THE DEPUTY COMMISSIONER OF INCOME TAX vs. PALLAV SETH
What did the High Court hold?
The Special Court held that CANFINA's claim based on an alleged mortgage over the subject property did not have priority. The Court found that the subject property was owned by Eskaydee Leasing and Investment Pvt. Ltd., and Pallav Seth, as a shareholder, could not have lawfully mortgaged the property. Furthermore, the Court noted that only a photostat copy of an agreement was deposited, not original title deeds, and no exceptional circumstances were made out for constructive delivery. Consequently, the Court agreed with previous observations that there was no valid equitable mortgage in favour of CANFINA. Therefore, CANFINA's claim fell under Section 11(2)(b) of the TORT Act, 1992, making it subservient to the Income Tax Department's claim under Section 11(2)(a). Given the disparity between liabilities and assets, the Court allowed the Custodian's prayer to release Rs.4 Crore from Pallav Seth's attached accounts to the Income Tax Department, subject to an undertaking to refund the amount with interest if directed. Misc. Application (L) No.39 of 2023 was dismissed, and Custodian’s Report No.10 of 2023 was allowed.
What were the facts?
The proceedings before the Special Court involve Pallav Seth, who was notified under the Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992 (TORT Act, 1992) and subsequently adjudged insolvent. Canbank Financial Services Ltd. (CANFINA) had obtained a money decree against Pallav Seth. Fair Growth Financial Services Ltd. (FFSL) also had decrees against Pallav Seth. A property, 15% shareholding of Pallav Seth in Eskaydee Leasing and Investment Pvt. Ltd., was sold, and the proceeds were to be distributed. The Income Tax Department sought release of outstanding tax demands for Assessment Years 1992-93 and 1993-94, claiming priority. CANFINA asserted a prior mortgage over the subject property, claiming priority for its debt. The Custodian filed a distribution report detailing liabilities and assets.
What were the issues?
1. Whether CANFINA's claim based on an alleged mortgage over the subject property has priority over the claims of the Income Tax Department under Section 11 of the TORT Act, 1992? Assessee (Income Tax Department) argued that its tax liabilities for the priority period under Section 11(2)(a) of the TORT Act, 1992, must be paid in full due to their highest priority. The revenue (CANFINA) contended that it had a pre-existing mortgage over the subject property, executed before Pallav Seth was notified under the TORT Act, giving its claim priority over subsequent liabilities, including tax demands, as per Section 11 of the TORT Act, 1992. They relied on the fact that the mortgage was an admitted fact in prior proceedings and that the Special Court had previously acknowledged their right to claim priority in payment at the time of final distribution.
Which sections of the Income-tax Act were involved?
Section 3(2),Section 3(3),Section 11,Section 11(2)(a),Section 11(2)(b)
AI-generated summary — verify with the full judgment below
Cause title — parties, addresses and appearances
JUDGMENT :
As common questions of facts and law arise for determination in these proceedings and the finding on one may bear upon the determination of another, these proceedings are decided by this common judgment. BACKGROUND FACTS :
Pallav Seth was notified by the Custodian under Section 3(2) of the Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992 (the TORT Act, 1992) vide Notification dated 6 October 2001. Simultaneous with the Notification, all the properties of Pallav Seth stood attached under sub-Section (3) of Section 3 of the TORT Act, 1992. Subsequently, by an order dated 5 November 2003 passed by the Adjudicating Court, Pallav Seth has been adjudged as an insolvent.
Canbank Financial Services Ltd. (CANFINA) is a non-banking financial institution and a fully owned subsidiary of Canara Bank. CANFINA had instituted a suit being Special Court Suit No.8 of 2002 against Pallav Seth and others, seeking a money decree and also a decree for foreclosure of mortgage SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 3/32 executed by Pallav Seth in favour of CANFINA. By a judgment and order dated 4 April 2008, the Special Court passed a decree against Pallav Seth in the sum of Rs.65,38,14,285/- along with interest @ 12% p.a. from the date of the suit till realization. The Special Court declined to pass a decree for foreclosure as the property that was mortgaged had already been attached under the provisions of the TORT Act, 1992 and sold.
Fair Growth Financial Services Ltd. (FFSL) is also an entity notified under Section 3(2) of the TORT Act, 1992. The Custodian had filed MA No.100 of 1994 against Shernik Jhaveri, FFSL and Pallav Seth seeking a money decree. A consent decree was passed in MA No.100 of 1994 on 22 March 1995 for an amount of Rs.16,21,77,739/- with interest @ 30% p.a., which was later on reduced to 24% by the Supreme Court. The Custodian has also filed MA No.193 of 1993 against Pallav Seth and FFSL. In MA No.193 of 1993, consent Minutes of Order were recorded and Pallav Seth agreed to pay Rs.51,49,07,417.92 with interest on the principal amount of Rs.25,61,75,517/- and Rs.14,85,34,832/- @ 24% p.a. from 1 March 1994 till payment or realization.
