REPORTABLE  

 IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 2924 OF 2008

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,  

1

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  

3

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  

4

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  

5

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  

6

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  

10

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.

11

(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  

12

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  

14

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  

15

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  

19

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.   

20

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  

23

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  

24

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-à-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