Case Law Details

Case Name : Victory Logitrans Pvt Ltd & Anr Vs Union of India & Ors (Supreme Court of India)
Appeal Number : Writ Petition (Civil) No. 136 of 2017
Date of Judgement/Order :
Related Assessment Year :
Courts : Supreme Court of India (897)
In a new affidavit filed before Supreme Court on 17th July 2017 Central Government  made it clear that it cannot give more time to deposit old currency notes, as  in case a fresh opportunity is offered for exchange of SBNs, it would lead to rampant illegal trading of these SBNs (that is, the SBNs being traded at discounts) thereby defeating the very purpose of demonetization,
The very object of demonetization and elimination of black money will be defeated if a window is opened for a further period as the persons in possession of the SBNs would have had sufficient time and opportunity to carefully plan the reasons and excuses for not depositing the SBNs within the permitted period that is before 30.12.2016. Any number of benami transactions and user proxies for the purpose of producing and depositing SBNs would then arise which the departments would have great difficulty in deciding any genuine case from the numerous bogus ones.”.

It is submitted that the period 09.11.2016 to 30.12.2016 was fairly a very long period during which any one can either himself or through his authorized agent/third person could have deposited/ exchanged the specified bank notes subject to following the prescribed norms. In other words, what was permitted was exchange and or deposit of specified bank notes during a block period a period up to and including 30.12.2016 either in person or through authorized third person,.

Content of Affidavit is as follows :-

IN THE SUPREME COURT OF INDIA
(CIVIL ORIGINAL JURISDICTION)
WRIT PETITION (CIVIL ) NO. 136 OF 2017
IN THE MATTER OF:

Victory Logitrans Pvt Ltd & Anr – Petitioner

Versus

Union of India & Ors – Respondents

ADDITIONAL AFFIDAVIT ON BEHALF OF
RESPONDENT NO.1, I.E., UNION OF INDIA THOUGH
THE SECRETARY,
MINISTRY OF FINANCE IN WRIT PETITION (CIVIL)
NO. 136 OF 2017 AND CONNECTED WRIT PETITIONS

 

I, T. Narasimhan, son of late Shri Thangaiyan, aged about 55 years, working as Under Secretary, Government of India, Ministry of Finance, Room No 221, North Block, New Delhi- 110011 do hereby solemnly affirm and state as under:
1. That I am working as Under Secretary in the Ministry of Finance and in such capacity, am well acquainted with the facts of the case as are borne from the records maintained by the answering Respondent. I am fully competent duly authorized to swear this additional counter affidavit and depose to the facts of the case on behalf of the answering Respondent.
2. At the outset it is most humbly and respectfully submitted that the answering respondent had filed short counter affidavit dated 07.04.2017 pursuant the order dated 21.03.2016 passed by this Hon’ble
Court, wherein, it was interalia directed as follows:-
“3. Having heard submissions, which remained inconclusive, and before proceeding further with the matter, it was felt, that this Court should ascertain from the Union of India (a) whether the Central Government intends to exercise the power conferred by clause 4(1)(ii) of Ordinance 10 of 2016; and (b) if the answer to (a) is in the negative, the reason why the Central Government chose not to exercise its jurisdiction. An affidavit may accordingly be filed by the Central Government, explaining its position to this Court.”
4. That as aforesaid, the Union of India filed a short counter affidavit dated 07.04.2017, the contents of which may be read as part and parcel of the present additional affidavit as well, and the answering respondent humbly craves leave of this Hon’ble Court to refer to and rely upon the earlier short counter affidavit if the need arises.
5. That subsequently, the matter had come up for hearing on 04.07.2017, and following the outcome of the hearing on said date, the present additional affidavit is being filed to place on record the following facts for kind consideration of this Hon’ble Court.
Notification, Grace period and its misuse
6. It is most humbly and respectfully submitted that vide Notification date 8.11.2016, issued by the Ministry of Finance (Department of Economic Affairs), the Government of India, exercising powers conferred by  sub-section (2) of Section 26 of the Reserve Bank of India Act, 1934 declared that that the specified bank notes of denomination of then existing series of the value of five hundred rupees and one thousand rupees shall cease to be legal tender with effect from 9.11.2016 to the extent specified in the aforesaid Notification date 8.11.2016 is annexed herewith and marked Annexure R/1 to this additional affidavit [Pg _ to _ ].
7. In Paragraph 2 of the aforesaid Notification, it was stated clearly that the specified bank notes held by a person [other than a banking company defined under the Banking Regulation Act, 1949 and every
Government Treasury] may be exchanged at any banks as mentioned therein for a period up to and including 30.12.2016 subject to the conditions set out in the said Paragraph 2 (i) to (ix) of the Notification dated 08.11.2016.
8. It is submitted that in terms of the aforesaid Notification date 8.11.2016, the demonetization period was between 09.11.2016 to 30.12.2016 within which primarily, the exchange and or deposit of specified bank notes subject to meeting the laid down norms was permitted to every person. The period thus available for every one to exchange and or deposit the specified bank notes was spread over 51 days [except for closed holidays] unlike the earlier demonetization drive carried out in the year 1978, that the period 09.11.2016 to 30.12.2016 was fairly a himself or through his authorized agent/ third person could have deposited/ exchanged the specified bank  notes subject to following the prescribed norms. In other words, what was permitted was exchange and period a period up to and including 30.12.2016 either in person or through authorized third person. It is submitted that this was significant because none of the petitioner[s] has given any valid ground as to why they could not deposit the specified bank notes through his or her authorized third person.
9. It is most humbly submitted that after the notification was issued the same became operational, various malpractices were reported post demonetization including use of old Specified Bank Notes [ie
erstwhile Rs 1,000 and Rs 500 rupee notes since ceased to be a valid legal tender] for buying gold. Between 09.11.2016 and 10.01.2017 alone- [which includes demonetization period ie., 09.11.2016 to 30.12.2016] there were more than 1100 raids/ surveys conducted by the Income Tax Department on various persons. During the same period, ie., between 09.11.2016 and 10.01.2017, more than 5,100 notices were issued for verification of high value suspicious cash deposits made in bank accounts.
10. It is submitted in this context that preliminary outcome of investigation post actions taken following such IT raids etc as mentioned above, in first three weeks after demonetization, the following were revealed:-
i. Unusual spurt of cash sales immediately after announcement;
ii. Cash sales without PAN in most cases;
iii. Splitting of bills to hide identity of purchasers;
iv. Backdating of sales;
v. Receipt of cash advances against future sales;
vi. In many cases, in order to avoid depositing of cash in own accounts directly, money was routed through accounts of shell companies and was layered through ‘intermediaries’ accounts before being received in accounts of bullion traders;

