Holding

All properties of persons notified under the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992 stand automatically attached, and the Special Court must reassess individual liabilities, tax liabilities and the sale of the attached properties afresh.

Summary

The Supreme Court heard appeals by Ashwin S. Mehta and other family members, who were notified persons under the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992, seeking release of residential flats and commercial premises that had been attached. The Special Court had allowed the Custodian to sell the properties but dismissed the appellants' applications for release. The Court examined whether mere notification, without a finding of personal involvement in securities offences, sufficed to attach all assets, and whether the individual liabilities of the appellants could be treated separately from the Harshad Mehta group. It also considered the effect of pending tax assessments, the propriety of auctioning commercial and residential properties, and the need for a fresh determination of liabilities. The Court held that attachment is automatic upon notification, irrespective of personal culpability, and that the Special Court must reconsider the individual liabilities, tax issues, and the sale of properties afresh. Accordingly, the appeals were allowed and the matter remitted to the Special Court with detailed directions.

Issues considered

Whether the appellants, not personally involved in securities offences, could be proceeded against under the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992.
Whether the individual liabilities of the appellants should be considered separately and not as part of the Harshad Mehta Group.
Whether tax liabilities can be deemed due when the assessment orders have not become final and binding.
Whether the commercial properties could be sold by auction.
Whether the residential properties should be released from attachment.

Legislation cited

Limitation Act, 1963s. 29(2)
Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992s. 11, s. 3, s. 4, s. 9, s. 9-A

Subjects

Special Courts Actattachment of propertynotified personssecurities fraudtax liabilityauction salecorporate veillimitationbest judgment assessmentHarshad Mehta group

Judgment

A ASHWIN S. MEHTA AND ANR.
v.
CUSTODIAN AND ORS.

JANUARY 3, 2006

B [S.B.SINHA AND P.P.NAOLEKAR, JJ.]

Special Courts (Trial of Offences Relating to Transactions in Securities)
Act, 1992: Sections 3 and 9-A.

c Notified persons-liabilities-Notified persons consisted offour brothers,
their wives and their widowed mother-These notified persons were related to
late Harshad Mehta-Properties oflate Harshad Mehta and the notified persons
stood attached in terms ofthe provisions ofthe Act-Notified persons purchased
nine residential flats in a building-Special Court allowed the applications
D filed by the Custodian seeking permission for the sale of residential premises
and commercial premises of eight notified persons-However, the Special
Court dismissed the applications filed by the notified persons for releasing of
the residential flats as well as the commercial premises from attachment-
Correctness of-Held: The properties of the notified persons stood automatically
attached-Any other income from such attached properties would also stand
E attached-For that purpose it is not necessary that they should be accused of
commission of an offence as such-Special Court is directed to consider afresh
the matters regarding tax liabilities of the notified persons, the auction sales
in respect of commercial and residential properties Qnd whether individual
liabilities of the notified persons ought to have been separately considered by
F the Special Court as not a part of Harshad Mehta Group-Notified persons
are entitled to inspection of all the documents in the Custodian's power or
possession-Assistance from a Chartered or Cost Accountant may be taken by
both parties-Matter remitted to Special Court.

The appellants who were related to one Harshad S. Mehta (since
G deceased) purchased nine residential flats in a building. The family of the
appellant consisted of four brothers, their wives, children and their
widowed mother.

The appellants and the said late Harshad S. Mehta were persons
notified in terms of the Special Courts (Trial of Offences Relating to
H 56
··---1.
!

ASHWIN S. MEllTA "· CUSTODIAN 57
Transactions in Securities) Act, 1992. The properties of late Harshad S. A
Mehta and the appellants stood attached in terms of the provisions of the
Act.

The Special Court allowed the applications filed by the respondent-
Custodian seeking permission for the sale of residential premises and
commercial premises of eight notified entities. However, the Special Court B
dismissed the applications filed by the appellants for releasing of the
\' residential nats as well as the commercial premises from attachment.
Hence the appeal.

The following questions arose before the Court:-
c
(i) Whether the appellants being not involved in offences in
transactions in securities could have been proceeded against in terms of
the provisions of the Special Courts (Trial of Offences Relating to
Transactions in Securities) Act, 1992?

(ii)Whether individual liabilities of the appellants ought to have been D
separately considered by the Special Court as not a part of Harshad Mehta
Group?

(iii) Whether the tax liabilities could not have been held to be due
as the order of assessments did not become final and binding?
E
(iv) Whether the commercial properties could have been sold in
auction?

(v) Whether the residential properties should have been released
from attachment?
F
Disposing of the appeal, the Court

HELD: I. Both the parties have raised several contentions before
this Court which have not precisely been raised before the Special Court.
Several subsequent events have also been brought to the notice of this
G
Court. The parties have also filed several charts before this Court showing
~ . . J,
individual assets and liabilities. It has further been contended that various
best judgment assessmen~s passed by the Assessing Authority against some
of the appellants have been set aside in appeal and the matters are pending
reassessment before the Assessing Authority. (77-H; 78-Af
H
58 SUPREME COURT REPORTS 12006] I S.C.R.

A l.S. Synthetics ltd. v. Fairgrowth Financial Services Ltd., 120041 11 r

SCC 456, Fairgrowth, B.C. Dalal v. Custodian (CA No. 2795 of 2004), The
Kedarnath Jute Mfg. Co. ltd. v. The Commissioner of Income Tax, ( 19721 3
SCC 252, Harshad Shanti/al Mehta v. Custodian, 1199815 SCC I, Fairgrowth
Investments Ltd. v. Custodian, 120041 I I SCC 472 and Tejkumar Balakrishna
B Ruia v. A.K. Menon. 119971 9 SCC 123, referred to.

Hitesh Shanii/al Mehta v. Union of India, (1992) 3 Born CR 716,
approved. •
2. It is no doubt true that the law of limitation bars a remedy but
C not a right. 178-EI

Bombay Dyeing & Manufacturing Co. Ltd. v. The State of Bombay, AIR
(I 958) SC 338, relied on.

Savitra Khandu Beradi v. Nagar Agricultural Sale and Purchase
D Cooperative Society ltd.. AIR (1957) Born 178 and Hari Raj Singh v.
Sanchalak Panchayat Raj, AIR 119681 All 246, approved.

3. There cannot be any doubt whatsoever that the appellants being
notified persons, all their properties would be deemed to be automatically
attached as a consequence thereto. For the said purpose, it is not necessary
E that the appellants should be accused of commission of an offence as such.
179-B-CI

4. 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 transaction made during the Statutory Period
F cannot be accepted as, all the appellants being notified, the attachment of
the assets would be automatic. 179-C-DI

L.S. Synthetics Ltd \'. Fairgrowth Financial Services Ltd, 120041 I I
sec 456, relied on.
5. The principle of lifting the corporate veil, however, ipso facto
G would not apply to the individuals. The Custodian in a case of this nature
may, however, show that the transactions entered into apparently by
Harshad Mehta were intimately connected with the acquisition of
properties in the name of others. A transaction of Benami indisputably
can be a subject matter of a /is in terms of Section 4(1) of the Special
H Courts (Trial of Offences Relating to Transactions in Securities) Act, I 992.
·--t,
ASHWIN S. MEHTA v. CUSTODIAN 59
As and when such a question is raised, the same may have to be dealt with A
by the Special Court appropriately. However, nexus between sev~~al
persons in dealing with the matter may be established by the Custodian.
179-F-GI

6. It is open to the appellants to show that even if they continued to
be notified, the Custodian was not right in clubbing all the i11dividual B
members of the family as a single entity styled as Harshad Mehta Group.
It is interesting to note that the properties belonging to the mother of
Harshad Mehta have since been released from attachment. (80-Hf

7. The Special Court should have analyzed the respective contentions C
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. f82-A-Bf
D
8. A clear picture as to the correctness or otherwise of the affidavit
I
filed by the Custodian vis a vis the Books of Accounts which have been
maintained by the appellants themselves as well as the Auditor's Report
has not been given. The Special Court merely accepted tbe figures
mentioned in the affidavit of the Custodian and relied thereupon without
discussing the contentions and arguments raised on behalf of the E
appellants. Therefore, in the interest of justice, it is necessary to give
another opportunity of hearing to the appellahts. f83-C-Df

9. It is true that horrendous figures as regards the liabilities ·of
Harshad Mehta have been projected before this Court, but the same had
been shown to be of the entire Group. If the liabilities of the individual F
entities are not treated as those 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 oth.erwise must be dealt with separately. f83-Ef
G
·10. A finding of fact arrived at upon discussing and analyzing the
respective contentions could have gone a long way in assisting this Court
J. in arriving at a correct conclusion. The Special Court 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 H
r'
60 SlJPREME COURT REPORTS j1006] I S.C'.R.