FFSL filed Misc. Application No.393 of 1995 against Pallav Seth and Others for execution of the decree dated 24 February 1994 passed in MA SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 4/32 No.193 of 1993 and the decree dated 22 March 1995 passed in MA No.100 of 1994. In MA No.393 of 1995 in MA No.193 of 1993 by an order dated 14 October 1996, this Court with the consent of the CANFINA, directed the sale of these properties, including 15% shareholding of Pallav Seth in the 13th Respondent Company therein – Eskaydee Leasing and Investment Pvt. Ltd. (the subject property). The Court clarified that CANFINA will have same interest in the proceeds of the sale as it had in the properties sold, subject to its claim being upheld.
By an order dated 4 August 2001, this Court directed the sale of the said property in public auction in Execution Application No.379 of 1999 in Garnishee Notice No.2 of 1997 in MA No.63 of 1997 in MA No.100 of 1994. By an order dated 29 November 2003, the sale of the said property was confirmed for an amount of Rs.60 Lakhs. The sale proceeds were first credited into the account of Pallav Seth and, later on, credited to the account of FFSL in satisfaction of the decree in MA No.100 of 1994. 7. The controversy in these proceedings revolves around 14.7% interest which Pallav Seth had in the subject property as he was holding 15 shares in Eskaydee Leasing and Investment Pvt. Ltd., which was the owner of the subject property, out of total 102 shares. The controversy stems from the claim of SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 5/32 CANFINA that the subject property was mortgaged by Pallav Seth in favour of CANFINA and the said mortgage was the subject matter of Special Court Suit No.8 of 2002 (original Suit No.4283 of 1993).
CANFINA claims, the mortgage was executed before Pallav Seth came to be notified under Section 3(2) of the TORT Act, 1992. The mortgage debt has, thus, priority over the claims against Pallav Seth which are to be discharged under Section 11 of the TORT Act, 1992. 9. In the aforesaid backdrop, a brief recourse to each of the proceedings may now be opposite. Misc. Application No.19 of 2022
The Income Tax Department has preferred this application seeking a direction to the Custodian (R2) to release outstanding principal income tax demand of Rs.36,75,00,295/- for A.Y. 1992-93 and Rs.12,86,000/- for A.Y. 1993-94 under Section 11(2)(a) of the TORT Act, 1992. The Income Tax Department asserts, in accordance with the provisions of Section 11(2)(a) of the TORT Act, 1992, the taxes for the priority period are required to be paid in full. Since the demand towards the principal tax liability for the priority period commands highest priority, the same deserves to be discharged in full. SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 6/32 Custodian’s Report No.10 of 2023
In the context of the abovenumbered application of the Income Tax Department, the Custodian has filed a distribution report. In the estimation of the Custodian, total liabilities of Pallav Seth as of 31 March 2023 were as under :
Tax liabilities under Section 11(2)(a) – Rs.48.76 Crores;
Total liabilities under Sections 11(2)(b) – Rs.74.03 Crores;
Total liabilities under Sections 11(2)(c) – Rs.646.66 Crores.
The total assets of Pallav Seth were Rs.4.69 Crores, out of which Rs.4.51 Crores were available in the form of liquid assets. The Custodian, thus, claimed that a sum of Rs.4 Crores can be ordered to be paid to the Income Tax Department from the attached account of Pallav Seth, subject to an undertaking to bring back the said amount if so directed by the Court.
CANFINA resisted the prayers in the Custodian’s Report. A short affidavit in reply came to be filed by CANFINA opposing the prayer of the Custodian for the reasons set out in the Misc. Application preferred by CANFINA. Misc. Application (L) No.39 of 2023
After setting out the historical backdrop, briefly noted above under the SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 7/32 caption ‘background facts’, CANFINA asserts that the attachment of the assets of a notified party by the Custodian under Section 3(3) of the TORT Act, 1992 is subject to the prior mortgage rights. Consequently, the amount available to the Custodian for distribution under Section 11 of the TORT Act, 1992 can only be the amount which remains surplus after discharge of the liability of the mortgagor under the prior mortgage. CANFINA further asserts that the Custodian is, thus, enjoined to first distribute the amount realized from the sale of the mortgaged property to the mortgagee before exercising any power of distribution as the subject property stood attached subject to the priority right of the mortgagee/CANFINA. It is, therefore, prayed that the Custodian be directed to release the sale proceeds of the subject property to CANFINA towards the satisfaction of the its decreetal dues in Special Court Suit No.8 of 2002. 15. Affidavits in Reply, additional Affidavits and Affidavits in Rejoinder have been filed. I deem it superfluous to note the contentions of the parties in the affidavits in detail. Suffice to note that the objections to the claim of CANFINA are four-fold. First and foremost, CANFINA had not succeeded in establishing that the subject property was mortgaged to CANFINA by Pallav Seth. Second, Pallav Seth was not the owner of the subject property and, at best, he had 14.7% shareholding in the company, and, thus, there could not have been an equitable SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 8/32 mortgage of the said property belonging to Eskaydee Leasing and Investment Pvt. Ltd., a corporate entity, which owned the said property. Thirdly, the claim of CANFINA that the said property was mortgaged to CANFINA has been explicitly negatived by this Court by an order dated 4 February 2022 in Custodian’s Report No.13 of 2022 in MA No.13 of 2019. It is in terms held that the said property has not been mortgaged to CANFINA. Fourthly, the assertion of CANFINA that it is entitled to priority, being prior mortgagee, before the liabilities under Section 11(2)(a) are discharged, is misconceived. The claim of CANFINA, at best, falls under clause (b) of Section 11(2) of the TORT Act, 1992. CANFINA will, therefore, have to work out its priorities in accordance with the provisions of Section 11 of the TORT Act, 1992 at the time of the distribution of the properties of Pallav Seth only, and has no claim over the proceeds of the subject property as those sale proceeds have already been apportioned towards the satisfaction of the decree passed in favour of FFSL and stand credited to the attached account of FFSL.
