2024 INSC 170 1

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO(S).4577 OF 2011

SUMAN L. SHAH ….APPELLANT(S)

VERSUS

THE CUSTODIAN & ORS. …..RESPONDENT(S)

WITH

CIVIL APPEAL NO(S).4583 OF 2011

J U D G M E N T

Mehta, J.

1. The factual and legal issues involved in these appeals are

common and hence the same have been heard together and are

being decided by this common judgment.

2. The instant appeals under Section 10 of the Special Court

(Trial of Offences relating to transactions in Securities) Act, 1992

(hereinafter being referred to as the ‘Act of 1992’) arise out of the

final judgments passed by the Special Court, Bombay constituted

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under the Act of 1992 of even date i.e. 11

th March, 2011, in MA

Nos. 162 and 184 of 2008 in MA No.343 of 1994 in MA No. 193 of

1993.

3. Before proceeding to consider the appeals on merits, it would

be apposite to consider the broad scheme of the Act of 1992.

4. The Act was promulgated as large -scale irregularities

committed by some share brokers in collusion with the employees

of Banks and Financial Institutions(in short ‘FIs’) came to light in

relation to transaction in Government/other securities leading to

diversion of funds from the banks/FIs to the individual accounts

of certain brokers.

5. The Act provided a mechanism to deal with the above

situations and in particular, to ensure speedy recovery of the huge

amounts illegally diverted, punish the guilty and restore the

confidence of public at large in the security transactions and also

to uphold and maintain the basic integrity and credibility of banks

and FIs. The period of transactions in securities under the purview

was from 1

st April, 1991 to 6

th 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

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one or more custodians under Section 3 so as to attach the

property/properties of the offenders with a view to preventing

diversion of such properties by the offenders.

6. Section 3(2) stipulates that the Custodian may, on being

satisfied on information received that any person has been found

involved in any offence relating to transactions in securities after

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st April, 1991 and on or before 6

th June, 1992, notify the name of

such person in Official Gazette.

7. Section 3(3) provides that any property, movable or

immovable or both, belonging to the notified persons would stand

attached simultaneously with the date of issuance of the

notification.

8. Section 3(4) mandates the Custodian to deal with the

attached properties in such manner as the Special Court may

direct.

9. Section 11(1) empowers the Special Court to pass appropriate

order(s) directing the Custodian for disposal of the attached

property.

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10. Under Section 11(2), liabilities of notified persons are

required to be paid or discharged in full by distributing monies so

realized after disposal of the attached assets.

11. Having taken into account the relevant provisions of the

statute, the brief facts arising for consideration in the present

appeals may be noted as below:-

(i) On 2

nd July, 1992, Fairgrowth Financial Services

Limited (hereinafter being referred to as the ‘FFSL’) was

notified under Section 3(2) of the Act and all its properties

stood attached. In 1993, the Custodian filed Miscellaneous

Application No. 193 of 93 in the Special Court for the

recovery of various sums of money belonging to FFSL from

respondent No. 2-Pallav Sheth.

(ii) The Special Court passed a consent decree on 24

th

February, 1994 directing respondent No. 2-Pallav Sheth to

pay a sum of Rs.51,49,07,417.92/- to the Custodian on

behalf of FFSL. Respondent No. 2-Pallav Sheth committed

default and as a consequence, the Custodian initiated

attachment of his assets to recover the decretal amount.

(iii) During the years 1996-1997, the appellant-Suman L.

Shah had borrowed a sum of Rs.50 lakhs from respondent

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No. 6-Klar Chemicals(P) Ltd. and a sum of Rs. 25 lakhs from

respondent No. 7-Malika Foods (P) Ltd. (original respondent

Nos. 5 and 6 before the Special Court) whereas appellant-

Laxmichand Shah had borrowed Rs.45 lakhs from

respondent No. 8-Jainam Securities(P) Ltd. (original

respondent No.7 before the Special Court). As per the case

set up by the Custodian before the Special Court, these were

the benami companies of respondent No. 2-Pallav Sheth who

had illegally parked the tainted money received from FFSL,

the notified company in the se benami companies

(respondent Nos.6, 7 and 8) created by himself.

