Benami companies

Supreme Court: In twin appeals under Section 10 of Special Court (Trial of Offences relating to transactions in Securities) Act, 1992 (‘1992 Act’) challenging judgments passed by the Special Court on 11-03-2011, the Division Bench of Pamidighantam Sri Narasimha and Sandeep Mehta, JJ. clarified that the burden of proving debt of benami companies of the notified person lies on the Custodian as per Section 101.

Factual Background

The Court raised certain facts that on 2-07-1992, Fairgrowth Financial Services Limited (‘FFSL’) was notified under Section 3(2) and all its properties stood attached. In 1993, the Custodian filed a Miscellaneous Application in the Special Court seeking recovery of various sums of money belonging to FFSL from respondent Pallav Sheth. The Special Court passed a consent decree on 24-02-1994 directing respondent Pallav Sheth to pay a sum of Rs. 51,49,07,417.92 to the Custodian on behalf of FFSL. After respondent Pallav Sheth committed default, the Custodian initiated attachment of his assets to recover the decretal amount.

Factual Background

During 1996-1997, the appellant Suman L Shah borrowed Rs 50 lakhs from respondent Klar Chemicals(P) Ltd., and appellant Laxmichand Shah borrowed Rs 45 lakhs from respondent Jainam Securities (P) Ltd.

According to the Custodian’s case before the Special Court, these were the benami companies of respondent Pallav Sheth who illegally parked the tainted money received from FFSL (a notified company) in benami companies created by himself and notified respondent Pallav Sheth under Section 3(2) of 1992 Act on 6-10-2001, who was declared insolvent on 5-11-2003 and all his assets and properties got vested in the official assignee, respondent 9. On respondent Pallav Sheth’s failure to pay decretal amount, the Custodian sought information from Income Tax Department regarding his assets, which through letter dated 5-05-1998 informed about respondent Pallav Sheth being the benami owner of the companies. In its order in the miscellaneous application for initiating contempt proceedings against respondent Pallav Sheth, the Special Court declared the said respondents to be benami companies of respondent Pallav Sheth.

The Custodian claimed of having information regarding appellant Suman L Shah receiving Rs 50 lakhs from respondent 6 and Rs 25 from respondent 7, and of appellant Laxmichand Shah receiving Rs 25 lakhs from respondent 8. Thus, the Custodian filed Miscellaneous Applications for recovery of Rs. Rs. 50 lakhs from appellant Suman L. Shah and recovery of Rs. 25 lakhs from appellant Laxmichand Shah.

On 11-03-2011, the Special Court passed judgment dated 11-03-2011 directing the appellants Suman L Shah and Laxmichand Shah to pay Rs 50 lakhs (Rs 25 lakhs each due to benami companies) and Rs 25 lakhs respectively to the Custodian with an interest @12% p.a. from 1-04-1997 till the realisation of amount. It was further directed for the appellants to deposit amounts with the Custodian within 2 months from the date of judgment or the Custodian would be free to execute orders as decrees of Civil Court. The said decision dated 11-03-2011 was challenged by the appellants Suman L. Shah and Laxmichand Shah before the Supreme Court.

Vide order dated 13-05-2011, the Supreme Court directed the appellants to deposit said amount with the Officer on Special Duty attached with the Special Court and furnish a bank guarantee to the Custodian towards the balance interest. Both the appeals were dismissed on 23-04-2012 due to non-compliance of the said order. The applications seeking restoration of the said appeals were accepted on 14-03-2014 after deposit of Rs 2.20 Crores by the appellants.

Court’s Analysis

The Court pointed out that the miscellaneous applications were filed by the Custodian in 2008 seeking recovery of Rs 50 lakhs and Rs 25 lakhs from the appellants towards the dues of alleged benami companies. It highlighted that the appellants borrowed the amounts in question in 1996-1997, when there could not have existed any justifiable reason for them to have entertained a belief that those were benami companies of respondent Pallav Sheth or a breach of provisions of 1992 Act. The court further assumed those to be benami companies for the sake of arguments, for respondent Pallav Shah not being notified under 1992 Act by the time the amounts were borrowed, the Court clarified that “the appellants could not be expected to entertain any doubt regarding the operation of the Act of 1992 either against these companies or even against respondent Pallav Sheth or that the companies were the benami companies.”

The Court explained that the Custodian’s assertion of appellants being the garnishees of respondent Pallav Sheth through the benami companies was based on communication dated 5-05-1998 as issued by the Income Tax Department. The Court pointed towards the affidavit filed on behalf of IT Department in the Special Court proceedings where there was no reference regarding outstanding dues of such purported benami companies, or the appellants being its debtors, and there was no reference to letter annexed which was filed on behalf of the custodian and heavily relied upon by the Special Court.

The Court perused Sections 3 and 9-A of the 1992 Act and expressed that “the properties of the person notified under Section 3(2) would stand attached automatically with effect from the date of notification by virtue of Section 3(3).” The Court explained that since respondent Pallav Sheth was notified on 6-10-2001, his properties would be deemed to be attached from the same date and not prior to that. The Court further viewed that “The applications for recovery having been filed by the Custodian with the allegation that the appellants herein were the debtors of the benami companies of the notified person, the primary onus of proving this assertion would be on the Custodian by virtue of Section 101 of Evidence Act. It is only after the Custodian discharged this primary burden and established the existence of the debt, then by virtue of Section 102 of the Evidence Act, perhaps, the onus could be shifted on to the appellants to rebut the same.” The Court further highlighted the lack of examination of an official from the IT Department to prove communication relied upon.

The Court mentioned the categoric stand of appellants having returned the amounts borrowed and expressed that the same could not be treated as ‘unnatural or an afterthought’ stating that the transactions were completed and the loans were repaid – “there was no reason for the appellants to have entertained a belief that after a period of about 13 years, they would be required to present the account books pertaining to transactions.”

Therefore, the Court quashed and set aside the impugned judgments and ordered reimbursement of amounts deposited by the appellants in furtherance of order dated 14-03-2014.

[Suman L. Shah v. The Custodian, 2024 SCC OnLine SC 234, decided on 5-03-2024]

Judgment authored by: Justice Sandeep Mehta

Know Thy Newly Appointed Supreme Court Judge – Justice Sandeep Mehta

Advocates who appeared in this case :

For Appellant: Advocate Mahesh Agarwal, Advocate Rishi Agrawala, Advocate Ankur Saigal, Advocate S. Lakshmi Iyer, Advocate Sukriti Bhatnagar, Advocate Chitra Agarwal, Advocate Manavi Agarwal, Advocate Divya Singh, Advocate on Record E.C. Agrawala, Advocate Aniruddh Joshi, Advocate Sunil G

For Respondent: Advocate on Record Arvind Kumar Tewari

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