Supreme Court of India
SMT. RASILA S. MEHTAversusCUSTODIAN, NARIMAN BHAVAN, MUMBAI
- Citation
- 2011 INSC 364
- Decided
- 6 May 2011
- Disposal
- Disposed off
- Bench
- P SATHASIVAM
Holding
The notification and automatic attachment were valid, the phrase “involved in the offence” includes persons reasonably suspected, a post‑decisional hearing suffices for natural justice, Canfina is a financial institution, and the Custodian may recover maintenance and repair costs but not interest or penalty on arrears.
Summary
The Supreme Court examined the validity of the notification of Smt. Rasila Mehta and Smt. Rina Mehta under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, which was based on a complaint by Canbank Financial Services Ltd. The Court held that the notification was proper despite the absence of a pre‑decisional hearing, as the Act provides a post‑decisional hearing under s.4(2) that satisfies natural justice. It interpreted the phrase “involved in the offence” to include persons reasonably suspected of involvement, not only those formally accused, and affirmed that all movable and immovable property of a notified person attaches automatically under s.3(3). The Court also ruled that Canfina qualifies as a “financial institution” under the Act. Regarding claims for maintenance, repair, interest and penalty, the Court modified the relief, allowing the Custodian to recover maintenance and repair costs but prohibiting the collection of interest and penalty on arrears. The appeals challenging the notification and related orders were dismissed.
Issues considered
- The validity of the notification of the appellants under s.3(2) without a pre‑decisional hearing
- The proper construction of the term “involved in the offence” in s.3(2)
- Whether attachment of all property of a notified person under s.3(3) is automatic
- Whether the post‑decisional hearing under s.4(2) satisfies the principles of natural justice
- Whether Canbank Financial Services Ltd. is a “financial institution” within the meaning of the Act
- The extent of the Custodian’s entitlement to recover maintenance, repair charges, interest and penalty
Legislation cited
- Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992s. 11, s. 3(2), s. 3(3), s. 3(4), s. 4(2), s. 9-A
- Special Court (Trial of Offences Relating to Transactions in Securities) Rules, 1992s. 2(b)
Subjects
securities scamSpecial Court Actnotificationattachment of propertynatural justicefinancial institutionmaintenance chargesHarshad Mehtastatutory interpretation
Judgment
[2011] 6 S.C.R. 234
A SMT. RASILA S. MEHTA
v.
CUSTODIAN, NARIMAN BHAVAN, MUMBAI
(Civil Appeal No. 2924 of 2008)
MAY 6, 2011
B
[P. SATHASIVAM AND DR. B.S. CHAUHAN, JJ.]
Special Court (Trial of Offences Relating to Transactions
in Securities) Act, 1992:
c
ss. 3(2) and 4(2) and 9-A - Notification of persons
involved in Securities Scam - Notification dated 4. 1. 2007
notifying two more family members of the entities initially
notified - HELD: When the earlier entities were notified,
0 complete details of their transactions were not known and the
appellants were not notified because their involvement and
diversion of funds to them was not clear - On the complaint
of Canbank Financial Services Ltd., the Custodian rightly
notified the appellants and the Special Court was justified in
E dismissing the petition of appellants for their de-notification
uls 4(2) - Securities Scam.
ss.3(2), 3(3), 3(4) and 9-A- Proceedings against persons
not involved in offences in transactions in securities -- HELD:
With the amendment carried out in the Act on 25.1.1994, by
F virtue of s. 9-A, civil jurisdiction has been conferred on Special
Court - The object of the Act is not merely to bring the
offender to book but also to recover the public funds - Even
if there is a nexus between third party, an offender and/or
property of the third party can also be notified - The word
G "involved" in s.3(2) has to be interpreted in such a manner as
to achieve the purpose of the Act - Interpretation of Statutes
- Purposive construction - Rule of construction, 'noscitur a
sociis' - Applicability of - Maxim 'ut res magis vafeat quam
pereat'
H 234
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 235
BHAVAN, MUMBAI
ss. 3(2), 3(3), 3(4), 9-A and 11 - Notified persons - A
Attachment of properties - HELD: From the date of
notification u/s 3(2} all movable/immovable properties whether
acquired by tainted fund of otherwise, belonging to notified
persons shall stand attached simultaneously with the issue
of the Notification and are available for distribution u/s 11. s
ss. 3(2), 3(4) and 11- Notification uls 3(2) -Attachment
of property- Opportunity of hearing - HELD: s.3(2) does not
give any right of personal hearing to the person being notified,
as a pre-decisonal hearing would frustrate the entire purpose C
of the Act - Attachment of property is natural consequence
of notification and not sale of property - Power to order sale
of property lies with Special Court which is presided over by
a High Court Judge - Notified person can file a petition uls
4(2) within 30 days of the issuance of notification - This
amounts to post-decisional hearing satisfying the principles D
of natural justice.
· ss. 3(2), 3(3), 3(4), 9-A and 11 - Notified persons -
Property attached - Claim for maintenance, repair charges,
interest and penalty for belated payment - HELD: The E
attached properties continue to remain with the Custodian -
For their upkeep maintenance, repair etc., Custodian is liable
to pay to the Housing Societies, and as such his claim as
approved by the Special Court is sustained, except that he
is not permitted to collect interest and penalty charges on the F
arrears of maintenance and repair charges. ·-
Special court (Trial of Offences relating to Transactions
in Securities) Rules, 1992: ·
r.2(b/ read with s.1.1(2) - !:Financial institution" - G
Complaint by and claim of Canbank Financial Services Ltd.
(Canfina) - HELD: For the purp9se of the Special Cowt Act
and the Rules, C6nfina is a ';inancia/ institution' - /ts claim
/alls uis 11(2)(b) of the Act and complaint falls under r.2(b) -
H
236 SUPREME COURT REPORTS [2011) 6 S.C.R.
A Special Court (Trial of Offences Relating to Transactions in
Securities) Act, 1992 - s.11(2).
Interpretation of Statutes:
Purposive construction - Object and reasons of a statute
B - Significance of - HELD: It is incumbent on courts to strive
and interpret the statute as to protect and advance its object
and purpose and to keep the legislative policy in mind while
applying the provisions of the Act to the facts of the case -
When rule of purposive construction is gaining momentum,
C courts should be very reluctant to ignore the legislative intent
when the language is tolerably plain what it seeks to achieve.
Harmonious construction - HELD: In the event of any
conflict, a har'!'onious construction should be given.
D Words and Phrases:
Expression "involved in the offence" and "accused of the
offence" in the context of s.3(2) of Special Court (Trial of
Offences Relating to Transactions in Securities) Act, 1992 -
E Connotation of.
On 8.6.1992, the Custodian, under the provisions of
the Special Court (Trial of Offences Relating to
Transactions in Securities) Act, 1992, notified late 'HSM'
F and 28 entities of 'HSM' group including his family
members, except the appellants in Civil Appeal Nos. 2924
and 2915 of 2008, namely, Smt. 'RSM', mother of 'HSM
and Smt. 'RM', the sister-in-law of 'HSM'. The appellants
were active investors and had built up a portfolio by
investment which appreciated in the value during the last
G three years. They owned flats at Madhuli Co-operative
Housing Society Ltd., which are merged and
amalgamated with other flats under the occupation of the
Joint family. The Bank account of shareholdings of these
appellants was held jointly wtiere the appellants were the
H
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 237
BHAVAN, MUMBAI
first holders and their family members were joint/second A
holders. Due to the fact that joint/second holders were
notified entities, the assets of the appellants were treated
as attached on and from 8.6.1992 and the same were
managed by the Custodian for the last 15 years. On
21.7.2006 the Custodian preferred a common B
miscellaneous Petition No. 20/2006 against the appellants
seeking relief of a declaration that the said appellants
were benamies and friends of late 'HSM' and other notified
entities, and, therefore, their assets should be utilized In
discharge of their liabilities. The appellants also filed M.A. c
No. 291 of 2006 on 11.9.1997, seeking relief of a
declaration that all the assets belonged to them and they
were the first holders and their bank accounts and fixed
deposits of the shareholdings may be declared as free
from attachment. On 4.1.2007, on the basis of the 0
complaint made by Canbank Financial Services Ltd.
(Canfina), the Custodian notified both the appellants u/s
3(2) of the 1992 Act, for which a public notice was
published in the newspaper on 6.1.2007. On 19.1.2007,
Smt. 'RSM', filed Miscellaneous Petition No. 1/2007 and
on 18.6.2007, Smt. 'RM' filed Miscellaneous Petition No. E
2/2007 for de-notification u/s 4(2) of the Act. The Special
Court by its order dated 26.2.2008 dismissed both the
petitions. It also approved Report No. 19/2008 filed by the
Custodian in respect of outstanding dues towards flats
No. 32-A, 32-8, 33, 34A, 34-B, 44-A, 44-B and 4ii in Madhull F
Co-operative Housing Society Ltd. belonging to 'HSM' as
well as other related notified entities of 'HSM' group and
Report No. 23/2009 of the Custodian on outstanding dues
towards flats No. 31 in Madhuli Co-operative Housing
Society Ltd. Aggrieved, Smt. 'RSM' filed Civil Appeal No. G
2294/2008 and Smt. 'RM' filed Clvil Appeal No. 2915/2008
against the final order dated 26.2.2008. Smt. 'RSM' also
filed Civil Appeal No. 4764 of 2010 challenging the order
dated 7.5.2010 passed by the Special Court approving
report No. 23/2009 of the Custodian. Smt. 'JSM' and six H
238 SUPREME COURT REPORTS [2011) 6 S.C.R.
A other family members of 'HSM' filed Civil Appeal No. 3377/
2009 against the order of the Special Court approving of
Report No. 19/2008 filed by the Custodian.
Disposing of the appeals, the Court
B HELD: 1.1. It is settled law that the objects and
reasons of an the Act are to be taken into consideration
in interpreting its provisions. It is incumbent on the court
to strive and interpret the statute as to protect and
advance its object and purpose. Any narrow or technical
C interpretation of the provisions would defeat the
legislative policy. The court must, therefore, keep the
legislative policy in mind while applying the provisions
of the Act to the facts of the case. [para 12] [256-C-D]
0 1.2. It is a cardinal principle of construction of statute
or the statutory rule that efforts should be made in
construing the different provisions, so that each
prov1s1on may have effective meaning and
implementation and in the event of any conflict a
E harmonious construction should be given. [para 12] [256-
D-E]
1.3. The Special Court (Trial of Offences Relating to
Transactions in Securities) Act, 1992 provides for
stringent measures. It was enacted for dealing with an
F extraordinary situation in the sense that any person who
was involved in any offence relating to transaction of any
security could be notified, whereupon all his properties
stood attached. The provision contained in the Act being
stringent in nature, the purport and intent thereof must
G be ascertained having regard to the purpose and object
it seeks to achieve. [para 18] [261-D-F]
Harshad Shanti/al Mehta vs. Custodian and Ors. (1998)
3 SCR 389=(1998) 5 SCC 1; Hitesh S. Mehta vs. Union of
H India & Anr., 1992 (3) Bomb. C.R. 716; LS. Synthetics Ltd.
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 239
BHAVAN, MUMBAI
vs. Fairgrowth Financial Services Ltd. & Anr. 2004 (4) Suppl. A
SCR 109 = (2004) 11 SCC 456; Jyoti Harshad Mehta & Ors.
=
Vs. Custodian & Ors. 2009 (12) SCR 1229 (2009) 10 SCC
564; Ashwin S. Mehta vs. Custodian & Ors. 2006 (1) SCR 56
= (2006) 2 sec 385 - relied on
B
2. Provisions with· regard to Attachment:
2.1. Sub-s. (3) of s. 3 of the Special Court Act contains
a non-obstante clause providing that on and from the
date of notification under sub-s.(2), any property,
movable or immovable, or both, belonging to any person C
notified under that sub-section shall stand attached
simultaneously with the issue of the notification and sub-
s. (4) of s. 3 makes it clear that such attached property
shall be dealt with by the Custodian in such manner as
the Special Court may direct. There is nothing in the Act D
which suggests that only such properties which belong
to the notified party and which have been acquired by the
use of tainted funds alone can be attached for the
purposes of distribution u/s 11 of the Act. Attachment of
all the properties in terms of s. 3(3) of the Act is automatic. E
The said section does not provide any qualification that
the properties which are liable to be attached should
relate to the illegal transactions in securities in respect
of which the Act was brought in force. [para 17 and 25]
[260-F-H; 267-A-C] F
2.2. A reading of s. 11 of the Act further provides that
all the properties which stand attached to the Special
Court u/s. 3(3) are available for distribution u/s 11 of the
Act. There is again nothing which suggests that the
distribution must be restricted only to sale of such G
properties which have been acquired by use of tainted
funds. The statutory period is irrelevant for the
attachment of properties and sale of the same. All
properties which are attached would be liabfe to be sold
H
240 SUPREME COURT REPORTS [2011] 6 S.C.R.
A for redemption of liabilities till the date of notification u/s
11 of the Act. [para 25) (266-H; 267-A-C]
3. Whether there are sufficient provisions for pre and post
decisional hearing thereby ensuring Rules of Natural
Justice?