vii. Gross misuse or abuse of the exemptions granted for use of old Specified Bank Notes [ ie erstwhile Rs 1,000 and Rs 500 rupee notes since ceased to be a valid legal tender] at Petrol Pumps, Air Ticketing Offices, Railway Booking Offices, Toll Plazas to name a few. In fact, the Central Government had to periodically review and cancel and or restrict such exemptions to plug the misuse of the exemptions granted.

11. As a result of the raids and other strict measures enforced, more than Rupees 610 Crore of rupees cash [including cash of Rupees 513 Crore out of which Rupees 110 Crore was in new currency] and valuables were seized by the IT Department and other government agencies. The undisclosed income detected in the above actions was more than Rupees 5,400 Crore. It is further submitted that out of 1,100 raids/ surveys more than 400 cases were referred to Enforcement Directorate and the Central Bureau of investigation for further action in accordance with law. Details of some of the specific searches conducted by the Enforcement Directorate including searches against Hawala Operators at various Metropolitan and other Cities have been provided in the short affidavit filed on behalf of the Respondent Ministry, which is already in the records of the Hon’ble Court.
12. The above malpractices and irregularities that surfaced had to be immediately arrested and plugged to achieve the stated objective of demonetization. The Central Government therefore, taking over all review of the situation during demonetization period ie., 09.11.2016 to 30.12.2016] and various reports including intelligence and other reports decided to invoke Article 123 of the Constitution of India with a view to bring an Ordinance to provide for cessation of liabilities on the specified bank notes. Accordingly, it was decided as a matter of conscious decision and as a major economic step to bring in an Ordinance known as ‘The Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016 since the Parliament was not in session on 30.12.2016. The aforesaid Ordinance known as ‘The Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016’ was promulgated by the President and published on  0.12.2016 and brought in to force from 31.12.2016.
13. It is further humbly and respectfully submitted that it was necessary to promulgate the said Ordinance since it was incumbent on the Central Government to inter- alia have clarity and finality to the liabilities of the Reserve Bank of India as well as the Central Government arising from such Specified Bank Notes which had ceased to be legal tender.
14. The aforesaid Ordinance viz., ‘The Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016’
provided for ‘grace period’ during which the specified bank notes can be deposited in accordance with the Ordinance. Sec 3 of the Ordinance however, provided that with effect from 31.12.2016, the specified bank notes ceased to be liabilities of the Reserve Bank under Sec 34 of the Reserve Bank of India Act, 1934 and it shall cease to have guarantee of the Central Government under sub- section (1) of Section 26 thereof. The Ordinance made it further explicitly clear that this was notwithstanding anything contained in the Reserve Bank of India Act, 1934 and or any other law for the time being in force.
15. That it is submitted that the only exception made by the Ordinance with regard to exchange of specified bank notes was provided for in Section 4. It was in respect of following category of persons, who were holding the specified bank notes on or before the 08-11.2016 and such category of persons were entitled to tender within the ‘grace period’:-
(i) a citizen of India who makes required declaration that he was outside India between 9.11.2016 and 30.12.2016 subject to such conditions as may be specified by the Central Government; or
(ii) such class of persons and for such reasons as may be specified, by notification by the Central Government.
16. It is submitted that the Central Government simultaneously by a separate Notification date 30.12.2016 imposed the conditions that are required to be fulfilled in respect of those Citizens who fall
within clause (i) of sub section (1) of Section 4 of Ordinance mentioned herein above. A true copy of the Notification date 30.12.2016 is annexed herewith and marked Annexure R/2 to this additional affidavit. [Pg ____ to _____].
17. It is further submitted that with effect from 31.12.2016, holding of specified bank notes which have not only ceased to be a valid legal tender but has also ceased to have guarantee of the Central Government, is a punishable offence except to the extent exempted by the Ordinance itself.
18. It is most humbly submitted that with the promulgation of the Ordinance viz., ‘The Specified Bank Notes (Cessation of Liabilities) Ordinance, 2016’, the earlier Notification date 8.11.2016 has ceased to be operational and resultantly, paragraph 2 (ix) on which reliance is placed by the petitioner ceased to be valid with effect from 31.12.2016. While the Notification date 8.11.2016 was a notification and more in the nature of subordinate legislation issued by the Central Government under Section 26 (2) of the Reserve Bank of India Act, 1934, the Ordinance is substantive law. This is with out prejudice to the submission of the Union of India that the Ordinance has overriding effect over everything contained in the Reserve Bank of India Act, 1934 [ including Notification date 8.11.2016 issued there under] and or any law in view of explicit legislative mandate of Sec 3 of the Ordinance. In fact, on and from 31.12.2016, there is no provision existing in law whatsoever, for exchange and or deposit of the specified bank notes in question for any person except in the case of Citizens exempted by the Ordinance itself.

