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Supreme Court ruled that in recovery cases, the burden of proof lies on custodian to hold debtors liable to pay alleged dues

CASE TITLE- Suman L. Shah Vs The Custodian & Ors

CASE NUMBER- Civil Appeal No(S).4583 Of 2011

DATED ON- 05.03.2024

QUORUM- Hon’ble Justice Pamidighantam Sri Narasimha and Hon’ble Justice Sandeep Mehta

FACTS OF THE CASE

Fairgrowth Financial Services Limited was notified under Section 3(2) (person found involved in offence relating to transactions in securities) of the Trial of Offences relating to transactions in Securities Act and all its properties stood attached. The Custodian filed application in the Special Court for the recovery of various sums of money belonging to FFSL from respondent No. 2. The appellant-Suman L. Shah had borrowed a sum of Rs.50 lakhs from respondent 4 and No. 6 and a sum of Rs. 25 lakhs from respondent No. 7 whereas appellant Laxmichand Shah had borrowed Rs.45 lakhs from respondent No. 8. These respondents were the benami companies of respondent No. 2 who had illegally parked the tainted money received from FFSL, the notified company in these benami companies created by himself. All the assets and properties of respondent no. 2 got vested in the Official Assignee. The Special Court directed Suman L. Shah and Laxmichand Shah to pay a sum of Rs. 50 lakhs and Rs. 25 lakhs to the Custodian with interest @ 12% per annum respectively due to respondent no. 2 till realisation of the amount. Aggrieved by the judgments both of them instituted Civil Appeal. The IAs seeking restoration of these Civil Appeals were accepted subject to deposit of a total sum to the tune of Rs. 2.20 crores by the appellants with the Officer on Special Duty, Special Court. The amount has been deposited and accordingly the appeals were taken on board.

LEGAL PROVISIONS

Section 3(2) of the Trial of Offences relating to transactions in Securities Act, 1992.

Section 101 of Evidence Act.

CONTENTIONS OF THE APPELLANT

It was contented that the Special Court committed error in holding that the appellants were the garnishees of Pallav Sheth. No documentary proof relating to the questionable transactions between the appellants and respondent was provided by the Custodian, the statement of appellants that the entire amounts of loan taken from respondent Nos. 6, 7 and 8 were repaid ought not to have been brushed aside. The appellants had taken the loans long before Pallav Sheth came to be notified under Section 3(2) and thus, the burden of proof regarding the existence of liability could not have been shifted on to the appellants and the onus lay upon the Custodian to prove that these amounts had not been repaid and were still recoverable Learned counsel urged that the since the Custodian failed to bring the letter of the Income Tax Department on record, either by summoning the income tax officials or by producing any other admissible evidence, the Special Court  committed a grave error on placing implicit reliance on such communication. it could not be said with any degree of certainty thaSuman L. Shah Vs The Custodian & Orst the amounts borrowed remained unpaid.

CONTENTIONS OF THE RESPONDENT

learned counsel for the respondents submitted that the bald statements of the appellants that the amount borrowed from the benami companies had been returned by way of adjustment towards material supplied was rightly discarded by the Special Court because such statements were not supported by any tangible proof, either oral or documentary. He implored the Court to affirm the impugned judgments and dismiss the instant appeals.

COURT’S ANALYSIS AND JUDGEMENT

The miscellaneous applications were filed by the Custodian for recovery of amount due. The respondent Nos.6, 7 and 8 are alleged to be the benami companies of the Pallav Sheth. There could not have existed any justifiable reason for the appellants to have entertained a belief that these were the benami companies of respondent No. 2-Pallav Sheth or that there was any breach of the provisions of the Act of 1992 by Pallav Sheth. Even if it is assumed the foundation behind the assertion made by the Custodian based entirely on a communication purportedly issued by the Income Tax Department. No reference was annexed with the affidavit, no witness from the Income Tax Department was examined in evidence before the Special Court in miscellaneous applications for recovery. The appellants had returned the amounts borrowed from the respondents but the books of accounts were not available because of lapse of time. It was not expected from the appellants to retain the books of accounts after more than a decade of the alleged suspicious transactions. Therefore, the appeal was allowed and the impugned judgments are hereby quashed and set aside.

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Judgement Reviewed By- Shreyasi Ghatak

Click here to read the Judgement