8
3.1. Section 3(2) of the Special Court Act confers
power on Custodian to notify a person in the Official
Gazette on being satisfied on information received that
such person was involved in any offence relating to
C transactions in securities during the statutory period
1.4.1991 to 6.6.1992. Section 3(2) does not give any right
of personal hearing to the person being notified. In the
absence of any such right there is no pre-decisional
hearing The provisions of the Act do not provide for a
D pre-decisional hearing before notification but contain an
impeccable milieu for a fair and just post decisional
hearing. The fact that it does not provide for a pre-
decisional hearing is not contrary to the rules of natural
justice because the decision of the Custodian to notify
E does not ipso facto take away any right of the person thus
notified nor does it impose any duty on him. Also a pre-
decisional hearing would frustrate the entire purpose of
the Act. If there is time given to show cause why a person
should not be notified, that time could practically be
F utilized to further divert the funds, if any, so that It
becomes even more difficult to trace it. [para 30-31) [269-
F-G; 270-A-C; 271-F-G]
Swadeshi Cotton Mills v. Union of India, 1981 (2) SCR
=
533 (1981) 1 sec 664 - relied on
G
3.2. Attachment of property is a natural consequence
of notification and not sale of the property. The power to
order a sale of the property lies only with the Special
Court u/s. 11 and at this instance where notified person
H can be adversely affected, sub-s. (2) of s. 4, provides for
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 241
BHAVAN, MUMBAI
a hearing as regards correctness or otherwise of the A
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. The Special
Court is presided over by a sitting Judge of the High
Court. All material before the Custodian is placed before B
the Special Court which independently analyses all the
material while deciding the application filed by the notified
party challenging the notification. This amounts to post
decisional hearing satisfying the principles of natural
justice. [para 18 and 31] [260-8-D; 271-D-F] c
4. Notification of the appellants:
4.1. When 'HSM' and 28 members of his group
including his family members/entities were notified under
the Ordinance, the complete details of his transactions D
were not known. At that time the appellants were not
notified because their involvement and diversion of funds
to them was not clear. The Reserve Bank of India
constituted the Janakiraman Committee to look into the
diversion of funds. Inasmuch as the scam relates to E
accounts and money transactions by way of. transfer of
shares through nationalized banks and financial
institutions, various committees were appointed by the
Union of India which collected relevant materials and
unearthed the persons involved, therefore, the Custodian F
and the Special Court are fully justified in relying on those
reports In order to ascertain the correctness or otherwise
of the transactions. [para 32 and 34] [272-B-D; 276-D-F]
Chi/dline India Foundation & Anr. Vs. Allan John Waters
& Ors., JT 2011(3) SC 750 - relied on G
4.2. The accounts of the notified parties where
significant diversion of funds had taken place were not
completed due to non-cooperation of members of 'HSM'
Group. The important aspect is that the appellants have H
242 SUPREME COURT REPORTS [2011] 6 S.C.R.
A not explained the source of their income either to the
Custodian or to the Income Tax authorities. The
outstanding Income Tax from the appellants for the
assessment year 1991-92 is Rs.2,65,38,345; for the
assessment year 1992-93 it is Rs.11,55,28,951 and for the
B assessment year 1993-94, it is Rs.4,46,40,586. On a
complaint, filed by Canbank Financial Services Ltd.
(Canfina), the Custodian notified the appellants on
04.01.2007. The appellants filed petitions u/s.4 (2) of the
Act challenging the notification. The Special Court looked
c into all the materials including the Audit Report and came
to a conclusion that the appellants are only fronts of late
'HSM'. It further concluded that the appellants are only
housewives, having no independent source of income,
and were given loan by the brokerage firms for purchase
of shares. The Special Court, therefore, rightly held that
0
the money and assets were diverted to the appellants by
the brokerage firms who were notified parties. The order
of the Special Court does not suffer from any infirmity
and there was sufficient material before the Custodian to
E arrive at a satisfaction that monies had been diverted by
late 'HSM' to the appellants. [para 37,38,44 and 46] [278-
A-B; D-G; 286-C-D; 291-F-G; 292-8-C]
5. Whether the appellants being not involved in offences
in transactions in securities could have been proceeded
F against in terms of the provisions of the Act?
5.1. On 25.1.1994, an amendment was carried out in
the Act, wherein, s.9-A was inserted to confer civil
jurisdiction on the Special Court. The appellants were
G active investors and had built up a portfolio of
investments which has appreciated in value over the
years, more particularly, during the last three years. It
cannot be said that since the appellant have not been I
charged for any offence, they cannot be notified under
H the Act. The plea that the phrase "involved in the offence"
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 243
BHAVAN, MUMBAI
could only mean "accused of the offence" and since the A
appellants are not charged with any offence they could
not be notified, cannot be accepted. In construing these
words which are used in association with each other, the
rule of construction noscitur a sociis may be applied. It
is a legitimate rule of construction to construe words in B
an Act of Parliament with reference to words found in
immediate connection with them. The actual order of
these words in juxtaposition indicates that meaning of
one takes colour from the other. The rule is explained
differently: that meaning of doubtful words may be c
ascertained by reference to the meaning of words
associated with it. [para 5(e) and 47) [250-H; 251-A-B; 292-
D-G]
Ahmedabad Teachers' Association vs. Administrative
Officer, AIR 2004 SC 1426 - relied on. D
5.3. In the instant case the nature of "offence", in
which the appellants are allegedly involved, is to be taken
into consideration. The Act does not create an offence for
which a particular person has to be charged or held E
guilty. Thus the phrase "involved in the offence" would
not mean "accused of the offence". Also, the appellants
could have been reasonably suspected to have been
involved in the offence after consideration of the various
reports of the Janakiraman Committee, Joint F
Parliamentary Committee and the Inter Disciplinary Group
(IDG); and also the fact that 28 members of MIS 'HSM'
group including his family members/entities were notified
under the Special Act Ordinance itself. The said factual
matrix was sufficient for the satisfaction of the Custodian G
to notify the appellants. [para 48) [292-G-H; 293-A-C]
5.4. The object of the Act is not merely to bring the
offender to book but also to recover what are ultimately
public funds. Even if there is a nexus between a third
party, an offender and/or property of the third party can H
244 SUPREME COURT REPORTS [2011) 6 S.C.R.
A also be notified. The word "involved" in s. 3(2) of the
Special Court Act has to be interpreted in such a manner
so as to achieve the purpose of the Act. (para 48) (293·
C-D]
Ashwin S. Mehta vs. Custodian & Ors., (2006) 2 SCC
8
386; and Jyoti H Mehta & Ors. vs. Custodian & Ors., (2009)
10 sec 564 - referred to.
5.5. In construing the statute of this nature the court
should not always adhere to a literal meaning but should
C construe the same, keeping in view the larger public
interest. For the said purpose, the court may also take
recourse to the basic rules of interpretation, namely, ut
res magis va/eat quam pereat to see that a machinery
must be so construed as to effectuate the liability
D imposed by the charging section and to make the
machinery workable. The statutes must be construed in
a manner which will suppress the mischief and advance
the object the legislature had in view. A narrow
construction which tends to stultify the law must not be
E taken. Contextual reading is a well-known proposition of
interpretation of statutes. The courts, when rule of
purposive construction is gaining momentum, should be
very reluctant to hold that Parliament has achieved
nothing by the language it used when it is tolerably plain
F what It seeks to achieve. [para 49] [293-H; 294-A-C, F]
6. Whether Canfina is a Financial Institution and whether '
the complaint filed by Canfina is invalid?
6.1. The complaint has been received from Canfina
G which is a 100% subsidiary of Canara Bank, a
nationalized bank. The term 'financial institution' has not :
been defined under the Act. It became necessary to
enact the Special Court Act because of the large scale
Irregularities which came to light as a result of the '
H investigations by the Reserve B~nk of India into the
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 245
BHAVAN, MUMBAI
affairs of various banks and financial institutions whose A
monies were siphoned out. It has come to light that there
were large scale siphoning out of monies from Canfina
also as held by the Special Court In its order dated
25.06.1997. [para 50) [294-G·H; 295-A·D]
B
6.2. The term "financial institution" for the purposes
of the Special Court Act should be interpreted in
accordance with the Statement of Objects and Reasons
of the Act. Thus, at the very inception of this Act are the
investigations by the Reserve Bank of India and these C
investigations were carried on by the Janakiraman
Committee. The Act was intended to be applied to the
workings of the banks and financial institutions (though
not covered by the strict definition of the term but involved
in the securities scam of 1992) into whose affairs the
Janakiraman Committee had investigated. Canfina, was D
one such non-banking financial institution that
Janakiraman Committee had investigated and thus it was
meant to be covered under the Act. The sources of
information illustrated in r. 2 of the Special Court (Trial of
Offences Relating to Transactions in Securities) Rules, E
1992 also indicates Canfina as a financial institution.
fhus, the claim of Canfina falls u/s 11(2)(b) of the Act and
their complaint falls under r. (2)(b). The power to deal with
the property ultimately lies with the Special Court. This
Court is entirely in agreement with the conclusion arrived F
at by the Special Court. [para 51-55] [295-F-H; 296-A-C,
H; 297-A-D]
7. Claim for maintenance. repair charges. interest and
penalty for belated payment (CA Nos. 3377 of 2009 and G
4764 of 2010)
7.1. The appellants in C.A.No. 3377 of 2009 were
notified under the Act. Upon enforcement of the Act, all
the properties of late 'HSM' and his family members,
h1cludlng the appellants apart from other corporate H
246 SUPREME COURT REPORTS (2011] 6 S.C.R.
A entities stood attached by the Custodian. Consequently,
all eight residential properties/flats of the appellants,
namely, residential flat Nos. of 32A, 328, 33, 34A, 348,
44A, 448 and 45 in the Madhuli Cooperative Housing
Society Ltd. at Dr. Anne Besant Road, Worli, Mumbai
B continue to remain attached under the Act with the
Custodian. Their upkeep/repair is essential so that their
market value does not get depreciated. Further, all the
owners of the residential properties/flats, as the members
of the Housing Society, are liable to pay such amount as
c may be determined by the Society towards the upkeep,
maintenance and repairs of the flats as well as common
areas and amenities in the housing complex, and the
Cooperative Housing Societies are entitled to recover all
the arrears and charges from the members who have not
paid the society in time. The appellants have failed to pay
0
to the Madhuli Cooperative Housing Society Ltd. their
contfibution towards the maintenance charges, interest
thereon and the charges incurred towards the repair of
the attached property by the Housing Society. The total
dues demanded by said Housing Society by its letter
E dated 12.03.2009 relating to the eight attached properties
in question is Rs.1,87,97,011/-. In the same way, in Civil
Appeal No. 4764 of 2010, the appellant, namely, 'RSM' a
notified party who is the owner of the attached property
failed to pay to the Housing Society her contribution
F towards maintenance charges, interest thereon and also
the charges incurred by the Housing Society towards
repair of the attached property. The total dues demanded
by the Housing Society, by its letter dated 21.06.2010 qua
the attached property is Rs.21,06,230/-. The attached
G properties are to be properly maiatained and as per the
scheme, the repair and upkeep of the attached properties
are to be followed by the Custodian and on the orders
of the Special Court. [para 56-58, 60 and 61) [297-F; 298·
8-H; 299-A·B, F-H; 300-8)
H
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 247
BHAVAN, MUMBAI
7.2. It is also brought to the notice of the Court that A ·
during the course of hearing, either before the Special
Court or in this Court, certain amounts have been paid/
deposited by the appellants. Considering the fact that the
appellants are agitating the matter at the hands of the
Custodian, the Special Court and before this Court, the B
appellants need not be burdened with interest and penal
charges for non-payment of maintenance and repair
charges to the society. Accordingly, while sustaining the
claim of the Custodian as approved by the Special Court,
it is clarified that the Custodian is not permitted to collect c
interest and penal_ty charges on the arrears of
maintenance and repair charges. The Custodian is free
to adjust the amounts deposited by the appellants on the
orders of this Court or the Special Court. The impugned
order in both the appeals is accordingly modified. [para D
62) [300-C-F]
Case Law Reference:
(1998) 3 SCR 389 relied on para 8
1992 (3) Bomb. C.R. 716 relied on para 19 E
2004 (4 ) Suppl. SCR 109 relied on para 20
2009 (12 ) SCR 1229 relied on para 21
2006 (1 ) SCR 56 relied on para 22 F
1981 ( 2) SCR 533 relied on para 33
JT 2011 (3) SC 750 relied on ·para 34
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
2924 of 2008. G·
From the Judgment & Order dated 26.2.2008 of the
Special Court (Trial of offences relating to transactions in
securities) at Bombay in Misc. Petition No. 2 of 2007.
H
248 SUPREME COURT REPORTS [2011] 6 S.C.R.
A WITH
C.A.Nos. 2915 of 2008, 3377of 2009 & 4764 of 2010.
K.K. Venugopal, l.H. Syed, Varinder Kumar Sharma,
Kamini Jaiswal, Sham Mohan, B. Vijayalakshmi Menon,
B Tushad Cooper, Sangeeta Mandal, Kayesh Begg, Taruna A.
Prasad (for Fox Mandal & Co.), Arvind Kumar Tewari,
Subramonium Prasad, S. Majumdar, Shyam Nanda for the
appearing parties.
c The Judgment of the Court was deliverd by
P. SATHASIVAM, J.1. Civil Appeal No. 2924 of 2008 has
been filed by Smt. Rasila S. Mehta, mother of late Harshad S.