A Group. Even in this behalf, it was necessary for the Special Court to assign
sufficient and cogent reasons. 184-A-Bl

11. A question may further arise as to whether the Special Court
was correct in considering the individual liabilities of the notified parties
as the liabilities of the Group. If those individuals, who had no connection
B 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
C were required to be sold irrespective of their individual involvement. It
was, thus, necessary for the Special Court to arrive at a firm conclusion
as regards the involvement of the individuals with Harshad Mehta, if any,
and the extent of his liability as such. 184-C-DI

12. The Special Courts (Trial of Offences Relating to Transactions
D in Securities) Act, 1992 confers wide power upon the Custodian and the
Special Court and, in that view of the matter, having regard to the
principles of natural justice, the judgment and order of the Special Court
should have furthermore been supported by sufficient and cogent reasons.
184-H; 85-AI

E 13. 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 the best judgment assessment. The contention
of the appellant to the effect that the income tax dues should have been
F considered at the point of time when they become recoverable cannot be
accepted. 185-BI

8. C'. Dalal v. Custodian, (CA No. 2795 of 2004, relied on.

14. The Special Court having not dealt with the question as regard
G the mode and manner of disbursements of the amount so far as the tax
liabilities of the appellants are concerned elaborately, the same require
fresh determination. 187-81

The J\.edarnath .lute Mfg Co. Ltd. v. The Commissioner of Income Tax.
119721 3 SCC 252 and Harshad Shanti/al Mehta v. Custodian 119981 5 SCC
H I, relied on.
\ ASH WINS. MEHTA v. CUSTODIAN 61

15. Furthermore, the orders of the appellate authority have been A
passed during pend ency of this appeal. This Court, it is trite, can take into
consideration the subsequent events. Such subsequent events could also
be taken into consideration for the purpose of review. 187-CI

Board of Control for Cricket in India v. Netaii Cricket Club, (2005) 4
sec 741, relied on. B
i
16. Evidently creation of any third party interest is no longer in
dispute nor is the same subject to any order of this Court. In any event,
ordinarily, a bona fide purchaser for value in an auction-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 c
purchaser in an auction-sale is saved. 188-E-FI

Zain-ul-Abdin Khan v. Muhammad Asghar Ali Khan, 15 IA 12 and
Gwjoginder Singh v. Jaswant Kaur. 119941 2 SCC 368, referred to.

17. That part of the order whereby and wherewith the auction-sale, D
as regards the commercial properties, had been directed by the Special
Court need not be interfered with. The Special Court may, therefore,
proceed to pass an appropriate order as regards the confirmation of the
sale of such properties. 189-EI
E
Janak Raj v. Gurdial Singh, 119671 2 SCR 77 and Padanthil Ruqmini
Amma v. P.K. Abdulla, 119961 7 SCC 668, relied on.

18. Admittedly, the flats have been sold subject to the result of these
appeals. The flats have been sold on the basis of the joint liabilities of the
appellants together with Harshad Mehta and other companies as a Group. F
The liabilities of the appellants are required to be considered afresh by
the Special Court. The purchasers have also filed applications for their
impleadment in these appeals. However, the purchasers have not been
heard as the question as to whther the auction-sale of the said flats will
be confirmed or not will depend upon the ultimate finding of the Special
Court upon consideration of the matter afresh. 189-H; 90-AI G
--\
19.(i). The contention of the appellants that they, being not involved
in offences in transactions in securities, could not have been proceeded
with in terms of the provisions of the Special Courts (Trial of Offences
Relating to Transactions in Securities) Act, 1992 cannot be accepted in H
62 SUPREME COL:R'r REPORTS (2006 J I S.C. R.

A view of the fact that they have been notified in terms thereof. (90-DI

(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
B by the Special Court need not be determined by this Court in view of the
fact that appropriate applications in this behalf are pending consideration
before the Special Court. 190-E-FI

(iii) As regards the tax liabilities of the appellants, the Special Court
C is requested to consider the matter afresh. The Special Court, in this
behalf, having regard to the fact that several orders of the 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
Shanti/al Mehta. (90-H; 91-A(

D HarshaJ Shanti/al Mehta v. Custodian, 119981 5 sec I, relied on.

(iv) The Special Court shall proceed to pass appropriate orders as
regards confirmation of the au~l.ion sales in respect of commercial
properties. (91-BI

E (v) As regards sale of residential properties, an appropriate order
may be passed by the Special Court. (91-Ci

(vi) The Custodian is directed 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
F 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 proceedings jointly, only one of thein 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 proceedings. (91-D(
G
(vii) The appellants shall file their objections to the said report, if
any, within ten days thereafter. The Custodian may also take the assistance
and/or further assistance from a Chartered Accountant of his choice. A
reply and/or rejoinder theret{) shall be filed within one week from the date
H of the receipt of the copy of the objection. The parties shall file their
ASHWIN S. MEHTA 1·. CUSTODIAN 63
respective documents within one week thereafter. Such documents should A
be supported by affidavits. Both the parties sha II be entitled to inspect such
documents and file their responses.thereto within one week thereafter. The
parties shall file the written submissions filed before this Court together
with all charts before the Special Court within eight weeks from the date
of this judgment. 191-E-GI
B
(viii) The 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. 191-G-HI

(ix) The Special Court while headng the matter in terms of this order C
shall also consider as to whether the auction-sale should be confirmed or
not. It will also be open to the Special Court to pass an interim order or
orders, as it may think fit and proper, in the event any occasion arises
therefor. 192-AI
D
(x) The Special Court is requested to complete the hearings of the
matter, keeping in view the fact that auction-sale in respect of the
residential premises is being considered, as expeditiously as possible and
not later than twelve weeks from the date of the receipt of the copy of
this judgment. Save and except for sufficient or cogent reasons, the Special
Court shall not grant any adjournment to either of the parties. 192-B-CI E
(xi) The 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 this judgment. If in the meanwhile orders of
assessment are passed by the Income Tax Authorities, the Custodian shall F
be at liberty to bring the same to the notice of the Special Court whic.h
shall also be taken into consideration by, the Special Court. 192-DI

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 667-671 of
2004.
G
From the Judgment and Order dated 17. I0.2003 of the Special Court
(Trial of offences relatiRg to Transactions in Securities at Bombay) in the
Misc. Application No. 41 of 1999 and Misc. Application No. 4/2001 and
Misc. Applications 265 and 266/2003.
H
64 SUPREME COURT REPORTS [20061 I S.C.R.

A WITH
..
C.A. Nos. 672 1 675, 676-680 and 681 of 2004.

