confirmation of the sale of such properties.In view of our foregoing discussions, we are of the opinion that:(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. (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. (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 (supra). (iv) The learned Special Court shall proceed to pass appropriate orders as regard confirmation of the auction sales in respect of commercial properties. (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. (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 therefor. (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. (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.