Mehta and Civil Appeal No. 2915 of 2008 has been filed by
Smt. Rina S. Mehta, sister-in-law of late Harshad S. Mehta
D against the final judgment and order dated 26.02.2008 passed
by the Special Court under the provisions of the Special Court
(Trial of Offences Relating to Transactions in Securities) Act,
1992 (hereinafter referred to as "the Act") at Bombay in Misc.
Petition Nos. 2 and 1 of 2007 respectively whereby the Special
E Court dismissed their petitions challenging the notification
dated 04.01.2007 issued by the Custodian exercising powers
under Section 3(2) of the Act notifying the appellants.
2. Civil Appeal No. 3377 of 2009 has been filed by Smt.
F Jyothi H. Mehta, widow of late Shri Harshad S. Mehta and six
others against the judgment and order dated 13.03.2009
passed by the Special Court in approving Report No. 19 of
2008 filed by the Custodian in respect of outstanding dues
towards Flat Nos. 32A, 328, 33, 34A, and 348 on the Third
G Floor and 44A, 448 and 45 on the Fourth Floor together with
terrace area on the Third Floor and eight car parking space in
Madhuli Cooperative Housing Society Limited, Worli belonging
to late Harshad S. Mehta as well as other related notified
entities of the Harshad Mehta Group.
H 3. Civil Appeal No. 4764 of 2010 has been filed by Smt.
RASILA S. MEHTA v. CUSTODIAN, NARIMAN . 249
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
Rasila S. Mehta challenging the order dated 07 .05.201 O A
passed by the Special Court in approving Report No. 23 of
2009 of the Custodian on outstanding dues of Madhuli
Cooperative Housing Society Limited, Worli as on 31. 03. 2009 ·
towards Flat No. 31 on the Third Floor belonging to her being
a notified party. · B
4. Since all the parties in the above appeals are famiiy
members of late Harshad S. Mehta and the orders challenged
were of the Special Court, the same are being disposed of by
the following common judgment.
c
5. Brief Facts:
(a) Sometime in 1992, it was noticed that frauds and
irregularities involving colossal amounts of money were
committed by certain stock brokers and other persons as a:so o
by certain banks and financial institutions. The amounts involved
in the said frauds and/or irregularities were estimated to run
into several thousand crores. The Central Government,
therefore, formed an opinion that it was necessary to take
immediate steps to try offences relating to such transactions . E
in securities and for matters connected therewith or incidental
thereto. The President of India thereupon promulgated an
Ordinance on 6th June 1992 known as the Special Court (Trial
of Offences Relating to Transactions in Securities) Ordinance
1992 and the said Ordinance came into force on the same day.
The said Ordinance with certain modifications became the Act F
when the assent of the President was given thereto on 18th
August 1992 and the said Act was deemed to have come into
force on 6th June 1992, namely, the date on which the said
Ordinance had been promulgated.
G
(b) On 6th June, 1992 the Central Government had also
framed certain rules under the provisions of Section 14 of the
said Ordinance known as the Special-Court (Trial of Offences
Relating to Transactions in Securities) Rules, 1992 (hereinafter
referred to as 'the Rules'). The said rules came into force on · H
250 SUPREME COURT REPORTS [2011] 6 S.C.R.
A the 6th June 1992 and continue in force after the enactment of
the Act under section 15(2) of the Act and/or Section 24 of the
General Clauses Act, 1897.
(c) The object of the Act, as apparent from the provisions
thereof, is to ensure that offences relating to securities were
8
expeditiously tried and it, therefore, provides for the
establishment of a Special Court. The Act also provides that
an appeal lies from the judgment, sentence or order, not being
interlocutory order, of the said Special Court to the Supreme
C Court of India both on facts and on law. An important object of
the said Act is to ensure speedy recovery of the huge amounts
involved, to punish the guilty in such irregularities or fraud, to
restore confidence in and maintain the basic integrity and
credibility of the banks and financial institutions.
D (d) On 13.05.1992, the Central Bureau of Investigation (in
short "the CBI") issued freeze orders under Section 102 of the
Code of Criminal Procedure (in short 'the Code) on all the bank
accounts of Smt. Rasila S. Mehta and Smt. Rina S. Mehta on
the ground that the appellants are recipients of monies diverted
E by M/s Harshad S. Mehta from banks and financial institutions.
This was a preventive measure taken by the CBI which powers
are normally invoked pending investigation to bring. within their
fold, any property which is the subject-matter of an offence.
Since then, all the charge-sheets came to tie filed by the CBI
F after thorough investigation and trial has been completed in
several cases. Based on the provisions of the Act, on
08.06.1992, the Custodian notified 29 entities except the
appellants (Smt. Rasila S. Mehta and Smt. Rina S. Mehta) in
the Mehta family comprising four brothers, the wives of three
G brothers, their three HUFs, a partnership firm, three brokerage
firms in the family and 15 corporate entities promoted by them.
These persons were notified on the basis of information/
complaint received from the Ministry of Finance in which the
Janakiraman Committee report was cited and relied upon.
H (e) On 25.01.1994, an amendment was carried out in the
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 251
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
Act, wherein, Section 9-A was inserted to confer civil jurisdiction A
to the Special Court. Smt. Rasila S. Mehta and Smt. Rina S.
Mehta were active investors and had built up a portfolio of
investments which has appreciated in value over the years,
more particularly, during the last three years. They own one
each of the nine flats at Madhuli Cooperative Housing Society B
Limited which are merged/amalgamated with other flats under
the occupation of the joint family. The bank accounts and
shareholdings of these appellants are held jointly where the
appellants are the first holders and their family members are
joint/second holders. Due to the fact that joint/second holders c
are notified entities, the assets of the appellants have been
treated as attached on and from 08.06.1992 and the same are
being managed by the Custodian for the last 15 years. On
21.07 .2006, the Custodian preferred a common Misc. petition
No. 20 of 2006 against Smt. Rasila S. Mehta and Smt. Rina 0
S. Mehta seeking relief of a declaration that the said appellants
are benamis and fronts of late Harshad S. Mehta and other
notified entities and, therefore, their assets should be utilized
.in discharge of their liabilities. The appellants also filed M.A.
No. 291/2006 on 11.09.2007 seeking relief of a declaration that E
all the assets belonged to them and they were the first holders,
namely, bank accounts and fixed deposits and the
shareholdings may be declared as free from attachment.
(f) On 04.01.2007, the Custodian issued a notification
notifying both the appellants under Section 3(2) of the Act for F
which a public notice was published in the newspapers on
06.01.2007.
(g) On 19.01.2007, Smt. Rina S. Mehta filed Misc. Petition
No. 1 of 2007 and on 18.06.2007, Smt. Rasila S. Mehta filed G
Misc. Petition No. 2 of 2007 for the relief of de-notification under
Section 4(2) of the Act. It transpired that the appellants were
notified on the basis of the alleged complaint by Canbank
Financial Services Ltd. (in short "Canfina"). On considering the
materials, the Special Court, by impugned order dated H
252 SUPREME COURT REPORTS [2011) 6 S.C.R.
A 26.02.2008, dismissed the petitions filed by the appellants ·
Smt. Rasila S. Mehta and Smt. Rina S. Mehta.
(h) Inasmuch as the other two appeals relate to the order:-
passed on the report submitted by the Custodian, there is n<-
B need to traverse all the details as stated therein.
6. Heard Mr. LH. Syed, learned counsel for the appellants
Mr. Subramonium Prasad, learned counsel for the Custodian
Mr. K.K. Venugopal, learned senior counsel for intervenor,....
Standard Chartered Bank and Mr. Tushad Cooper, learnet
C counsel for intervenor/State Bank of India.
7. Mr. Syed, learned counsel for the appellants after taking•
us through the relevant provisions of the Act, Rules and the
materials available with the Custodian as well as the reasonings
0 of the Special Court raised the following contentions:
(i) The impugned notification is non-reasoned and non-
speaking. The validity of a statutory order must be judged by a
court of law by the reasons mentioned in the order itself and a
statutory order cannot be explained and supplemented by fresh
E reasons in the shape of affidavit or otherwise whereas in the
present case the Special Court accepted the same which is
contrary to settled law.
(ii) Delay of 15 years in passing the order of notification
F is unreasonable. The explanation offered for delay is also
unacceptable.
(iii) Material relied upon in passing the order of notification
i.e. Canfina's letter dated 28.12.2006 is not supported by an
G affidavit which could not have been relied upon as it is contrary
to proviso to Rule 2 of the Rules.
(iv) Reliance on the reports of Joint Parliamentary
Committee, Jankiraman Committee, IDG and Chartered
Accountants' by the Custodian is unacceptable.
H
RASILA S. MEHTA v. CUSTODIAN. NARIMAN 253
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
(v) Pre-decisional hearing by the Custodian was required A
., be given and in the case on hand such opportunity was not
•fforded.
(vi) No effective post-decisional hearing as the materials
-elied upon was not supplied in time. 8
(vii) The Special Court erroneously held the transaction ~o
->e benami in general on the basis of Chartered Accountants'
-eports without examining individual transactions.
(viii) The onus to establish the validity, correctness, legality, c
->ropriety of the notification order is on the Custodian but
-Yrongly shifted on the appellants.
(ix) Satisfaction of Custodian while passing an order of
1otification should be objective and based on materials as
0
>rovided in the Rules.
(x) The Special Court erroneously held that the meaning
::>f the phrase "involved an offence" has attained finality by this
8ourt, though the said question was left open. In any event, the
-case of the Custodian was that a sum of Rs. 50 crores was E
::liverted by M/s Harshad S. Mehta to the appellants during the
1period 01.04.1990 to 06.06.1992. In such event, monies
ltransferred/diverted from the banks/financial institutions can only
lbe recovered from the appellants and nothing more.
F
(xi) The jurisdiction of the Special Court is limited to the
-statutory period only, i.e. 01.04.1991 to 06.06.1992.
(xii) No interest can be levied on the notified parties as per
the judgment of this Court in Harshad Shanti/al Mehta vs.
Custodian and Ors. (1998) 5 SCC 1. G
8. On the other hand, Mr. Subramonium Prasad, learned
counsel for the Custodian heavily relying on the circumstances
for passing the Act, the statement of Objects and Reasons and
the releva!lt provisions submitted that: H
254 SUPREME COURT REPORTS [2011) 6 S.C.R.
A (i) The impugned order of the Special Court is valid and
the appellants have not made out any case for interference by
this Court.
(ii) As per Section 4(2) of the Act, it is for the appellants
B to show to the Special Court that they are not involved in any
offence in securities between 01.04.1991 to 06.06.1992.
· (iii) A perusal of various reports like the Auditor's report,
Janakiraman Committee's report, report of Inter Disciplinary
Group (IDG), report of Vinod K. Aggarwal and Company
C coupled with materials placed and discussed, the impugned
decision of the Special Court cannot be faulted with.
(iv) From the materials placed, it is clear that the appellants
are nothing but front benamidars of Harshad S. Mehta and there
0 is no acceptable material to show that the appellants were
having sufficient funds in their hands due to the purchase and
sale of shares by placing acceptable materials such as
income-tax returns etc. Inasmuch as the Special Court is
manned by or presided over by a sitting Judge of High Court,
E sufficient safeguards are provided in the Act and, in any event,
the appellants have no way prejudiced.
(v) As per the provisions of the Act and interpreted by this
Court on various occasions, it is for the appellants to make out
a case before the Special Court that they are not involved in
F any offence or that they have no nexus.
9. Mr. K.K. Venugopal, learned senior counsel for
intervenor/Standard Chartered Bank and Mr. Tushad Cooper,
learned counsel for intervenor/State Bank of India assisted the
G Court by highlighting the object and salient features of the Act
as well as huge financial implications on the banks due to the
act of Harshad S. Mehta in the sale and purchase of shares.
They also highlighted that crores of public monies were lost due
to the conduct of Harshad S. Mehta and his family members
H which resulted in huge financial loss to the banks.
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 255
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
10. Before going into the rival submissions, it is necessary A
to trace the history of enactment of the Act. The Special Courts
Act, 1992 (27of1992) was legislated to meet the necessity of
establishing Special Courts for trial of offences committed in
relation to Transactions in Securities Act, 1992. Reserve Bank
of India found that large scale irregularities and malpractices B
were found in Government and other securities through brokers
in collusion with Bank employees. This legislation was enacted
to meet this situation. It is a short Act containing only 15
sections. It deals with establishment of Courts, defines
jurisdiction and powers of Special Court. It also defines civil c
jurisdiction of such Special Courts. Provision of arbitration was
reserved and appeal could also be preferred under the Act.
Much protection was given for acts done in good faith and
punishment for contempt was also provided so that the
provisions of the Act would be more strictly implemented.
D
11. Objects & Reasons:
The Statement of Objects and Reasons is as follows:-
"(1) In the course of the investigations by the Reserve E
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 tl1e 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 G
punish the guilty and restore confidence in and
maintain the basic integritv and credibility of the
banks and financial institutions the Special Court
(Trial of Offences Relating to Transactions in
Securities) Ordinance, 1992, was promulgated on H
256 SUPREME COURT REPORTS [2011) 6 S.C.R.
A 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 disposal
of properties attached. It also provides for
B 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."