19. The aforesaid Ordinance was replaced by The Specified Bank Notes (Cessation of Liabilities) Act, 2017 by the Parliament. This Act received the assent of the President on 27.02.2017 and was published in the Official Gazette on 28.02.2017. The aforesaid Ordinance was repealed under sec. 13(1) and the Act was deemed to have come into force on 31.12.2017 by virtue of sec. 1(2). In view of the intervention of the Parliament by enacting the aforesaid Act, the Petitioners furthermore cannot claim any right since there is no estoppel against statute. A true copy of the Specified Bank Notes (Cessation of Liabilities) Act, 2017 dated 28.02.2017, [ herein after referred to as the Act of 2017] a copy whereof is annexed herewith and marked as Annexure R/3 [ Pg ____ to _____] to this additional affidavit.

20. According to the petitioner(s) the ‘grace period’ may be opened up to 30.06.2017 for all the citizens of India, who could not deposit/ exchange the SBNs till 31.12.2016 for one reason or the other. In this regard, the petitioner(s) have sought a writ of mandamus asking the answering respondent to exercise its powers under Clause 2 (ix) of the Notification dated 8.11.2016 read with Section 4 (1) (ii) of the Act of 2017.
Malpractices/ irregularities / abuse of relaxation noticed by various Government agencies:
21. It is further submitted that after the demonetization period from 9.11.2016 to 30.12.2016 was over, the Income Tax Department further initiated “Operation Clean Money” on 31.01.2017 to leverage technology and data analysis for e-verification of cash deposits made during the demonetization period i.e., 09.11.2016 to 30.12.2016. The exercises has resulted in identification of approximately 1.8 million persons for such on line verification, who appeared to be not in line with tax payer’s profile. More than 1.2 million online responses from 0.838 million distinct PANs/ persons have already been received. It is submitted that in case there has been due explanation the verifications are being closed after proper analysis and examination. Similarly, where there has been deposits made in Pradhan Mantri Garib Kalyan Yojna (PMGKY) then also the verifications are being closed. It is further submitted more than 0.378 million out of approximately 1.8 million, high risk cases have been detected and have been taken up for assessment and investigation.
22. It is further submitted that searches undertaken taken by the Income Tax Department between 1.4.2014 and 28.2.2017, has led to admission of undisclosed income of more than Rupees 36,051 Crore involving searches in more than 2027 groups. This is in addition to seizure of undisclosed assets worth Rupees 2,890 Crore. Similarly, the Income Tax Department between 1.4.2014 and 28.2.2017, conducted more than 15,000 surveys which resulted in detection of undisclosed income of more than Rs 33,000 Crore.
23. In about 2 months (9th November 2016 to 10th January 2017) a significantly large number of enforcement actions were undertaken by the Income- tax Department. They included 1100 searches and surveys and more than 5100 verifications. The total seizure through these actions was of about Rs. 610 crores including cash of Rs. 513 crore. The cash seizure included seizures in new currency of more than Rs. 110 crore. The total undisclosed income admitted was more than Rs. 5400 crore.
24. The Income-tax Department detected several instances of manipulation for conversion of unaccounted cash held in SBNs into legal tender by various entities during these actions and apart from taking actions under Income-tax Act (as summarized above) in more than 400 cases references were made to the Enforcement Directorate and the Central Bureau of Investigation for action under criminal laws, as applicable. Some illustrations of modus operandi detected for conversion of unaccounted cash held in SBNs into legal tender are as under:
i. The most widespread route used to convert SBNs

into legal tender was through purchase of jewellery and bullion in the initial period after demonetization. Jewelers across the country have claimed unusual sales in cash on 8 November, 2016- the day announcement regarding demonetization was made. Large number of jewelers also accepted SBNs on account of sale after 8 November, 2016 as part of their cash sales. In many cases such transactions were given a color of legitimacy by back dating of sales  invoices. In a few cases sales were also found to be bogus or mere book entries. The identities of the purchasers or beneficiaries appear to have been hidden through splitting of sale invoices below threshold limit (Rs. 2  lakh for jewellery) to avoid quoting of PAN. In most cases the sale bills had either no details of the names and addresses of purchasers or such details were incomplete or bogus.

ii. Business entities (other than jewelers) were found to have deposited huge amount of SBNs in their bank account under the garb of cash sales. It was found that either the cash sales vouchers did not exist or bogus vouchers were created only to adjust the otherwise unaccounted cash as part of sales proceeds. In reality such sales never took place. This was done do adjust the unaccounted cash of these business entities or others.

iii. Holders of unaccounted cash in SBNs were also found to have made wide use of entry operators (managing shell companies and other entities), for conversion of the unaccounted cash through layered transactions.

iv. Another practice was depositing unaccounted cash in others’ bank accounts (including friends, relatives, employees and even unrelated persons whose bank accounts were available on hire for payment of a commission) or hiring persons for exchange at the bank counters through use of forged KYC documents.

v. Depositing amounts below the threshold to avoid scrutiny. Several persons with large amount of black money were found to have split the amounts and deposited them in multiple bank accounts and in the names of various individuals. It was observed that during the period of demonetization several dormant bank accounts became active and people with limited means were used to launder black money by depositing in their accounts for a commission. Many persons opened new bank accounts in several names for depositing unaccounted cash.

vi. Some educational institutions were found to have accepted fees in old currency notes after midnight of 08.11.2016.

vii. Many cooperative banks and credit societies as also other banks were found involved in helping people for conversion of unaccounted cash, through various methods.

