Rasila S Mehta vs Custodian, Nariman Bhavan, Mumbai

Smt. Rasila S. Mehta ....

Appellant(s)

Versus

Custodian, Nariman Bhavan, Mumbai ....

Respondent(s)

WITH

CIVIL APPEAL NO. 2915 OF 2008,

CIVIL APPEAL NO. 3377 OF 2009

AND

CIVIL APPEAL NO. 4764 OF 2010

J U D G M E N T

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,

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sister-in-law of late Harshad S. Mehta 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

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.

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, 32B, 33, 34A, and 34B on the Third

Floor and 44A, 44B 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.

2 3) Civil Appeal No. 4764 of 2010 has been filed by Smt.

Rasila S. Mehta challenging the order dated 07.05.2010

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.

4) Since all the parties in the above appeals are family

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.

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 also

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

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such transactions 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 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.

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 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

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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

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) 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 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

be filed by the CBI after thorough investigation and trial has

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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 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.

e) On 25.01.1994, an amendment was carried out in the

Act, wherein, Section 9-A was inserted to confer civil

jurisdiction 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 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

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jointly where the appellants are the first holders and their

family members are joint/second holders. Due to the fact that

joint/second holders 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 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 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

which a public notice was published in the newspapers on

06.01.2007.

7 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

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

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 orders

passed on the report submitted by the Custodian, there is no

need to traverse all the details as stated therein.

6) Heard Mr. I.H. 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,

learned counsel for intervenor/State Bank of India.

8 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 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 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 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

affidavit which could not have been relied upon as it is

contrary to proviso to Rule 2 of the Rules.

9 (iv) Reliance on the reports of Joint Parliamentary Committee,

Jankiraman Committee, IDG and Chartered Accountants' by

the Custodian is unacceptable.

(v) Pre-decisional hearing by the Custodian was required to be

given and in the case on hand such opportunity was not

afforded.

(vi) No effective post-decisional hearing as the materials relied

upon was not supplied in time.

(vii) The Special Court erroneously held the transaction to be

benami in general on the basis of Chartered Accountants'

reports without examining individual transactions.

(viii) The onus to establish the validity, correctness, legality,

propriety of the notification order is on the Custodian but

wrongly shifted on the appellants.

(ix) Satisfaction of Custodian while passing an order of

notification should be objective and based on materials as

provided in the Rules.

(x) The Special Court erroneously held that the meaning of the

phrase "involved an offence" has attained finality by this

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Court, though the said question was left open. In any event,

the case of the Custodian was that a sum of Rs. 50 crores was

diverted by M/s Harshad S. Mehta to the appellants during

the period 01.04.1990 to 06.06.1992. In such event, monies

transferred/diverted from the banks/financial institutions can

only be recovered from the appellants and nothing more.

(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 Shantilal Mehta vs.

Custodian and Ors. (1998) 5 SCC 1.

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 relevant provisions submitted that:

(i) The impugned order of the Special Court is valid and the

appellants have not made out any case for interference by this

Court.

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(ii) As per Section 4(2) of the Act, it is for the appellants 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

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 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, 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

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out a case before the Special Court that they are not involved

in 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 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 which resulted in huge financial loss to the

banks.

10) Before going into the rival submissions, it is necessary to

trace the history of enactment of the Act. The Special Courts

Act, 1992 (27 of 1992) 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

were found in Government and other securities through

brokers in collusion with Bank employees. This legislation was

13

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

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.

11) Objects & Reasons:

The Statement of Objects and Reasons is as follows:-

"(1) In the course of the investigations by the Reserve Bank

of India, large scale irregularities and malpractices were

noticed in transactions in both the Government and

other securities, indulged in by some brokers in

collusion with the employees of various banks and

financial institutions. The said irregularities and

malpractices led to the diversion of funds from banks

and financial institutions to the individual accounts of

certain brokers.

(2) To deal with the situation and in particular to ensure

speedy recovery of the huge amount involved, to punish

the guilty and restore confidence in and maintain the

basic integrity and credibility of the banks and financial

institutions the Special Court (Trial of Offences Relating

to Transactions in Securities) Ordinance, 1992, was

promulgated on the 6th June, 1992. The Ordinance

provides for the establishment of a Special Court with a

sitting Judge of a High Court for speedy trial of offences

relating to transactions in securities and disposal of

properties attached. It also provides for appointment of

one or more custodians for attaching the property of the

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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 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, 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 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 Court is to

merely interpret the section and in doing so it cannot re-write

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or re-design the section. Keeping all these principles in mind,

let us consider the relevant provisions.