12. It is settled law that the objects and reasons of the Act
C are to be taken into consideration in interpreting the provisions
of the statute. It is incumbent on the court to strive and interpret
the statute as to protect and advance the object and purpose
of the enactment. Any narrow or technical interpretation of the
provisions would defeat the legislative policy. The Court must,
D therefore, keep the legislative policy in mind while applying the"·
provisions of the Act to the facts of the case. It is a cardinal
principle of construction of statute or the statutory rule that efforts
should be made in construing the different provisions, so that
each provision may have effective meaning and implementation
E and in the event of any conflict a harmonious construction should
be given. It is also settled law that literal meaning of the statute
must be adhered to when there is no absurdity in ascertaining
the legislative intendment and for that purpose the broad
features of the Act can be looked into. The main function of the
F Court is to merely interpret the section and in doing so it cannot
re-write or re-design the section. Keeping all these principles
in mind, let us consider the relevant provisions.
13. Relevant Provisions:
G As per Section 2(b), 'Custodian' means "the Custodian
appointed under sub-section (1) of Section 3." Section 2(c)
'securities' includes.-
"(i) shares, scrips, stocks, bonds, debentures,
H debenture stock, units of the Unit Trust of India or
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 257
BHAVAN, MUMBAI [P.. SATHASIVAM, J.]
any other mutual fund or other marketable securities A
of a like nature in or of any incorporated company
or other body corporate;
(ii) Government securities; and
(iii) Rights or interests in securities;" B
11md as per Section 2(d) 'Special Court' means "the Special
:ourt established under sub-section (1) of Section 5." Among
11111 the provisions Sections 3 and 4 are relevant which read as
~ollows: c
"3. Appointment and functions of Custodian.--(1) The
Central Government may appoint one or more Custodian
as it may deem fit for the purposes of this Act.
(2) The Custodian may, on being satisfied on information D
received that any person has been involved in any offence
relating to transactions in securities after the 1st day of
April, 1991 and on and before 6th June, 1992, notify the
name of such person in the Official Gazette.
E
(3) Notwithstanding anything contained in the Code and any
other law for the time being in force, on and from the date
of 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 F
with the issue of the notification.
(4) The property attached under sub-section (3) shall be
dealt with by the Custodian in such manner as the Special
Court may direct.
G
(5) The Custodian may take assistance of any person
while exercising his powers or for discharging his duties
under this section and section 4.
4. Contracts entered into fraudulently may be H
258 SUPREME COURT REPORTS [2011) 6 S.C.R.
A cancelled.-(1) 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 1st 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
B section 3 has been entered into fraudulently or to defeat
the provisions of this 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
c except after giving to the parties to the contract or
agreement a reasonable opportunity of being heard.
(2) Any person aggrieved by a notification issued under
sub-section (2) of section 3 or any cancellation made under
D sub-section (1) of section 4 or any other order made by
the Custodian in exercise of the powers conferred on him
under section 3 or 4 may file a petition objecting to the
same within thirty days of the assent to the Special Court
(Trial of Offences Relating to Transactions in Securities)
E Bill, 1992 by the President before the Special Court where
such notification, cancellation or order has been issued
before the date of assent to the Special Court (Trial of
Offences Relating to Transactions in Securities) Bill, 1992
by the President and where such notification, cancellation
F or order has been issued on or after that date, within thirty
days of the issuance of such notification, cancellation or
order, as the case may be; and the Special Court after
hearing the parties, may make such order as it deems fit."
Section 9 speaks about procedure and powers of Special
G Court and by way of an amendment with effect from 25th
January, 1994, Section 9-A was inserted to confer jurisdiction,
powers, authority and procedure of Special Court in respect of
civil matters. As per Section 10, against any judgment,
sentence or order, not being interlocutory in nature of the
H Special Court, an appeal shall lie to the Supreme Court both
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 259
BHAVAN, MUMBAI [P. SATHASIVAM, J.)
on facts and on law. Like Sections 3 and 4, another important A
section is Section 11 which reads as under:
"11. Discharge of liabilities.- (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
8
deem fit directing the Custodian for the disposal of the
property under attachment.
(2) The following liabilities shall be paid or discharged in
full, as far as may be, in the order as under :-
c
(a) all revenues, taxes, cesses and rates due from the
persons notified by the Custodian under sub-
section(2) of Sec. 3 to the Central Government or
any State Government or any local authority.
(b) all amounts due from the person so notified by the D
Custodian to any bank or financial institution or
mutual fund ; and
(c) any other liability as may be specified by the
Special Court from time to time." E
Section 13 makes it clear that the provisions of the Act shall
have effect notwithstanding anything inconsistent therewith
contained in any other law for the time being in force or in any
instrument having effect by virtue of any law, other than this Act, F
or in any decree or order of any Court, Tribunal or other
authority. Section 14 empowers the Central Government to
make rules for carrying out the provisions of the Act.
14. Based on the above statutory provisions, let us
consider the claim of the appellants, stand taken by the G
Custodian and the reasonings of the Special Court in passing
the impugned orders.
15. Discussion:
H
260 SUPREME COURT REPORTS (2011) 6 S.C.R.
A The objects of the Act are two fold:
(a) to punish the guilty, and
(b) to ensure speedy recovery of the huge amount
involved.
B
"Amount involved" means the amount of the banks and financial
institutions alleged to have been diverted to the accounts of the
offenders during the statutory period from 01.04.1991 to
06.06.1992.
c 16. The attached properties can be dealt with by the
Special Court under sub-Sections (3) and (4) of Section 3, sub-
section (2) of Section 4, Sections 9-A and 11 of the Act.
Section 3(3) of the Act provides for an automatic attachment
of all properties as a consequence of Notification. The object
D provides the attachment of all properties of the offender with a
view to prevent diversion of such properties. The said provision
is a preventive provision.
17. Section 11 provides for disposal and sale of attached
E properties extinguishing the rights and title of a notified party,
which is a punitive provision. 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 being satisfied
on information received that any person has been involved in
F any offence relating to transactions in securities after the 1st
day of April, 1991 and on and before 06.06.1992 (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 notification under sub-
G section (2), any property, movable or immovable, or both,
belonging to any person notified under that sub-section s'
stand attached simultaneously with the issue of the notific<
and sub-section (4) of Section 3 makes it clear that SL.~.1
attached property shall be dealt with by the Custodian in such
H manner as the Special Court may direct.
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 261
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
18. In the Ordinance which preceded the Act, there was A
no provision for giving post facto hearing to a notified person
for cancellation of notification, but such a provision has been
made in the Act, as would appear from Section 4(2) thereof.
Sub-section (2) of Section 4, however, provides for a hearing
as regards correctness or otherwise of the notification notifying B
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 of Special Court.
A perusal of the Act makes it clear that any prosecution in c
respect of any offence referred to in sub-section (2) of 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 25.01.1994, confers all such
0
jurisdiction, powers and authority as were exercisable,
immediately before such commencement by any civil court in
relation to the matter specified therein. The Act provides for
stringent measures. It was enacted for dealing with an
extraordinary situation in the sense that any person who was
involved in any offence relating to transaction of any security E
could be notified, whereupon all his properties stood 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.
F
Provisions with regard to Attachment
19. The vires of Sections 3(2), 3(3) and 3(4) of the
Ordinance was challenged before the High Court of Bombay
in Writ Petition No. 1547 of 1992 Hitesh S. Mehta vs. Union
of India & Anr., 1992 (3) Bomb. C.R. 716. It was argued before · G
the Bombay High Court that there is no provision for hearing
at the stage of notification i.e. Section 3(2) and also at the stage
of attachment of all properties i.e., Section 3(3). Therefore, the
provisions are contrary to the principles of natural justice and
H
262 SUPREME COURT REPORTS [2011] 6 S.C.R.
A be struck down. The Division Bench of the High Court in
paragraph 8 of the said judgment observed as follows:
"Had the provision been confined to Section 3, sub-
sections (2) and (3), the argument which is advanced
before us would have had considerable force. It is
B undoubtedly true that neither in sub-Section (2) nor in (3)
is there any provision for any hearing being given to the
person who may be notified; nor is there any provision for
any reasoned order being passed by the Custodian at the
time when he notifies such a person. There is, however, a
c further sub-Section, namely, sub-Section (4) of Section 3
which provides as follows:
Section 3 (4) : The property attached under sub-Section
(3) shall be dealt with by the Custodian in such manner as
D the Special Court may direct.
This sub-section clearly contemplates that the power of the
Custodian to deal with the property of a person who has
been notified is subject to the orders and directions of the
Special Court. Now, in the first place, the Special Court
E under the Ordinance is a Court presided over by a sitting
Judge of a High Court. This itself is a check on any
arbitrary exercise of powers by the Custodian. Secondly,
the power of the Special Court to give directions to the
Custodian in respect of any attached property must
F necessarily bring within its ambit, the power to order the
release of such property or any part of its from attachment.
If the person who is aggrieved by his name being notified
under sub-section (2) approaches the Special Court and
makes out, for example, a case that the property which is
G attached or a portion of its 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 of such property, in our view, the
H Special Court would have the power to direct the custodian
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 263
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
to release such property from attachment. In the same way, A
if ultimately, the Special Court, after looking at all the
relevant circumstances, comes to the conclusion that the
entire property should be released from attachment, we do
not see any reason why such a direction also cannot be
given by the Special Court under Section 3, sub-section B
(4). In such a situation, if the entire property is required to
be released from attachment, the Special Court, in our
view, can also direct the Custodian that the name of the
notified person should be de-notified. This would be a
necessary consequence of the power of the Special Court C
to give proper directions in connection with the property
which the Custodian seeks to attach. If sub-section (4) is
read in this light, the grievance of the petitioner relating to
the validity of powers granted to the Custodian under
Section 3 would not survive.
D
The above-said paragraph of Hitesh S. Mehta's judgment
was relied upon by this Court in Harshad S. Mehta vs.
Custodian (supra).
20. This Court in LS. Synthetics Ltd. vs. Fairgrowth E
Financial Services Ltd. & Anr. (2004) 11 SCC 456 considered
the judgment of Harshad S. Mehta (supra) and in paragraphs
27 to 29 observed as under:
"27. This Court in para 14 was merely recording the
submissions of one of the notified parties. Even a question F
as to whether all properties of notified persons would be
subject to the statutory attachment under sub-section (3)
of Section 3 of the said Act or not did not arise for
consideration therein.
G
28. Therein indisputably this Court was referring to a
judgment of the Bombay High Court but did not prono,unce
finally on the correctness or otherwise thereof.
29. In Hitesh Shanti/al Mehta the Bombay High Court H
264 SUPREME COURT REPORTS [2011] 6 S.C.R.
A appears to have merely held that in appropriate cases the-
Special Court would have the power to direct the
Custodian to release such property from attachment, in the
event, it is found that the property which is attached has
no nexus with the illegal dealings in securities belonging
B to banks and financial institutions during the relevant
period and/or there are no claims or liabilities which have
to be satisfied by attachment and sale of such property.
Once it is held that a debt can be the subject-matter of
attachment, the provisions of sub-section (3) of Section 3
of the said Act would squarely be applicable in view of the
c fact that the same was the property belonging to a notified
person. This position in law is not disputed. Such attached
property, thus, if necessary, for the purpose of discharging
the claims and liabilities of the notified person indisputably
would stand attached and can be applied for discharge of
D his liabilities in terms of Section 11 of the said Act."
21. In paragraphs 45, 46 and 47 of Jyoti Harshad Mehta
& Ors. vs. Custodian & Ors. (2009) 10 SCC 564 this Court
held as under:
E
"45. It is contended by the learned counsel for the
appellants Mr Syed that if any of the properties or assets
of the notified parties have no nexus with the illegal
securities transactions, the same can be released from
attachment or at least need not be sold.
F
46. It has further been argued that no evidence has been
adduced that loans given by M/s Harshad S. Mehta to his
family members or monies used by Shri Harshad Mehta
for purchase of his flat were acquired from the tainted
G funds. It is submitted by the appellants that unless it can
be shown that the properties in question were acquired
from the tainted funds they would be liable to be released
from attachment. It is argued that the fact that the properties
had been purchased much before the securities scam
H
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 265
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
would go on to show that they had no nexus with the funds A
diverted therefrom.
47. In our opinion the arguments advanced on behalf of the
appellants need to be rejected at the outset because a
plain reading of the sections of the Special Act would 8
dearly point otherwise. In our opinion the attachment of all
the properties in terms of sub-section (3) of Section 3 of
the Special Act is automatic. The attachment restricts sale
of the properties which have been acquired from illegal
securities transaction. The sub-section specifically C
mentions that on and from the date of the notification, "any
property, movable or immovable, or both", belonging to any
person notified under the Act shall stand attached.
"
22. In Ashwin S. Mehta vs. Custodian & Ors. (2006) 2 D
SCC 385 in paragraph 15, this Court observed as under:
"15. The Act provides for stringent measures. It was
enacted for dealing with an extraordinary situation in the
sense that any person who was involved in any offence E
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 F
'
that he is not liable 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 terms of sub-section (2)
of Section 4 of the Act. But, at the stage when liabilities G
are required to be discharged, the notified persons may
raise a contention inter a/ia for the purpose of establishing
that the properties held and possessed by them are
sufficient to meet their liabilities. In terms of the provisions
H
266 SUPREME COURT REPORTS [2011] 6 S.C.R.
A of the Act, the Special Court had been conferred a very
wide power."
