Authorities shall provide opportunity of hearing before arriving at any figure in demand Notice

Golden Trees Plantation Limited Vs SEBI (Gujarat High Court)

Conclusion: In present facts of the case, the Hon’ble High Court quashed the recovery Notice issued by SEBI as no opportunity of hearing was provided to the petitioner and no mechanism/ calculation was provided by the recovery officer on the basis of which demand could be sustained.

Facts: In present facts of the case, the Demand Notice was issued by SEBI under Rule 2 of the Second Schedule to the Income Tax Act, 1961 read with Section 28A of the Securities and Exchange Board of India Act, 1992, wherein Rs. 1,068,64,56,000/- (Rupees One Thousand Sixty Eight Crore Sixty Four Lakh Fifty Six Thousand Only) was demanded form the Petitioner within 15 days of the recipe of the said Notice. In view of the said Notice, the Petitioner have filed writ under Article 226 before the Hon’ble High Court.

The Petitioner submitted that the impugned notice has been issued without giving any opportunity of hearing to the writ-applicants. And Recovery officer has not provided any mechanism or calculation on the basis of which, such figure has been derived. Further, it was submitted that if adequate opportunity of hearing would have been given, then all the relevant aspects of the matter could have been pointed out to the authority concerned.

The Respondent submitted that the present writ may not be entertained as the writ-applicants have an alternative remedy to prefer an appeal before the Securities Appellate Tribunal under Section 15(T) of the SEBI Act.

The Hon’ble High Court observed that the said order does not say anything or explain as to how the figure is to be arrived at. In other words, the order does not fix any particular liability to be discharged by the writ-applicants. If upon such order recovery is sought to be undertaken of an amount of Rs.1,068,64,56,000/- (Rupees One Thousand Sixty-eight Crores Sixty-four Lakhs Fifty-six Thousand Only), then it was expected of the concerned authority to at least issue a notice to the writ-applicants and give an opportunity of hearing before arriving at a particular figure.

The Hon’ble High Court further quashed the recovery notice and remit the matter to the authority concerned with a direction to give an opportunity of hearing to the writ-applicants and thereafter appropriately determine the amount to be paid to the depositors. Also, it was observed that it would be open to the writ-applicants to point out to the authority concerned that as on date they have discharged their liabilities in toto.

FULL TEXT OF THE JUDGMENT/ORDER OF GUJARAT HIGH COURT

By this writ-application under Article 226 of the Constitution of India the writ-applicants have prayed for the following reliefs :-

“(a) To quash and set aside the demand notice dated 05.11.2020 bearing Certificate No.RC3134/2020 at ANNEXURE-A passed by the Respondent No. 2;

(b) Pending hearing and final disposal of this petition, this Hon’ble Court may be pleased to stay implementation and operation of demand notice dated 05.11.2020 bearing Certificate No.RC3134/2020 at ANNEXURE-A and restrain respondents from taking any coercive action against the Petitioners herein;

(c) Any other and further relief, which is just and proper, may kindly be granted as may be deemed expedient by this Hon’ ble Court in the facts and circumstances of the case.

(d) Award cost of the present petition.”

2. The facts giving rise to this writ-application may be summarised as under :-

2.1 It appears from the materials on record that the present litigation is an off shoot of the earlier litigation between the parties. We are talking about the Special Civil Application No.4895 of 2003 filed by the writ-applicants herein in this High Court seeking the following reliefs :-

“(A) To issue an appropriate writ, order or direction in the nature thereof and declare sub section (1B) of Section 12 of the Securities and Exchange Board of India Act, 1992 ultra vires the Constitution of India, in so far as it includes Collective Investment Scheme.

(B) To issue an appropriate writ, direction or order in the nature thereof and declare Section 11(2)(c) and J11AA of the Securities and Exchange Board of India Act, 1992 ultra vires the Constitution of India.

(C) To issue a writ, order or direction of quashing the impugned Regulation (Securities and Exchange Board of India (Collective Investment Scheme) Regulation 1999) to the extent aforesaid as being ultra vires the Constitution of India i.e. violative of Article 14, 19(1)(g) and 19(1)(c) of the Constitution of India and being inconsistent with and in derogation of the Companies Act, 1956, Indian Trust Act, 1882 and the Income Tax Act, 1961 and are inherently inconsistent, and contradictory and vague.