13) Relevant Provisions:

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, debenture

stock, units of the Unit Trust of India or any other

mutual fund or other marketable securities of a like

nature in or of any incorporated company or other

body corporate;

(ii) Government securities; and

(iii) Rights or interests in securities;"

and as per Section 2(d) `Special Court' means "the Special

Court established under sub-section (1) of Section 5." Among

all the provisions Sections 3 and 4 are relevant which read as

follows:

"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

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.

(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

16

immovable, or both, belonging to any person notified under

that sub-section shall stand attached simultaneously 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.

(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

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 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

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 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) 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 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 Court

and by way of an amendment with effect from 25th January,

17

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 Special Court,

an appeal shall lie to the Supreme Court both on facts and on

law. Like Sections 3 and 4, another important 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

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 :-

(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

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."

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, or in any decree or order of any Court, Tribunal or other

18

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 Custodian and

the reasonings of the Special Court in passing the impugned

orders.

15) Discussion:

The objects of the Act are two fold:

(a) to punish the guilty, and

(b) to ensure speedy recovery of the huge amount involved.

"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.

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 provides the

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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

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 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-section (2), any property, movable or

immovable, or both, belonging to any person notified under

that sub-section shall stand attached simultaneously with the

issue of the notification and sub-section (4) of Section 3 makes

it clear that such attached property shall be dealt with by the

Custodian in such manner as the Special Court may direct.

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18) In the Ordinance which preceded the Act, there was 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 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 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 jurisdiction, powers and

authority as were exercisable, immediately before such

commencement by any civil court in relation to the matter

21

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 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.

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 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

be struck down. The Division Bench of the High Court in

paragraph 8 of the said judgment observed as follows:

22 "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 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 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 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

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

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

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

Special Court would have the power to direct the custodian

to release such property from attachment. In the same way,

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 (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

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consequence of the power of the Special Court 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.

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 L.S. Synthetics Ltd. vs. Fairgrowth

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

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.

28. Therein indisputably this Court was referring to a

judgment of the Bombay High Court but did not pronounce

finally on the correctness or otherwise thereof.

29. In Hitesh Shantilal Mehta the Bombay High Court

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 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 fact that the same was the

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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 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:

"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.

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 funds. It

is submitted by the appellants that unless it can be shown

that the properties in question were acquired from the

tainted funds they would be liable to be released from

attachment. It is argued that the fact that the properties had

been purchased much before the securities scam would go

on to show that they had no nexus with the funds diverted

therefrom.

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 clearly 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 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. ......................."

25

22) In Ashwin S. Mehta vs. Custodian & Ors. (2006) 2 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 relating to

transaction of any security may be notified, whereupon all

his properties stand attached. The provision contained in the

Act being stringent in nature, the purport and intent thereof

must be ascertained having regard to the purpose and object

it seeks to achieve. The right of a person notified to file an

application or to raise a defence that he is not liable 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 are required to be discharged, the notified

persons may raise a contention inter alia for the purpose of

establishing that the properties held and possessed by them

are sufficient to meet their liabilities. In terms of the

provisions 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

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

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

property attached cannot be sold or distributed under

Section 11........"

26

24) This Court in Ashwin S. Mehta's case (supra), in

paragraphs 51 and 52 observed as under:

"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.

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 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

attached by the Custodian are used to discharge the liabilities

in full as far as may be in the order prescribed under Section

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 the date of notification all

properties movable, immovable or both, belonging to the

27

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 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

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 period is irrelevant for the attachment of properties

and sale of the same. All properties which are attached would

be liable to be sold for redemption of liabilities till the date of

notification under Section 11 of the Act.

28 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., M/s Harshad S. Mehta, M/s 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

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.

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.

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, observed:

29

"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 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

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 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 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 there would be a statutory

attachment of that property. Once there is a statutory

attachment of that property the 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

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.

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

30

directed to be released in his favour or in favour of any

other person."

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 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."