23. Section 9-A was inserted by an amendment dated
25.01.1994 conferring jurisdiction, powers, authority and
procedure of Special Court in civil matters. In view of this
8
amendment, this Court in paragraph 41 of Harshad Mehta's
case (supra) observed as under:
"41 .......... If, according to any of the banks or financial
institutions, any of the properties attached belongs to the
C bank or financial institution concerned, it is open to that
bank or financial institution to file a claim before the
Special Court in that connection and establish its right to
the property attached or any part thereof in accordance with
law. Obviously, until such a claim is determined, the
D property attached cannot be sold or distributed under
Section 11 ....... ."
24. This Court in Ashwin S. Mehta's case (supra), in
paragraphs 51 and 52 observed as under:
E "51 ......... It was, thus, necessary for the learned 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.
F 52. Furthermore, the question as regards liability of the
parties should have been determined at the stage of
Section 9-A of the Act. ... ... . .. It does not appear that
claims inter se between the entities within the so-called
group had ever been taken into consideration. The
G 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."
25. As regards Section 11, the properties which stand
H attached by the Custodian are used to discharge the liabilities
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 267
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
in full as far as may be in the order prescribed under Section A
11 (2) of the Special Court Act. There is nothing in the Act which
suggests that only such properties which belong to the notified
party and which have been acquired by the use of tainted funds
alone can be attached for the purposes of distribution under
Section 11 of the Act. Section 3(3) postulates that on and from 8
the date of notification all properties movable, immovable or
both, belonging to the notified party on and from the date of the
notification stand attached. Attachment of all the properties in
terms of Section 3(3) of the Act is automatic. The said section
does not provide any qualification that the properties which are C
liable to be attached should relate to the illegal transactions in
securities in respect of which the Act was brought in force. Had
the Parliament intended otherwise it would have specifically
provided for the same as was done under the Smugglers and
Foreign Exchange Manipulators (Forfeiture of Property) Act,
1976. A reading of Section 11 of the Act further provides that 0
all the properties which stand attached to the Special Court
under Section 3(3) are available for distribution under Section
11 of the Act. There is again nothing which suggests that the
distribution must be restricted only to sale of such properties
which have been acquired by use of tainted funds. The statutory E
period is irrelevant for the attachment of properties and sale
of the same. All properties which are attached woule be liable~
to be sold for redemption of liabilities till the date of notification •
under Section 11 of the Act. •
F
26. The Custodian filed Misc. Petition No. 20 of 2006 on
21.07.2006 against the appellants for the recovery of the money
alleged to have been advanced by the three brokerage firms
i.e., Mis Harshad S. Mehta; Mis Ashwin Mehta and M/s J.H.
Mehta to the appellants and prayed that the appellants be
declared benami/front of late Harshad S. Mehta and/or his G
group, and the assets be utilized for discharging the liabilities
of late Harsahd S. Mehta and/or his group. On 04.01.2007, the
Custodian notified the appellants and subsequently on
23.01.2007 withdrew the said M.P. No. 20 of 2006 after the
notification. H
268 SUPREME COURT REPORTS 12011) 6 S.C.R.
A 27. The appellants filed Misc. Petition Nos. 1 & 2 of 2007
challenging the validity of the Notification dated 04.01.2007
before the Special Court. The Special Court dismissed the said
petitions and granted the prayer In Misc. Petition No.20 of 2006
filed by the Custodian.
B 28. This Court in L.S. Synthetics (supra) in paragraphs 35,
36 and 42 held as under:
"35. S.N. Variava, J. in A.K. Menon, Custodian
whereupon the learned Special Court has placed reliance,
c observed:
"19. It is thus that the said Act lays down a responsibility
on the Court to recover the properties. So far as monies
are concerned, undoubtedly the particular coin or particular
currency note given to a debtor would no longer be
D
available. That however does not mean that the lender .
does not have any right to monies. What is payable is the
loan i.e. the amount which has been lent. The right which
the creditor has is not a 'right to recover' the money. The
creditor has the title/right in the money itself. An equivalent
E amount is recoverable by him and the title in any equivalent
amount remains with the lender. Thus the property which
a notified party would have is not the right to recover but
the 'title in the money itself. Thus under Section 3(3) what
would stand attached would be the title/right in the money
F itself. Of course what would be recoverable would be an
equivalent of that money. Once the money stands attached
then no application is required to be made by any parties
for recovery of that money. It is then the duty of the court
to recover the money. No period of limitation can apply to
G any act to be done by a court. Therefore in all such
applications the only question which remains is whether on
the date of the notification the right in the property existed.
If the right in the property existed then irrespective of the
fact that the right to recover may be barred by limitation
H there would be a statutory attachment of that property.
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 269
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
Once there is a statutory attachment of that property the A
court is duty-bound to recover it for the purposes of
distribution. There can be no period of limitation for acts
which a court is bound to perform. In this case since the
court is compulsorily bound to recover the money there can
be no limitation to such recovery proceedings. To be· B
remembered that Section 3(3) as well as Section 13
provide that provisions of the said Act would prevail over
any other law. This would include the Limitation Act.
36. We respectfully agree with the said view.
c
42. Only in the event, all the claims as provided for under
Section 11 of the said Act are fully satisfied, the amount
belonging to the notified person can be directed to be
released in his favour or in favour of any other person."
D
29. The same position is reiterated in para 56 of the
judgment in Jyoti Harshad Mehta's case (supra) wherein this
Court held that,
"...... It is true that to such an extent all properties would
be liable to be sold which are needed for redemption and E
not beyond the same. What should be kept uppermost in
the mind of the Court is to see that the liabilities are
discharged and not beyond the same. It is with that end in
view that the powers of the Special Court contained in
Sections 9A and 11 must be construed." F
30. Whether there are sufficient provisions for pre and
post decisional hearing thereby ensuring Rules of Natural
Justice?
Section 3(2) of the Special Courts Act confer power to G
Custodian to notify a person in the Official Gazette on being
satisfied on information received that such person was involved
in any offence relating to transactions in securities during the
statutory period 01.04.1991 to 06.06.1992. Though Mr. Syed
H
270 SUPREME COURT REPORTS [2011] 6 S.C.R.
A contended that the appellants are entitled to hearing even at
the stage of Section 3(2), we are unable to accept his claim.
Section 3(2) does not give any right of personal hearing to the
person being notified. In the absence of any such right there is
no pre-decisional hearing The provisions of the Act do not
B provide for a pre-decisional hearing before n:>tification but
contains an impeccable milieu for a fair and just post decisional
hearing. The fact that it does not provide for a pre-decisional
hearing is not contrary to the rules of Natural Justice because
the decision of the Custodian to notify does not ipso facto takes
c away any right of the person thus notified or imposes any duty
on him. This also has to be read in the light of the judgment of
Swadeshi Cotton Mills v. Union of India, (1981) 1 SCC 664
which reads as under:
"Rules of natural justice are not embodied rules. Being
D means to an end and not an end in themselves, it is not
possible to make an exhaustive catalogue of such rules.
But there are two fundamental maxims of natural justice viz.
(i) audi alteram partem and (ii) nemo judex in re sua. The
audi alteram partem rule has many facets, two of them
E being (a) notice of the.case to be met; and (b) opportunity
to explain. This rule cannot be sacrificed at the altar of
administrative convenience or celerity. The general
principle-as distinguished from an absolute rule of
uniform application-seems to be that where a statute
F does not, in terms, exclude this rule of prior hearing but
contemplates a post-decisional hearing amounting to a full
review of the original order on merits, then such a statute
would be construed as excluding the audi alteram partem
rule at the pre-decisional stage. Conversely if the statute
G conferring the power is silent with regard to the giving of
a pre-decisional hearing to the person affected and the
administrative decision taken by the authority involves
civil consequences of a grave nature, and no full review
or appeal on merits against that decision is provided,
H courts will be extremely reluctant to construe such a
RASILA S. MEHTA v. CUSTODIAN. NARIMAN . 271
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
statute as excluding the duty of affording even a minimal A
hearing, shorn of all its formal trappings and dilatory
features at the pre-decisional stage, unless, viewed
pragmatically, it would paralyse the administrative
process or frustrate the need for utmost promptitude. In
short, this rule of fair play must not be jettisoned save in B
very exceptional circumstances where compulsive
necessity so demands. The court must make every effort
to salvage this cardinal rule to the maximum extent
possible, with situational modifications. But, the core of it
must, however, remain, namely, that the person affected c
must have reasonable opportunity of being heard and
the hearing must be a genuine hearing and not an empty
public relations exercise."
(Emphasis supplied)
D
31. Attachment of property is a natural consequence of
notification and not sale of the property. The power to order a
sale of the property lies only with the Special Court under
Section 11 and at this instance where the notified person can
be adversely affected, Section 4(2) provides that any person E
aggrieved by the notification can file a petition objecting the
same within 30 days of the date of the issuance of the
notification. The Special Court is presided over by a sitting
Judge of the High Court. All material before the Custodian is
placed before the Special Court which independently analyses F
all the material while dec:ding the application filed by the
notified party challenging the notification. This amounts to post
decisional hearing satisfying the principles of natural justice.
Also a pre-decisional hearing would frustrate the entire purpose
of the Act. If there is time given to Show Cause why a person G
should not be notified, that time could practically be utilized to
further divert the funds, if any, so that it becomes even more
difficult to trace it.
32. Notif; ~ation of the appellants:
H
272 SUPREME COURT REPORTS [2011) 6 S.C.R.
A As stated earlier that some time in 1992, it was noticed
that frauds and irregularities involving huge amounts of money
running into several thousand crores were commited by certain
financial brokers and financial institutions. The Central
Government, to combat with the situation, promulgated an
B ordinance on 6.6.1992 known as the Special Court (Trial of
Offences relating to Transactions in Securities) Ordinance,
1992. On 08.06.1992. Mr. Harshad S. Mehta (since deceased)
and 28 members of his group including his family members/
entities were notified under the Ordinance. It is pertinent to
C mention here that the complete details of the transactions of
Harshad Mehta were not known. At that time the appellants -
Mrs. Rasila Mehta (mother of Harshad Mehta) and Mrs. Rina
Mehta (sister-in law of Harshad Mehta and wife of Sudhir
Mehta) were not notified because their involvement and
diversion of funds to them was not clear. The Reserve Bank of
D India constituted the Janakiraman Committee to look into the
diversion of funds. The Janakiraman Committee in March 1993
brought out the 4th Interim Report. Para 2.3 of the said report
reads as under:
E "2.3 In the names of HSM and his family members, the
bank's Adayar branch, Madras granted 19 individual
overdrafts against shares. Significantly, all the current
accounts, which were opened between April and June,
1991 were introduced by the same person viz. Branch
F Manager Shri Bakshi Varunkumar, Adayar branch,
Madras and a cheque book was issued only in the name
of one account holder, Smt. Jyoti H. Mehta. All the
overdrafts limits were sanctioned between 20 April. 1991
and 24th July, 1991 and on the very day of sanction, the
overdrafts amounts were transferred to Smt. Jyoti H.
G
Mehta's current account for operational convenience. This
facility also appears to have been extended, as HSM was
a 'significant customer'."
Similarly, the Joint Parliamentary Committee established ·
H to enquire into the irregularities in securities and bank
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 273
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
transactions also found out the involvement of the family P.
members of Harshad Mehta. Para 17.21 of the Report reads
as under:
"17.21 In January, 1992 Smt. Rasila Mehta, mother of HSM
and Shri Hitesh Mehta, brother of HSM received US $ 5 8
lakhs each from Popular Espanol Las Palmas, Spain on
the advice of Giorgia Pvt. Ltd., New York under the
Immunity Scheme, 1991. Smt. Rasila Mehta also received
US$ 96, 331 as per advice of Morgan Guaranty Trust Co.
New York also under the Immunity Scheme, 1991. As Shri C
Niranjan J Shah had narcotic and hawala business links,
it was suspected that the said remittances were arranged
through him."
In accordance with the recommendations of the Joint
Parliamentary Committee a group known as Inter Disciplinary D
Group (IDG) for tracing the end use of funds was set up by the
Reserve Bank of India. The findings of the IDG read as under:
"3.5.2 On the basis of reliable and specific information,
action under Section 132 of the Income Tax Act was taken E
on 23.07 .1993, during which shares valued at Rs. 22.69
crores were seized. Records of Income Tax investigations
indicated that investment in these shares had been made
in the names of dummy companies and individuals at the
behest of the HMG. About 30 defunct Private Limited F
Companies appear to have been 'purchased' and the
shares transferred in their names. Further enquiries led to
identification of further 50 dummy companies and over 40
individuals. Enquiries have revealed that they were
apparently fronts, since they were located in chawls, shops,
etc. and prima facie could not have been made such huge G
investments. Considerable assistance was made
available by CBI in identifying employees and associates
ofHMG.
3.5.3 Action under Section 132 was thereafter conducted H
274 SUPREME COURT REPORTS [2011) 6 S.C.R.
A on 27.08.1993 at more than 30 premises. The search
confirmed that the shares had been transferred in the
names of these companies and individuals by the HMG.
Documents seized indicated the possibility of investments
of market value of over Rs. 50 crores in the names of Smt.