(iv) The Custodian notified respondent No.2-Pallav Sheth

under Section 3(2) of the Act on 6

th October, 2001. He was

declared insolvent on 5

th November, 2003 and as a

consequence, all his assets and properties got vested in the

Official Assignee i.e. respondent No.9 herein. As respondent

No. 2-Pallav Sheth failed to pay the decretal amount, the

Custodian sought information from respondent No. 3-

Income Tax Department regarding the assets of respondent

No. 2-Pallav Sheth. In turn, the Income Tax Department,

vide letter dated 5

th May, 1998 informed the Custodian

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about respondent No. 2-Pallav Sheth being the benami

owner of the companies (respondent Nos. 4 to 8 herein).

(v) The Special Court, by an order passed in miscellaneous

application registered for initiating contempt proceedings

against respondent No. 2-Pallav Sheth observed that

respondent Nos. 4 to 8 were benami companies of respondent

No.2-Pallav Sheth.

12. The Custodian claims to have acquired

knowledge/information that the appellant Suman L. Shah had

received an amount of Rs. 50 lakhs from respondent No. 6(out of

which Rs. 25 lakhs were repaid by cheque and the entry dated 5

th

May, 1997 is available in the passbook) and Rs. 25 lakhs from

respondent No.7 and that the appellant-Laxmichand Shah had

received an amount of Rs.25 lakhs from respondent No.8.

13. Accordingly, Miscellaneous Application Nos. 162 of 2008 and

184 of 2008 were filed by the Custodian before the Special Court

for recovery of Rs. Rs. 50 lakhs from the appellant Suman L. Shah

(Civil Appeal No.4577 of 2011) and for recovery of Rs. 25 lakhs

from the appellant/Laxmichand Shah (Civil Appeal No. 4583 of

2011), both being garnishees of respondent No. 2-Pallav Sheth i.e.

the owner of the benami companies (respondent Nos.4 to 8).

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14. The Special Court, vide judgment dated 11

th March, 2011

passed in Miscellaneous Application No. 162 of 2008 directed the

appellant Suman L. Shah to pay a sum of Rs. 50 lakhs(Rs. 25 lakhs

each due to respondent Nos. 6 and 7) being benami companies of

respondent No. 2-Pallav Sheth, to the Custodian with interest @

12% per annum from 1

st April, 1997 till realisation of the amount.

15. Vide another judgment of even date passed in Miscellaneous

Application No. 184 of 2008, the Special Court directed appellant-

Laxmichand Shah to pay a sum of Rs. 25 lakhs due to respondent

No. 8, benami company of respondent No. 2-Pallav Sheth, to the

Custodian with interest @ 12% per annum from 1

st April, 1997 till

realisation of the amount.

16. The Special Court further directed that the appellants shall

deposit the amounts with the Custodian within a period of two

months from the date of the judgment failing which the Custodian

would be free to execute the orders as decrees of the Civil Court.

Upon recovery, the amounts were directed to be paid to respondent

No. 9-Official Assignee whereafter the appellants would stand

discharged of their liabilities towards the benami companies of

respondent No.2 Pallav Sheth.

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17. Aggrieved by the judgments dated 11

th March, 2011, Suman

L. Shah and Laxmichand Shah have instituted Civil Appeal Nos.

4577 of 2011 and 4583 of 2011 before this Court.

18. While entertaining the appeals, vide order dated 13

th May,

2011, this Court directed appellant-Suman L. Shah to deposit

Rs.50 lakhs and appellant-Laxmichand Shah to deposit Rs. 25

lakhs with the Officer on Special Duty attached with the Special

Court and to furnish a bank guarantee to the Custodian towards

the balance amount, i.e., interest.