Mahesh Jethmalani, Arvind K. Nigam, Ms. Kamini Jaiswal, Mrs.
Shomila Bakshi and Ms. Rani for the Appellants.
B
Ashok V. Desai, Gaurav Joshi, Jay Kishor Singh, Abhay Kumar, Gopal
Krishnan, Subramonium Prasad, A. Subba Rao, Mahesh Agrawal. E.C.
Agrawala, Ms. lndu Malhotra, Ms. Savita Sinha, Ms. B. Vijayalakshmi Menon,
Ms. Sunita and Shiv Kumar Suri for the Respondents.

C The Judgment of the Court was delivered by

S.B. SINHA, J. These appeals are directed against a judgment and
order dated 17.10.2003 passed by the Special Court constituted under the
Special Courts (Trial of Offences Relating to Transactions in Securities) Act,
1991 (for short "the Act") in Mis~. Application Nos. 41 of 1999. 4 of 2001,
D 265, 266 and 275 of 2003.

BACKGROUND FACTS

The Appellants herein who are related to one Harshad S. Mehta (since
deceased) purchased nine residential flats in a building called Madhuli
E 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.

The Appellants herein and the said late Harshad Mehta were persons
F
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
G 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.

The properties of Late Harshad Mehta and the Appellants. herein being
H
ASllWIN S. MEHTA v. CUSTODIAN !SINHA . .I.I 65
'"'· notified persons stood attached in terms of the provisions of the Act. A

PROCEEDINGS BEFORE THE SPECIAL COURT

Before the learned Special Court, the parties herein filed several
applications which can be sub-divided in three categories, as would be noticed
shortly hereinafter. It is not in dispute that the k1rn<'<.l Special Court on or B
about 3.08.1993 issued directions in various proceedings before it appointing
auditors to prepare and audit the books of accounts of all notified persons for
the period 1.4.1990 and E.06.1992. i.e., the date of the notification. Three
firms of Chartered Accountants were appointed to prepare statement of
accounts and liabilities of each of the Appellants, herein.
c
A Chartered Accountants· Firm was appointed by the learned Special
Judge by an order dated 17.9.2003 to represent all notified entities in the
family of late Harshad Mehta for the purpose of ascertaining their tax liabilities.

We may. at this juncture. notice the nature of the applications filed by D
the parties, herein before the learned Special Court:

(i) On 26.04.1999. the Custodian filed an application being Misc.
Application No. 41 of 1999 seeking permission of the Special
Court for sale of residential premises commonly known as
Madhuli of eight notified entities.
E
(ii) A Misc. Application being 4 of 2001 was filed by the Custodian
praying for the sale of commercial premises.
1. (iii) The Appellants herein filed several Misc. Applications praying
for lifting of attachment on their residential premises on the
ground that the same had been purchased much prior to 1.4.1991 F
and the same had no nexus with any illegal transactions in
securities. Alternatively, it was prayed that since their asset base
was greater than genuine liabilities, the said residential premises
shouli:I be released from attachment.

IMPUGNED JUDGMENT G

By reason of the impugned order dated 17.10.2003, the learned Special
Judge allowed Misc. Applications Nos. 4 of 2001 and 41 of 1999.

The Misc. Applications filed by the Appellants herein for release of the
H
66 SUPREME COURT REPOR rs [20061 I S.C.R.

A residential flats as well as the commercial premises from attachment were
dismissed. It was directed:

''In case, all adult members of the family of late Shri Harshad Metha.
who are presently occupying the abovereferred flats. file an undertaking
in this Court within a period of four weeks from today undertaking
B to vacate the flat occupied by them and hand over peaceful possession
thereof to the custodian within a period of four weeks from the date
on which the custodian sends them communication asking them to
vacate the flats, on sale 9f the flats being sanctioned by the Court.
The custodian shall permit the members of family of late Shri Harshad
c Mehta to occupy the flats during the time that the process of the sale
of the flats goes on.

In case no such undertakings are filed by the adu It members as directed
above, within the aforesaid period. the custodian shall stand appointed
as receiver of the flats which are described in Exh. 8 and Exh. 8-1
to Misc. Petition No. 41 of 1999."
D
CONTENTIONS OF THE PARTIES

Appellants

E Mr. Mahesh Jethmalani. learned senior counsel appearing on behalf of
the Appellants in assailing the said judgment of the learned Special Court
inter alia raised the following contentions:

(i) Some of the entities having their asset base much more than
actual liability, the impugned judgments are unsustainable. There
was no occasion for the Custodian to club all the notified entities
F
in one block so as to be termed as Harshad Mehta Group and/
or to club their assets and liabilities jointly. Although in relation
to a body corporate incorporated and registered under the Indian
Companies Act. the doctrine of lifting the corporate veil would
be applicable, but the same cannot be applied in case of
G individuals.
(ii) Having regard to the fact that only three entitles out of eight
were involved in the offences. the liability of Harshad Mehta
could not have been clubbed for the purpose of directing
attachment and consequent sale of the properties which
H
~
I
_,,,.- -- .

ASHWIN S. MEHTA v. CUSTODIAN [SINHA. J.) 67
exclusively belong to them. A
(iii) The liabilities of Harshad Mehta, who was a sui generis, could
have been recovered from the properties held and possessed by
him or from the companies floated by him but not from the
individual entities; at least two of whom being medical
·practitioners have their income from other sources. B
(iv) The books of accounts and other documents on the basis whereof
the auditor's report had been made having not been allowed to
be inspected by the Appellants herein on the plea that they had
the knowledge thereabout, the same could not have been taken
into consideration for the purpose of pass[JJ(l___of the impugned C
order or otherwise.
(v) The Appellants having preferred appeals against the income tax
orders of assessment passed by the authority and the same having
1. been set aside, no liability to pay income tax by the Appellants
as of now being existing, the residential properties could not D
have been sold.
(vi) Drawing our attention to a representative chart showing the
discrepancies in the accounts of Mrs. Deepika A. Mehta as shown
in (a) affidavit by the Custodian; (b) Books of Accounts
maintained by the Appellants; and (c) Auditor's Report, it was E
submitted that the Auditor's Report could not have been relied
upon.
(vii) A copy of the Auditor's Report having only been supplied during
pendency of these appeals, the learned Special Judge committed
a serious error in passing the impugned judgment relying on or F
on the basis thereof.

Respondents

Mr. Ashok H. Desai. learned senior counsel appearing on behalf of the
Custodian. on the other hand, would, inter alia, submit: G
J.
(i) In view of the decision of this Court in l.S. Synthetics ltd. v.
FairKrowth Financial Services ltd. and Anr.. [2004] 11 SCC
~
456 all properties belonging to the notified persons being subject
to automatic attachment, could be applied for discharge of the
joint liabilities of the Harshad Mehta Group in terms of Section H
68 SUPREME COURT REPORTS 120061 I S.C.R.

A I I of the Act.

(ii) The applications for de-notification filed by the Appellants herein
having been withdrawn. the contention raised by the Appellants
that they are not liable in terms of the provisions of the Act are
not open to question. particularly. in view of the fact that no
B application for de-notification could be filed subsequently as they
had become barred by limitation.