B Rasila Mehta, mother of Harshad Mehta and Smt. Reena
Mehta, wife of Sudhir Mehta. Statements recorded of
various persons confirmed that they had merely allowed
their names as benamidars of HMG. In addition, persons
found in premises given as addresses of various
c companies stated that they had allowed their premises to
be used as mailing addresses, and no companies existed
there. They also stated that the shares received at these
addresses were handed over mainly to one Shri Vinod
Mehta, an uncle of HSM, who died in February, 1993.
Subsequent to his death, these were handed over to his
D
wife, Smt. Vanita Mehta who confirmed that her husband
was receiving these shares, and that after his death she
had, on instructions from HSM, handed them over to his
representative. The involvement of the HMG in the matter
of transfer of shares in benami names was corroborated
E by recorded statements of HSM and Sudhir Mehta. The
total shareholding of HMG in benami shares identified so
far comes to 81.65 lakh shares in 131 companies of
market value (as in June, 1995) of Rs. 453 crores.
F 4.7 Problems in tracing:
4. 7 .1. The identification of end use of funds was a
laborious process involving examination and correlation of
every investment transaction of the brokers and banks. The
following were among the more important constraints:
G
Entries in the books of one counterparty
bank did not correspond with that of the other
counterparty.
H There was mismatch between seller and
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 275
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
payee or buyer and payer. A
The investment records did not depict the
true character of the deals. Actual recipient
and issuer of cheque were not known.
Often, and more particularly in the case of B
HMG, entries in broker's current account at
SBI, Bombay only revealed the net effect of
all bankers cheques received and issued on
his behalf on a particular day. On days when
the value of cheques issued equaled the C
value of cheques received there was no entry
in his current account.
Transactions with banks/financial institutions
whose investment account was maintained
0
by the same routing bank was difficult to
analyze as the payments and receipts were
netted and only the net effect reflected in the
bank accounts. One to one correspondence
between security transactions and payments
was difficult to establish as entries did not E
reflect true details of the transactions.
Accounts of the brokers had not been
prepared."
F
33. Mr. Syed heavily contended that the Custodian and the
Special Court ought not to have based reliance on these
reports since the appellants were not afforded opportunity to ·
go through the contents of the same. This objection is liable to
be rejected. First of all, there is no criminal prosecution against G
these appellants and in the event of prosecution, all documents
relied on by them could be furnished. These are all materials
from various bodies constituted by the Reserve Bank of India/
Government of India about the scam created at the instance of
Harshad Mehta. These bodies consist of experts in various H
276 SUPREME COURT REPORTS [2011) 6 S.C.R.
A fields, particularly, from the financial side. The Special Court
is fully justified in relying on these Reports.
34. This Court in Childline India Foundation & Anr. Vs.
Allan John Waters & Ors., JT 2011 (3) SC 750, while
B considering the plight of street children in Bombay, heavily
relied on the evidence of PW-2 & PW-3, who were the
members of NGOs, who highlighted the plight of street children
in a shelter home at Bombay. Similar objection was raised in
that case about the admissibility and reliability of those
witnesses. Rejecting the said objection, this Court held that
C though based on the statements of PWs 2 & 3, members of
NGOs the accused persons cannot be convicted but taking into
account their initiation, work done, interview with the children,
interaction with the children at the shelter homes which laid the
foundation for the investigation and to that extent their
D statements and actions are reliable and acceptable. By
applying the same analogy, inasmuch as the scam relates to
accounts and money transactions by way of transfer of shares
through nationalized banks and financial institutions, various
committees were appointed by the Union of India which
E collected relevant materials and unearthed the persons
involved, hence the Custodian and the Special Court are
justified in relying on those reports in order to ascertain the
correctness or otherwise of the transactions. Accordingly, we
reject the objection of the counsel for the appellants relating to
F the report of various Committees mentioned above.
35. The Special Court, vide its order dated 03.08.1993
allowed the application of the Custodian for appointing Auditor.
The Minutes of the Order read as under:
G "1. Order in terms of prayer (a)
2. Order in terms of prayer (b) & (c), Respondents 2 and
3 to furnish the information within 6 weeks.
3. To enable the 1st Respondent to furnish the said
H
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 277
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
information one or more of the following persons, viz., Mr. A
Harshad Mehta, Mr. Ashwin Mehta, Mr. Pankaj Shah and
· Mr. Atul Parekh and a computer specialist will be entitled
to attend the offices of the 1st Respondent between 1O
a.m. to 6 p.m. A representative of the Custodian and the
C.B.I. will be present for which prior intimation will be given. B
The said persons will be entitled to operate the computers
in the presence of the officers of Respondent Nos. 2 and
3 and if necessary hire a personal computer to compile
the requisite information.
4. The Custodian will appoint one or more auditors to C
prepare and audit the accounts of the 1st Respondent
from 1st April, 1990. The auditors will be entitled to obtain
all requisite information and documents from the
Respondents or any other person in possession of the
same. They will be entitled to use the computers of D
Respondent no.1 and the requisite hard discs and floppy
discs will be made available to the auditors by
Respondents No. 2 and/or 3. The remuneration of the
auditors will be determined by the Custodian. The persons
named in Clause 2 will assist the auditors. The auditors E
will complete the work and submit a report to court as
expeditiously as possible and preferably within 3 months.
The auditors will be entitled to furnish reports from time to
time as the work is completed.
F
5. The remuneration payable to the auditor to be released
from the bank account of the Respondent No.1.
6. Liberty to apply."
36. The Special Court vide its order dated 03.02.1994 G
appointed M/s Kalyaniwalla & Mistry, M/s Kapadia Damania
& Co. and M/s Natwarlal Vepari & Co., Chartered Accountants
firms for the purposes of preparing Statements of Accounts and
liabilities of the notified parties i.e. the Harshad Mehta Group
for the period 01.04.1990 to 08.06.1992. H
278 SUPREME COURT REPORTS [2011) 6 S.C.R.
A 37. It was the grievance of the Custodian that the notified
parties were not at all cooperating in the process of auditing.
The accounts of the notified parties where significant diversion
of funds had taken place were not completed due to non-
cooperation of members of M/s Harshad Mehta Group. When
B their non-cooperation was brought to the notice of the Special
Court, the members of the Harshad Mehta Group had given an
undertaking to fully cooperate with the Auditors. Rasila S.
Mehta, the appellant herein had filed an application being M.A.
No. 467/1999 for lifting the attachment over assets which she
c was owning jointly with the other members of the family. In the
said application, the Custodian filed a reply highlighting the
complete non-cooperation of the group in completing the
accounts.
38. The important aspect is that the appellants have not
D explained the source of their income. The outstanding Income
tax from the appellants for the Assessment Years 1988-89 to
1993-94 is as under:
1988-89 Rs.2,005
E
1989-90 Rs. 0
1990-91 Rs.2,54,595
1991-92 Rs.2,65,38,345
F
1992-93 Rs.11,55,28,951
1993-94 Rs.4,46,40,586
The appellants are house-wives having no independent source
G of income. It is impossible for such persons to have such huge
amounts of money unless they were the beneficiaries of monies
diverted by late Harshad Mehta and his other family members
who were notified and firms belonging to the Harshad Mehta
Group. The appellants have not been able to reveal their source
H of income either to the Custodian or to the Income Tax
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 279
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
authorities. A
I
1
39. It is relevant to point out that in a letter dated
..
22.03.1996 addressed to the Assistant Commissioner of
Income Tax the appellant - Rasila P. Mehta has stated as
under:
B
"3) Please be.informed that as far as my source of funds
·is concerned for making investments or taking trading
positions to the extent the funds are required the same are
from the following:
c
(a) Capital plus profits
(b) Borrowings
(c) Proceeds from sale of shares and debentures.
0
4. As far as borrowings are concerned, the same is
resorted in two ways. I have obtained loans from my family
members, particularly, Shri Harshad S. Mehta which is as
and by way of monies advanced to me through cheques
or payments made on my behalf. The other way of E
borrowing is through enjoying a running current account
with the brokerage firms in my family of Mis Harshad S.
Mehta, Mis Ashwin S. Mehta and M/s Jyoti Mehta which
are partly paid-unpaid. Under this arrangement for
transactions undertaken by me at these respective F
brokerage firms my account is debited and credited for
each and every transaction, i.e. for every purchase made
by me my account gets debited and for every sale effected
by me my account with these brokerage firms gets
credited. I state that barring a few exceptions payments G
for these transactions have not been exchanged on a
trapsaction to transaction basis and the account is in the
nature of a running account. I state that for the borrowings
effected under both the methods. I have agreed tci pay
interest to the lender. I state that the same is computed
on the basis of deliveries performed for purchase and sale H
280 SUPREME COURT REPORTS (2011) 6 S.C.R.
A of shares. I state that in cases where I have purchased the
shares for delivery and the delivery has not been tendered 1
to me, for the purposes of computation of interest the debit
will not be reckoned. I say that thus on the net outstanding
balance after giving credit to each party on account of non-
B delivery of share the amount payable at the end of month
is arrived at which is mentioned for the computation of
interest (not on compounded basis). I state that as such
interest is payable on the amounts borrowed by me and 1
the same constitutes my expense. I humbly submit that this ,
c expense is allowable as a deduction from my taxable
income. In support of my above and other related
contentions I am also pleased to enclose confirmation
letters of the three brokerage firms of Mis Harshad S.
Mehta, Mis Ashwin S. Mehta and Mis J.H. Mehta. I further
submit that due to course of events and multiple raids and
D
our groups accounting system having gone haywire and
the delivery status of all the transa~tions remaining
unascertained we have not been able to precisely compute
my interest liability for the earlier as well as the present
year.
E
5. I state that I follow an accrual method of accounting for
all my income as well as expenses which system of
accounting is being followed by me for a number of years.
I state that pending finalization of my payable figure for
F which effort is being made to arrive at the figure and on
the basis of the minimum amount due by me I have made
the provision of interest payable by me in my books of
accounts and the extract of my account in this regard is
being forwarded separately to your kindself. I submit that
G since my books of accounts are in the process of being
drawn I am not in a position to make a provision of the
precise figures of interest amo.unt much as I would like to
do. I submit that in this regard the respective brokerage
firms have to assist and furnish substantial particulars. I
H further state that the provision made by me is in fact on a
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 281
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
conservative basis though the interest payable by me A
would be higher that the provision. I humbly request your
kindself to take note of above and grant me a deduction
of the same from the income that your kindself is arriving
for the present year. In case your kindself is not inclined
to accept my submissions or allow me the deduction of B
above expenses then kindly give me an opportunity to
make further representation in this regard more so as it
vitally affects determination of my taxable income".
40. A perusal of the above letter shows that there was no C
proper maintenance of accounts and there was no cooperation
at all. Even, late Harshad Mehta in his letter and declarations
to the Income Tax Authorities in which the appellant Rasila
Mehta is a signatory had admitted that the family is a joint Hindu
family where all are living together and that the business is such
that it requires very c1ose control at the operational level. D
41. It is relevant to note that in a letter dated 21.01.1991
late Harshad S. Mehta informed the following particulars about
source of payments for acquisition of flats in Madhuli, Worli by
the entities of his family to the Deputy Director of Income Tax E
(Investigation), Mumbai. ·
"My transactions in the Capital and Money markets,
especially the latter, result in a continuous stream of funds
and securities moving in and out. These transactions result
in large but transient positive balances in my bank F
accounts on any given day. Running up of such current
liabilities constitutes payables to my clients/constituents
which include, inter alia, corporates and banks. Such
funds, though transient in nature, tend to acquire semi-
permanency in view of the daily operations in the Money G
Market and result in a pool of funds float. This float of funds
has been utilized for acquisition of flats as well as for
making investments in shares, pending accrual of income,
in future, when such liabilities are automatically washed off.
In point of fact, deferred and future incomes have been H
282 SUPREME COURT REPORTS [2011] 6 S.C.R.
A financed in advance by the float. I now enclose, on behalf
of my family and myself details of payments made to Mis 1
Crest Hotels Pvt. Ltd. the owners of the 9 (nine) flats, at
"Madhuli", Worli in the firsthalf of 1990 and extracts of the
relevant Bank Accounts of the concerned members of my
B family, reflecting the payments and corresponding receipts
in the bank. Details of transactions which resulted in credit
balances in my accounts on those particular dates on which
the payments for these flats were effected are also
enclosed. You will appreciate that all my family members
c have been financed through my business operations."
42. Another important aspect relates to final declaration
made by Harshad S. Mehta and all his family members
including Rasila S. Mehta under Section 132(4) of the Income
Tax Act, 1961. The following material from his statement dated
D 24.01.1991 is relevant:
"First of all, I would like to put on record a few things about
my family members. I take justifiable pride in asserting that
it is the combination of the efforts of all the members of
," E my family that has been responsible for our expansion and
growth in terms of volume since 1988. Each and every
member of the family is taking charge of some or the other
vital functions in the organization creating controls and
checks which are so very essential for generating,
F maintaining and reaping the fruits of any business activity.
Almost all of them are very well attained and qualified and
do business in their individual capacities and possess a
sound and thorough knowledge of Investments, Finance
and are authorized agents of the Unit Trust of India or
G members of the recognized Stock Exchange in Bombay.