In the backdrop of the aforesaid facts and pleadings, I have heard Mr. Deshmukh, learned Counsel for the Applicant – CANFINA in SPMA (L) 39 of 2023, Mr. Raikar, learned Counsel for the Custodian, Mr. Chatterjee, learned Senior Advocate for the Income Tax Department and Mr. Swapnil Newaskar, SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 9/32 learned Counsel for FFSL (Respondent No.4) in SPMLA 39 of 2023. 17. Mr. Deshmukh, learned Counsel for CANFINA submitted that Pallav Seth had mortgaged the said property a decade ago his Notification under Section 3(2) of the TORT Act, 1992. Attention of the Court was invited to the letter dated 15 September 1992 whereby title deeds in relation to the immovable properties of Pallav Seth were delivered to create equitable mortgage to secure the liability. The said property was included in his statement of immovable properties at Sr. No.5 (Exhibit B).
Mr. Deshmukh would urge that the decree passed in favour of CANFINA in Special Court Suit No.8 of 2002 dated 4 April 2008 cannot be construed to the prejudice of the Applicant. The fact that the Court declined to pass a decree for foreclosure in view of the prior attachment and sale of the suit property does not imply that the prior rights of CANFINA in the subject property were extinguished.
Emphasis was laid on the order passed by the Special Court in MA No.393 of 1995 in MA 193 of 1993 dated 14 October 1996 whereby the subject property alongwith other properties of Pallav Seth were ordered to be sold subject to rider that CANFINA will have the same interest in the sale proceeds as it had in the properties sold. It is, in this context, according to Mr. SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 10/32 Deshmukh, that the decree passed in Special Court Suit No.8 of 2002 is required to be considered. Liberty granted by this Court in the judgment and decree dated 4 April 2008 to claim priority in payment when the Court takes up the question of distribution of assets of Pallav Seth under Section 11 of the TORT Act, 1992, in law entitled the Applicant – CANFINA to seek discharge of its liability by the Custodian out of the sale proceeds of the subject property, before any amount is disbursed to the Income Tax Department, or for that matter, decreetal debt of FFSL is satisfied.
It was submitted that prior rights in the attached property remained intact and the subsequent attachment of the said property or sale thereof in execution of the decree, with regard to another debt owed by the notified party, does not extinguish the said right. Mr. Deshmukh made an earnest endeavour to impress upon the Court that the order passed by this Court in Custodian’s Report No.13 of 2021 in Misc. Application No.37 of 2019 cannot also have the effect of destroying rights of CANFINA as a mortgagee. It was submitted that the issue cannot be said to have been conclusively determined by the aforesaid order dated 4 April 2022. When this Court while passing decree in Special Court Suit No.8 of 2002 had observed in clear and explicit terms that the mortgage of the properties by Pallav Seth in favour of CANFINA was admitted by Pallav Seth, SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 11/32 it is now not open for the Respondents to contend that there was no mortgage, submitted Mr. Deshmukh.
Mr. Raikar, learned Counsel for the Custodian, submitted that in the face of the observations of this Court in the order dated 4 April 2022 in Custodian’s Report No.13 of 2021 in Misc. Application No.37 of 2019 that CANFINA has not made out a case of deposit of title deeds, the claim in the instant application cannot be sustained. It was further submitted that, at any rate, CANFINA could lay claim over not more than 15% of share in the sale proceeds, as indubitably Pallav Seth had only 14 .7% shares in Eskaydee Leasing and Investment Pvt. Ltd. Thus, if required, the Court may balance the equities by passing appropriate orders to the extent of the said portion of the sale proceeds.