19. Both the appeals were dismissed by this Court vide order

dated 23

rd April, 2012 on account of non-compliance of the order

dated 13

th May, 2011.

20. The IAs seeking restoration of these Civil Appeals were

accepted vide order dated 14

th March, 2014, subject to deposit of

a total sum to the tune of Rs. 2.20 crores by the appellants with

the Officer on Special Duty, Special Court. The amount has been

deposited and accordingly the appeals were taken on board.

21. Learned counsel representing the appellants contended that

the Special Court committed manifest error in facts as well as in

law in holding that the appellants herein were the garnishees of

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respondent No. 2-Pallav Sheth. It was contended that the

questionable transactions between the appellants and respondent

Nos. 6, 7 and 8, the alleged benami companies of respondent No.

2-Pallav Sheth (notified party) and judgment debtor of

FFSL(notified party) were 13-14 years old and as no documentary

proof relating to these transactions was provided by the Custodian

on the record of the proceedings before the Special Court, the

statement of appellants that the entire amounts of loan taken from

respondent Nos. 6, 7 and 8 were repaid ought not to have been

brushed aside.

22. It was contended that the appellants herein had taken the

loans from respondent Nos. 6, 7 and 8 in the years 1996-1997,

i.e., long before respondent No. 2-Pallav Sheth came to be notified

under Section 3(2) of the Act of 1992, i.e., 6

th October, 2001 and

thus, the burden of proof regarding the existence of liability could

not have been shifted on to the appellants and the onus essentially

lay upon the Custodian to prove that these amounts had not been

repaid and were still recoverable.

23. It was contended that the specific assertion made by the

appellants in their deposition affidavits that the amounts in

question borrowed from respondent Nos. 6, 7 and 8 had been

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repaid partly by cheque and partly by material supplied to these

respondents could not be unsettled by the Custodian in cross-

examination. Only a bald suggestion was given to the appellants

in cross-examination that they did not have any document in the

form of vouchers, receipts, invoices or entries in the book accounts

to show the adjustment of the remaining amount.

24. It was urged that the letter dated 5

th May, 1998 issued by

respondent No. 3-Income Tax Department was referred to in the

cross-examination of the appellants. However, the said letter was

not proved by exhibiting the same in the proceeding before the

Special Court. Learned counsel urged that the since the

Custodian failed to bring the letter of the Income Tax Department

on record, either by summoning the income tax officials or by

producing any other admissible evidence, the Special Court

committed a grave error on placing implicit reliance on such

communication.

25. It was contended that the appellants herein being respondent

Nos. 8 before the Special Court were not cross-examined either by

respondent No. 2-Pallav Sheth or on behalf of the benami

companies i.e. respondent Nos. 6, 7 and 8 and thus it could not be

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said with any degree of certainty that the amounts borrowed

remained unpaid.

26. The pertinent assertion of learned counsel for the appellants

was that since the appellants were never notified under the Act of

1992, the burden of proof could not have been shifted upon them

so as to require them to disprove the case set up by the Custodian

in the applications for recovery. In this regard, learned counsel for

the appellants referred to the following observations made by the

Special Court in the impugned order:-

“7. It is true that oral evidence cannot be ignored, but at the

same time, it has to be borne in mind that the Official Assignee

- respondent No.9 has to recover the properties and assets of

respondent No.1 for satisfaction of the decree against him. For

the reasons best known to respondent No.1 or respondent Nos.

5 and 6, neither they filed any reply nor cross-examined

respondent No.8. At the same time, it cannot be forgotten that

the respondent No.8 is a businessman and he was expected to

maintain accounts of his business. It is impossible to believe

that he would not have maintained accounts of his business.

According to him, he had partly repaid these amounts to

respondent Nos. 5 and 6 by cheques and partly the amounts

were adjusted against the purchases made by respondent Nos.

