By virtue of Sec3(3) of Special Court (Trial of Offences relating to transactions in Securities) Act, 1992, properties of person notified u/s 3(2) would automatically stand attached with effect from date of notification: Top Court
Justices Pamidighantam Sri Narasimha & Sandeep Mehta [05-03-2024]

Read Order: SUMAN L. SHAH v. THE CUSTODIAN & ORS (CIVIL APPEAL NO(S). 4577 OF 2011)

Tulip Kanth

New Delhi, March 8, 2024: In a case pertaining to the Special Court (Trial of Offences relating to transactions in Securities) Act, 1992, the Supreme Court has set aside the judgment of the Special Court directing garnishees of owner of the benami companies to pay Rs 75 lakh. The Top Court held that the entire case of the Custodian was based on a communication received from the Income Tax Department but no witness from the Department was examined in support of the recovery application.

The factual background of this case was that in the year 1992, Fairgrowth Financial Services Limited (FFSL) was notified under Section 3(2) of the Special Court (Trial of Offences relating to transactions in Securities) Act, 1992 and all its properties stood attached. In 1993, the Custodian filed Miscellaneous Application for the recovery of various sums of money belonging to FFSL from respondent No. 2-Pallav Sheth.The Special Court passed a consent decree on  directing respondent No. 2-Pallav Sheth to pay a sum of Rs51,49,07,417.92 to the Custodian on behalf of FFSL. Respondent No. 2-Pallav Sheth committed default and as a consequence, the Custodian initiated attachment of his assets to recover the decretal amount.

During the years 1996-1997, the appellant-Suman L. Shah had borrowed a sum of Rs50 lakh from respondent No. 6-Klar Chemicals(P) Ltd. and a sum of Rs25 lakh from respondent No. 7-Malika Foods (P) Ltd. (original respondent Nos. 5 and 6 before the Special Court) whereas appellant- Laxmichand Shah had borrowed Rs45 lakh from respondent No. 8-Jainam Securities(P) Ltd. (original respondent No.7 before the Special Court). As per the case set up by the Custodian, these were the benami companies of respondent No. 2-Pallav Sheth who had illegally parked the tainted money received from FFSL, the notified company in these benami companies (respondent Nos.6, 7 and 8) created by himself.

The Custodian notified respondent No.2-Pallav Sheth and he was declared insolvent. As a consequence, all his assets and properties got vested in the Official Assignee i.e. respondent No.9. As respondent No. 2-Pallav Sheth failed to pay the decretal amount, the Special Court, by an order passed in miscellaneous application registered for initiating contempt proceedings against respondent No. 2-Pallav Sheth observed that respondent Nos. 4 to 8 were benami companies of respondent No.2-Pallav Sheth.

Miscellaneous Applications were filed by the Custodian before the Special Court for recovery of Rs50 lakh from the appellant Suman L. Shah and for recovery of Rs25 lakh from the appellant/Laxmichand Shah both being garnishees of respondent No. 2-Pallav Sheth i.e. the owner of the benami companies (respondent Nos.4 to 8).

The Special Courtdirected the appellant Suman L. Shah to pay a sum of Rs50 lakhsto the Custodian with interest. The Court also appellant- Laxmichand Shah to pay a sum of Rs25 lakh. Aggrieved by these judgments, Suman L. Shah and Laxmichand Shah had instituted Civil Appeals before the Top Court.

The Division Bench of Justice Pamidighantam Sri Narasimha and Justice Sandeep Mehta noticed that the foundation behind the assertion made by the Custodian that the appellants herein were garnishees of respondent No. 2- Pallav Sheth through respondent Nos. 6, 7 and 8 was based entirely on a communication purportedly issued by the Income Tax Department. In the affidavit filed on behalf of the Department, there was no reference whatsoever to the outstanding dues of respondent Nos. 6, 7 and 8 or that the appellants were its debtors. No witness from the Department was examined in evidence before the Special Court in miscellaneous applications for recovery.

Referring to sections 3 and 9(A) of the Act, the Bench stated, “From a bare perusal of these provisions, it would become clear that the properties of the person notified under Section 3(2) would stand attached automatically with effect from the date of notification by virtue of Section 3(3).”

It was opined that since respondent No.2- Pallav Sheth was notified (as being a debtor of the originally notified company FFSL) with effect fromOctober 6, 2001, a fortiori, his properties would be deemed to be attached with effect from that date and not prior thereto.

The entire case of the Custodian regarding subsisting debts of the appellant towards respondent Nos. 6, 7 and 8 was based on a communication received from the Income Tax Department but no witness from the Department was examined in support of the recovery application and the communication forwarded by the Department and relied upon by the Custodian was not proved by proper evidence.

The appellants took a categoric stand in their depositions that they had returned the amounts borrowed from respondent Nos. 6, 7 and 8, but the books of accounts were not available because of lapse of time. As per the Bench, the said plea of the appellants herein could not be treated as unnatural or an afterthought because once the transactions were completed and the loans were repaid, there was no reason for the appellants to have entertained a belief that after a period of about 13 years, they would be required to present the account books pertaining to transactions.

“Resultantly, the conclusions drawn and the findings recorded in the impugned judgments passed by the Special Court that the appellants herein failed to prove the fact that the amounts had been repaid to the benami companies of the notified person, namely, Pallav Sheth do not stand to scrutiny and cannot be sustained as being contrary to facts and law”, the Bench said.

Thus, quashing the impugned judgements and allowing the appeals, the Bench ordered that the amounts deposited by the appellants should be reimbursed to them forthwith.