Mr. Swapnil Newaskar, learned Counsel for FFSL, submitted that admittedly CANFINA was not in custody of the title deeds of the subject property. From the own showing of CANFINA, what Pallav Seth had allegedly delivered was the photocopy of the agreement dated 30 September 1986 between Venus Diamonds and Eskaydee Leasing and Investment Pvt. Ltd. Incontrovertibly, the original title deeds were not deposited. Nor title deeds were deposited by Eskaydee Leasing and Investment Pvt. Ltd., which was the owner of the subject property. SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 12/32
Mr. Newaskar further submitted that the subject property was attached at the hands of FFSL in 1996 much before Pallav Seth was notified under Section 3(2) of the TORT Act, 1992 and it was sold in satisfaction of a decree passed in favour of FFSL and not CANFINA. Therefore, CANFINA can have no claim over the sale proceeds. Liberty granted to CANFINA to claim priority in payment under the order dated 4 April 2008 in Special Court Suit No.8 of 2002 was qua the assets of Pallav Seth and not the property which has been credited to the account of FFSL.
Mr. Chatterjee, learned Senior Advocate for the Income Tax Department, submitted that the controversy sought to be raised on behalf of CANFINA has been put to rest by an order dated 4 February 2022. Mr. Chatterjee laid special emphasis on the observations in paragraphs 18, 22 and 23 of the said order. It was further submitted that the claim of the Income Tax Department towards the principal tax due for the priority period far exceeds the assets of Pallav Seth. Therefore, at this juncture, there is no impediment in releasing a sum of Rs.4 Crores, as proposed by the Custodian, subject to an undertaking to bring back the said amount, if so ordered.
I have given anxious consideration to the aforesaid submissions. Though the rights and liabilities of the parties seem to be intertwined in a number of SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 13/32 proceedings by and between the parties to these proceedings and the third parties, yet the core questions that crop up for consideration are primarily two. First, was there a lawful mortgage by deposit of title deeds of the subject property by Pallav Seth in favour of CANFINA ? Second, what is the effect of such a mortgage on the discharge of the liabilities of the notified party under Section 11(2) of the TORT Act, 1992. 26. Before adverting to explore an answer to the aforesaid questions, which is, in a fair measure, rooted in facts, it may be apposite to consider the nature of the attachment under Section 3(3) of the TORT Act, 1992. Under Section 3(2) of the TORT Act, 1992, the Custodian is empowered to notify any person who has been involved in any offence relating to transactions in securities after 1st day of April 1992 and on and before 6th June, 1992. Sub-Section (3) of Section 3 begins with a non-obstante clause, which provides that notwithstanding anything contained in the Code and any other law for the time being in force, on and from the date of notification under sub-Section (2), any property, movable or immovable, or both, belonging to any person notified under that sub-Section shall stand attached simultaneously with the issue of the notification. Sub- section (4) provides that the property attached under sub-section (3) shall be dealt with by the Custodian in such manner as the Special Court may direct. SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 14/32
The provisions of sub-section (3) of Section 3 envisage simultaneous and automatic attachment of the assets of a party notified thereunder. Separate attachment order by the Custodian is not necessary. The notification of a person in itself has the consequence of instantaneous attachment of the entire property of such notified person. Neither the knowledge of attachment of the property nor the identity of the party in whose hands the attached property is found, is of any significance. The measure of statutory attachment under Section 3 was introduced with a view to deal with the extra-ordinary situation which arose in the wake of large scale irregularities in the transactions in securities involving the employees of the banks and financial institutions as well. Nonetheless, the property which stands simultaneously attached with the notification of a person under Section 3(2) of the TORT Act, 1992 does not vest in the Custodian. Attachment does not have the effect of divesting any person of any pre-existing rights in the attached property. If there are third party rights created in the property, which is subsequently attached under sub-Section (3) of Section 3, those rights are not extinguished.
A useful reference in this context can be made to the decisions of the Supreme Court in which the nature of the attachment has been expounded. In SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 15/32 the case of Harshad Shantilal Mehta V/s. Custodian and Ors.1 on which reliance was placed by Mr. Deshmukh, the Supreme Court considered the question, inter alia, whether in case of mortgaged/pledged property of the notified person already mortgaged/pledged to the bank or financial institution on the date of the attachment, the words of Section 3(3) "any property movable or immovable or both belonging to any person notified" would refer only to the right, title or interest of the notified person in the mortgaged/pledged property and not the entire property itself. If so, the liabilities mentioned in Section 11(2) which are to be paid from the proceeds of the sale of the attached property, would only refer to proceeds of the sale of the right, title and interest of the notified person in the attached property.
The Supreme Court answered the said question as under :
“18. The last question can be answered first. As stated above, Section 3(3) clearly provides that the properties attached are properties which belong to the person notified. The words "belong to" have a reverence only to the right, title and interest of the notified person in that property. It in the property "belonging to" a notified person, another person has a share or interest, that share or interest is not extinguished. Of course, if the interest of the notified person in the property is not a severable interest, the entire property may be attached. But the proceeds from which distribution will be made under Section 11(2) can only be the proceeds in relation to the 1 (1998) 5 SCC 1 SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 16/32 right, title and interest of the notified person in that property. The interest of a third party in the attached property cannot be sold or distributed to discharge the liabilities of the notified person. This would also be the position when the property is already mortgaged or pledged on the date of attachment to a bank or to any third party. This, however, is subject to the right of the Custodian under Section 4 to set aside the transaction of mortgage or pledge. Unless the Custodian exercises his power under Section 4, the right acquired by a third party in the attached property prior to attachment does not get extinguished nor does the property vest in the Custodian whether free from encumbrances or otherwise. The ownership of the property remains as it was.”