(iii) The order of assessment under the Income Tax Act having become
final and binding as on the date when the orders of assessment
were passed and. thus, mere filing of appeals, were not sufficient
c for raising a contention that the taxes did not become due. Reliance
in this behalf has been placed on B.C. Dalal v. Custodian, Civil
Appeal No. (2795) of 2004 and The Kedarnath Jute Mfg. Co.
ltd. v. The Commissioner of Income Tax, (Central), Calcu//a,
[ 1972] 3 sec 252.
D (iv) The Appellants herein. apart from the corporate entity which is
a front company of late Harshad Mehta, have received large
loans. advances and credits from the Harshad Mehta Group and
there had been intermingling of the assets to the tune of crores
of rupees, they cannot escape their liabilities under the Act. The
affidavit filed by the Appellants herein before the Special Court
E clearly' shows that the liabilities exceed the assets in all cases.
Even in the case of Dr. Pratima Mehta wherein .some e~cesses
has been shown, if the interest is calculated for the last over 13
years of the amount received, the liabilities would exceed the
assets.
F (v) The assets and liabilities of each of the entities having been
audited by the Chartered Accountants, it is evident from the
reports that in all cases liabilities exceed the assets.
(vi) The decretal amount against the Harshad Mehta Group also would
exceed Rs. 4339 crores and. thus. the assets held by the Appellants
G are wholly insufficient to meet the liabilities.
(vii) Furthermore. the Appellants are also unable to maintain their
ri:sidential properties as the Custodian had to pay a sum of Rs.
1.06 crores towards the maintenance of the said residential
properties. The assets of the Harshad Mehta Group are valued at
H Rs. 972 crores apart from the income tax dues whereas the
ASHWIN S. MEHTA v. CUSTODIAN !SINHA . .I.I 69

'"' aggregate amount of income tax dues exceed Rs. 13,800 crores. A
(viii) Dr. Hitesh Mehta and Dr. Pratima Mehta who are medical
practitioners by profession having affirmed affidavits admitting
that the share broking and investment businesses which were
part of family businesses were undertaken and conducted by late
Harshad Mehta and they had no knowledge thereabout nor were B
they involved therewith, they at this stage cannot be permitted to
tum round and contend that they have nothing to do with the
liabilities of Late Harshad Mehta.
(ix) The sale of commercial property had never been seriously
contested by the Appellants and in fact the contention of the c
Appellants here.in before the Special Court was that if the
commercial properties were sold. there would be no need to sell
the residential properties. Even before this Court, the sale of
commercial properties had not been questioned. A large number
of commercial properties having already been sold and third
party rights having been created, this Court should not interfere D
with the impugned judgment.

THE ACT

The Statement of Objects and Reasons for enacting the Act reads as
~~ E
"(I) In the course of the investigations by the Reserve Bank of India.
large scale irregularities and malpractices were noticed in transactions
in both the Government and other securities, indulged in by some
brokers in collusion with the employees of various banks and financial
institutions. The said irregularities and malpractices led to the diversion F
of funds from banks and financial institutions to the individual accounts
of certain brokers.

(2) To deal with the situation and in particular to ensure speedy
recovery of the huge amount involved, to punish the guilty and restore G
confidence in and maintain the basic integrity and credibility of the
banks and financial institutions the Special Court (Trial of Offences
Relating to Transactions in Securities) Ordinance. 1992. was
promulgated on the 6th June. 1992. The Ordinance provides for the
establishment of a Special Court with a sitting Judge of a High Court
for speedy trial of offences relating to transactions in securities and H
70 SllPREME COURT REPORTS [20061 I S.C.R.

A disposal of properties attached. It also provides for appointment of
one or more custodians for attaching the property of the offenders
with a view to prevent diversion of such properties by the offenders."

Section 3 of the Act provides for appointment and functions of the
Custodian. Sub-section (2) of Section 3 postulates that the Custodian may, on
B being satisfied on information received that any person has been involved in
any offence relating to transactions in securities after the Ist day of April,
1991 and on and before 6th June. 1992 (the Statutory Period), notify the
name of such person in the Official Gazette. Sub-section (3) of Section 3
contains a non-obstante clause providing that on and from the date of
C notification under sub-section (2), any property, movable or immovable, or
both, belonging to any person notified under that sub-section shall stand
attached simultaneously with the issue of the notification and such attached
properties may be dealt with by the Custodian in such manner as the Special
Court may direct. In the Ordinance which preceded the Act, there was no
provision for giving post facto hearing to a notified person for cancellation
D of notification, but such a provision has been made in the Act, as would
appear from Section 4(2) thereof.

Sub-section (I) of Section 4 of the Act reads as under:

'"4. Contracts entered into fraudulently may be cancelled.~
E (I) If the Custodian is satisfied, after such inquiry as he may think fit.
that any contract or agreement entered into at any time after the Ist
day of April. 1991 and on and before the 6th June, 1992 in relation
to any property of the person notified under sub-section (2) of section
3 has been entered into fraudulently or to defeat t~e provisions of this
F Act, he may cancel such contract or agreement and on such
cancellation such property shall stand attached under this Act:

Provided that no contract or agreement shall be cancelled except after
giving to the parties to the contract or agreement a reasonable
opportunity of being heard."
G
Sub-section (2) of Section 4. however. provides for a hearing as regard
correctness or otherwise of the notification notifying a person in this behalf,
in the event. an appropriate application therefor is filed within 30 days of the
issuance of such notification. Section 5 provides for establishment of the
Special Court. Section 7 confers exclusive jurisdiction upon the Special Court.
H
-4,

ASHWIN S. MEHTA v. CUSTODIAN !SINHA . .l.j 71

Any prosecution in respect of any offence referred to in sub-section (2) of A
Section 3 pending in any Court is required to be transferred to the Special
Court. Section 9 provides for the procedure and powers of the Special Court.
Section 9-A, which was inserted by Act 24 of 1994 with effect from 25th
January, 1994, confers all such jurisdiction, powers and authority as were
exercisable, immediately before such commencement by any Civil Court in B
relation to the matter specified therein. Section 11 of the Act reads as under:

".11. Discharge of liabililies.-( 1) Notwithstanding anything contained
in the Code and any other law for the time being in force, the Special
Court may make such order as it may deem fit directing the Custodian
for the disposal of the property under attachment. C

I .~ - (2) The following liabilities shall be paid or discharged in full, as far
as may be, in the order as under;
(a) all revenues, taxes, cesses and rates due from the persons
notified by the Custodian under sub-section (2) of Section 3 to D
the Central Government or any State Government or any local
authority;
(b) all amounts due from the person so notified by the Custodian
to any bank or financial institution or mutual fund; and
(c) any other liability as may be specified by the Special Court E
from time to time."

ANALYSIS OF THE STATUTORY PROVISIONS

The Act provides for stringent measures. It was enacted for dealing
with an extra-ordinary situation in the sense that any person who was involved F
in any offence relating to transaction of any security may be notified
whereupon, all his properties stand attached. The provision contained in the
Act being stringent in nature, the purport and intent thereof must be ascertained
having regard to the purpose and object it seeks to achieve. The right of a
person notified to file an application or to raise a defence that he is not liable G
in terms of the provisions of the Act or in any event, the properties attached
should not be sold in discharge of the liabilities can be taken at the initial
stage by filing an application in tenns of Sub-section (2) of Section 4 of the
Act. But, at the stage when liabilities are required to be discharged, the
notified person may inter alia raise a contention inter alia for the purpose of
establishing that the properties held and possessed by them are sufficient to H
72 SUPREME COURT REPORTS 120061 I S.C.R.

A meet their liabilities. In terms of the provisions of the Act. the Special Court
had been conferred a very wide power.

PRECEDENTS AS REGARD SCOPE OF THE ACT

Constitutionality and/or interpretation of the Act came up for
B consideration before this Court in Harshad Shanti/al Mehta v. Custodian and
Ors., [ 1998) 5 SCC I wherein the following questions were framed:

"(I) What is meant by revenues, taxes, cesses and rates due? Does
the word "due" refer merely to the liability to pay such taxes etc., or
does it refer to a liability which has crystallised into a legally
c ascertained sum immediately payable"

(2) Do the taxes [in clause (a) of Section 11 ('.!)) refer only to taxes
relating to a specific period or to all taxes due from the notified ·~

person?