5 and 6 from Shree Jalaram Timber Depot Pvt. Ltd. He has

shown payment of Rs.25 lakh by cheque to respondent No.5

and that is reflected in his passbook. Whenever any payment is

made by cheque and the cheque is encashed, naturally the

debit entry is taken in the account of the person, who has

issued the cheque. For a moment, if it is believed that other

documents were not available, at least respondent No.8 could

produce the passbook of his account showing the debit entries

indicating payment by cheque to respondent Nos. 5 and 6.

However, respondent No.8 did not produce any such passbook

to show that certain payments were made by cheque and those

cheques were encashed and the amounts were debited in his

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account. If Shree Jalaram Timber Depot Pvt. Ltd belonging to

respondent No.8 had supplied certain material to respondents

Nos. 5 and 6 and that amount was adjusted against the dues

payable to respondents Nos. 5 and 6, there must have been

some documents in the form of bill books, vouchers, receipts,

entries in the account books. However, no such document was

produced. It is true that respondent No.8 was not cross-

examined by respondent No.1 or respondent Nos.5 and 6. Still,

it is to be noted that best evidence in the form of documentary

evidence was available with the respondent No.8, but he chose

not to produce the best evidence and relied only on his oral

testimony. Even though respondent No.8 contended that the

documents are not traceable he has nowhere stated that the

records were lost or destroyed. There is no satisfactory

clarification as to why the records are not traceable. When the

best evidence, which is expected to be available with him, has

not been produced, the Court may draw an inference that if

such record would be produced, it would go against his claim.

Therefore, his contention that the amount of Rs.25 lakh each

payable to respondent Nos. 5 and 6 has been actually repaid

partly by cheque and partly by adjustment of the price of

material supplied to them cannot be accepted. Therefore, I hold

that the respondent No.8 is liable to pay amount of Rs.25 lakh

to respondent No.5 and Rs.25 lakh to respondent No.6.

27. It was fervently contended by learned counsel for the

appellants that the impugned judgments do not stand to scrutiny

inasmuch as the onus of proof has been shifted on to the

appellants without any justification and contrary to the principles

enshrined in the Indian Evidence Act, 1872(hereinafter being

referred to as the ‘Evidence Act’). He thus, implored the Court to

accept the appeals and set aside the judgments passed by the

Special Court.

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28. Per contra, learned counsel for the respondents submitted

that the bald statements of the appellants herein in their affidavits

that the amount borrowed from respondent Nos. 6, 7 and 8 i.e. the

benami companies of the notified person i.e. respondent No.2-

Pallav Sheth had been returned by way of adjustment towards

material supplied was rightly discarded by the Special Court

because such statements were not supported by any tangible

proof, either oral or documentary. He urged that the appellants

claim to be reputed businessm en and thus, it is wholly

unbelievable that accounts of business had not been maintained

by them so as to substantiate the plea of repayment being made to

respondent Nos. 6, 7 and 8 by way of adjustment of material

supplied. He thus, implored the Court to affirm the impugned

judgments and dismiss the instant appeals.

29. We have given our anxious consideration to the submissions

advanced at the bar and have perused the material available on

record.

30. For adjudicating the issues raised in these appeals, few

admitted facts need to be noted. The miscellaneous applications

were filed by the respondent-Custodian in the year 2008 seeking

to recover the amounts of Rs.50 lakhs from appellant Suman L.

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Shah towards the dues of respondent Nos. 6 and 7 and amount of

Rs.25 lakhs from appellant Laxmichand Shah towards the dues of

respondent No.8. The respondent Nos.6, 7 and 8 are alleged to be

the benami companies of the respondent No. 2-Pallav Sheth.

31. Respondent No. 2-Pallav Sheth is the judgment debtor of

FFSL which was a company notified under the provisions of the

Act of 1992. Respondent No. 2-Pallav Sheth was notified under

the Act of 1992 on 6

th October, 2001 and thus, by virtue of Section

3(3) of the Act of 1992, all properties belonging to him stood

automatically attached from the date of such notification. The

appellants herein had borrowed the amounts in question from

respondent Nos. 6, 7 and 8, way back in the years 1996-1997. By

that date, there could not have existed any justifiable reason for

the appellants herein to have entertained a belief that these were

the benami companies of respondent No. 2-Pallav Sheth or that

there was any breach of the provisions of the Act of 1992 by Pallav

Sheth or the respondent companies.