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

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 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

31

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 pre-decisional

hearing before notification 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 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

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 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 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 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

32

appeal on merits against that decision is provided,

courts will be extremely reluctant to construe such a

statute as excluding the duty of affording even a

minimal 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 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 must have reasonable opportunity of being heard

and the hearing must be a genuine hearing and not an

empty public relations exercise."

(Emphasis supplied)

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

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

all the material while deciding the application filed by the

notified party challenging the notification. This amounts to

33

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 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) Notification of the appellants:

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 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 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)

34

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 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:

"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 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. 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 to

enquire into the irregularities in securities and bank

transactions also found out the involvement of the family

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

lakhs each from Popular Espanol Las Palmas, Spain on the

35

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 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

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

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

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

investments. Considerable assistance was made available by

CBI in identifying employees and associates of HMG.

3.5.3 Action under Section 132 was thereafter conducted 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. 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 companies stated

that they had allowed their premises to be used as mailing

36

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 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 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.

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:

- Entries in the books of one counterparty bank did not

correspond with that of the other counterparty.

- There was mismatch between seller and payee or

buyer and payer.

- 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 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

value of cheques received there was no entry in his

current account.

- Transactions with banks/financial institutions whose

investment account was maintained 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

reflect true details of the transactions.

- Accounts of the brokers had not been prepared."

37

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 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 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

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 though based

38

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

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

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

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:

"1. Order in terms of prayer (a)

39

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

information one or more of the following persons, viz., Mr.

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 10 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. 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

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 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 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.

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

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

40

and liabilities of the notified parties i.e. the Harshad Mehta

Group for the period 01.04.1990 to 08.06.1992.

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

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 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

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:

41 1988-89 Rs.2,005

1989-90 Rs. 0

1990-91 Rs.2,54,595

1991-92 Rs.2,65,38,345

1992-93 Rs.11,55,28,951

1993-94 Rs.4,46,40,586

The appellants are house-wives having no independent source

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 of income either to the Custodian or to the

Income Tax authorities.

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:

"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:

42

a) Capital plus profits

b) Borrowings

c) Proceeds from sale of shares and debentures.

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 borrowing is through

enjoying a running current account with the brokerage firms

in my family of M/s Harshad S. Mehta, M/s Ashwin S.

Mehta and M/s Jyoti Mehta which are partly paid-unpaid.

Under this arrangement for transactions undertaken by me

at these respective 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

for these transactions have not been exchanged on a

transaction 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 to pay

interest to the lender. I state that the same is computed on

the basis of deliveries performed for purchase and sale of

shares. I state that in cases where I have purchased the

shares for delivery and the delivery has not been tendered 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-

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 the same

constitutes my expense. I humbly submit that this 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 M/s Harshad S. Mehta, M/s Ashwin S. Mehta and

M/s J.H. Mehta. I further submit that due to course of

events and multiple raids and our groups accounting system

having gone haywire and the delivery status of all the

transactions remaining unascertained we have not been able

to precisely compute my interest liability for the earlier as

well as the present year.

43 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 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 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

amount 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 further state that the

provision made by me is in fact on a conservative basis

though the interest payable by me 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 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

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 close control at the

operational level.

44 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

(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 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

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 financed in

advance by the float. I now enclose, on behalf of my family

and myself details of payments made to M/s 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 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 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

45 Tax Act, 1961. The following material from his statement

dated 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 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,

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 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 philosophy.

The sharp growth in income in the last two 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 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 importance in

our business e.g. Research, On-the-floor, trading, dealing in

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. ..... ...

... "

43) It is also useful to refer the letter of Smt. Rasila S. Mehta

dated 25.06.2007 addressed to Mukund M. Chitale & Co.,

46

Chartered Accountants, Mumbai wherein she admitted that

during the relevant period i.e. in 1990s she and all her 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 of M/s

Harshad S. Mehta, M/s Ashwin Mehta and M/s J.H. Mehta.

44) All the above details clearly show their association with

brokerage firms being handled by Harshad S. Mehta and also

their interest and entitlement in the transactions of their joint

family business.