D (3) At what point of time should the taxes have become due?

(4) Does the Special Court have any discretion relating to the extent
of payments to be made under Section I I(2 )(a) from out of the attached
funds/property?

E (5) Whether taxes include penalty or interest?

(6) Whether the Special Court has the power to absolve a notified
person from payment of penalty or interest for a period subsequent
to the date of his notification under Section 3. In the alternative, is
a notified person liable to payment of penalty or interest arising from
F his inability to pay taxes after his nliltification""

As regard, Question No. I, it was held:

.. In the present case, the words "taxes due" occur in a section dealing
with distribution of property. At this stage the taxes "due" have to be
G actually paid out. Therefore, the phrase "taxes due .. cannot refer merely
to a liability created by the charging section to pay the tax under the
relevant law. It must refer to an ascertained liability for payment of
taxes quantified in accordance with law. In other words. taxes as
assessed which are presently payable by the notified person are taxes
which have to be taken into account under Section I 1(2)(a) while
H
ASllWIN S. MEHTA 1·. CUSTODIAN !SINHA, J.) 73
\
distributing the property of the notified person. Taxes which are not A
legally assessed or assessments which have not become final and
binding on the assessee, are not covered under Section I I (2)(a) because
unless it is an ascertained and quantified liability, disbursement cannot
be made. In the context of Section 11 (2), therefore, "the taxes due"
refer to ''taxes as finally assessed".
B
In regard to Question No. 2, it was opined:

"Every kind of tax liability of the notified person for any other period
is not covered by Section I I (2)(a), although the liability may continue
to be the liability of the notified person. Such tax liability may be
discharged either under the directions of the Special Court under c
Section I 1(2)(c), or the taxing authority may recover the same from
any subsequently acquired property of a notified person (vide Tejkumar
Balakrishna Ruia v. A. K. Menon) or in any other manner from the
notified.person in accordance with law. The priority, however, which
is given under Section I 1(2)(a) to such tax liability only covers such D
liability for the period 1-4-1991 to 6-6-1992."

In respect of· the Question No. 3, it was opined that the date of
distribution arrives when the Special Court completes the examination of
claims under Section 9-A and if on that date, any tax liability for the statutory
period is legally assessed, and the assessment is final and binding on a notified E
person, that liability would be considered for payment under section 11 (I )(a),
subject to what follows.

So far as Question No. 4 is concerned. this Court despite upholding the
contention of the Custodian that no question of any reopening .of tax
assessments before the Special Court would arise and the liability of the F
t notified person to pay the tax will have to be determined under the machinery
provided by the relevant tax law, observed:

l "But the Special Court can decide how much _of that liability will be
discharged out of the funds in the hands of the Custodian. This is
because the tax liability of a notified person having priority under G
J., Section I 1(2)(a) is only tax liability pertaining to the "statutory period".
Secondly payment in full may or may not be made by the Special
Court depending upon various circumstances. The Special Court can,
for this purpose, examine whether there is any fraud, collusion or
miscarriage of justice in assessment proceedings. The assessee who H
74 SUPREME COURT HPORTS 120061 I S.C.R.

A is before the Special Court, is a person liable to be charged with an
offence relating to transactions in securities. He may not, in these
circumstances, explain transactions before the Income Tax authorities,
in case his position is prejudicially affected in defending criminal
charges. Then, on account of his property being attached, he may not
be in a position to deposit the tax assessed or file appeals or further
B proceedings under the relevant tax law which he could have otherwise
done. Where the assessment is based on proper material and pertains
to the "statutory period", the Special Court may not reduce the tax
claimed and pay it out in full. But if the assessment is a "best
judgment" assessment, the Special Court may examine whether, for
c example, the income which is so assessed to tax bears comparison to
the amounts attached by the Custodian, or whether the taxes so assessed .
are grossly disproportionate to the properties of the assessee in the
hands of the Custodian, applying the Wednesbury Principle of
Proportionality. The Special Court may in these cases. scale down the
tax liability to be paid out of the funds in the hands of the Custodian."
D
In regard to Question No. 5. this Court agreed with the finding of the
Special Court that neither penalty nor interest can be considered as tax under
Section I 1(2)(a) of the Act.

So far Question No. 6 is concerned, it was held that the remedy of a
E notified person who is assessed to penalty or interest, after the notified period.
would be entitled to move the appropriate authority under the taxing statute
stating:

"If it is open to him under the relevant taxing statute to contend that
he was unable to pay his taxes on account of the attachment of all his
F properties under the Special Court Act, and that there is a valid reason
why penalty or interest should not be imposed upon him after the
date of notification, the authorities concerned under the taxing statute
can take notice of these circumstances in accordance with law for the
purpose of deciding whether penalty or interest can be imposed on
G the notified person. The Special Court is required to consider this
question only from the point of view of distributing any part of the
surplus assets in the hands of the Custodian after the discharge of
liabilities under Sections I: (2)(a) and 11 (2)(b). The Special Court
has full discretion under Section I 1(2)(c) to decide whether such
claim for penalty or interest should be paid out of any surplus funds
H
ASHWIN S. MEllTA v. CUSTODIAN [SINHA . .I.] 75
in the hands of the Custodian." A
We must, however, notice that reliance was sought to be placed on
paragraph 14 of the said judgment wherein reference was made to a Bombay
High Court judgment in Hitesh Shanti/al Mehta v. Union of India, (1992) 3
Born CR 716 wherein it was held:
B'
"If the person ... approaches the Special Court and makes out, for
example. a case that the property which is attached has no nexus of
any sort with the illegal dealings in securities belonging to banks and
financial institutions during the relevant period and/or that there are
no claims or liabilities which have to be satisfied by attachment and
sale ofsuch property. in our view. the Special Court would have the c
power to direct the Custodian to release such property from
attachment."

But. the said observation was held to be not laying down a law by a
3-Judge Bench of this Court in L.S. Synthetics Ltd. v. Fairgrowth Financial
Services Ltd. and Anr., (2004) 11 SCC 456 holding: D
''(i) A notified party has the requisite locus to bring the fact to the
notice of the Special Court that certain sum is owing and due to him
from a third party whereupon a proceeding can be initiated for recovery
thereof by the Custodian and consequent application thereof in E
discharge of the liability of the notified person.

(ii) Sub-section (3) of Section 3 should be literally construed and so
construed, all properties belonging to the notified person shall be
subject to attachment which may, consequently, be applied for
discharge of his liabilities in terms of Section J I of the said Act. F
(iii) The provisions of the Limitation Act, 1963 have no application
in relation to the proceedings under the said Act."

The ratio of the said decision as regard applicability of the Limitation
Act was further considered by a Division bench of this Court in Fairgrowth
Investments Ltd. v. Custodian. (2004) 11 SCC 4 72 wherein it was held that G
Section 5 of the Limitation Act will have no application in relation to an
application falling under Sub-section (2) of Section 4 of the Act stating:

" ... It is enough for the purpose of this appeal to hold that Section
29(2) of the Limitation Act. 1963 does not apply to proceedings H
76 Sl 'PRE\>1E COURT REPORTS 120061 I S.CR.

A under Section 4(2) of the Special Court (Trial of Offences Relating
10 Transactions in Securities) Act, 1992. Since the appellant's petition
of objection had been filed much beyond the period prescribed under
that section, the Special Court was right in rejecting the petition in
limine. The appeal is accordingly dismissed but without any order as
to costs."
B
ATTACHMENT OF PROPERTIES

The Appellants herein are notified persons in terms of the provisions of
the Act. Therefore, all the properties belonging to them stand attached. Such
C attachment being automatic, no finding was required to be arrived at that the
same had been acquired either during the notified period or the Appellants
were involved in offences in transactions in securities.