32. Even if it is assumed for the sake of arguments that

respondent Nos. 4 to 8 were the benami companies of respondent

No. 2-Pallav Sheth, he not having been notified under the Act of

1992 by the time the amounts were borrowed, the appellants could

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not be expected to entertain any doubt regarding the operation of

the Act of 1992 either against these companies or even against

respondent No. 2-Pallav Sheth or that the companies were the

benami companies of Pallav Sheth.

33. The foundation behind the assertion made by the Custodian

that the appellants herein were garnishees of respondent No. 2-

Pallav Sheth through respondent Nos. 6, 7 and 8 is based entirely

on a communication dated 5

th May, 1998 purportedly issued by

the Income Tax Department. An affidavit was filed on behalf of the

Department in the proceedings before the Special Court but in

such affidavit, there is no reference whatsoever to the outstanding

dues of respondent Nos. 6, 7 and 8 or that the appellants were its

debtors. Furthermore, there is no reference whatsoever in this

affidavit with regard to letter dated 5

th May, 1998 which was

annexed with the affidavit filed on behalf of the Custodian and was

heavily relied upon by the Special Court. No witness from the

Income Tax Department was examined in evidence before the

Special Court in miscellaneous applications for recovery.

34. While initiating recoveries, the Custodian relied upon the

provisions of Sections 3 and 9A of the Act of 1992 which are

reproduced hereinbelow:-

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“3. Appointment and functions of Custodian. —

(1) The Central Government may appoint one or more

Custodians 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

insecurities after the 1st day of April, 1991 and on

and before the 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 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.

9A. Jurisdiction, powers, authority and procedure of Special

Court in civil matters. —

(1) On and from the commencement of the Special

Court (Trial of Offences Relating to Transactions in

Securities) Amendment Act, 1994 (24 of 1994) the

Special Court shall exercise all such jurisdiction,

powers and authority as were exercisable,

immediately before such commencement, by any civil

court in relation to any matter or claim—

(a) relating to any property standing

attached under sub-section (3) of section 3;

(b)arising out of transactions in securities

entered into after the 1st day of April, 1991,

and on or before the 6th day of June, 1992,

in which a person notified under sub -

section (2) of section 3 is involved as a party,

broker, intermediary or in any other

manner.

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(2) Every suit, claim or other legal proceeding (other

than an appeal) pending before any court immediately

before the commencement of the Special Court (Trial

of Offences Relating to Transactions in

Securities)Amendment Act, 1994 (24 of 1994), being

a suit, claim or proceeding, the cause of action

whereon it is based is such that it would have been,

if it had arisen after such commencement, within the

jurisdiction of the Special Court under sub-section

(1), shall stand transferred on such commencement

to the Special Court and the Special Court may, on

receipt of the records of such suit, claim or other legal

proceeding, proceed to deal with it, so far as may be,

in the same manner as a suit, claim or legal

proceeding from the stage which was reached before

such transfer or from any earlier stage or de novo as

the Special Court may deem fit.

(3) On and from the commencement of the Special

Court (Trial of Offences Relating to Transactions in

Securities) Amendment Act, 1994 (24 of 1994), no

court other than the Special Court shall have, or be

entitled to exercise, any jurisdiction, power or

authority in relation to any matter or claim referred

to in sub-section (1).

(4) While dealing with cases relating to any matter or

claim under this section, the Special Court shall not

be bound by the procedure laid down by the Code of

Civil Procedure, 1908 (5 of 1908), but shall be guided

by the principles of natural justice, and subject to the

other provisions of this Act and of any rules, the

Special Court shall have power to regulate its own

procedure.