The nature of the attachment and its purpose was expounded by the Supreme Court in the case of Kudremukh Iron Ore Co. Ltd. V/s. Fairgrowth Financial Services Ltd. and Anr.2 It was enunciated that Section 11 of the Act exclusively empowers the Special Court to give directions in the matter of the property of a notified person. The foundation for the jurisdiction under Section 11 to deal with any such property is that it should have been a property under attachment. Section 3(3) of the Act provides that the attachment of property whether movable or immovable, or both, belonging to the notified person becomes effective simultaneously with the issue of the notification under Section 3(2) of the Act. It is with respect to this attached property that powers 2 (1994) 4 SCC 246 SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 17/32 under Section 11 of the Act, could be exercised.
Limited and another3 wherein it was observed that :
“25. It is not a case where a third party right is involved as was the case in Kudremukh Iron Ore Co. Ltd. (supra). The purpose of the said Act is to discharge the liabilities of the government banks, financial institutions, mutual funds, etc. and for the said purpose, the statute itself provides that all properties belonging to the notified person shall stand attached. Once a statutory attachment comes into force, although the properties in question unlike the provisions of some other Acts do not vest in the Custodian but the same evidently remain under the control of the Special Court…..
The position in law which thus emerges is that, what can be lawfully attached under Section 3(3) of the TORT Act, 1992 is that which “belongs to” notified party. If the notified party had a limited interest in the property, it is that limited interest only which can be lawfully attached. Conversely, the attachment does not have the effect of extinguishing the rights or interest of the third party in the attached property. The interest of the third party in the attached property cannot be sold or distributed to discharge the liabilities of the notified party. Thus, if the property is already mortgaged or pledged on the date 3 (2004) 11 SCC 456. SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 18/32 of attachment to a bank or financial institution, the prior mortgage or encumbrance is not extinguished.
The aforesaid position in law is the fulcrum of the submissions on behalf of CANFINA. Evidently, this submission would hold ground if CANFINA is in a position to demonstrate that the said property was lawfully mortgaged by Pallav Seth. There are two facets to the existence of a lawful mortgage. First, the capacity of the mortgagor to transfer the interest in the subject property to secure the debt. Two, the mortgage having been created in the manner known to law.
An endeavour was made on behalf of CANFINA to urge that the existence of a valid mortgage is judicially recognized. The Court has in terms held that there was, in fact, such a mortgage of the subject property by Pallav Seth in favour of CANFINA. Therefore, it is beyond remit of inquiry in these proceedings to delve into that question again.
Per contra, the Respondents contend, the factum of mortgage by deposit of title deeds has not at all been established. On the contrary, on the basis of the material relied upon by CANFINA, it becomes abundantly clear that no such mortgage could have been created.
As noted above, the claim of CANFINA rests on the order passed by the SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 19/32 Special Court dated 8 April 2008 in Special Court Suit No.8 of 2002. I will advert to those observations a little later. To appreciate the controversy in a correct perspective, it may be appropriate to first notice the observations of this Court in the order dated 14 October 1996 in MA No.393 of 1995 in MA No.193 of 1993, whereby the subject property was ordered to be sold in execution of the decree in favour of FFSL. The observations in paragraphs 12 and 13 of the said order indicate that CANFINA (R3 therein) claimed that all the properties which had been disclosed by Pallav Seth (R2 therein), to be his properties, were mortgaged in its favour and CANFINA had instituted Suit No.4283 of 1993 (Special Court Suit No.8 of 2002) for a decree in the sum of Rs.72 Crores.
In contrast, Pallave Seth, the Court notes, disputed the debt as well as the claim of CANFINA that those properties were mortgaged in its favour. As regards the subject property, in paragraph 13.5, the Court has recorded that the said property was owned by Eskaydee Leasing and Investment Pvt. Ltd. (Respondent No.13 therein) and Pallav Seth had 15% shareholding in Eskaydee Leasing and Investment Pvt. Ltd. The observations of the Court in paragraph Nos.14, 15, 16 and 19 of the said order are of material significance. They read as under :
“14. Therefore, today the Court can only consider sale of SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 20/32 properties at Sr. No.2, Room No.131-B, comprising of 700 sq.ft. Out of Sr. No.4, the 15% shareholding of Respondent No.2 in Respondent No.13 company (which owns the property at Sr. No.51 and the property at Sr. No.7).