In Tejkumar Bulukrishnu Ruia v. A.K. Menon and Anr.. [1997] 9 SCC
123, this Court held:
D "In our view, the terms of sub-section (3) of Section 3 are clear. By
reason thereof, the property that belongs to a notified person stands
attached simultaneously with the issue of the notification that makes
him a notified party. The words ..on and from the date of notification"
indicate the point of time at which the attachment takes effect: this
E is reiterated by the words "shall stand attached simultaneously with
the issue of the notification". This also indicates that no separate
notification or order in regard to the attachment is necessary.

Neither the words "on and from the date of notification·· nor the word
·property' lead to the conclusion that what is attached is not only that
F property which the notified person owned or was possessed of on the
date of the notification but also all such property as he might acquire
at any time thereafter. The intention to attach property which did not
belong to the notified person on the date of the notification but which
he might acquire later would, had it been there. have been clearly
expressed and sub-section (3) would have stated that such property
G would stand attached the moment it was acquired by the notified
person. The Act would also have made provision for a subsistence
allowance or the like for the notifi~d person.

It seems to us that to give to Section 3(3) the wide meaning that has
been ascribed to it in the judgment and order under appeal wou Id
H
ASllWIN S. MEllTA 1·. CUSTODIAN !SINHA . .I.I 77
render it perilously close to being held unconstitutional. for it would A
deprive the notified person. so long as he remained a notified person.
from earning a livelihood. Even to say that such interpretation would
reduce a notified person to beggary would not be accurate (sic in
accurate) because the alms that he received, being his property, would
stand attached.
B
The apprehension expressed by the Special Court does not appear to
be well founded: if what a notified person obtains by way of purported
income or gift or inheritance is really his own money, such money
would, upon establishment of the fact, stand attached automatically
under the provisions of Section 3(3). In any event, it is for Parliament C
to enact a law that meets all contingencies. The courts must interpret
the law as it reads. While a purposive interpretation is permissible
where two interpretations are possible, the purposive interpretation
must be such as preserves the constitutionality of the provision."

It has further been held that the property, be shares, dividends and D
bonus and rights shares. would also be attached property.

ISSUES

(i) Whether the Appellants being not involved in offences in
transactions in securities cou Id have been proceeded against in E
terms of the provisions of the Act.
(ii) Whether individual liabilities of the Appellants ought t· have
been separately considered by the Special Court as not a part of
Harshad Mehta Group.
(iii) Whether the tax liabilities could not have been held to be due as F
the order of assessments did not become final and binding.
(iv) Wheth.er the commercial properties could have been sold in
auction.
( v) Whether the residential properties should have been released from G
attachment.

Before adverting to the questions raised herei~. we may notice that
both the parties have raised several contentions before us which have not
precisely been raised before the learned Special Judge. Several subsequent
events have also been brought to our notice. The parties have also filed H
78 SllPRE\1E COURT REPORTS 12006) I S.C.R.
r
A several charts before us showing individual assets and liabilities. It has, as
noticed hereinbefore, further been contended that various best judgment
assessment passed by the Assessing Authority against some of the Appellants
have been set aside in appeal and the matters are pending reassessment before
the Assessing Authority.

B APPl!CAT!ON FOR DE-NOTIFICATION
The Appellants' case is that the individual and corporate Appellants
other than Harshad Mehta, Ashwin Mehta and Sudhir Mehta filed applications,
within the prescribed period, before the Special Court praying for their de-
C notifications. However, by an order dated 14.07 .2000, the said applications
were permitted to be withdrawn with a permission to re-file tht: same.

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
D 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.

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
E Court could entertain their applications for de-notifications could 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 & Ma1111fac1111·ing Co. Ltd. v. The State
of Bombay and Ors.. AIR ( 1958) SC 338. S£11'ilro Khandu Beradi v. Nagar
Agricuflllral Sale and Purchuse Co-operatil'e Society ltd. Ahmednagar and
F Ors., AIR ( 1957) Born 178, para 6 and Hari Roj Singh v. Sundwluk Panchayat
Raj U.P. Govt. Lucknow and Ors., 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.

G In l.S. Synthetics ltd. (supra), this Court observed:

"A statute of limitation bars a remedy and not a right. Although a
remedy is barred, a defence can be raised. In construing a special
statute providing for limitation, consideration of plea of hardship is
irrelevant. A special statute providing for special or no period of
H limitation must receive a liberal and broader construction and not a
ASHWIN S. MEHTA v. CUSTODIAN !SINHA. J.j 79
rigid or a narrow one. The intent and purport of Parliament enacting A
the said Act furthermore must be given its full effect. We are, therefore,
of the opinion that the provisions of the Limitation Act have no
application, so far as directions required to be issued by the Special
Court relating to the disposal of attached property, are concerned."

Although, we do not intend to enter into the correctness or otherwise B
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
wouid 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.
c
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 attach'ment of the assets
would be automatic. [l.S. .~vnthetics Ltd. (supra)] D
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.
E
A corporate veil indisputably can be lifted on several grounds.

l!FTING THE CORPORATE VEIL
J.
The principle of lifting the corporate veil, however, ipso facto would
not apply to the individuals. The Custodian in a case of this nature JTiay. F
however. show that the transactions entered into apparently by Harshad Mehta
were intimately connected with acquisition of properties in the name of others.
A transaction of Benami indisputably can be a subject matter of a lis in terms
of Section 4( I) of the Act as and when such a question is raised. the same
may have to be dealt with by the Special Court appropriately. However. G
nexus between several persons in dealing with the matter may be established
by the Custodian.

LIABILITIES UF THE APPELLANTS - DETERMINATION

The fact. however. remains that the copies of the documents. books of H
>-\

80 St:PRF\IF COliRT RFPORTS [2006] I S.C.R.

A accounts and other records on the basis whereof the Auditors appointed by
the Court tiled their reports had not been shown to the Appellants herein, on
the premise that they were in know of the things. As the said question has
not been gone into by the learned Judge. Special Court, it is necessary that
the same be considered and appropriately dealt with. The Appellants, however,
raised the following contentions:
B
(i) That the statement prepared by the Custodian and Exhibited as
'C' to his affidavit in rejoinder dated I. I0.2003 was based on
material. at least. all of which were not connected to the
Appellants as were pointed out before the Court. The learned
Special Judge has accepted the figures stated by the Custodian at
c face value without probing the basis on which the statement was
prepared. even though the Appellants in their sur-rejoinder
asserted that the figures in the statement were contrary to both
the books of accounts drawn by them as also the Auditor's report.
(ii) In Para 14 of the sur-rejoinder. the Appellants denied the asset
D and liability position as arrived al by the Custodian. According
to the Appellants. the Custodian has under-estimated the assets
and exaggerated and overstated their liabilities. A triable issue
had been raised and the Custodian ·s petition should have been
converted into a suit. This was not done. In fact, according to the
E Appellants. there are gross errors in the material relied upon by
the Custodian. The said contention must be properly adjudged.

Several charts have been filed before us by the Appellants to show:

(i) liabilities have been exaggerated by the Custodian. No credit for
Rs. 1227 crores released to revenue on interest are given by the
F
Custodian.
(ii) liabilities have been shown in relation to unperformed contracts.
(iii) Credits not given for relief obtained from Income Tax. Subsequent
to the filing of the present appeal in a large number of cases the
G revenue demands have been set aside.