(D) To issue a writ of Mandamus, or a writ, order or direction in the nature of mandamus commanding Respondent No.2 not to give effect to the impugned Regulation (Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999) and to withdraw their instructions as indicated inter alia in their letter dated 14.3.2003 against the petitioner.

(E) Pending the hearing and final disposal of this petition,

(a) stay the operation of the order dated 14.3.2003 issued by Respondent No. 2 to Petitioner No.1;

(b) stay the operation of SEBI (Collective Investment Schemes) Regulations, 1999 in so far as its applicability is concerned on Petitioner No.1;

(c) restrain Respondent No. 2s from taking any adverse or coercive action against Petitioner No.1 under the SEBI (Collective Investment Scheme) Regulations, 1999 Securities Contracts (Regulations) Rules, 1956 and Securities Exchange Board India Act, 1992;

(F) Any other order(s) or direction(s) which this Hon’ble Court deems fit and proper passed in favour of humble petitioner,

(G) Cost of the writ petition be awarded in favour of humble petitioner.”

2.2 The first order that came to be passed in the Special Civil Application No.4895 of 2003 referred to above is dated 21.4.2003. The same reads thus :-

“1. Notice returnable on 07-05-2003. Notice to Attorney General of India. During the course of hearing, Mr.R.P.Bhatt, learned Senior Advocate appearing for the petitioners, states that the review application of the order dated 05-04-2003 on behalf of the petitioning-Company shall be withdrawn as not pressed.

2. Notice as to interim relief. In the meantime, by way of ad-interim relief, the impugned order dated 14-03-2003 shall stand stayed.”

2.3 The second order that came to be passed on 21.7.2003 reads thus :-

“Rule returnable on 22nd Sept. 2003. Notice to learned Attorney General of India.

After having heard the learned Senior Counsel Shri R. P. Bhatt for the petitioner and learned Advocate General Shri S. N. Shelat, the ad-interim relief granted earlier shall stand confirmed considering the peculiar facts and circumstances and considering the three celebrated principles governing grant of refusal of interlocutory order in terms of provisions of Order 31(1) of Code of Civil Procedure. In the event of the petition failing, the Petitioner shall refund the amount, if Court also directs upon holding that the petitioner has been liable for refunding the amount stated in the impugned order.”

2.4 However, ultimately the said writ-application came to be disposed of as withdrawn vide order dated 23.3.2017 which reads thus :-

“1. By way of this petition under Article 226 of the Constitution of India the petitioners – Golden Trees Plantation Ltd. and Another have prayed for the following reliefs;

(A) To issue an appropriate writ, order or direction in the nature thereof and declare Sub Section (1B) of Section 12 of the Securities and Exchange Board of India Act, 1992 ultra vires the Constitution of India, in so far as it includes Collective Investment Scheme.

(B) To issue an appropriate writ, direction or order in the nature therefore and declare Section 11(2)(c) and 11AA of the Securities and Exchange Board of India Act, 1992 ultra vires the Constitution of India.

(C) To issue a writ, order or direction of quashing the impugned Regulation (Securities and Exchange Board of India (Collective Investment Scheme) Regulation 1999) to the extent aforesaid as being ultra vires the Constitution of India i.e. violative of Articles 14, 19 (1)(g) and 19(1)(c) of the Constitution of India and being inconsistent with and in derogation of the Companies Act, 1956, Indian Trust Act, 1882 and the Income Tax Act, 1961 and are inherently inconsistent, and contradictory and vague.

(D) To issue a writ of mandamus, or a writ, order or direction in the nature of mandamus commanding respondent no.2 not to give effect to the impugned Regulation (Securities and Exchange Board of India (Collective Investment Schemes) Regulations, 1999) and to withdraw their instructions as indicated interalia in their letter dated 14/03/2003 against the petitioner.