45) The firms of M/s Kalyaniwalla & Mistry, M/s Kapadia

Damania & Co. and M/s 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 M/s Vyas & Vyas Chartered

Accountants to audit the accounts and also to investigate

fraudulent and illegal transactions entered into by M/s

Harshad S. Mehta Group and his notified entities as referred

to in Janakiraman Committee Report, IDG Report and reports

47

based on the audit of the banks conducted by the RBI and the

charge-sheet filed in the Special Court. M/s 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 accounts of M/s Harshad S. Mehta regarding the

diversion of funds it was observed as under:

"12 Diversion of funds

12.1 HSM diverted his funds to his family members as and

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 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 immovable

properties or for purchase of shares and securities. HSM has

not charged interest from his family members and his

associate companies. The details of end use (broadly) by

HSM group are also enclosed.

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

should have been followed. In this case no interest was

charged/paid and there are huge differences in the balances

of both the books.

48

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 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 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 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

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

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 are the

dates when other members of the family purchased flat in

`Madhuli'. Therefore in our opinion these funds were diverted

by M/s HSM to Smt. Rasila Mehta (mother) for purchase of

flat in `Madhuli'. Further we have also observed that M/s

HSM debited the account of Smt. Rasila on account of

purchases of shares in different companies. Similarly in case

of Smt. Reena Mehta huge quantity of share were purchased

by her, which were funded by M/s HSM. Copy of accounts of

Mrs Rasila & Mrs Reena Mehta is enclosed in annexure

No.5E

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."

49

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

including the Audit Report submitted by M/s 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 1.4.1991 to

8.6.1992 in the books of accounts of various entities of Harshad

Mehta Group.

SUMMARY

M/s Harshad S. Mehta

Opening Balance as on 01.04.1990

ADD: 3227047.30

i) Shares purchased 275393709.50

ii) Funds transferred 110184616.44

Total debits 388805373.24

LESS CREDITS:

1990-91 71135919.00

1991-92 195090538.50

8TH June 1992 16948055.00 283174512.50

Debit balance as on 08.06.1992 105630860.74

50

ADD:

Loans & Advances due to M/s 2635000.00

Harshad S. Mehta as per Balance

Sheet as on 08.06.1992.

Total Debits 108265860.74

Mr. Harshad S. Mehta

Opening Balance as on 01.04.1991 NIL

ADD:

i) Shares purchased NIL

ii) Funds transferred 5000000.00

Debit balance as on 08.06.1992 5000000.00

LESS CREDITS:

1991-92 NIL

8TH June 1992 NIL

Total Debits 5000000.00

M/s Jyoti H. Mehta

Opening Balance as on 08.06.1992

As per client control - AR summary 117899544.00

ADD:

i) Interest receivable (as per

Annexure E of Balance Sheet) 2500000.00

Total Debits 120399544.00

Mrs. Jyoti H. Mehta

Opening Balance as on 01.04.1990 179550.00

ADD:

i) Shares purchased NIL

51

ii) Funds transferred 18000.00

Total Debits 197550.00

LESS CREDIT:

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

Opening Balance as on 01.04.1990 117756.00

ADD:

i) Shares purchased 149166082.25

ii) Funds transferred 300.00

Total debits 149048626.25

LESS CREDITS:

1990-91 88034149.00

1991-92 47414656.84

8TH June 1992 649373.00 136098178.84

Debit balance as on 08.06.1992 12950447.41

Mr. Ashwin S. Mehta

Opening Balance as on 01.04.1991 NIL

ADD:

i) Shares purchased 204085.50

ii) Funds transferred NIL

Total Debits 204085.50

Less Credits NIL

Total Debits 204085.50

Mrs. Deepika A. Mehta

52

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 1st April,

1990 to 8th June, 1992 in the books of accounts of various entities

of Harshad Mehta Group:

SUMMARY:

M/s Harshad S. Mehta

Opening balance as on 01.04.1990 NIL

ADD:

i) Shares purchased 72918112.75

ii) Funds transferred 32239980.94

Total Debits 105158093.69

LESS CREDITS:

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

(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

ADD:

i) Shares purchased NIL

ii) Funds transferred 3500000.00

Total Debits 3500000.00

53

LESS CREDITS:

NIL

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)

M/s Jyoti H. Mehta

Opening balance as on 08.06.1992 50757937.00

As per client control - AR Summary

(extracts of report of M/s Jyoti H. Mehta)

