Issues: There were questionable transactions between the appellants and respondent Nos. 6, 7 and 8, the alleged benami companies of respondent No. 2 (notified party)?
Whether the Special Court committed manifest error in facts as well as in law in holding that the appellants herein were the garnishees of respondent No. 2?
Whether the conclusions and findings passed by the Special Court, that the appellant herein failed to prove the fact that amounts had been repaid to the benami companies of the notified person respondent No.2, can be sustained?
In twin appeals under Section 10 of Special Court (Trial of Offences relating to transactions in Securities) Act, 1992 (‘1992 Act’) challenging judgments passed by the Special Court on 11-03-2011, the Division Bench of Pamidighantam Sri Narasimha and Sandeep Mehta, JJ. clarified that the burden of proving debt of benami companies of the notified person lies on the Custodian as per Section 101 of the Evidence Act.
Suman L. Shah v. The Custodian & Ors.
(Civil Appeal No(s). 4577 of 2011)
05 March 2024
[Pamidighantam Sri Narasimha and Sandeep Mehta,* JJ.]
Suman L. Shah v. The Custodian & Ors. is a case involving questionable transactions between appellants and alleged benami companies of respondent No. 2. The Special Court was directed to pay the respective amounts due to the benami companies, but the appellants failed to prove that the amounts had been repaid. The claim was based on a communication from the Income Tax Department, which was not examined in evidence before the Special Court.
The appellants claimed they had borrowed the amounts from respondent Nos. 6, 7, and 8, but the books of accounts were not available due to lapse of time. It was neither a requirement in law nor could it be expected from them to retain the books of accounts after more than a decade of the alleged suspicious transactions.
The conclusions drawn and findings recorded in the impugned judgments passed by the Special Court that the appellants failed to prove the fact that the amounts had been repaid to the benami companies of the notified person-respondent No.2 do not stand to scrutiny and cannot be sustained as being contrary to facts and law. The case is based on the Special Court's judgment and order dated 11.03.2011, which was constituted under the provisions of the Special Court (Trial of Offences Relating to Transaction in Securities), Act, 1992.
The Supreme Court has decided on appeals under Section 10 of the Special Court (Trial of Offences relating to transactions in Securities) Act, 1992. The Act was established to address large-scale irregularities committed by share brokers in collusion with employees of Banks and Financial Institutions (FIs) in relation to transactions in Government/other securities, leading to the diversion of funds from banks/FIs to individual accounts of certain brokers. The Act provided a mechanism to ensure speedy recovery of illegally diverted funds, punish the guilty, restore public confidence in security transactions, and uphold the integrity and credibility of banks and FIs. The period of transactions in securities under the purview was from 1st April, 1991 to 6th June, 1992. A Special Court headed by a sitting Judge of the High Court was established for speedy trial of offences relating to transactions in securities and disposal of properties attached. The Act also provided for appointment of custodians to attach the property of offenders to prevent diversion.
The case revolves around the benami companies owned by respondent No. 2-Pallav Sheth, who illegally parked tainted money from FFSL. The Custodian notified Sheth of the case and declared him insolvent in 2003. The Custodian sought information from the Income Tax Department about Sheth's assets, which revealed that he was the benami owner of the companies. The Special Court, in a miscellaneous application, observed that the companies were owned by Sheth. The Custodian filed several applications for recovery of the money, with the court directing the appellants to deposit the money with the Custodian within two months. The amounts were then paid to the Custodian, and the appellants would be discharged of their liabilities.
Suman L. Shah and Laxmichand Shah instituted Civil Appeal Nos. 4577 and 4583 of 2011, which were dismissed due to non-compliance with the order dated 13th May, 2011. The IAs seeking restoration of these appeals were accepted, subject to a deposit of Rs. 2.20 crores with the Officer on Special Duty, Special Court. The appeals were taken on board.
The appellants argued that the Special Court erred in holding them as garnishees of respondent No. 2-Pallav Sheth, citing questionable transactions between them and respondents Nos. 6, 7, and 8, the alleged benami companies of respondent No. 2-Pallav Sheth and judgment debtor of FFSL. They argued that the appellants had taken loans from these respondents in 1996-1997, long before respondent No. 2-Pallav Sheth was notified under Section 3(2) of the Act of 1992.
The appellants also argued that the specific assertion made by the appellants in their deposition affidavits that the amounts borrowed were partly by cheque and partly by material supplied to these respondents could not be unsettled by the Custodian in cross-examination. They also argued that the appellants were not cross-examined either by respondent No. 2-Pallav Sheth or on behalf of the benami companies, making it impossible to say with certainty that the amounts borrowed remained unpaid.
The appellants argued that since they were never notified under the Act of 1992, the burden of proof could not have been shifted upon them to disprove the case set up by the Custodian in the applications for recovery. They cited observations made by the Special Court in the impugned order, which stated that respondent No.8 was liable to pay Rs.25 lakh to respondent No.5 and Rs.25 lakh to respondent No.6.
The appellants argued that the impugned judgments do not stand to scrutiny as the onus of proof has been shifted on the appellants without any justification and contrary to the principles enshrined in the Indian Evidence Act, 1872.
The counsel for the respondents argued that the appellants' affidavits that the amount borrowed from respondent Nos. 6, 7, and 8 was returned by way of adjustment towards material supplied were discarded by the Special Court due to lack of tangible proof. They argued that the appellants were reputed businessmen and that accounts of business were not maintained to substantiate the plea of repayment. The court ruled in favor of the respondents, stating that the miscellaneous applications filed by the respondent-Custodian in 2008 sought to recover Rs.50 lakhs from appellant Suman L. Shah towards the dues of respondent Nos. The respondent-Custodian's assertion that the appellants were garnishees of respondent No. 2-Pallav Sheth through respondent Nos. 6, 7 and 8 is based on a communication dated 5th May, 1998 purportedly issued by the Income Tax Department. The court found no reference to the outstanding dues of respondent Nos. 6, 7 and 8 or that the appellants were its debtors. The court also found no witness from the Income Tax Department examined in evidence before the Special Court in miscellaneous applications for recovery.
The Special Court (Trial of Offences Relating to Transactions in Securities) Amendment Act, 1994 (24 of 1994) grants the Special Court jurisdiction, powers, and authority over matters related to property attached under sub-section (3) of section 3 and transactions in securities entered into after April 1, 1991, and June 6, 1992. Any suit, claim, or legal proceeding pending before the commencement of the Special Court shall stand transferred on its commencement, and the Special Court may proceed to deal with it in the same manner as a suit, claim, or legal proceeding.
The Special Court is not bound by the procedure laid down by the Code of Civil Procedure, 1908 (5 of 1908), but must be guided by natural justice principles. It has the same powers as a civil court under the Code of Civil Procedure, 1908 (5 of 1908) while trying a suit, including summoning and enforcing attendance, requiring document discovery and production, receiving evidence on affidavits, requisitioning public records, issuing commissions for witness examination, reviewing decisions, dismissing cases for default, setting aside orders of dismissal, and any other matter prescribed by the Central Government.
The appellants argued that dues towards respondent Nos. 6, 7, and 8, generated from borrowings made in 1996-1997, stood repaid and closed because the amounts had been repaid by cheques and adjustments towards materials supplied. However, no witness from the Income Tax Department was examined in support of the recovery application, and the appellants' depositions that they had returned borrowed amounts were not supported by proper evidence.
The impugned judgments are quashed and set aside, and appeals are allowed. The amounts deposited by the appellants in furtherance of the order dated March 14, 2014, will be reimbursed to them immediately. Pending applications will be disposed of.
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