(E) Pending the hearing and final disposal of this petition,

a) stay the operation of the order dated 14/03/2003 issued by respondent no.2 to petitioner no.1;

b) stay the operation of SEBI (Collective Investment Schemes) Regulations, 1999 in so far as its applicability is concerned on petitioner no.1;

c) restrain respondent no.2 from taking any adverse or coercive action against petitioner no.1 under the SEBI (Collective Investment Schemes) Regulations, 1999 Securities Contracts (Regulations) Rules, 1956 and Securities Exchange Board of India Act, 1992;

(F) Any other order(s) or direction(s) which this Hon’ble Court deems fit and proper passed in favour of humble petitioner.

2. Today, when the present petition is taken up for final hearing, Shri Shelat, learned Senior Advocate appearing on behalf of SEBI has placed reliance upon the decision of the Hon’ble Supreme Court in the case of M/s. P.G.F. Ltd. and Ors Vs. Union of India and Anr reported in AIR 2013 SC 3702 by which the provisions of which vires are under challenge have been held constitutionally valid. The aforesaid is not disputed by Ms. Manisha Lavkumar, learned Advocate appearing on behalf of the petitioners.

3. Under the circumstances and in view of the decision of the Hon’ble Supreme Court in the case of M/s. P.G.F. Ltd. and Ors (Supra) the challenge under constitutional validity of the provisions of SEBI, which are under challenge, fails.

4. In view of the above, Ms. Manisha Lavkumar, learned Advocate appearing on behalf of the petitioners seeks permission to withdraw the present petition. Permission is accordingly granted. The present petition is dismissed as withdrawn. Rule is discharged. Ad-interim relief granted earlier stands vacated forthwith.”

2.5 Thus, the first round of litigation having come to an end with the above referred order, the Securities and Exchange Board of India (for short ‘the SEBI’) proceeded to pass the following order dated 14.3.2003 :-

“23. Upon perusing the documents submitted by the company including the details of the company and the scheme(s), the Articles of Association and Memorandum of Association as well as the names and addresses of the promoters of the company, it is noted that the company is presently running two kinds of schemes i.e. teak memberships scheme and mango membership scheme. Under the teak membership scheme, there are 61,549 investors and a total amount of Rs. 9.18 crores stated to have been mobilised by the company under the said scheme. I have also noted the contents of the teak sapling sale certificate issued by the company and have also perused the prospectus of the scheme. In terms of the same, it Is noted that the Investor is required to pay an amount of Rs. 550 (which amount was subsequently raised to Rs. 850) and become an owner of a teak plant. Under the mango membership scheme, there are 237 investors and an amount Rs.0.08 crores is stated to have been mobilised by the company under the scheme which is-of 15 years duration.

24. Upon the perusal of the Memorandum of Association of the company, it is noted that the promoters of the company are also shown under the head of ‘directors of the company. It is noted that Rs. 0.99 crores has been paid as commission by the company to the agents, while an amount of Rs. 0.82 crores has been shown as administrative expenses of the company. Further, instead of the company submitting its latest audited annual accounts, the provisional accounts as on December 15, 2002, has been submitted.

25 It can be seen from the documents submitted by the company that the funds of the investors are hooled and utilised for the purpose of the scheme. The investors have entered into the agreement with a view to receive a consolidatery amount from such a scheme. It is also seen that the property forming part of the scheme is managed on behalf of the investors and they do not have day-to-day control over the management of the aforesaid property as the company has exclusive control for managing and developing the property.

26. Thus it is apparent that the schemes of the company are in the nature of a collective investment scheme in as much as, there is a pooling of resources, Investments are made with a view to profit, property is managed on behalf of the investors and the Investors do not have day to day control. However details of the ownership of the land on which the saplings are stated to have been planted, have not been provided. Having regard to the above. I am of the considered view that the schemes floated by the company fall squarely within the definition Collective Investment Scheme as defined under Section 11AA of SEBI Act.

27. I have further noted that several complaints have been made by the investors to the effect that the company was not redressing the grievances of the investors with regard to the return of the dues. Despite forwarding the same to the company, it has failed to take any steps to redress the same.

28. I have noted that although several press releases and newspaper advertisements/notices were issued by SEBI from time to time in all the leading newspapers of India bringing to the notice or the investors and the persons concerned, the various instructions issued by SEBI from time to time as well as the statutory requirements as contained under the Act and the Regulations, the company has failed to comply with the same. Therefore the company has violated the provisions of Section 12(1B) of the SEBI Act, 1992 and Regulation 5(1) read with regulations 68(1), 68(2), 73 & 74 of the Regulations.