Add: Interest receivable 3000000.00

Total Debits 53757937.00

Mrs. Jyoti H. Mehta

Opening balance as on 08.06.1992 131000.00

(as pretrial balance as on

8th June 1992)

M/s Ashwin S. Mehta

Opening balance as on 01.04.1990 NIL

ADD:

i) Shares purchased 102293155.00

ii) Funds transferred 4929687.50

Total Debits 107222842.50

LESS CREDITS:

1990-91 NIL

1991-92 50936485.00

Total Debits 56286357.50

Mrs. Deepika A. Mehta

Opening Balance as on 08.06.1992 8300.00

(As per Trial Balance of

Mrs. Deepika A. Mehta)

54

After perusing the Report of M/s Vyas & Vyas, the Special

Court came to a conclusion that the appellants are only fronts

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 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. 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 are conversant with

accountancy. In view of complicity in the matter, there is

nothing wrong on the part of the Special Court getting report

55

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 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?

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 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 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

56

rule is explained differently: 'that meaning of doubtful words

may be ascertained by reference to the meaning of words

associated with it. (vide Ahmedabad 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 a

particular person has to be charged or held 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 Parliamentary Committee and the Inter

Disciplinary Group (IDG); and also the fact that 28 members 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

also to recover what are ultimately public funds. Even if there

57

is 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

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

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."

49) In Jyoti H Mehta & Ors. vs. Custodian & Ors., (2009)

10 SCC 564, this Court from para 33 to 38 has held that the

Special Court Act is a special statute and is a complete code in

itself. The purpose and object for which it was created was to

punish the persons who were involved in the act for criminal

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 appropriated for the

discharge of liabilities of not only banks and financial

institutions but also other governmental agencies. In

58

construing the statute of this nature the court should not

always adhere to a literal meaning 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 valeat quam

pereat to see that a machinery must be so construed as to

effectuate the liability 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

taken. Contextual reading is a well-known proposition of

interpretation of statute. The clauses of a statute should be

construed with reference to the context vis-`-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 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

59

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 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 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

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

the large scale irregularities which came to light as a result of

the investigations by the Reserve Bank of India into the affairs

60

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

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 Bank of India

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

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 treated as a Financial Institution

after the rejection of the Reserve Bank of India to consider

61

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 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 Reserve Bank of India and these

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 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

Rule 2 of the Rules, which reads as under:

62 " 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

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

(c) any enforcement or investigating agency or department of

the Government;

(d) any officer or authority of the Government;

(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:

(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.

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."

Thus the claim of Canfina falls under Section 11(2)(b) of the

Act and their complaint falls under Rule (2)(b). Thus the fact

that it was not accompanied by an affidavit signed by that

person and duly verified by a Magistrate or a Notary Public,

does not make it an inappropriate complaint for consideration

by the Custodian.

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

63

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

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 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 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 of 2009

and 4764 of 2010)

64

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

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

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 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 corporate entities stood attached by the

Custodian. As a consequence thereof, all eight residential

65

properties/flats of the appellants, namely, residential flat Nos.

of 32A, 32B, 33, 34A, 34B, 44A, 44B and 45 in the Madhuli

Cooperative Housing Society Limited at Dr. Anne Besant Road,

Worli, Mumbai continue to remain attached under the Act by

the Custodian. 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 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

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 towards the upkeep, maintenance and repairs

of the flats as well as common areas and amenities in the

66

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.

58) The appellants herein are notified parties who are the

owners of the attached properties and have failed to pay to the

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 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

Interest thereon.

ii. Repairs of 8 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

properties, the maintenance charges including the interest for

the delayed payment is to be borne by the notified

67

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

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.

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

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:

"i. Maintenance Charges Rs. 2,59,759-00

ii. Repairs Rs. 9,57,501-00

iii. Interest Rs. 8,88,970-00"

68

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 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 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 penalty charges from the arrears of maintenance and

repair charges. This position is also clear from the decision of

this Court in Harshad Shantilal Mehta vs. Custodian &

Ors, (1998) 5 SCC 1. The Custodian is free to adjust the

69

amounts deposited by the appellants on the orders of this

Court or the 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

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.

...........................................J.

(P. SATHASIVAM)

..........................................J.

(DR. B.S. CHAUHAN)

NEW DELHI;

MAY 6, 2011.

70