Violations detected by the Income Tax Department

25. Some of the cases detected by the Income Tax Department of the Government of India are as follows:

i. Cooperative Bank, Alwar: Survey was conducted in the case based on a reference by the police on seizure of cash of more than Rs 1.3 crores from a vehicle carrying 3 directors of the bank. On investigations, it was found that the bank was used for conversion of personal unaccounted cash of Rs 2 crores by the Chairman and his family.

ii. Urban Co-operative Bank, Jaipur: Unrecorded cash of Rs 1.5 crores was found secreted away in an almirah in the “Clearing House” room of the Bank. Cash was found in unallotted and benami lockers Jaipur.

iii. Co-operative Banks, Pune and Mumbai: Investigation has found receipts of SBNs to the RBI far in excess to that found during stock taking. The excess reporting from just these two banks was more than Rs. 100 crores.

iv. Cooperative Bank, Delhi: It was found in a search of the head office and its branches that the bank systematically opened more than 1200 benami and fraudulent accounts and made 600 dormant accounts active after 08.11.2016. A total of more than Rs.120 Crores was deposited in the Bank by 26 December, most of which were routed back to the beneficiaries.

v. Cooperative Bank, Bangalore: Bank accepted more than Rs 200 crores as deposits, from different persons, without PAN and also paid interests without deducting tax at source, mandatory for such interest payments. This was done to camouflage the real owners of these deposits. Three beneficiary families have been tracked and questioned. They have accepted that the deposits made by them were their unaccounted incomes. The main person involved in bank’s operations also admitted to have been running financing and chit funds operations out of books, which evidences suggest could be as large as Rs 40 crores or more, with an out of books interest pay out of more than Rs 9 crores.

vi. Shell companies: As per preliminary findings, in only five major cases in Delhi, Gurgaon and Noida, the cash laundered was more than Rs 400 crores.

vii. Kashmere Gate, Delhi: Investigations were initiated on the basis of information from the police following interception of a vehicle carrying cash of Rs 3.7 Crore in old currency. The carrier confessed to have deposited nearly 35 crores of cash in old denomination note in the bank since 11.11.2016. The bank accounts were opened in the name of paper companies. Cash was collected from various parties, deposited in Bank account of one such fake company, then transferred through RTGS from one company to another company’s bank account and after three- four layering, were finally deposited in the account of original owner. All these accounts were operated by a single person. This was done with active involvement of the Branch Manager and the Operation Manager in lieu of commission at the rate of 1% on the sums deposited.

viii. Charkhi Dadri, Haryana: Investigations were initiated on the basis of STRs on cash deposits of more than Rs 31 crores made during 10-25 November, 2016 in five proprietorship concerns of a single person. The person was later found to be a front man of an entry operator, who accepted to have taken cash in SBNs and provided entries through RTGS to beneficiaries through a web of 18 bank accounts controlled by him. Analysis of seven bank accounts revealed that he had facilitated conversion of unaccounted cash for 70 beneficiaries, providing entries to an extent of Rs 79 crores.

ix. Gaya case: A search was conducted on the offices and residence of the main person. Investigations revealed that the operator used bank accounts held in the names of ten benamidars to launder cash of more than Rs 13 crores for a Delhi based beneficiary. The money was transferred to bank accounts linked to ten firms of the beneficiary through RTGS. This was done with the cooperation of the bank officials.

x. Kolkata case-1: The case was identified for search action on the basis of data on entry Operators.
Search revealed that post 8 November, 2016 the entry operator had provided entries of Rs 103 crores to more than 120 beneficiaries, most of which were Delhi based. Entries were provided through 198 bank accounts linked to shell companies through RTGS and cheques. The Department has prepared the cash trail of Rs 103 crores for further action.

xi. Proprietorship Kolkata case-2: Investigations in the case were initiated on the basis of risk based information on high value cash deposit of Rs 1.5 crores (P2 category) made by the entity post 08.11.2016. It was found that the mastermind worked through a set of proprietorships held in the name of persons who acted at his behest. The cash trail prepared on the basis of bank statements of these proprietorship concerns has revealed that more than Rs 20 crores were laundered by this  perator for 20 beneficiaries spread across the country.

xii. NOIDA Bank case: Survey in this case was carried out on the bank based on information on cash deposits in 23 bank accounts amounting to Rs 52 crores, with the total credits in these accounts running into Rs 800 crores post 8 November, 2016. Cash deposited in the accounts were transferred ultimate beneficiaries through multiple layers by RTGS.

Conversion of SBNs through Jewelers

xiii. Bhopal Cases: Post-08.11.2016, many persons with unaccounted cash were purchasing jewellery and the jewelers were accepting SBNs against the government regulations. The jewelers had shown exceptionally high sales on 08.11.2016 and payments were shown as advance against future sale.

xiv. Hyderabad case-1: Cash deposits of Rs. 97 crores made in SBNs was claimed to have received on 8 November, 2016 from 9:00 pm on wards towards advance for purchase of bullion from 5200 customers.

xv. Hyderabad case-2: Cash deposits of Rs. 22 crores made in SBNs was claimed to have received from April, 2016 to 08.11.2016 towards advance for purchase of bullion from 1475 customers.The accountant, however, stated on oath that the entire transactions were bogus and the books were fabricated on 12th November.

xvi. Patiala Group case: Cash deposits of Rs. 11 Crores made by the group on 11.11.2016 in their bank account was claimed to be on the basis of sales invoice between 01.10.2016 to 08.11.2016. It was found that all sales invoices were created on 08.11.2016.

Petrol pumps

xvii. Cash deposits data during demonetization period revealed that there were more than 110 petrol pumps under Rajkot charge which had deposited cash of Rs 190 Cr during demonetization. On an average, it was found that one-fifth is the excess cash deposited in the pumps over and above the sales made in the corresponding period. The Methodology for investigation that was adopted included analysis of the return details of petrol pumps figuring in the data disseminated on cash deposits and comparing of sales with cash deposited during demonetization. Demonetization data was compared with average monthly sale of last year. The bank statements were also gone through for further analysis like periodicity and magnitude of cash receipts and payments. Cases where deviations were observed beyond 25% were selected for survey, as the government had allowed petrol pumps to accept SBN notes against sale during demonetization. The exercise led to detection of discrepancies of more than Rs 10 Cr in 9 surveys.