(5) Without prejudice to the other powers conferred

under this Act, the Special Court shall have, for the

purposes of discharging its functions under this

section, the same powers as are vested in a civil court

under the Code of Civil Procedure, 1908 (5 of 1908),

while trying a suit, in respect of the following matters,

namely: —

(a) summoning and enforcing the

attendance of any person and examining

him on oath;

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(b) requiring the discovery and production

of documents;

(c) receiving evidence on affidavits;

(d) subject to the provisions of sections 123

and 124 of the Indian Evidence Act, 1872 (1

of 1872), requisitioning any public record or

document or copy of such record or

document from any office;

(e) issuing commissions for the examination

of witnesses or documents;

(f) reviewing its decisions;

(g) dismissing a case for default or deciding

it ex parte;

(h) setting aside any order of dismissal of

any case for default or any order passed by

it ex parte; and

(i) any other matter which may be

prescribed by the Central Government

under sub-section (1) of section 14.”

35. From a bare perusal of these provisions, it would become

clear that the properties of the person notified under Section 3(2)

would stand attached automatically with effect from the date of

notification by virtue of Section 3(3). Since respondent No.2-

Pallav Sheth was notified (as being a debtor of the originally

notified company FFSL) with effect from 6

th October, 2001, a

fortiori, his properties would be deemed to be attached with effect

from that date and not prior thereto.

36. The appellants herein took a pertinent plea before the Special

Court that the dues towards respondent Nos. 6, 7 and 8, generated

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from borrowings made in the years 1996-1997 stood repaid and

closed because the amounts had been repaid by cheque(s) and by

way of adjustments towards materials supplied. The applications

for recovery having been filed by the Custodian with the allegation

that the appellants herein were the debtors of the benami

companies of the notified person, the primary onus of proving this

assertion would be on the Custodian by virtue of Section 101 of

Evidence Act. It is only after the Custodian discharged this

primary burden and established the existence of the debt, then by

virtue of Section 102 of the Evidence Act, perhaps, the onus could

be shifted on to the appellants to rebut the same.

37. The entire case of the Custodian regarding subsisting debts

of the appellant towards respondent Nos. 6, 7 and 8 was based on

a communication received from the Income Tax Department. The

appropriate witness to prove such communication would be the

official concerned from the Income Tax Department. However, as

has been mentioned above, no witness from the Income Tax

Department was examined in support of the recovery application.

Even the communication forwarded by the Income Tax

Department and relied upon by the Custodian was not proved by

proper evidence.

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38. The appellants herein took a categoric stand in their

depositions that they had returned the amounts borrowed from

respondent Nos. 6, 7 and 8, but the books of accounts were not

available because of lapse of time. The said plea of the appellants

herein could not be treated as unnatural or an afterthought

because once the transactions were completed and the loans were

repaid, there was no reason for the appellants to have entertained

a belief that after a period of about 13 years, they would be

required to present the account books pertaining to transactions.

It was neither a requirement in law nor could it be expected from

the appellants herein to retain the books of accounts after more

than a decade of the alleged suspicious transactions.

39. Resultantly, the conclusions drawn and the findings recorded

in the impugned judgments passed by the Special Court that the

appellants herein failed to prove the fact that the amounts had

been repaid to the benami companies of the notified person,

namely, Pallav Sheth do not stand to scrutiny and cannot be

sustained as being contrary to facts and law.

40. As an upshot of the above discussion, the impugned

judgments are hereby quashed and set aside.

41. The appeals are allowed accordingly.

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42. The amounts deposited by the appellants in furtherance of

the order dated 14

th March, 2014 shall be reimbursed to them

forthwith.

43. Pending application(s), if any, shall stand disposed of.

…………………...………………………….J.

(PAMIDIGHANTAM SRI NARASIMHA)

……………………………………………….J.

(SANDEEP MEHTA)

New Delhi;

March 05, 2024.