As stated above, the 3rd Respondent has claimed that all these properties are mortgaged in their favour. Mr. Sancheti, on behalf of Respondent No.3 states that the 3rd Respondent is consenting to these properties being sold free from mortgage on the footing that the 3rd Respondent will have the same interest in the proceeds of sale of these properties as they had in the properties. Parties are agreed that the question whether 3rd Respondents have a claim can be decided after the sale takes place. Parties are also agreed that after sale the amounts realized will be deposited in Court and keep invested, applicant or Respondent No.3 depending on who is held to be entitled to the monies, will give to the 2nd Respondent credit for these amounts from the date that they are deposited in Court. It follows that the person entitled to the monies will then be also entitled to the interest earned on these amounts.
Mr. Cooper submits that he had already applied for stay of sale on 10th October 1996. He points out that this was on the ground that 2nd Respondent had by Misc. Petition No.38 of 1996 prayed that the Consent Decree be set aside. Mr. Cooper submits that his application for stay of sale has been rejected by this Court on 10th October 1996. he states that he is therefore not repeating that application. He submits that no legal objection can be raised against a Sale in execution of the Decree. He, however, submits that this is not the right time to sell immovable properties. He submits that the property market is depressed at present. He submits that it is likely that the property market may go up after sometime. He submits that SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 21/32 sale should not take place at this stage.
As the 3rd Respondent is consenting, in my view, the properties at Sr. No.2, Room No.131-B, consisting of 700 sq. ft. out of Item No.4, the 15% shareholding of the 2nd Respondent in 13th Respondent Company and the property at Sr. No.7 must now be sold. As stated above, this sale is taking place with the consent of the 3rd Respondent on the footing that they will have the same interest in proceeds of the sale as they had in the properties sold. This subject to their claim being upheld.”
The aforesaid observations make it abundantly clear that, at that point of time, the Court had made it explicitly clear that the claim of the mortgagee was contentious; CANFINA (Respondent No.3 therein) gave consent for the sale of the said property, free from mortgage, on the footing that CANFINA will have the same interest in the proceeds of the sale as it had in the properties sold and the said dispensation was also subject to the claim of CANFINA being upheld. By no stretch of imagination, can it be urged that the order dated 14 October 1996 fortifies the claim of CANFINA that it had a lawful mortgage over the subject property. On the contrary, it was made absolutely clear that the entitlement of CANFINA in the sale proceeds was subject to the claim of CANFINA being upheld.
The occasion for establishing the claim of CANFINA as the mortgagee SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 22/32 was presented in Special Court Suit No.8 of 2002. In paragraph No.4 of the order dated 4 April 2008 in Special Court Suit No.8 of 2002, this Court observed as under :
“4. In the plaint, the Plaintiff has claimed for foreclosure in so far as mortgaged property of defendant No.1 is concerned. As noted above the learned Counsel appearing for Defendant No.1 admitted that the property was mortgaged to Defendant No.1, therefore, between defendant No.1 and Plaintiff it is an admitted position that the property was mortgaged. But no decree for foreclosure can be passed because it is an admitted position that the property that was mortgaged has already been attached under the provisions of the Special Court (Trial of Offences relating to transactions in Securities) Act, 1992 and has also been sold. In my opinion, therefore, the appropriate order in this regard would be to grant liberty to the Plaintiff to claim priority in payment when the Court takes the question of distribution of assets of defendant No.1 notified party under Section 11 of the Act, it is accordingly so ordered. The suit is disposed of. No order as to costs.”
Mr. Deshmukh, learned Counsel for the Applicant strenuously submitted that since Pallav Seth (Defendant No.1 in Special Court Suit No.8 of 2002) admitted that the property was mortgaged, CANFINA was not required to prove the factum of mortgage. This Court has observed in no uncertain terms that between CANFINA and Pallav Seth (Defendant No.1), it was an admitted position that the property was mortgaged. Therefore, the Court must proceed SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 23/32 on the premise that there was a lawful mortgage of the subject property.
As noted above, the issue again arose before this Court in Custodian’s Report No.13 of 2021 in MA No.37 of 2019 as CANFINA sought various directions against the Custodian for sale of certain shares and immovable properties on the premise that Pallav Seth had created equitable mortgages of immovable properties by having separately delivered title deeds in respect of those properties to CANFINA.
In paragraph No.5 of the said order dated 4 February 2022, this Court had noted that only shares were pledged. The observations in paragraph Nos.18 to 23 of the said order deserve to be extracted as most of the submissions now sought to be canvassed were urged before, and dealt with by, the Court with regard to the said claim of valid mortgage and, consequently, priority in the sale proceeds. They read as under :
“18. Although Mr. Sancheti submitted that the decree dated 14th October, 1996 records that the properties were mortgaged, I find that there was no factual enquiry in this respect and the court proceeded on the basis of the letter dated 15th July, 1992. It is also appropriate that we consider the fact that the Custodian has in its affidavit dated 2nd January, 2020 and additional affidavit dated 23rd January, 2020 clearly set out the fact that the property at Trinity Circle viz. the property at Du Parc, Trinity Complex Bengaluru was never owned by respondent no.
That read with the fact that the builder has SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 24/32 confirmed that no sale took place, no document has been executed. An observation in the decree that the property is mortgaged cannot in my view entitle the applicant to claim that the said property stood attached and can be proceeded against under a decree passed.