Mules (use of accounts of large number of employees)

xviii. Amritsar case: It was found that the entity had deposited Rs. 2.5 cr. in about 700 accounts of his employees without their consent and then withdrawn using withdrawal slips already in custody of HR staff of the company without the employees’ knowledge.

xix. Chennai case: Two Trusts had planned to convert Rs 8.18 crores of unaccounted income held in cash through its 650 employees by depositing cash in the employees’ bank accounts in sums less than Rs. 50,000/-.

xx. Mumbai case : The entity searched was engaged in the business of event management and real estate. Search in this case led to seizure of about 300 blank Bank Authorization forms, duly signed along with necessary KYC documents, at the premise. These were apparently to be used to convert the unaccounted cash held in SBNs by the Group. Evidence of bogus loans from Kolkata based shell companies and suspicious individuals amounting to Rs. 21 Cr. and Rs. 12 Cr. respectively was also found.

Use of exempt persons

xxi. Dimapur case: Information regarding transport of large quantity of cash in a private plane to Dimapur airport was received by the department. The cash was dropped at Dimapur and the parties flew back by the aircraft to Delhi, where they were intercepted by the Air Intelligence Unit, Delhi. During subsequent questioning, the person belonging to Nagaland stated on oath that after the announcement of demonetization on 08.11.2016, he arrived had at an arrangement with his friend to transport cash from Delhi to Dimpaur. The understanding reached was that he would receive the cash in Dimapur, deposit the same in his bank account in Dimapur and return it via RTGS or in cash at a later date. The beneficiary, in this case, has admitted that Rs. 8.5 crores was transported from Hisar to Dimapur on two occasions.

Traders

xxii. Several actions on traders were conducted post the announcement of the demonetization scheme by the Government. These actions revealed that the unaccounted cash found in their possession was mostly part of their unaccounted incomes, which they were forced to deposit in bank accounts or were seized by various agencies during the demonetization period.

xxiii. Delhi case: This was the case of a search on a Bitumen Trader. Documents found during the search revealed that the person had deposited about Rs. 150 crores in the bank accounts of his firm post 8 November, 2016. These deposits were sought to be explained as cash sales by making backdated entries in Tally software.

xxiv. Surat cases: The entities involved are the authorized wholesale dealers of Pan Masala of a particular brand in the South Gujarat Region. The group was initially covered under a survey, which was later converted into search on finding of cash of Rs 1.5 in new currency notes at the business premise. The source of cash was stated to be cash sales, but they could not produce any documentary evidence of cash sales.

xxv. Patna cases: Cash was recovered from two individuals by the police. Investigations were initiated by the department post the police action. In one case the seizure was of Rs 31.5 lakhs from the proprietor of a business entity as he failed to explain the source of the cash in his possession. In the second case, the individual was found to be a wholesaler of sarees. He admitted that the cash found in his possession was his undisclosed income. He was found to have not maintained any books of accounts of his business. Rs 1.05 crores was seized from the wholesaler.

Real Estate

xxvi. Bangalore case: The case involved two major civil contractors of Bangalore. The two groups
were alleged to have engaged in massive inflation of expenses and investment of unaccounted income in purchase of immovable properties. A sum of Rs 1.96 crores in SBNs, belonging to the Group, was also seized from the residential premise of a close friend of the MD of the Group. The group also paid nearly Rs.1.3 crores in SBNs to their labor on 8 November, 2016 and booked it as labor expenses. The search led to seizure of Rs 4 crores in cash and valuables and admission of Rs 167 crores as undisclosed income.

xxvii. Chandigarh cases: Cash of Rs. 2.22 cr. in SBNs were caught by the police apparently while being transported from Lucknow to Delhi in Palwal. The owners of the cash have voluntarily offered additional income of Rs. 55 cr. over and above their regular income. No explanation regarding the source of cash has been offered. In the second case, the company was found to have deposited cash amounting to Rs.14 crores in its bank accounts on different dates after 08.11.2016 without any explanation.

Report received from Ministry of Home Affairs

26. The Ministry of Home Affairs vide its communication dated 11.07.2017 has reported that as per intelligence agencies there were reports of large scale misuse of the window for exchange of old notes. Seizure of cash during the month of November and December 2016 was to the tune of Rs 147.9 crores and Rs 306.897 crores and seizure of gold for the month of November and December 2016 was 69.1 kg and 234.267 kg respectively. Large quantities of new notes were also seized indicating exchange of old currency cash with new currency circumventing the rules. Numerous methods for cash conversion were observed as below:

i. Use of poor persons for exchange of old denomination notes.

ii. Use of copies of KYC (Know Your Customer) documents submitted by customers to exchange OCNs (Old Currency Notes) at other branches.

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iii. Suspected backdating of entries by some cooperative banks and selling them at premium.

iv. Upgrading of Jan Dhan Accounts to small KYC compliant accounts, in order to take advantage of the facility to deposit more than Rs. 50,000.

v. Sale of bullion/jewelry by backdating the sale.

vi. Cash deposited in religious trusts especially temple trusts.

vii. Cash deposit at liquor vends.

viii. Paying of advance salaries by some cash holders to their employees.

ix. Showing of cash balance in the balance sheets without having a significant business.

x. Some persons have made voluntary disclosure under the Income Disclosure Scheme (IDS) which has been en cashed by selling it at a premium as their undeclared asset may be in several different forms.

xi. Large amount of OCNs were deposited as advance tax as per tax rules to show hike in income in the current year.

xii. Receivables were shown on OCN deposited in business accounts as the sales made prior to November 8.

xiii. In real estate builders accepted cash to pay off in OCN to laborers and petty traders for items like sand, cement etc. for dormant stocks of flats.

xiv. Deposit of bank notes in the North Eastern States given the income tax exemptions in these states.

xv. In the Left Wing Extremism affected areas the contractors, jewelers, transporters, petrol pump owners, small businessmen, couriers, commission agents, tendu patta contractors were used for the exchange of old currency notes.

xvi. Moving of notes across the border to Bhutan and Nepal for exchange.

xvii. Showing the income as agricultural income especially in Punjab and Chandigarh.

xviii. In the services sector, some individuals, especially doctors were found ferrying cash for conversion.

xix. Activities of entry operators who manage vast financial infrastructure for conversion of black money to white through name lending/ID lending /account lending.