29. In view of the same, on the basis of the facts of the case. I, in exercise of powers conferred upon me under Section 11B or the SEBI Act read with Regulation 65 of the Regulations, hereby direct the company, as an existing collective investment scheme. to wind up its existing scheme(s) and refund the money collected under the scheme(s) with returns which are due to the investors as per the terms of offer within a period of one month from the date of the order. failing which the following actions would follow :

1. Initiation of prosecution proceedings. under Section 24 of the SEBI Act, 1992, against the company / its promoters / directors / managers / persons in charge of the business of its scheme(s).

2. Debarring the company / its promoters/ directors / managers / persons in charge of the business of its schemes (s) from operating in the capital market-and accessing the capital market for a period of 5 years.

3. Writing to the State Government / local police to register civil / criminal cases against the company and its promoters / directors for apparent offences fo fraud, cheating, criminal breach of trust and misappropriation of public funds. and

4. Writing to the department of company affairs to initiate the process of winding up of the company.”

2.6 The aforesaid order passed by the SEBI ultimately led to the issue of impugned notice of demand under Rule 2 of the Second Schedule to the Income Tax Act, 1961 read with Section 28A of the Securities and Exchange Board of India Act, 1992. The impugned notice reads thus :-

“1. This is to certify that a sum of Rs. 1,068,64,56,000/- (Rupees One Thousand Sixty Eight Crore Sixty Four Lakh Fifty Six Thousand Only) as detailed below is due to SEBI from you.

2. You are hereby directed to pay the above sum of Rs. 1,068,64,56,000/- (Rupees One Thousand Sixty Eight Crore Sixty Four Lakh Fifty Six Thousand Only) along with returns due to investors, further interest, all costs, charges and expenses incurred in respect of all the proceedings taken for recovery of the said sum, within 15 (fifteen) days of the receipt of this notice (Payment shall be made either by way of Demand Draft to be drawn in favour of the Securities and Exchange Board of India (SEBI) payable at Ahmedabad (or) by way of EFT/NEFT/RTGS to A/c No. 012210210000013 of Bank of India, Bandra Kurla Complex Branch) [IFS Code – BKID0000122]), failing which the recovery shall be made in accordance with the provisions of Section 28A of the Securities and Exchange Board of India Act, 1992 as amended by the Securities Laws (Amendment) Act, 2014 read with Section 220 to Section 232 of the Income Tax Act, 1961 and the Second Schedule to the said Act and the rules made thereunder.

3. If payment is made in aforesaid Bank Accour, you are also directed to forward the details and confirmation of the payment so made (as per Annexure-A) to Recovery Division, SEBI, Western Regional Office, Ahmedabad.

Date : November 05, 2020

Sd/- illegible
Recovery Officer Kirtikumar Jadhav
Recovery Officer & Dy. General Manager
Securities and Exchange Board of India
Ahmedabad”

3. In view of the aforesaid, the writ-applicants have come up before this Court with the present writ-application.

4. Mr. S. N. Soparkar, the learned Senior Counsel assisted by Mr. Jaimin R. Dave, the learned advocate appearing for the writ-applicants vehemently submitted that the impugned notice has been issued without giving any opportunity of hearing to the writ-applicants. Mr. Soparkar would submit that a huge amount to the tune of Rs.1,068,64,56,000/- (Rupees One Thousand Sixty-eight Crores Sixty-four Lakhs Fifty-six Thousand Only) is sought to be recovered from the writ-applicants. The principal argument of Mr. Soparkar is that on what basis the Recovery Officer has arrived at such mammoth figure is not understood.