It is open to the Appellants. herein 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 Harshad Mehta Group. It
is interesting to note that the properties belonging to the mother of Harshad
H Mehta has since been released from attachment.
ASHWIN S. MEllTA v. CUSTODIAN !SINHA. J.J 81

The learned Special Court, despite, such a contention having been raised A
by the Appellants in their affidavit in reply did not advert thereto. It is
furthermore not in dispute that pursuant to or in furtherance of the directions
issued by the learned Special Court, the accounts of all entities, be it corporate
or individual. were drawn up separately which approach had not been dis-
approved by the Auditor appointed by the Special Court. Even in the rejoinder B
filed by the Custodian, e.g., paragraphs 14, 20, 21 a11d 2:'., before the Special
Court, such contentions have been raised.

A sur-rejoinder thereto was filed on 15.10.2003 and in paragraphs I to
6 thereof, the said statements were denied and disputed.

Our attention has also been drawn to a letter dated 7.10.2003 addressed C
by all the Appellants to the Office of the Custodian wherein the attention of
the Custodian was drawn to the fact that all the documents relied upon by
him had not been permitted to be inspected and he was requested to forward
a report prepared by the Chartered Accountants in respect of the individual
addressors of the letters. The said letter was replied by the Custodian by his D
letter dated I 0.10.2003 wherein none of the queries contained in paragraphs
3 to 8 of the said letter was even attempted to be answered. The Appellants.
herein contended that the Custodian did not furnish the requisite particulars
thereof and inspection was refused on the grounds stated therein.

The learned Special Court, in paragraph 9 of the impugned order. stated: E
(i) the grand total of the admitted liability, thus, comes to Rs.
7,279, 127,317.15.
(ii) the amount of priority demand of Income Tax liabilities comes
to Rs. 18,297,576,248. F
(iii) the estimated value of the immovable properties of this group is
Rs. 184,030,038. ,-'\

(iv) Thus, the total value of the assets as per the affidavit filed on
behalf of the Custodian of Harshad Mehta Group is Rs.
9,727,332,166.94. G
(v) Thus, taking into consideration the total of the decretal amount
and the income-tax liability, it is clear that the total assets of
Harshad Mehta group would be far below the liabilities.

In arriving at the said finding, no contention of the parties raised in H
82 SUPREME un:1n REPORTS [2006[ I S.C.R.

A 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 !ilarties 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
B Mehta Group and their individual liabilities can be met from the assets held
and possessed by them separately.

The statement annexed to the affidavit of the Custodian showed
individual break-up and in that view of the matter the net asset picture of
each individual of the Appellants herein on individual basis and the effect
C thereof, in our opinion, should have received serious consideration at the
hands of the learned Special Court.

The Custodian in terms of the directions issued by the learned Special
Court had affirmed an affidavit putting on record the assets and liabilities of
each of the members of the so-called Harshad Mehta Group on an individual
D basis. Allegedly, therein it was shown that the individuals had received large
loans, advances, credits from the Harshad Mehta Group and there had been
intermingling of the assets to the tune of crores of rupees. Before us, Mr.
Desai had filed a chart for showing the same. The said chart, however, shows
that at least Mrs. Deepika Mehta held assets more than her liabilities. Mr.
Desai contended that if interest is calculated, liabilities would be more than
E assets. But, the said chart has been drawn up on the basis of the audited
accounts, the correctness whereof is itself in dispute. Before us a chart has
been produced by the Appellants herein as regards Mrs. Deepika Mehta to
show her liabilities payable as on 8th June, 1992 which are as under:

"Chart showing comparison of payables as on 8th June, 1992
F
As per As per As per
Custodian's Books of Auditor's
Affidavit Accounts Report

Mis. Harshad S. 25,44,68,654 9,70, 18,916 9,70,18,916
G Mehta (Payable
as on 8.6.92) •

Mis. Ashwin S. 2,68.4 7,613 1,02,35,942 1,02,35,942
Mehta (Payable
H as on 8.6.92)
--~

ASllWIN S. MEHTA 1•. CUSTODIAN ISINllA . .I.] 83

Mis. Jyoti H. 1,45,28,332 55.39,083 55.39.083 A
Mehta (Payable
as on 8.6.92)
Interest payable 6,14,86.640 2.34.42.444 2,34.42.444"
towards three
brokerage firms B
as on 8.6.1992
J We, therefore, have not been given a clear picture as to the correctness
or otherwise of the affidavit filed by the Custodian vis-a-vis the Books of
Accounts which have been maintained by the Appellants themselves as well
as the Auditor's Report. The learned Judge merely accepted the figures C
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.
D
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 the_ir E
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 .rni 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 F
therewith. As regards liabilities of Harshad Mehta, the Appellants contended
that since his expiry in the year 200 I 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 G
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 H
84 SUPREME COURT REPORTS 120061 I S.C.R.

A 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
B 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
C 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
D 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.

E Furthermore. the question as regard liability of the parties should have
been determined at the stage of Section 9-A of the Act. The Appellants have
contended that the Custodian had taken contradictory or inconsistent ~tand
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
F 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 the so-
G called group 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 the so-called group against those he had to recover loans.
Such claims may also be preferred.

The Act confers wide power upon the Custodian and the learned Special
H Court and in that view of the matter. having regard to the the principles of
·-<I

ASHWIN S. MEHTA v. CUSTODIAN ISINllA. J.) 85
natural justice, the judgment and order of the learned Judge, Special Court A
should have furthermore been supported by sufficient and cogent reasons.

TAX LIABILITY

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 B
not in dispute that in a large number of cases the appellate authorities have
.,f
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 the
3-Judge Bench 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
c
higher court, the liabilities would remain.

We may further notice that the learned Special Court relied upon a
decision in Custodian v. Union of India and Ors., [Misc. Petition No. 64 of
1998, disposed of on 17th August, 2000] wherein allegedly a dichotomy D
between sale and distribution was sought to be resolved in terms of the
decision of this Court in Harshad Shanti/al Mehta (supra), the appeal
whereagainst being Civil Appeal No. 5812 of 2000 was dismissed by this
Court by an order dated 4.12.2000 stating that it was in agreement with the
• decision of the Special Court which called for no interference .
E
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.

In Kedarnath Jute Mfg. Co. ltd. (supra), this Court has held:
F
"Although that liability cannot be enforced till the quantification is
effected by assessment proceedings, the liability for payment of tax
is independent of the assessment. It is significant that in the present
case, the liability had even been quantified and a demand had been
created in the sum of Rs 1,49, 776 by means of the notice, dated
November 21, 1957, during the pendency of the assessment G
,_\ proceedings before the Income Tax Officer and before the finalisation
of the assessment. It is not possible to comprehend how the liability
wou Id cease to be one because the assessee had taken proceedings
before higher authorities for getting it reduced or wiped out so long
as the contention of the assessee did not prevail with regard to the H
86 SUPREME COURT REPORTS 120061 I S.C.R.

A quantum of liability etc.''

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 asse5sing authorities,
B 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.

A chart has been annexed to the additional written submissions filed by
Mr. Desai, which originated from a letter dated 9th December, 2005 issued
c by the Office of the Commissioner of Income Tax showing the current status
of the liabilities of the individual members of the Harshad Mehta group in the
following tenns:

"(I) Ashwin Mehta · Rs. 1396 crores,

D (II) Deepika Mehta· Rs. 120 crores (even after deducting the amount
set aside by IT AT, it exceeds Rs. 63 crores ).
(III) Late Harshad Mehta · Rs. 11829 crores
(IV) Jyoti Mehta • Rs. 1457 crores

E (V) Hitesh Mehta · Rs. 73 crores
(VI) Pratima Mehta· Rs. 115 crores (even after deducting the amount
set aside by ITA T it exceeds Rs. 35 crores)
(VII) Sudhir Mehta · Rs. 339 crores
(VIII) Aatur Holdings · Rs. 15.95 crores (even after deducting the
F
amount set aside by ITAT, it exceeds Rs. 2.7 crores)"

The Custodian has further brought on records that if the transactions by
or on behalf of corporate entity, viz., Aatur Holdings Pvt. Ltd. and Dr. Pratima
Mehta by way of illustration are taken into consideration, the same would
G reveal their modus operandi to the effect that the moneys were diverted from
banh and financial institutions by late Harshad Mehta which were in tum
diverted to his family concerns and family members. These moneys were
used for spccu lative transactions and securities and the profits generated was
used for acquiring assets.