All of them take active interest in Investments in the Stock
Market. Ours is an investor family committed to growth
through capital appreciation and holds a mix of both short
term and long term portfolio of shares. In brief, we owe our
success to our coordinated endeavours and investment
H
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 283
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
philosophy. The sharp growth in income in·the last two A
years from 1988 is only after entering the Money Market.
Our family is run as a Joint Hindu Family. We, all live
together. Our joint effort is one of the most important factors
8
. that has contributed to the growth of our business. Our
business is such that it requires very close control at the
operational level. The different members of the family have
taken charge of various areas of crucial importan~e in OlJr
business e.g. Research, On-the-floor, trading, dealing in C
Money Market, Share Handling, Accounts, Finance, etc. My
wife Mrs. Jyoti Mehta and Ashwin's wife Mrs. Deepika
Mehta while handling other functions in the office, also work
as authorized clerks and hold the necessary badge for entry
into the trading floor of the Stock Exchange, Bombay......
• D
43. It is also useful to refer the letter of Smt. Rasila S.
Mehta dated 25.06.2007 addressed to Mukund M. Chitale &
Co., Chartered Accountants, Mumbai wherein she admitted
that during the relevant period i.e. in 1990s she and all her E
family members actively associating in the brokerage firms and
companies promoted by them jointly. She also admitted that
she had a running account with brokerage firms ofM/s Harshad
S. Mehta, Mis Ashwin Mehta and Mis J.H. Mehta. ·
44. All the above details clearly show their ass.ociation with F
brokerage firms being handled by Harshad S. Mehta and also
their interest and entitlement in the transactions of their joint
family business.
. 1
45. The firms of M/s Kalyaniwalla & Mistry; M/s Kapadia G
Damania & Co. and Mis Natwarlal Vepari & Co. did not
complete the audit and as permitted by the Special Court, vide
Order dated 16.10.2003, the Custodian was permitted to
appoint another Auditor. The Custodian, vide its Order dated
05.11.2003, appointed Mis Vyas & Vyas Chartered H
284 SUPREME COURT REPORTS [2011] 6 S.C.R.
A Accountants to audit the accounts and also to investigate
fraudulent and illegal transactions entered into by Mis Harshad
S. Mehta Group and his notified entities as referred to in
Janakiraman Committee Report, IDG Report and reports
based on the audit of the banks conducted by the RBI and the
B charge-sheet filed in the Special Court. Mis Vyas & Vyas
submitted their report in respect of Harshad S. Mehta Group.
Even in the said report, Vyas & Vyas pointed out the complete
non-cooperation on the part of the appellants and the group
while auditing the accounts. In the report, on review of un-audited
c accounts of M/s Harshad S. Mehta regarding the diversion of
funds it was observed as under:
"12 Diversion of fund&
12.1 HSM diverted his funds to his family members as and
D when he received funds generated form PSU banks and
• financial institutions. We have drawn a statement of funds
diverted to family members and his associate companies
in Annexure No. 7. We have also checked these figures
from the audited reports of his family members and
E associate companies and comparative chart is enclosed
In Annexure No. 6A.
12.2 Further we studied the end use of funds diverted to
family members and associate companies of HSM group
and found that either funds were used for purchase of
F immovable properties or for purchase of shares and
securities. HSM has not charged interest fror.i his family
members and his associate companies. The details of end
use (broadly) by HSM group are also enclosed.
G 12.3 It is a case of one man show i.e. Mr. H.S. Mehta, who
generated funds from PSU banks and financial institutions
and diverted funds to his group entities. There is no ban
on payment/receipt of funds from one family member to
another member of the family. But then all prudential norms
H should have been followed. In this case no interest was
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 285
BHAVAN, MUMBAI [P. SATHASIVAM, J.)
charged/paid and there are huge differences in the A
balances of both the books.
12.4 The concept of corporate entity was evolved to
encourage and promote trade and commerce but not to
commit illegalities or to defraud people where therefore i:]
the corporate character is employed for the purpose of
committing illegality or for defrauding other the corporate
character should be ignored and will look at the reality
behind the corporate veil.
12.5 We have found that these corporate bodies are C
merely cloaks behind which lurks HSM and/or member of
his family are involved and the device of incorporation was
really a ploy adopted for committing illegalities and/or to
defraud revenue and other people. Finally to get protection
by law, in case HSM gets exposed the property belonging D
to his family members may be protected.
12.6 Further we have studied the accounts of Smt. Rasila
Mehta and Reena Mehta who is not notified parties and
their accounts were not subject to audit. The total balances E
outstanding in the books of M/s HSM of both the entities
are as under as on 8/6/92:
Smt. Rasila Mehta 10,82,65,860.74 Dr
Smt. Reena Mehta 6,33,35,834.69 F
We are enclosing the copies of accounts of Smt. Rasila
Mehta and Reena Mehta appearing in the books of M/s
HSM. From the accounts we observed that M/s HSM paid
a sum of Rs. 30 Lacs on 16th April 1990 and a sum of
Rs. 1259000/- on 18th April 1990 to Rasila Mehta. These G
are the dates when other members of the family purchased
flat in 'Madhuli'. Therefore in our opinion these funds were
diverted by Mis HSM to Smt. Rasila Mehta (mother) for
purchase of flat in 'Madhuli'. Further we have also observed
that Mis HSM debited the account of Smt. Rasila on H
286 SUPREME COURT REPORTS (2011) 6 S.C.R.
A account of purchases of shares in different companies.
Similarly in r.ase of Smt. Reena Mehta huge quantity of
share were purchased by her, which were funded by Mis
HSM. Copy of accounts of Mrs Rasila & Mrs Reena Mehta
is enclosed in annexure No.SE
B
12.7 The above funds diverted by HSM to his family
members were certainly for purchase of immovable
properties and shares. Therefore all assets so called
belonging to above persons should go back to HSM only."
C 46. On a complaint, filed by Canbank Financial Services
Ltd. (wholly owned subsidiary of Canara Bank), the Custodian
notified the Appellants on 04.01.2007. The appellants filed
petitions challenging the order of notification under Section 4(2)
of the Act. The Special Court looked into all the materials
D including the Audit Report submitted by Mis Vyas & Vyas. A
summary of the accounts produced by M/s Vyas & Vyas is as
under:
Ledger Account of Mrs. Rasila S. Mehta for the period
E 1.4.1991 to 8.6.1992 in the books of accounts of various
entities of Harshad Mehta Group.
SUMMARY
Mis Harshad S. Mehta
F Opening Balance as on 01.04.1990
ADD: 3227047.30
(i) Shares purchased 275393709.50
G (ii) Funds transferred 110184616.44
Total debits 388805373.24
..
LESS CREDITS:
H 1990-91 71135919.00
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 287
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
1991-92 195090538. 50 A
8TH June 1992 16948055.00 283174512.50
Debit balance as on 08.06.1992 105630860.7 4
ADD: B
Loans & Advances due to Mis 2635000.00
Harshad S. Mehta as per Balance
Sheet as on 08.06.1992.
c
Total Debits 108265860.7 4
Mr. Harshad S. Mehta
Opening Balance as on 01.04.1991 NIL
D
ADD:
(i) Shares purchased NIL
(ii) Funds transferred 5000000.00
Debit balance as on 08.06.1992 5000000.00 E-
LESS CREDITS:
1991-92 NIL
8TH June 1992 NIL F
Total Debits 5000000.00
M/s J~oti H. Mehta
Opening Balance as on 08.06.1992 G
As per client control - AR summary 117899544.00
ADD:
(i) Interest receivable (as per
H
288 SUPREME COURT REPORTS (2011) 6 S.C.R.
A Annexure E of Balance Sheet) 2500000.00
Total Debits 120399544.00
Mrs. Jyoti H. Mehta
B Opening Balance as on 01.04.1990 179550.00
ADD:
(i) Shares purchased NIL
c (ii) Funds transferred 18000.00
Total Debits 197550.00
LESS CREDIT:
D Debit balance as on 31st March 1991. NIL
The balance is as per Trial balance as
on 8th June, 1992. 197550.00
M/s Ashwin S. Mehta
E Opening Balance as on 01.04.1990 117756.00
ADD:
(i) Shares purchased 149166082.25
F
(ii) Funds transferred 300.00
Total debits 149048626.25
LESS CREDITS:
G
1990-91 88034149.00
1991-92 47414656.84
8TH June 1992 649373.00 136098178.84
H
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 289
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
Debit balance as on 08.06.1992 12950447.41 A
Mr. Ashwin S. Mehta
Opening Balance as on 01.04.1991 NIL
ADD: B
(i} Shares purchased 204085.50
(ii} Funds transferred NIL
Total Debits 204085.50 c
Less Credits NIL
Total Debits 204085.50
Mrs. Deepika A. Mehta
D
Opening Balance as on 08.06.1992 20500.00
(As per Trial Balance of
Mrs. Deepika A. Mehta)
Ledger Account of Mrs. Rina S. Mehta for the period from E
1st April, 1990 to 8th June, 1992 in the books of accounts
of various entities of Harshad Mehta Group:
SUMMARY:
Mis Harshad S. Mehta F
Opening balance as on 01.04.1990 NIL
ADD:
(i) Shares purchased 72918112.75 G
(ii) Funds transferred 32239980.94
Total Debits 105158093.69
LESS CREDITS: H
290 SUPREME COURT REPORTS [2011) 6 S.C.R.
A 1990-91 NIL
1991-92 41822259.00 41822259.00
Debit Balance as on 08.06.1992.
The balance is the same as on 31.03.1992
B (as per the copy of client control accounts
as on 08.06.1992.) 63335834.69
Mr. Harshad S Mehta
Opening balance as on 01.04.1991 NIL
c ADD:
(i) Shares purchased NIL
(ii) Funds transferred 3500000.00
D
Total Debits 3500000.00
LESS CREDITS:
NIL
E
Total Debits 3500000.00
Balance as on 08.06.1992
is the same as on 31.03.1992
(As per trial balance as on 08.06.1992)
F
Mis Jvoti H. Mehta
Opening balance as on 08.06.1992 50757937.00
As per client control - AR Summary
G (extracts of report of M/s Jyoti H. Mehta)
Add: Interest receivable 3000000.00
Total Debits 53757937.00
Mrs. Jyoti H. Mehta
H
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 291
BHAVAN, MUMBAI [P. SATHASIVAM, J.] ·
Opening balance as on 08.06.1992 131000.00 A
(as pretrial balance as on
8th June 1992)
Mis Ashwin S. Mehta
Opening balance as on 01.04.1990 NIL B
ADD:
(i) Shares purchased 102293155.00
(ii) Funds transferred 4929687.50
c
Total Debits 107222842.50
LESS CREDITS:
1990-91 NIL
D
1991-92 50936485.00
Total Debits 56286357.50
Mrs. Deepika A. Mehta
E
Opening Balance as on 08.06.1992 8300:00
(As per Trial Balance of
Mrs. Deepika A. Mehta)
After perusing the Report of M/s Vyas & ·Vyas, the Special
Court came to a conclusion that the appellants are only fronts F
of late Harshad S. Mehta. It further concluded that the appellants
are only housewives and were given loan by the brokerage firms
for purchase of shares. The Special Court, therefore, rightly held
that the money and assets were diverted to the appellants by
the brokerage firms who were notified parties. Mr. Syed G
objected to the order of the Special Court for fully relying on the
Auditor's report. We reject his objection for the following
reasons. First of all, the issue relates to accounting of several
persons. Several volumes of accounts relating to various
members of late Harshad Mehta's family have to be scrutinized. H
292 SUPREME COURT REPORTS [2011) 6 S.C.R.
A The Court and members of the bar are not conversant with the
accounting procedures and in such event assistance from an
established Chartered Accountant Firm is needed. In fact, even
during the course of arguments in respect of questions by the
Court, Mr. Syed himself sought the assistance of persons who
B are conversant with accountancy. In view of complicity in the
matter, there is nothing wrong on the part of the Special Court
getting report from M/s Vyas and Vyas who are recognized
Chartered Accountants. The order of the Special Court does
not suffer from any infirmity and there was sufficient material
c before the Custodian to arrive at a satisfaction that monies had
been diverted by late Harshad S. Mehta to the appellants.
47. Whether the appellants being not involved in
offences in transactions in securities could have been
proceeded against in terms of the provisions of the Act?
D
The contention of the appellants that since they have not
been charged for any offence, they cannot be notified under the
Act. According to the appellants, the phrase "involved in the
offence" could only mean "accused of the offence" and since
E they are not charged with any offence they can not be notified.
In construing the above mentioned words which are used in
association with each other, the rule of construction noscitur a
sociis may be applied. It is a legitimate rule of construction to
construe words in an Act of Parliament with reference to words
F found in immediate connection with them. The actual order of
these three words in juxtaposition indicates that meaning of one
takes colour from the other. The rule is explained differently:
'that meaning of doubtful words may be ascertained by
reference to the meaning of words associated with it. (vide
G Ahmadabad Teachers' Association vs. Administrative Officer,
AIR 2004 SC 1426).