Report from Central Bureau of Investigation (CBI)

27. The CBI has informed that they have registered 63 cases relating to irregularities committed  during post demonetization period involving 57 Regular Cases and 06 Preliminary Inquiries from 25.11.2-16 to 30.04.2017. The cases allegedly involve total amount of Rs. 395.19 crores. Out of these cases, 10 cases are disposed of including filing of 03 charge- sheets against the involved accused whereas 53 cases are under investigation. The cases registered involve the irregularities pertaining to banks, post offices, railways involving 113 public servants. CBI in these matters has seized new currency of denominations of Rs.2000 & Rs. 500 which is to the tune of Rs. 21602500/- whereas demonetized currency seized by CBI is to the tune of Rs. 1602500/-. Summary of cases is as follows:

1 Total number of cases / enquiries registered from – 25.11.2016 to 30.4.2017 63 (57 RCs & 6 PEs)
2 FIR amount involved Rs.395.19 crores
3 Cases under investigation / under enquiry 53 (50 RCs & 3 PEs)
4 Cases disposed off 10 (7 RCs & 3 PEs)
5 Number of charge-sheets filed 03
6 Number of public servants involved ( arrested) 113 (21)
7 Number of Cases relating to banks / post offices / railways 50 / 10/ 03
8 New currency of denomination of Rs.2000 & Rs.500 seized by CBI Rs.21602500/-
9 Demonetized currency seized by CBI Rs.1602500/-
10 Zone-wise Distribution of cases under investigation / enquiry
Hyderabad Zone 15
Delhi Zone 05
Patna Zone 02
Kolkata Zone 05
Bhopal Zone 02
Chennai Zone 06
Mumbai Zone 12
EO-I Zone 01
Lucknow Zone 03
Chandigarh Zone 02

Inputs received from the Enforcement Directorate,
Government of India:

28. As per the information received from the Directorate of Enforcement, post demonetization, due to cancellation of legal tender characteristics of Rs. 500/- and Rs. 1000/- denomination notes, these currencies acquired the character of commodities which can be traded. During the demonetization period from 08.11.2016 to 30.12.16, it had come to notice that the SBNs were illegally traded in many parts of the country and various malpractices were employed to get the SBNs exchanged. The grace period offered for exchange of SBNs was also misused as was observed in FIRs registered by Local Police ‘at many places. Based on such FIRs the Directorate also registered money laundering cases and investigations conducted so far revealed that the discounted price varying from 25% to 30% was given in the exchange of new currency with old currency. In one such case in Goa, few persons were apprehended carrying New Currency Notes amounting to Rs. 70 lakhs. It was revealed by them that these notes were supposed to be exchanged for Old Currency Notes of Rs. one crore. However, these people were apprehended before actual exchange could take place. In a similar case in Bangalore, New Currency Notes worth Rs. 96 Lakhs were recovered from various persons during search operation by this Directorate. These persons accepted that these notes were supposed to be delivered to someone at a commission of 25% in exchange with Old Currency Notes.

Inputs received from the Financial Intelligence Unit,
Government of India:

29. It is submitted that the Financial Intelligence Unit-India (FIU-IND) is an intelligence agency receiving Cash Transactions Reports (CTRs), Suspicious Transactions Reports (STRs) etc. as prescribed under Prevention of Money Laundering Act (PMLA), filed by the reporting entities i.e. banks, financial institutions etc, which after analysis are being disseminated to various law enforcement agencies viz. CBDT, ED, DRI, DGCEI. CBI, etc.

30.  It is submitted that FIU-India has received approximately 13 lacs STRs pertaining to the period of demonetization based on Red flag indicators as compared to 55,644 STRs in F.Y. 2014-15 and 1,05,973 STRs in F.Y. 2015-16. It is only after investigation/inquiry by the concerned Law Enforcement authority can any conclusive finding be arrived at.

31. As informed by the FIU, the CBDT in its feedback on reports made available to it by FIU-IND in respect of bank transaction in the demonetization period has informed that:-

i. As a result of enforcement action during the period 09.11.2016 to 10.01.2017 were able to seize valuables more then Rs. 6100 million including Rs.5130 million cash and detected undisclosed income as on 10.01.2017 of more than Rs. 54000 million.

ii. As a result of investigation on 11223 accounts, were able to detect undisclosed income of Rs. 27433.5 million.

iii. Investigation on 90 Jan Dhan Accounts led to detection of unaccounted income of Rs. 19.2 million.

iv.  Operation clean money initiated on 31.01.2017 in which:-

i. 1.8 million cases identified having cash transactions not in line with taxpayer’s profile, on-line response from 0.972 million people, with 1.333 million accounts involving cash deposits of around Rs. 2890000 million received.

ii. identified 0.371 million new accounts relating to 0 158 million taxpayers who made partial declaration of accounts/amounts in their earlier responses.

iii. additional 0.568 million new cases identified for e-verification process.

32. Thus, going by the extent and enormity of the malpractices observed during post-demonetization period, it is apparent that in case a fresh opportunity is offered for exchange of SBNs, it would lead to rampant illegal trading of these SBNs (that is, the SBNs being traded at discounts) thereby defeating the very purpose of demonetization.