Mr. Yogesh Patel, Director of FFSL has filed an affidavit dated 17th January, 2022 opposing the payment of money of Rs. 52,46,575/- since according to the deponent the money was transferred to FFSL much before notification of Pallav Sheth who was notified on 6th October, 2001. Pursuant to order dated 10th October, 1996 the EMD amount was deposited in court and has since been paid over to the Custodian vide order dated 3rd April, 1997. There is no occasion to treat that property or EMD as attached property.
In my view this contention must be accepted because the property was not having owned by respondent no.
There was no occasion to treat the amount of EMD as property of respondent no. 1 and as security of the applicant since the amount was paid over to the Custodian A/c-FFSL in 1997 whereas respondent no. 1 was notified on 6th October, 2001, the amount of Rs. 50 lakhs EMD could not have been property in favour of the applicant in any stretch of imagination and hence the claim of the Custodian to make payment of the said amount to the applicant cannot be acceded to. In effect the Du Parc, Trinity Circle property never was attached property. Moreover it has been now confirmed that the property has been sold to Bharat Petroleum Corporation Limited and hence it is beyond the reach of the applicant or the Custodian. It is pertinent to note that the refund of EMD occasioned in 1996, whereas respondent no. 1 was notified only in 2001, as a result there is no question of the Du Parc property being subject of attachment. I am therefore of the view that SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 25/32 the applicant has not made out a case of mortgage by deposit of title deeds. The applicant cannot therefore claim under a decree of foreclosure in its favour nor can the Custodian claim that the Du Parc property stood attached upon notification of respondent no.1. 21. The sale of properties as above have occasioned pursuant to attachment of the properties by the Custodian and in this respect it is also necessary to point out that the applicant’s claim today is based on a decree that it obtained in Special Court Suit no. 8 of 2002 on 4th April, 2008. In paragraph 4 of the judgment decree the court observed that the mortgage is admitted position but although the plaintiff had claimed foreclosure, no decree for foreclosure could be passed. because the property mortgaged already attached and in that respect it was not felt appropriate to grant any order for sale by foreclosure. However, the court observed that it was open to the applicant to claim priorities in payment at the time of distribution. Mr. Sancheti has canvassed the applicant’s case on the basis that the court has found there is a valid mortgage, but that in my view are observations based on the pleadings and after the attachment is said to have taken effect.
In my view the application will today remain relevant only to the extent of the property situated at Green Field and pay of the sale proceeds of the property of Eskaydee Leasing & Investment Pvt. Ltd. Prayer clause (a) and (b) of the Miscellaneous Application seeks sale of 15% share of one Eskaydee Leasing & Investment Pvt. Ltd. In the course of submissions Mr. Raikar has clearly stated as far as prayer clauses (a) and (b) are concerned, it is case of the Custodian that 15% share holding of respondent no. 1 in the company continues to be held in terms of shares but these are not dematerialised. Hence there is no occasion to disclose the sale proceeds of 15% shares. It is SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 26/32 however an admitted position that certain property owned by Eskaydee Leasing & Investment Pvt. Ltd. was sold and an amount of Rs. 60 lakhs is said to have been recovered and credited in the attached account of respondent no. 1 and that has been invested by the Custodian. Mr. Sancheti has therefore contended that the amount so recovered must be paid over to the applicants because the claim for the sale of 15% shares held is based on the applicant’s contention that the commercial premises in question admeasuring 1200 sq. ft at 5th Floor, Mittal Tower, ‘C’ Wing was mortgaged to it. Exhibit 2 to the Notice of Motion no.1517 of 1996 reveals that the title deeds deposited in relation to this premises is a copy of the agreement dated 30th September, 1996 between M/s.Venus Diamonds and the said Eskaydee Leasing & Investment Pvt. Ltd. This property was since attached and has been sold as aforesaid and it is the sale proceeds of about Rs. 60 lakhs which lies invested as aforesaid. On an analysis of the facts as above all that the applicant can expect is to claim priority and the request for payment of monies in prayer clause (c) and (d) can be considered at the appropriate stage on a report by the Custodian. Prayer clause (b) of the report cannot be granted.