48. Therefore, in the present case the nature of "offence~
in which the appellants are allegedly involved, is to be taken
into consideration. The Act does not create an offence for which
H a particular person has to be charged or held guilty. Thus the
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 293
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
phrase "involved in the offence" would not mean "accused of A
the offence". Also, the appellants could have been reasonably
suspected to have been involved in the offence after
consideration of the various reports of the Janakiraman
Committee, Joint Parliamentary Committee and the Inter
Disciplinary Group (IDG); and also the fact that 28 members B
of the M/s Harshad S. Mehta group including his family
members/entities were notified under the Special Act
Ordinance itself. The above factual matrix was sufficient for the
satisfaction of the Custodian to notify the. Appellants. The
object of the Act is not merely to bring the offender to book but c
also to recover what are ultimately public funds. Even if there
i~ a nexus between a third party, an offender and/or property
the third party can also be notified. The word "involved" in
Section 3(2) of the Special Court Act has to be interpreted in
such a manner so as to achieve the purpose of the Act. This 0
Court in Ashwin S. Mehta vs. Custodian & Ors., (2006) 2 SCC
386 has observed as under:
"Although, we do not intend to enter into the correctness
or otherwise of the said contention of the appellants at this
stage, however, there cannot be any doubt whatsoever that E
they 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 that they
should be accused of commission of an offence as such."
F
49. In Jyoti H Mehta & Ors. vs. Custodian & Ors., (2009)
10 SCC 564, this Court from para 33 to 38 has hel~ that the
Special Court Act is a special statute and is a complete code
in itself. The purpose and object for which it was cre~ted was
to punish the persons who were involved in the act for criminal G
misconduct in respect of defrauding banks and financial
institutions and its object was to see that the properties of those
who were involved shall be appropriat~d for the discharge of
liabilities of not only banks and financial institutions but also
e>ther governmental agencies. In construing the statute of this
nature the court should not always adhere to a literal meaning H
294 SUPREME COURT REPORTS [2011) 6 S.C.R.
A but should construe the same, keeping in view in the larger
public interest. For the said purpose, the court may also take
recourse to the basic rules of interpretation, namely, ut res
magis va/eat quam pereat to see that a machinery must be
so construed as to effectuate the liability imposed by the
B charging section and to make the machinery workable. The
statutes must be construed in a manner which will suppress the
mischief and advance the object the legislature had in view. A ,
narrow construction which tends to stultify the law must not be
taken. Contextual reading is a well-known proposition of
c interpretation of statute. The clauses of a statute should be
construed with reference to the context vis-a-vis the other
provisions so as to make a consistent enactment of the whole
statute relating to the subject-matter. Furthermore, even in
relation to a penal statute any narrow and pedantic, literal and
0 lexical construction may not always be given effect to. The law
would have to be interpreted having regard to the subject-matter
of the offence and the object of the law it seeks to achieve. The
purpose of the law is not to allow the offender to sneak out the
meshes of law. The courts will reject the construction which will
E defeat the plain intention of the legislature even though there
may be some inexactitude in the language used. Reducing the
legislation futility shall be avoided and in a case where the
intention of the legislature cannot be given effect to, the courts
would accept the bolder construction for the purpose of bringing
about an effective result. The courts, when rule of purposive
F construction is gaining momentum, should be very reluctant to
hold that Parliament has achieved nothing by the language it
used when it is tolerably plain what it seeks to achieve.
50. Whether Canfina is a Financial Institution and
G whether the complaint filed by Canfina is invalid?
The complaint has been received from Canfina which is a
100% subsidiary of Canara Bank, a nationalized bank. The
term financial institution has not been defined under the Act. It
became necessary to enact the Special Court Act because of
H
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 295
BHAVAN, MUMBAI [P. SATHASIVAM, J.)
the large scale irregularities which came to light as a result of A
the investigations by the Reserve Bank of India into the affairs
of various banks and financial institutions whose monies were
siphoned out. Thus the Statement of Objects and Reasons
makes it clear that the purpose and the object of the Act was
to recover and return monies to those banks and financial B
institutions from whom the monies were siphoned out. It is thus
clear that the bodies which were sought to be covered were
the banks and financial institutions whose affairs were
investigated into by the Reserve Bank of India. The
investigation was conducted by the Reserve BMk of India c
through Janakiraman Committee; the Joint Parliamentary
Committee, and the Inter Disciplinary Group. The affairs of
Canfina were also investigated by the various committees as
a financial institution. It has come to light that there were large
scale siphoning out of monies from Canfina also as held by the
0
Special Court in its order dated 25.06.1997 in the matter of
Fairgrowth Financial Services Vs. Andhra Bank in Misc.
Petition No. 222 of 1996.
51. It is the argument of learned counsel for the appellants
that Canfina should not be tre~ted as a Financial Institution after E
the rejection of the Reserve Bank of India to consider Canfina
as a Financial Institution. But this straight jacket definition
should be applied to the provisions of other Acts like the Debt
Recovery Act, the Companies Act, the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security F
Interest Act, 2002 etc. The term "Financial Institution" for the
purposes of this Act should be interpreted in accordance with
the Statement of Objects and Reasons of the Act.
52. Thus, at the very inception of this Act are the
investigations by the Re_serve Bank of India and these G
investigations were carried on by the Janakiraman Committee.
The Act was intended to be applied to the workings of the banks
and financial institutions (though not covered by the strict
definition of the term but involved in the securities scam of 1992)
into whose affairs the Janakiraman Committee had H
296 SUPREME COURT REPORTS [2011) 6 S.C.R.
A investigated. Canfina, was one such non-banking financial
institution that Janakiraman Committee had investigated and
thus it was meant to be covered under the Act.
53. These sources of information have been illustrated in
B Rule 2 of the Rules, which reads as under:
"2. Sources of information: The Custodian appointed under
sub-section (1) of section 3 of the Special Court (Trial of
Offences Relating to Transactions in Securities) Act, 1992
(hereinafter referred to as the Act) may entertain for
C consideration any information or complaint in writing
submitted personally or sent by post to him by -
(a) the Reserve Bank of India;
(b) any bank or financial institution
D
(c) any enforcement or investigating agency or department
of the Government;
(d) any officer or authority of the Government;
E (e) any person who is engaged in transactions of securities
as a dealer, agent or broker;
(f) any other person whose rights or interests in securities
are affected:
F (g) any other source including reports and proceedings
before the Special Court established under the Act or any
Court or Tribunal for the time being in force as the
Custodian may deem fit at any point of time.
G Provided that the information or complaint sent by any
person referred to in clauses (e) and (f) shall not be
entertained by the Custodian if it is not accompanied by
an affidavit signed by that person and duly verified by a
Magistrate or a Notary Public."
H Thus the claim of Canfina falls under Section 11 (2)(b) of the
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 297
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
Act and their complaint falls under Rule (2)(b). Thus the fact that A
it was not accompanied by an affidavit signed by that person
and duly verified 1>y a Magistrate or a Notary Public, does not
make it an inapprop'riate complaint for consideration by the
Custodian.
B
54. Further, Rule 3 illustrates situations whereby the
Custodian may reject a certain complaint which is not
accompanied by copies of documents referred to in the
information or complaint, or is vague or does not contain the
name and address of the sender. This rule also does not make
it mandatory on the Custodian to reject a complaint if it does C
not accompany the above details. If the material information or
the documents received by the Custodian are sufficient in his
opinion, to reveal that a person is involved in an offence referred
to in sub-section (2) of section 3 of the Act, he may proceed to
notify the name of the person under that sub-section. Thus the D
satisfaction of the Custodian is of a subjective nature and is
not violative of Natural Justice. The power to deal with the
property ultimately lies with the Special Court.
55. In view of the same, we are in entire agreement with E
the conclusion arrived at by the Special Court and unable to
accept any of the contentions raised by counsel for the
appellants.
56. Claims for maintenance, repair charges, interest
and penalty for belated payment (Civil Appeal Nos. 3377 F
of 2009 and 4764 of 2010)
With regard to the above appeals filed against the orders
of the Special Court approving their report of the Custodian for
realization of certain amounts payable to the Society towards G
repairs and maintenance charges, interest and penalty for
belated payment, learned counsel for the appellants again
raised various objections, inasmuch as the claim of· the
Custodian depends upon the outcome of the other appeals i.e.
Civil Appeal Nos. 2924 of 2008 and 2915 of 2008 and in view H
298 SUPREME COURT REPORTS [2011] 6 S.C.R.
A of our conclusion on these appeals, we are not inclined to go
into all those details once again. Since we agree with the claim '
of the Custodian and various steps taken by him and the ,
ultimate order of the Special Court in the normal circumstance,
present appeals are also to be dismissed. We have already
B noted that Smt. Jyoti H. Mehta and six other family members of
late Harshad S. Mehta were notified under the Act. Upon
enforcement of the aforesaid Act, all the properties of late
Harshad S. Mehta and his family members, including the six
appellants in Civil Appeal No. 3377 of 2009 apart from other
c corporate entities stood attached by the Custodian. As a
consequence thereof, all eight residential properties/flats of the
\
appellants, namely, residential flat Nos. of 32A, 328, 33, 34A,
· 348, 44A, 448 and 45 in the Madhuli Cooperative Housing
Society Limited at Or. Anne Besant Road, Worli, Mumbai
continue to remain attached under the Act by the Custodian.
0
Since the aforesaid eight residential properties remain attached
with the Custodian their upkeep/repair is essential so that the
market value of the said attached properties does not get
depreciated and that they may fetch best market value as and
when the same are permitted to be sold by the Special Court
E so as to pay the liabilities of the Government, Banks, Financial
Institutions as well as other decree holders under the provisions
of Section 11 (2) of the Act.
57. It was highlighted by the Custodian that as per the rules
F and bye-laws of the Cooperative Housing Societies in Mumbai,
which are incorporated under the provisions of the Maharashtra
Cooperative Societies Act, all the owners of the residential
properties/flats, as the members of the Housing Society are
liable to pay such amount as may be determined by the Society
G towards the upkeep, maintenance and repairs of the flats as well
as common areas and amenities in the housing complex. In
view of the same, the Cooperative Housing Societies are
entitled to recover all the arrears and charges from the
members who have not paid the society in time.
H 58. The appellants herein are notified parties who are the
RASILA S. MEHTA v. CUSTODIAN, NARIMAN 299
BHAVAN, MUMBAI [P. SATHASIVAM, J.]
owners of the attached properties and have failed to pay to the A
Madhuli Cooperative Housing Society Limited their contribution
towards the maintenance charges, interest thereon and the
charges incurred towards the repair of the attached property
by the Society. The total dues demanded by Madhuli
Cooperative Housing Society Limited vide its letter dated B
12.03.2009 relating to the eight attached properties in question
is Rs.1,87,97,011/-. The Custodian has furnished break-up of
the same as follows:
"i. Maintenance Charges & Rs. 1,62,80,811-00
Rs. Interest thereon. c
ii. Repairs of Flats. Rs. 25, 16,200-00"
59. Learned counsel for the Custodian submitted that as
per the scheme of the repair and upkeep of the attached
0
properties, the maintenance charges· including the interest for
the delayed payment is to be borne by the notified parties/ ·
entities occupying the attached property, whereas the charges
incurred by the society towards the repair of the attached
properties is to be paid by the Custodian from the attached .
account of the notified parties. Regarding payment of E
maintenance and repair charges, there cannot be any doubt
that the Custodian is liable to pay the same to the society.
However, the Custodian has claimed interest for arrears of
maintenance charges as claimed by the Housing Society.
F
60. In the same way, in Civil Appeal No. 4764 of 2010,
the appellant, namely, Rasila S. Mehta, a notified party who is
the owner of the attached property failed to pay to the Madhuli
Cooperative Housing Society Limited her contribution towards
maintenance charges, interest thereon and also the charges G
incurred by the Society towards repair of the attached property.
The total dues demanded by the Madhuli Cooperative Housing
Society Limited, vide its letter dated 21.06.2010 qua the
attached property is Rs.21,06,230/- and breakup of the same
is as follows:
H
300 SUPREME COURT REPORTS ·· (2011) 6 S.C.R.
A Rs. 2,59,759-00
Rs. 9,57,501-00
Rs. 8,88,970-00"
s 61. As discussed earlier, unless the attached properties
are properly maintained and as per the scheme, the repair and
upkeep of the attached properties are to be followed by the
Custodian and on the orders of the Special Court.
62. It is also brought to our notice that during the course
C of hearing, either before the Special Court or in this Court,
certain amounts have been paid/deposited by the appellant.
Considering the fact that the appellants are agitating the matter
at the hands of the Custodian, the Special Court and before
this Court, we feel that the appellants need not be burdened
D with interest and penal charges for non-payment of
maintenance and repair charges to the society. Accordingly,
while sustaining the claim of the Custodian as approved by the
Special Court in view of the reasons mentioned above, we
clarify that the Custodian is not permitted to collect interest and
E penalty charges from the arrears of maintenance and repair
charges. This position is also clear from the decision of this
Court in Harshad Shanti/a/ Mehta vs. Custodian & Ors, (1998)
5 SCC 1. The Custodian is free to adjust the amounts
deposited by the appellants on the orders of this Court or the
F Special Court. With the above direction, the impugned order
in both the appeals is modified to the limited extent.
63. In the light of the above discussion, we do not find any
merit in Civil Appeal Nos. 2924 of 2008 and 2915 of 2008 and
accordingly they are dismissed. Civil Appeal Nos. 3377 of
G 2009 and 4764 of 2010 are disposed of granting the relief to
the extent mentioned in para 62. No order as to costs in all the
appeals. ·
R.P. Appeals disposed of.
H
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