EXAMINATION OF PETITIONS FOR RELAXATIONS

33. That based on large number of references (letters, emails, telephone calls) received from other
Government Department, foreign Governments, VIPs/ MPs, Indian Missions abroad, foreign embassies in India, foreign institutions and emails and letters from individuals from within the country/ abroad, highlighting issues arising out of cancellation of legal tender character of Specified Bank Notes (SBN), following issues were identified and were examined by the competent authorities.

The issues that had been raised were on the following matters:

i. NRIs who are denied exchange of SBN, kept in India;

ii. Resident Indians, who do not satisfy the eligibility criteria of being outside the country during November 8 to December 30,2016.

iii. Accidental holding, arising from situations like lost and found/ forgotten and found/ hidden by old people and found by relatives after their death/ debilitating ailment etc.

iv.  Possessing of SBN by those who claim to have waited as per the Prime Minister’s address to exchange them at RBI offices after Dec. 30 , 2016 to avoid waiting at banks.

v.  Involuntary holding due to forced donations like in case of offering in the hundis of temples/ unsolicited donations by post or courier or some other means etc. to temples/ trusts.

vi. Allowing depositing of SBNs by Overseas Citizen of India (OCI) and other foreign nationals.

vii. Depositing of SBN’s by foreign institutions and by foreign Governments, e.g., money exchangers in other countries, Korean banks, Financial Institutions in Thailand, commercial establishment of Israel, Bank owned by Bangladesh Government, have requested to advise for deposit of SBN, collected by them.

viii. Allowing third party deposit even after December, 30th, 2016.

ix. Option for surrender of SBN’s to avoid penal actions.

x. Allowing depositing of SBN in more number of RBI offices, especially in state capitals/ major cities.

After extensive deliberations on the above issues, it was decided that any relaxation from what has been already allowed regarding deposit of Specified Bank Notes based on the notifications issued as a result of the Ordinance is not warranted in view of the extensive misuse of the provisions as detailed previous paragraph. Moreover, the Specified Bank Notes (Cessation of Liabilities) Ordinance , 2016 has been

replaced by Specified Bank Notes (Cessation of Liabilities ) Act, 2017 and notified on 28.02.2017. Copy of the Specified Bank Notes (Cessation of Liabilities) Act, 2017 is being annexed herewith and marked as ANNEXURE R/4. It is submitted that none of the writ petitioners in the present writ petition and the connected matters have chosen to amend their writ petition and challenge the aforesaid Act.

34. That it is relevant to note that under the SBN Act, 2017, clause (c) of the proviso to section 5 permits holding of SBNs “by any person on the direction of a court in relation to any case pending in the court”. In furtherance to this, the Central Government has framed the Specified Bank Notes (Deposit of Confiscated Notes) Rules, 2017 and notified the same on 12.05.2017. These Rules provide for the conditions and manner in which the confiscated SBNs can be deposited. Copy of the Specified Bank Notes (Deposit of Confiscated Notes) Rules, 2017 is being annexed herewith and marked as ANNEXURE R/5.

35. That the Central Government has further framed the Specified Bank Notes (Deposit by Banks, Post Offices and District Central Cooperative Banks) Rules, 2017, Rule 2 whereof reads as under:

“2. Deposit of specified bank notes with Reserve Bank.—(1) Where in pursuance of the notification of the Government of India in the Ministry of Finance number S.O. 3407(E), dated the 8th November, 2016, published in the Gazette of India, Extraordinary, the specified banks notes have been accepted from their customers,—

(a) by any Bank or Post Office on or before the 30th December, 2016; or

(b) by any District Central Cooperative Bank within the period of 10th November to 14th November, 2016,

such specified bank notes may be deposited by such Bank, Post Office or District Central Cooperative Bank, as the case may be, in any office of the Reserve Bank, within a period of 30 days from the commencement of these rules, and get the exchange value thereof by credit to the account of such Bank, Post Office or District Central Cooperative Bank, as the case may be, subject to the satisfaction of the Reserve Bank of the conditions specified in the said notification and the reasons for non-deposit of the specified bank notes within the period under that notification.”

Copy of the Specified Bank Notes (Deposit by Banks, Post Offices and District Central Cooperative Banks) Rules, 2017 is being annexed herewith and marked as ANNEXURE R/6.

36. That it is also relevant to note at this stage that the Central Government, vide notification dated 08.11.2016, had, under Clause (2) thereof,permitted deposit of SBNs through third party authorization subject to the following:

“(v) the equivalent value of specified bank notes tendered may be credited to a third party account, provided specific authorization therefor accorded by the third party is presented to the bank, following standard banking procedure and on production of valid proof of identity of the person actually tendering;”

Thus any person who was unable to deposit the SBNs during the period up to 30thDecember, 2016, could have done so, through any authorized person by using the above provision.

COMPARATIVE STATEMENT OF WINDOWS MADE
AVAILABLE IN DEMONETIZATION HELD IN 1978 VIS-

À-VIS THE PRESENT CASE

37. That on 16th January, 1978, an Ordinance, viz., The High Denomination Banknote  (Demonetization) Ordinance, 1978 (1 of 1978) was promulgated, providing that on the expiry of the 16th day of January, 1978, all high denomination bank notes shall, notwithstanding anything contained in section 26 of the Reserve Bank of India Act, 1934, cease to be legal tender in payment or on account at any place. The procedure prescribed for exchange of demonetized Notes are as below:

A high denomination bank note shall prepare in the form set out in the Schedule three copies of a declaration signed by him giving in full the particulars required by that form and shall, not later than the 19th day of January, 1978, deliver such copies in person together with the high denomination bank notes he desires to exchange-

a. to either of the offices of the Reserve bank at Bombay or to the sub-office, office or branch, as the case may be, of that bank at Ahmadabad, Bangalore, Bhubaneswar, Calcutta, Gauhati, Hyderabad, Jaipur, Kanpur, Madras, Nagpur, New Delhi and Patna; or

b. to the main office or branch of the State Bank at the head-quarters of a district; or

c. to any other office of a public sector bank notified in this behalf by the Reserve Bank.