In my view it is not possible to grant any relief sought in the Miscellaneous Application because out of the said eight properties, four were sold. The Du Parc property at Bangalore and the commercial property at Gundecha Chambers were not owned by respondent no. 1 and are therefore beyond the scope of attachment. In respect of the Green Field property the Custodian proposes to attempt transfer of tenancy. Preliminary steps in this regard are being taken. As far as the shares in Eskaydee Leasing & Investment Pvt. Ltd. are concerned the property having been sold, the right of the applicant, if any, to seek payment of the aforesaid amount of sale proceeds of SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 27/32 payment of Rs. 60 lakhs or such part thereof as Custodian seems to suggest, is kept open to be considered in a report which the Custodian may file…”
Mr. Deshmukh made strenuous efforts to persuade the Court to hold that the aforesaid observations of this Court in SPCR 13 of 2021 do not impair the rights of CANFINA. The fact admitted need not be proved. Thus, once this Court held in the order dated 4 April 2008 in Special Court Suit No.8 of 2002 that the factum of mortgage was an admitted fact, this Court could not have again delved into the said aspect in the order dated 4 February 2022. 44. I find it rather difficult to accede to the aforesaid submissions of Mr. Deshmukh. The context cannot be lose sight of. As noted above, when the Special Court passed order directing the sale of the said property along with other properties of Pallav Seth in satisfaction of the decreetal debt of FFSL on 14 October 1996, the claim of CANFINA (Respondent No.3 herein) was contested by Pallav Seth. Thus, the Court made it clear that the entitlement of CANFINA to the portion of the sale proceeds would be subject to its claim being upheld. In Special Court Suit No.8 of 2002, this Court declined to pass a decree of foreclosure. In fact, the decree of foreclosure could not have been passed as, with the consent of CANFINA, the mortgaged property was sold, free from mortgage. Whatever mortgage rights CANFINA had qua the subject SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 28/32 property, they came to an end with the sale of the subject property free of mortgage. CANFINA could, thereafter, lay claim over the sale proceeds to the extent it was entitled to. Thus, the observations in the order dated 4 April 2008 in Suit No.8 of 2002 that a decree of foreclosure could not have been passed as the property was already attached and sold, and, therefore, the appropriate course would be to grant liberty to the Plaintiff (CANFINA) to claim priority in payment at the time of final distribution under Section 11 of the TORT Act, 1992, cannot read to confer a right on CANFINA, which it otherwise did not possess.
Even otherwise, if the documents on which reliance is placed by CANFINA are considered, it becomes clear that the claim of CANFINA that the subject property was mortgaged, is fraught with infirmities. Firstly, as noted above, the subject property was owned by Eskaydee Leasing and Investment Pvt. Ltd. Pallav Seth was holding only 15 out of 102 shares in the said company. It is well settled a shareholder is not the owner of the company or its property. A useful reference can be made to the judgment of the Supreme Court in the case of Life Insurance Corporation of India V/s. Escorts Ltd. and ors.4 Therefore, the subject property could not have been lawfully mortgaged by 4 (1986) 1 SCC 264 SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 29/32 Pallav Seth.
Secondly, the details of the properties mortgaged by Pallav Seth (Exhibit 2 to the Notice of Motion No.1517 of 1996 in Suit No.4283 of 1993) shows that a photostate copy of the agreement dated 30 September 1986 between Venus Diamonds and. Eskaydee Leasing and Investment Pvt. Ltd. was deposited. It is manifest, original title deeds were not deposited with CANFINA. Nor CANFINA ever claimed that it was in custody of the original title deeds of the subject property. I am conscious that in a given case, there could be a mortgage by constructive delivery of title deeds or even by delivery of copies of title deeds where the mortgagor is not in a position to deliver the original title deeds in exceptional circumstances. No such case is made out by CAFINA. It is in the aforesaid factual context, the observations in paragraphs 18 to 23 in SPCR No.13 of 2021 are required to be appreciated.
I am in full agreement with the aforesaid observations recorded by this Court in the order in SPCR No. 13 of 2021 dated 4th February 2022. Once the Court finds that there was no valid equitable mortgage in favour of CANFINA, the claim of CANFINA based on pre-existing rights in the subject property falls through. Consequently, the claim of CANFINA in the capacity of a bank and financial institution will fall under clause (b) of Section 11(2) of the TORT Act, SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 30/32 1992. The claim of CANFINA would thus be subservient to the claim of income tax department under Section 11(2)(a) so far as the tax liability for the priority period.
In any event, there is such a disparity in the assets and liability position that the principal tax liability for the priority period far exceeds the amount standing to the credit of the account of Pallav Seth. Having regard to the quantum of the liability under Section 11(2)(a) and the amount standing to the credit of the account of Pallav Seth, in my view, the prayer of the Custodian for release of a sum of Rs.4 Crores out of Rs.4.69 Crores standing to the credit of the attached account of Pallav Seth, subject to the Income Tax Department furnishing an undertaking, appears justifiable.
Hence, the following order : ORDER (i) Misc. Application (L) No.39 of 2023 stands dismissed. (ii) Custodian’s Report No.10 of 2023 stands allowed in terms of prayer clauses (a) and (b). (iii) The amount of Rs.4 Crore be released from the attached accounts of Pallav Seth to the Income Tax Department, subject to the Principal Commissioner, Income Tax Department, Central Circle 4, furnishing an SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 31/32 undertaking to bring back the said amount along with interest at such rate as may be directed by the Court. (iv) In view of the disposal of Custodian’s Report No.10 of 2023, Misc. Application No.19 of 2022 also stands disposed. (v) No costs.
( N.J.JAMADAR, J. ) SSP (corrected order as per Speaking to the Minutes of Order dated 30 August 2024) 32/32
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