H The learned Special Court. having not arrived at such a finding. this
ASH WINS. MEHTA 1·. CUSTODIAN [SINHA. J.] 87
Court is not in a position to go into the correctness or otherwise thereabout. A

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 Shanlilal Mehta (supra). B
.;
In fact, the Appellants have brought on records various orders passed
by Income Tax Appellate Authorities to show that the demands of the revenue
have been set aside.

Furthermore, the orders of the appellate authority have been passed C
during pendency of this appeal. This Court, it is trite, can take into
consideration the subsequent events. Such subsequent events .could also be
taken into consideration for the purpose of review.

~
I
In Board of Control forCricket in India and Anr v. Netaji Cricket Club D
and Ors., (2005] 4 SCC 741, this Court held:

"It is also not correct to contend that the Court while exercising its
review jurisdiction in any situation whatsoever cannot take into
consideration a subsequent event. In a case of this nature when the
Court accepts its own mistake in understanding the nature and purport E
of the undertaking given by the learned Senior Counsel appearing on
behalf of the Board and its correlation with as to what transpired in
the AGM of the Board held on 29-9-2004, the subsequent event may
be taken into consideration by the Court for the purpose of rectifying
its own mistake."
F
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.

SALE OF COMMERCIAL PROPERTIES
G
Sale of commercial properties has never been seriously contested by
the Appellants. In fact one of the contentions raised on behalf of the Appellants
had been that if commercial properties are sold, there would be no need to
sale the residential properties. This Court also in its order dated 5th May,
2004 clarified that the interim order dated 30th January, 2004 shall not be H
88 SUPREME CO! 'RT REPORTS j2006I I S.C.R.

A applicable as regard sale of commercial properties as even before this Court
the same had not been questioned. It is. furthermore. not in dispute that third
party rights have since been created by reason of sale of a large number of
commercial properties.

By an order dated 30th January. 2004, while admitting the appeals, this
B Court directed:
"The learned counsel for the Custodian brings on record the result
of the bids and the order of the Special Court dated 17.12.2003 and
20.1.2004. The learned counsel for the Appellants proposes to offer
his comments on the bids and the two orders of the Special Court. Let
c it be done within two weeks.

The process of finalizing the bids according to law may be
proceeded ahead by the Special Court. However, the finalization shall
be subject to the result of these appeals."
t
D The said order, however, was modified and clarified by an order dated
5th May, 2004 that the same shall not apply to the sale of commercial
properties in view of the order of the learned Judge, Special Court dated 17th
October, 2003 wherein it was pointed out that the notified parties did not
dispute the commercial properties being put to sale by the Custodian.
E
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
forn1er event, even if such a decree is set aside, the interest of the bona fide
F purchaser in an auction sale is saved. [See Zain-u/-Abdin Khan v. Aluha111111ad
Asglwr Ali Khan. 15 IA 12). The said decision has been affirmed by this
Court in Gurjoginder Singh v. Jaswant Kaur (S111t.J and Anr.. [ 1994] 2 SCC
368.

In Janak Raj v. Gurdial Singh and Anr.. [ 1967) (2) SCR 77, this Court
G confirmed a sale in favour of the Appellant therein who was a stranger to the
suit being the auction purchaser of the judgment-debtor's immovable property
in execution of an ex parte money decree in terms of Order XXXI Rule 92,
Civil Procedure Code. Despite the fact that ordinarily a sale can be set aside
only under Rules 89, 90 and 91 of Order XXXI, it was opined that the court
H is bound to confirm the sale and direct the grant of a certificate vesting the
i
ASHWIN S. MEHTA v. CUSTODIAN [SINHA . .I.) 89

title in the purchaser as from the date of sale when no application in term of A
Rule 92 was made or when such application was made and disallowed and
in support thereof Zain-ul-Abdin Khan (supra) and various other decisions
were referred to.

v.
In Padanathil Ruqmini Am ma P.K. Abdulla, [ 1996) 7 SCC 668, this
Court making a distinction between decree-holder auction purchaser himself B
and 11 third party bona fide purchaser in an auction sale, observed :

" ... The ratio behind this distinction between a sale to a decree-holder
and a sale to a stranger is that the court, as a matter of policy, will
pFotect honest outsider purchasers at sales held in the execution of its C
decrees, although the sales may be subsequently set aside, when such
purchasers are not parties to the suit. But for such protection, the
properties which are sold in court auctions would not fetch a proper
price and the decree-holder himself would suffer. The same
consideration does not apply when the decree-holder is himself the
) purchaser and the decree in his favour is set aside. He is a party to' D
the litigation and is very much aware of the vicissitudes of litigation
and needs no protection.

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, E
therefore, proceed to pass an appropriate order as regard confirmation of the
sale of such properties.

RESIDENT/AL PROPERTY

In these appeals, we are concerned with sale of eight residential flats
F
in a building known as Madhuli. The flat belonging to the mother of Late
Harshad Mehta has been released. The flats, however, during pendency of
these appeals have been sold in auction. One of the flats being flat No. 202,
Arunachal Bhawan, Barakhamba Road, is subject matter of a separate
proceeding pending before this Court, viz., Civil Appeal No. 681 of 2004. In G
these appeals, we are not concerned with the said flat.

Admittedly, the flats have been sold subject to the result of these appeals ..
The flats have been sold on the basis of the joint liabilities of the Appellants
together with Harshad Mehta and other companies as a group. The liabilities
of the Appellants. in view of our findings aforementioned, are required to be H
90 SUPREME COL!Rl REPORTS [2006] I S.C.R.

A considered afresh by the learned Judge, Special Court. The purchasers have
also filed applications for their impleadment in these appeals. We, however,
have not heard the purchasers as the question as to whether the auction sale
of the said flats will be confirmed or not will depend upon the ultimate
finding of the learned Judge, Special Court upon consideration of the matter
B afresh in the light of the observations made hereinbefore.

We, therefore, would direct that the confirmation of sale of those flats
be considered and appropriate order thereupon may be passed by the learned
Special Court while considering the matter afresh. In the light of the directions
issued herein, it would be for the purchasers of the said flats to wait till a
C final decision is made or take back the amount deposited by them, subject to
any other or further order (s) that may be passed by the learned Special
Judge.

CONCLUSION

D 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.
E (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
F 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
G 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
H learned Judge. Special Court. in this behalf. having regard to the
•.
ASHWIN S. MEHTA v. CUSTODIAN [SINHA . .I.] 91

fact that several orders of Best Judgment Assessment have been A
passed by the Assessing Authority, may take into consideration
the ratio laid down in the decision of this Court in Harshad
Shanti/al Mehta (supra).

(iv) The lea~ed Special Court shall proceed to pass appropriate orders
as regard confirmation of the auction sales in respect of B
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 D
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 E
.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 F
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. G
(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.
H
92 SUPREME COURT REPORTS (2006) I S.C.R.

A (ix) The learned Judge, Special Court while hearing the matter in
tenns 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.
B
(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 res.idential 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
c 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
D 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.
E With the aforementioned observations and directions, these appeals are
allowed. Th~ impugned judgments are set aside and the matter is remitted to
the learned Judge, Special Court for consideration of the matter afresh.
However, the parties shall bear their own costs.

R.P. Appe,al disposed of.