5. Mr. Soparkar would submit that his clients have deposited a substantial amount so far in due compliance of the order passed by the SEBI dated 14.3.2003. Mr. Soparkar pointed out that between 2012 and 2018 the writ-applicant No.1 made total payment of Rs.10,97,50,000/- (Rupees Ten Crores Ninety-seven Lakhs Fifty Thousand Only) to various stake-holders. It is further pointed out that the Company has also made payments to the tune of Rs.23,20,900/- (Rupees Twenty-three Lakhs Twenty thousand Nine Hundred Only) to various other stake-holders. It is also pointed out that even according to the respondents, the Company had collected an amount not exceeding Rs.9,23,27,000/- (Rupees Nine Crores Twenty-three Lakhs Twenty-seven Thousand Only), as against that the Company had incurred the total expenditure of Rs.11,40,04,621/- (Rupees Eleven Crores Forty Lakhs Four Thousand Six Hundred Twenty-one Only) for nurturing and maintenance of saplings/trees and refunded Rs.11,20,70,000/-(Rupees Eleven Crores Twenty Lakhs Seventy Thousand Only) to various tree holders.

6. Mr. Soparkar would submit that in view of the aforesaid, it is something very unreasonable on the part of the respondents to say that Rs.1000 crore and odd is to be paid by the writ-applicants.

7. According to Mr. Soparkar, if adequate opportunity of hearing would have been given, then all the relevant aspects of the matter could have been pointed out by his clients to the authority concerned.

8. In such circumstances referred to above, Mr. Soparkar prays that there being merit in his writ-application the same be allowed and the matter be remitted to the authority concerned with a direction to give an opportunity of hearing to the writ-applicants and thereafter determine an appropriate amount, if at all any amount is to be paid by the writ-applicants.

9. On the other hand, this writ-application has been vehemently opposed by Ms. Dharmishta Raval, the learned counsel appearing for the respondents. Ms. Raval would submit that this writ-application may not be entertained as the writ-applicants have an alternative remedy to prefer an appeal before the Securities Appellate Tribunal under Section 15(T) of the SEBI Act.

10. Ms. Raval would submit that without prejudice to her aforesaid preliminary contention even otherwise the writ-applicants have no case on merits.

11. Ms. Raval seeks to rely upon the exhaustive reply filed on behalf of the respondents. In such circumstances referred to above, Ms. Raval prays that there being no merit in the present writ-application, the same be rejected.

12. Having heard the learned counsel appearing for the parties and having gone through the materials on record the only question that falls for our consideration is whether the recovery notice is sustainable in law.

13. The order dated 14.3.2003 passed by the SEBI referred to above only says that the Company is directed to wind up its existing scheme and refund the money collected under the scheme (with returns due to the investors in accordance with the terms of the offer). The said order does not say anything or explain as to how the figure is to be arrived at. In other words, the order does not fix any particular liability to be discharged by the writ-applicants. If upon such order recovery is sought to be undertaken of an amount of Rs.1,068,64,56,000/- (Rupees One Thousand Sixty-eight Crores Sixty-four Lakhs Fifty-six Thousand Only), then it was expected of the concerned authority to at least issue a notice to the writ-applicants and give an opportunity of hearing before arriving at a particular figure.

14. Ms. Raval in a way is right that in view of the alternative remedy available, this Court should not exercise its writ jurisdiction. However, even if we reject this writ-application on such ground asking the writ-applicants to file an appeal, the Appellate Authority would also be faced with the same problem or rather difficulty as regards determining a particular amount. In such circumstances relegating the writ-applicants, at this stage, to avail the alternative remedy and challenge the recovery notice by way of an appeal would not serve any good purpose. Instead we should quash the recovery notice and remit the matter to the authority concerned with a direction to give an opportunity of hearing to the writ-applicants and thereafter appropriately determine the amount to be paid to the depositors. Of course, it would be open to the writ-applicants to point out to the authority concerned that as on date they have discharged their liabilities in toto.

15. In view of the aforesaid, the impugned recovery notice is hereby quashed and set aside. The matter is remitted to the respondent No.2. The respondent No.2 shall issue notice to the writ-applicants and fix a particular date so as to give an opportunity of hearing to the writ-applicants and thereafter determine a particular amount to be paid by the writ-applicants to the depositors in accordance with law. We once again clarify that it shall be open for the writ-applicants to point out to the authority concerned that they have discharged their liabilities and nothing is to be paid to the depositors. The authority concerned shall take into consideration all the relevant aspects that may be pointed out by the writ-applicants and decide the matter afresh.

16. With the aforesaid, this writ-application stands disposed of.