Later as on 23.01.1978, the period for exchange of high denomination was allowed up to 24.1.1978.The aforsaid Ordinance was replaced by the High Denomination Bank Notes (Demonetization) Act, 1978 (Act no. 11 of 1978) on 30.03.1978. Copy of the High Denomination Bank Notes (Demonetization) Act, 1978 is being annexed herewith and marked as ANNEXURE R/7.

38. That the following provides for a comparative position of the demonetization held in 1978 vis-à-vis the present one held in 2016:

i. In the previous occasion limited scope, only in case where the person did not have a bank account, was provided for exchange over the counter, whereas, on cancellation of legal tender character of SBN’s in 2016, members of public were allowed exchange over the bank counters up to a limit. This limit was monitored closely and was modified according to the prevailing situation.

ii. Compared to the provisions allowed in 1978, in 2016, more types of banking establishments were allowed to exchange for demonetized banknotes. In 1978, only the RBI offices and few branches of State Bank of India / designated nationalized banks were allowed. Compared to that in the present instance the notes could be exchanged at any issue office of the Reserve Bank of India or any branch of Public Sector Banks, Private Sector Banks, Foreign Banks, Regional Rural Banks,

Urban Cooperative Bank, State Cooperative Banks and Banking Companies as defined in the Banking Regulation Act 1949. Thus, besides all the RBI offices, 1.3 lakh Bank branches, 1.5 Post Offices Branches, 1 Lakh Banking Correspondents and 2.2 lakh ATMS were involved in retrieving back the SBN’s from the system and dispensing exchange value to the members of public.

iii. In the previous instance, no transactions with demonetized banknotes were allowed immediately on declaration of demonetization, whereas to mitigate difficulties faced by the members of public, various essential goods and services were allowed to be available on tendering of SBN’s for a limited period.

iv. Control Rooms were set up both in the Ministry and RBI, which were in operation till 30th December, 2016, that is till the last date of stipulated period of deposit.

v. The form of declaration that had been specified in 1978 and needed to be filed by each individual at the time of tendering for exchange the high denomination of bank notes required a large number of details from the declarant that time.

Further this form had to be attested by the Manager or other person In charge of the bank in which the declarant maintained an account or by a salaried Magistrate or Justice of the Peace or a Police Officer not below the rank of an Inspector of Police.The said Form of Declaration was part of the Schedule to the 1978 Act and had to be submitted in triplicate. Copy of the form required for exchange of money in 1978 is being annexed herewith and marked as ANNEXURE R/8.

Compared to that the form which had been suggested in 1978, at the present time the form was much simpler without requiring many of the details which had been sought in 1978. Further, there was no requirement of any attestation. Apart from that, a single copy was required rather than multiple copies. Copy of the Form required for exchange of money in the present case is being annexed herewith and marked as ANNEXURE R/9.

vi. It may also be noted that the penetration of the electronic media in 1978 was very limited as compared to the numerous electronic channels now available through DTH mode also. Further at that time there was no internet and hence no social media. Despite that the window for exchange had been kept open for limited period of only six days. Seen in conjunction with the spread of media in the present, the window offered of 51 days was extremely reasonable.

39. That it is submitted that under the Foreign Exchange Management Act, 1999, the Reserve Bank of India, in exercise of the powers conferred by clause (g) of sub-section (3) of Section 6, subsection (2) of Section 47 of the said Act, has framed the Foreign Exchange Management (Export and Import of Currency) Regulations, 2015. Regulation 3(2)(b) mandates that any person resident outside India, not being a citizen of Pakistan or Bangladesh, and visiting India, may bring into India currency notes of Government of India and Reserve Bank of India notes up to an amount not exceeding Rs.25000 (Rupees Twenty Five Thousand Only) per person or such other amount and subject to such conditions as notified by Reserve Bank of India from time to time. It is, therefore, submitted that no person can anyway bring into India the Indian currency of an amount exceeding Rs. 25,000/-. Copy of the Foreign Exchange Management (Export and import of currency) Regulations, 2015 is being annexed herewith and marked as ANNEXURE R/10. It may also be mentioned that prior to December 29, 2015, the amount allowed was only Rs. 5000/-, vide RBI Notification dated 03.05.2017.

40. That it is most humbly submitted that the Central Government took a conscious decision that no necessity or any justifiable reason exists either in law or on facts to invoke its power under Section 4 (1) (ii) of the Act 2017, to entitle any person to tender within the grace period ie., after 30.12.2016 and upto 30.06.2017, the specified bank notes except the prescribed category of persons.

41. That it is most respectfully submitted that the very object of demonetization and elimination of black money will be defeated if a window is opened for a further period as the persons in possession of the SBNs would have had sufficient time and opportunity to carefully plan the reasons and excuses for not depositing the SBNs within the permitted period that is before 30.12.2016. Any number of benami transactions and user proxies for the purpose of producing and deposting SBNs would then arise which the departments would have great difficulty in deciding any genuine case from the numerous bogus ones.

42. That in view of the aforesaid it is most respectfully submitted that this Hon’ble Court may be pleased to dismiss the instant writ petition as also all the connected writ petitions.

DEPONENT

VERIFICATION:

I, the deponent above named, do hereby verify that the contents of my above affidavit are based on records of the Respondent maintained in the normal course of business and believed by the deponent to be true, no part of it is false and nothing material has been concealed there from.

Verified at New Delhi on this .day  ………………of July, 2017

DEPONENT

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